Part 4: Channel Institutions Chapter 13: Franchising

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Part 4 Channel InstitutionsChapter 13
Franchising

• MKTG 406 Pimentel

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Franchising Defined

• Independent businesses made to appear as a
  corporate chain
• Franchisor
• Franchisee

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2 Basic Types of Franchises

• Authorized franchise systems (aka product and
  trade name franchising)
• Minimal requirements to be an authorized dealer
• Business format franchising
• Licensing of an entire way of doing business
• Common name or sign
• Uniform presentation of the premises
• Expertise shared by franchisor
• Continuing business and technical assistance
• Gray areas

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Becoming a Franchisee

• Have capital to invest
• Desire to own a business
• Want proven model and assistance
• Willing to give up some independence in exchange
  for assistance

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Benefits to Franchisees

• Brand name
• Brand equity
• Economies of scale
• Market survey and site selection
• Facility design
• Lease negotiations advise
• Financing advice
• Operating manuals
• Management training programs
• Training of franchisees employees

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Benefits to Franchisees (cont.)

• Field supervision of operations
• Field supervision of operations of other
  franchisees
• Merchandising and promotion materials
• National advertising
• Market data and guidance
• Auditing and record keeping
• Group insurance plans

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Becoming a Franchisor

• Want fast growth
• Minimum efficient scale
• Need a source of capital
• Need a source of good managers
• Want to be able to retain good managers
• Want to minimize monitoring costs
• Residual claimants
• Want a source of new ideas
• Want consultants in specific markets
• Want control
• Not the only solution

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Franchise Contract

• Payment system
• Real estate
• Termination
• Hostages

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Franchise Contract

• Payment System
• Lump-sum fee
• Initial investment
• Royalty fee
• Balancing the fees
• Tied sales

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Franchise Contract

• Real Estate
• Franchisor as landlord
• Capital and effort intensive
• Prime locations
• Can assist franchisees
• Can evict franchisees

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Franchise Contract

• Termination
• Difficult and costly for franchisor
• Replacing franchisee
• Protections for franchisor
• Hostages
• Transfer fees
• Right-of-first-refusal

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Company Outlets in Franchise Systems

• Common
• Franchisors original locations
• Selected markets
• Temporary company outlets

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Company Outlets in Franchise Systems

• Synergy from the plural form
• Control system
• Benchmarks
• Career paths
• Mutual strategy

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Multi-Unit Franchising

• Master franchisee
• Faster growth
• Learning curves
• Unfamiliar markets
• Adjacent markets
• Simplifies for franchisor
• Influence other franchisees

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Challenges for Franchisors

• Survival
• More established
• Entrepreneur magazine ratings
• Cooperation

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Challenges for Franchisors

• Goal conflict
• Cannibalization

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Key Terms

• Franchising
• Franchisor
• Franchisee
• Authorized franchise systems
• Product and trade name franchising
• Authorized dealer
• Business format franchising
• Brand equity
• Minimum efficient scale
• Residual claimants

• Plural form
• Benchmarks
• Mutual strategy
• Hostages
• Transfer fees
• Right-of-first-refusal
• Benchmark
• Master franchisee
• Goal conflict
• Cannibalization