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Franchising is a way of distribute or sale products or services. Two parties is the minimum to any franchise agreement: first is the franchisor which who own the trademark or the name. Second is the franchisee which who pays to use the trademark and want to work under supervision of the franchisor.
The franchise chain starts when the owner succeeds in his business and want to expand his business but with help of who will operate his other outlets so he lend his name to other party to operate other outlet under his name or trade mark. (Doherty and Quinn, 2000, P354),EFDA.(2010). from http://www.efda.org.eg/Default.aspx?Id=128
Franchising concept and business format.
Franchisor usually provides the franchisee with business plan which should be operate the business and franchisee should use this plan. Also franchisee provides most of solutions for the problems may face the franchisor during the operation process which here the franchisor finds the one of the advantage of franchising.
By distributing trusted and well known trademark product or services lead to the rapid increase of expansions more than the independently owned business.
(Beshel, 2000:1-8). (Rothenberg, 1976:52-54).
Quinn,1999,P347 shows that the franchise contract plays the role of the controller of the relationship between the franchisee and the franchisor, the author defines the franchise contract as a legal written document between the franchisor and the franchisee which states the role of both parties. As per Doherty and Quinn, 2000, P355 the authoritarian enforcement of the franchise contract is the main control in the international retail franchising.
Another definition of the franchising contract is raised by Kaufmann and Vincent, 1997, p290 which states that the franchising contract is the determiner of the franchisor control and the rights of the franchisor and the franchisees and also states that the administration of the franchising relation is handled by the federal and state laws that et rules as for example that the franchisor should provide the franchisee with information that both parties relationship showing the rights and obligation of this relationship.
There are three legal documents for the franchising relationship
1.The Disclosure Document, which could be known as the UFOC.
2. Franchise agreement
Beshel, 2000, p 40 shows that the reason behind these documents is to provide potential franchisees with information about the franchisor, these information explains to the franchisee the franchising process and the agreements that they should agree on as to help them in taking the franchising decision. with the disclosure part which includes terms and conditions that the franchisee should accept along with the franchisor. Beshel, 2000, p 44 states that the disclosure document contains the below information:
"The company's key staff"
"Management's experience in franchise management"
"Franchisor's bankruptcy and litigation history"
"Initial and ongoing fees involved in opening and running the franchise"
"Required investment and purchases"
"Responsibilities of the franchisor and franchisee"
"Other franchisees in the system with contact information"
According to Roger and David, 1985, p 940 the franchisor applies the "ten day rule" before signing the franchising document, the "ten day rule" refers to a "cooling-off period in which franchisors must give prospective franchisees 10 business days to evaluate the whole deal before they are allowed to sign the franchise agreement" to make sure that they asses the business properly.
The Franchise Agreement
Beshel, 2000, p 44 found that the franchise agreement is more specific than the disclosure document about the terms of the relationship between the franchisor and franchisee. A typical franchise agreement may include the below terms:
"The franchise system, such as use of trademarks and products"
"Rights and obligations of the parties: standards, procedures, training, assistance, advertising, etc."
"Term (duration) of the franchise"
"Payments made by the franchisee to the franchisor"
"Termination and/or the right to transfer the franchise"
Before the final signature of the contracts there is a five days period which the franchisee have the chance to review the final agreement and to consider all the terms and condition this information was raised by Roger and David, 1985, p 940
Franchising as an international business tool.
Independent vs. Franchised.
To compare between the two modes for analyzing the impact of franchising on fast food market in Egypt, some issues should be taken into consideration to show that. Some interviews were conducted with many fast food chains managers and supervisors (franchised and local) to help us compare and choose the most appealing strategy for market entry in Egypt.
The first point of the comparison between the franchising and the independent is the startup capital. Here acquiring a franchise contract is not easy, that because the franchisor usually search about the franchisee who meet his requires about the image, standards and everything which save the franchisor trade mark. This is usually requiring the franchisee to have a huge amount of money that makes him able to meet the franchisor expectations and also to pay for the trademark fees which paid to the franchisor. And sometimes the franchisor asks his franchise to open a certain number of branches within a specified period of time. (Kaufmann & Dant, 2001:538-539) (Calhoun,1975:61-65), (M,Momen. Personal interview, 2010)
On the other hand, it's easier to start up a local independent fast food restaurant of chain, that because the less numbers of financial terms required comparing to the franchising. Start a new small chain first and then grew up without the limitations and restrictions of franchise contracts such as:
Initial franchise fees
Size and time frame of growing up
But sometimes in some cases the franchise can be easier because it can be financed by loans with a good reputation conditions because the name of the trademark and its trusted brand which usually meet acceptance from the financial intermediates which offer the loans to the franchisee.
(A,Hamza, Personal Interview, 2010),(M,Momen. Personal interview, 2010)
Second point in the comparison is the established name. Franchising by default gives the franchisee a well known name and brand. This name usually worth money because it is trusted, known and internationally this give the franchise the priority of the customer decision to chose which restaurant to eat. That mean that the franchisee when he buy the franchise contract he also buy the customer.
On the other hand entering the market independently with a new name the founder have to build his name first, that will take time and money to be trusted and have quality which will encourage the customers, but franchising usually remove this obstacle by the well known name and trusted trade mark.
Also the franchisee will get the benefits from the mother company advertising all over the world which support him in his area.
(Peterson & Dant, 1990:46-47), (S.Mahmoud, Personal Interview, 2010),(M,Momen. Personal interview,2010), (A,Hamza, Personal Interview, 2010).
Access to Technology and Training.
Third point of the comparison is Access to Technology and Training. Usually the franchisor supports the franchisee with the training and the latest technology to set up the business. He also provides the franchisee with manual and orientations to help the franchisee running the business.
Also the franchisor provides the franchise with all the equipments and the specialized materials to save his name and help the franchisee run the business.
On the other hand the founder of the independent new chain has to search about this new technology by himself. And also he has to determine his equipment and learn his employee by himself with no assistance from any other partner.
(Peterson & Dant, 1990,46-47), (M,Mohamed, Pesonal interview, 2010)
The fourth point of the comparison is the operating cost. Usually the price of all materials and supplies which are necessary are always very negotiable in franchising that because the mother company always negotiate in behalf of all franchising units that can help the mother company reduce the price because of the mass quantity in the orders from its suppliers. On the other hand the independent negotiate about small quantities which will make the negotiations not flexible and complicated. This give the advantage for the franchised business. (M,Momen. Personal interview,2010),(A,Hamza, Personal Interview, 2010)
The fifth point in the comparison is the business risks. In franchising concept when the franchisee buy a franchising contract means that he bought an existing business. The risk of this business will be very small that because the franchisor already have the standards and provide the solutions of the most common problems that can be happen and also the franchisor do all the experiments on all the products he offer. To cut it short the franchisee buy a package of a very proven business. On the other hand the independent business will face many operating problems that because he will start from the first day for a new business without any assistance.
(M,Momen. Personal interview,2010), (B,Soliman. Personal interview, 2010)
Advantage and disadvantage of franchising.
When the franchisee start his business he start as big and known because he take the main franchising advantage which is that his business is a well known and well established successful company. The franchisee has the experience and the support from day one of his business. And all the operations of the business are examined and established for that business. In addition to all the advantage described in the comparison before. On the other hand there are two main disadvantage of franchising that are first the franchisee consider as dependent to his franchisor and he has many restrictions and specified frame he cannot go out this frame. Second is the financial issue and the money paid to the franchisor along the period of the contract. (Beshel, 2000:2)
Determining a good franchise.
The decision to get a franchise is one of the many important decisions that the potential franchisee should decide. The next step should be decided is to determine the best franchise opportunity. And Good opportunity consists of many major factors, these factors play and work together to achieve the goal of franchising. The most important factor and the primary one is the financial issue and the amount of money required to rent or buy the trademark and the other expenses. What should be consider before buying a franchise? The question what will discus later on this and the recommended answers and advices suggested from the interviews and the (EFDA) Egyptian Franchising Development Association.
(B,Soliman. Personal interview, 2010), (S,Nazmi, personal interview, 2010), (M,Mohamed, Pesonal interview, 2010)
It would be better if the franchisee do his own research and study before singing the contract or meet his franchisor. This will make him aware and experienced in the market and what is need of the market that will make his decision of franchising
(M,Mohamed, Pesonal interview, 2010)
In the case of franchising with less popular franchisor company, the franchisee should do a complete study about the franchisor company including history of the company, image services and quality of the goods provided. (B,Soliman. Personal interview, 2010)
The location of the branch of store that the franchisee welling to open his new business considers one of the important factors of success for the business. The location should be in crowded area such as business centers, shopping malls, near to school or universities or in area with high human traffic.
(M, Almakhawy. Personal interview, 2010)
What should be considered before buying a franchise?
Before involving in any franchise contract some points should take into consideration:
Understanding well the type of business.
The working hours, who are the people required and the business experience required to run such business.
Study and knowing well the history of the franchisor and what his successful story.
Do other franchisee of this franchisor doing well?
What is the total cost of this franchise?
What is the maximum operating cost?
What is the product or services should be bought from the franchisor and how he will supply?
Terms and conditions of renewed or terminate the contract. and there is any franchisee terminate his contract in the past years and why?
What are the financial terms?
Also understanding well all the laws which required such as franchising laws, trademark laws and the federal trade commission franchise rules before signing the agreement. Examine every franchise document and asking all secured questions to the people who involved with the franchisor about everything in the business with the help of your lawyer and your personal accountant to secure your investment.
(S,Nazmi, personal interview, 2010),(B,Soliman. Personal interview, 2010),(M,Mohamed, Pesonal interview, 2010), (EFDA) Egyptian Franchising Development Association. From http://www.efda.org.eg/Default.aspx?Id=128
Egyptian fast food Market.
To enter the food market in Egypt there are two successful ways according to stories in Egypt. First is to start and create any new independent name. Second is to acquire a franchise from any international trademark. Franchising is totally opposite of independent business. In the independent way the founder decided to create a new trade mark taking into consideration the cost and risks of the new name, image and quality in addition to the time to be known and trusted. (Aboul Fath 2008: 2-8)
Franchising impacts on the Egyptian market.
Analyzing the new market that the company wants to operate in the business of franchising is one of the important points should be done and also to determine the impact of any entry modes or business operation method the market should be analyzed. Office of government commerce, (2006)
(Figure 2: PEST Analysis Model)
(The Times100 2008:94)
PEST analysis is one of the important tools companies used to analyze the markets. This method analyzes the market throw 4 major points which are political, economical, social and technological.
This paper will discuss the four factors in the coming words.
The political factors are one of the important tasks that should be analyzed by any company want to enter any new market. On the side of the Egyptian political, Egypt political is stable comparing to many countries and potential market. But sometimes some companies faced some problems in Egypt or in the all Arab countries because the company's home region, for example some American companies faced boycotting by many people just because its American. This issue lead some company to make a special products to help solving this problem for example MacDonald's make two sandwich special for the Arabic market like McArabia and Mc falafel and we find also Americana announce in all its ads the word of Arabia 100% to feel the customer the loyalty of the local market. ( Waguih, 2002: 1-2)
In the period of Sadat president and his open door policy the Egyptian economy changed and opened especially with the globalization the franchisors found that the Egyptian market is economically stable and healthy to invest. Opening food factories in Egypt by the franchisor to supply the material and ingredients was very good profitable projects after the increasing numbers of customer fast food market in Egypt and the factories became more efficient in the production and starts to export this production while they used to import every material and ingredients at the first period of entering the market. That all because the help of the stable economical factors (Aboul Fath 2008: 2-8)
The figure below shows the increasing in the GDP per capita in the last few years. This shows that how the economically of the Egyptian market is very attractive to investors.
(Ministry of Finance Macro Fiscal Policy Unit 2008: 3)
(Figure 3: Annual Percent Change %)
(Ministry of Finance Macro Fiscal Policy Unit 2008: 1)
The foreign investment is defined as a critical component to continue the economic growth by the Egyptian government. So the government gives the foreign investors exemptions and special incentives. But this special treatment didn't remove the barriers of the high level of bureaucracy, complicated taxes and the high levels of customs procedures. Now the monetary government is working on to be more Clearfield about all procedures and to be more fiscally transparent also improve tax regulations to encourage more foreign investments. (Aboul Fath 2008: 2-8)
In the Egyptian market the consumers consist of three main groups, low income, middle and high income families. This distributions and levels secure the Egyptian fast food market. Also Egypt have about 50% of population is young consumers which present in the figure below. This young age consumers make the Egyptian fast food market target to all the American fast food companies because the young people consider the main target for all the fast food chains. Also in figure below the high percentage of the work age consumers by 62% which represent the purchasing power and they who search for the fast food meals.
(Awad and Zohry 2005: 7, Shaefer 2008: 2)
(Figure 4: Egyptian Population by Broad Age groups 1950-2010)
(Awad and Zohry 2005: 8)
The Egyptian life style shows that there are three main meals in the day. The Egyptian tradition meal includes rice, bread, vegetables and sometimes meat but it depends on the class of family or the price. The middle and high class families consider the main target of the fast food market in Egypt. Also some high class families are now aware by healthy food and they search about the food with low calories and fat.
The average of families in Egypt prefers to eat out once or twice monthly. Also taking fast food may meet a lot of people in Egypt especially after entering women the business in Egypt and also singles or the middle aged people in the universities. (Fabiosa and Soliman 2008: 3-11) (Fabiosa 2008: 1-8)
With improving in the technology nowadays in all fields, the fast food production became easier and faster also with the high quality standards. Now ordering the fast food became easier by many ways can be by telephone, internet and in addition to the old tradition way of order. All these improvement increase the demand on the fast food market.
Also these technology improvements reached to the food itself, now you can order and design a special meal for yourself by the high technology in the ingredients like flavors which can be added to the food. (A.Hamza, personal interview, 2010)
Porter's five forces analysis.
According to Michael Porter the industry is influenced by five forces. These forces can show the level of how this industry is competitive and by that show if this industry is attractive for investment showing if it would be a profitable industry or not.
The advantage of this model is that it represents the micro environment side of the industry which is more specific than the macro environment side. The below figure represents the forces that affects and shapes the market. (Michael E. Porter 1980: 31)
(Figure 1: Porter's Five forces Model)
(Michael E. Porter 1980: 31)
Rivalry among existing competitors.
Rivalry among existing firms is the first component of the model, as it is essential to build on it the marketing strategies, knowing the consumer perception, drivers and need is very important in order to compete with the existing firms. Focusing on the Egyptian market, Egyptians have high expectation that was the main reason that drived fast food chains to work hard in marketing means as for example McDonalds started with the toy on the happy meal that made children love eating in McDonalds because of the reward they receive which is the toy. Also other marketing tools were used in order to win in this competition as advertising campaigns that raised the new products, discounts and other benefits fast food chains offers.
(M,Mohamed, Pesonal interview, 2010),(S.Mahmoud, Personal Interview, 2010)
Large number of competitors:
Having many existing fast food chains add of the complexity of the market as there are many choices available to the consumer, each of these chain seek more market share to do this they need to do extra effort in a high competitive market as Egypt that has many chains local as (Mo'men, Smiley's Grill, Cook Door and El-Shabrawy), and on the other hand multinational chains such as (KFC, McDonald's, Pizza Hut, Burger King, and many others).
(S.Mahmoud, Personal Interview, 2010)
Slow market growth:
Having a low market growth causes the competition to be more difficult as there is a fight for the existing market share, While on the otherhand if the market is growing fast then there is an opportunity for larger profits. When we focus on the Egyptian market we can find that it is a perfect market for investment in the fast food industry as the market value is $7billion and expected to be $10 in the coming five years. (Schaefer, 2008: 1)
Highly perishable products:
Usually the food products is highly perishable and carrying an expiration date which sometimes push the seller to reduce the price however the product is still can use. And this leading to more competition.
(A,Hamza, Personal Interview, 2010)
Low switching costs:
If the consumer feel free about to chose from more than one product because the lowing switching costs, it will be difficult to save the consumer. This is the case in the fast food market. The similarities in the prices between the restaurants lead the fast food chains to make different types of competitive methods discarding the prices.
(M,Momen. Personal interview,2010)
Low levels of product differentiation:
Because of the similarities on kin of foods or products offers by the fast food restaurants, the fast food chains are going to increase their trademark and the awareness to be well known and to increase also their market shares.
(M,Momen. Personal interview,2010)
The increasing of people and consumer of fast food restaurants and the high profits from this industry encourage new investors to join and enter this market. Also the existing chains increase their size. The industry shakeout happen when the fast food market crowded and the existing restaurants were not able to serve the rapid increase in demand.
(B,Soliman. Personal interview, 2010), (M,Momen. Personal interview,2010)
One of the Exit Barriers is the specialization of assets which can determine by how the fast food chain can liquidating their asset easily specially that some fast food franchisor asking their franchisee about some specialized equipment that can help and save the quality of food. These specialized assets are difficult to be liquid asset because of its specialization for a specified restaurant, which subsequently creates many exit barriers.
(B,Soliman. Personal interview, 2010)
Threat of substitute products or services.
Substitute product is another product that may choose in case of the absence of the required product as Porter described.
Price, quality, availability, the way of display and many other variables may affect on the elasticity of demand. The buyer may change his decision according to the change in price and this change may increase the demand on the substitute product. And one of the major thing nowadays that much people is going to chose the healthy food which will decrease the demand on the fast food.
Porter suggested that the threat of substitutes is increased if:
The substitute product provide more reasonable price or quality than the primary product that because the buyer usually chose the valuable product to him for example many people may chose eat in restaurant because it provide higher quality however it may be more expensive.
The price of the substitute products is very near and easy to switch from product to another and this is the case on the fast food.
(M, Almakhawy. Personal interview, 2010), (M,Momen. Personal interview,2010)
Bargaining power of buyers.
There are many types of buying power. First is the sensitivity of the consumer's price, if the offered meals prices are similar the consumer usually chose the cheaper one because the similarity of meals offered by the fast food chains. This push the fast food chains reduce the prices and reduce their profitability which finally is better for the consumers.
Other type is the negotiating power here the larger buyers negotiate the seller in the price but this type of power does not exist in our market.
(A,Hamza, Personal Interview, 2010),(S.Mahmoud, Personal Interview, 2010)
Bargaining power of suppliers.
The supplier's power in fast food those people who provided materials used on the food production such as vegetables, bakery and packing.
The fourth point of this analysis is the power of the suppliers and it's powerful to drive the prices. The drive of the prices depend on what they offer form the quality of materials, prices and the number of suppliers offer the similar materials and what is the cost to switch to another supplier.
To determine how much the suppliers are powerful we have to asses several aspects;
If the supplier depends heavily on one buyer he will be less powerful. For example Farm Frites Egypt provide MacDonald's with the French fries Macdonald's here represent a major buyer and source for revenue and they cannot work to lose such this source so they do their best to save this buyer because there are many suppliers in the market.
This case usually is the case in all Fast food chains in Egypt where the suppliers willing to offer a special and good price for the customer to be the exclusive supplier for a certain material.
(A,Hamza, Personal Interview, 2010),(S.Mahmoud, Personal Interview, 2010)
Taking into consider that one of the supplier power point is that changing the supplier have high switching cost choosing such supplier comes after many tests of his material and its quality and should be approved by the chain to save the specialization of the material. (S,Nazmi, personal interview, 2010)
Also the supplier can be more powerful if there is no substitution for his material in the market but this case is very rare in our market as mentioned before that Macdonald's can change Farm Frits Egypt by UniFood.
(M,Momen. Personal interview,2010)
Barriers to entry/ Threat of entry.
Not only the existing chains is the threat for competitors in the market but also the entrants the market. It is possible for any firm to enter the market and go to the track of competition.
Entry barriers are the characteristics that define the industry. And any firm want to enter the industry should pass all the Barriers. These barriers may prevent some firms to inter the market and this maintains some shares for the existing firms
There are many types of barriers:
Nowadays, the steps to open an new fast food restaurant is very hard and time wasting and need a lot of work and papers. These steps include safety regulation, insurance and taxation procedures. The high level of bureaucracy in Egypt makes the task very hard.
(B,Soliman. Personal interview, 2010),(M,Mohamed, Pesonal interview, 2010)
The ideas and the experience of the market by the existing firms consider as a private property. And they prevent others to get such information about the market which create a barrier to enter the market. For example KFC have secret recipe for cooking the chicken and they prevent any one to know this secret recipes that make them leading in the fried chicken market and its hard for competitors to compete in the same market. (A,Hamza, personal interview, 2010)
Customer switching cost:
If the switching cost is high so it is hard to make the customer change his decision to get a new meal. And also if the switching cost is low it is easy to encourage people to change their decision to try the new restaurant then gain a new market share. So it is require the entrants to reduce the price to can compete the switching cost.
(S.Mahmoud, Personal Interview, 2010)
Entering the new market require a huge capital, this will reduce the new firms entering the market so it is consider an entry barrier. The capital requirement is not only for the fixed asset but may be required for to finance the start losses and build the inventory.
In Egypt there are two types of startup cost first is the cost of stat independently second is cost of acquiring a franchise which be better in Egypt according to the study and impacts of franchising in the fast food market in Egypt.
(B,Soliman. Personal interview, 2010)
Franchising impact and Conclusion.
Egyptian Fast food market grew in a very good rate during the last years and considering now one of the most profitable markets in Egypt. Thanks to the government and the open door policy by president Sadat which opens the Egyptian markets to the world and to the franchisors. Franchisor found Egyptian market is a very good to do business with the help of the government.
Franchising in Egypt open the doors to many business men to do a successful business. which lead finally to support the Egyptian economic growth and was one of the solutions for the problem of unemployment in Egypt. Also franchising was one of the methods of develop the Egyptian business by the new ideas of doing business.
The comparison between the independent and the franchised business in Egypt shows the franchising importance in Egyptian fast food market as a better way of doing business and the development of the independent business by the high degrees of competition. The comparison shows that accruing a franchise is not an easy task because of the large amount of money needed to startup the business that gives the advantage to the independent business. But the name of the trade mark the franchisee buys will give him the advantage to earn the consumer. Also the new technology which the franchising business using in Egypt help the market to grew up rapidly in Egypt and make the independent founder search also for this new technology discarding its high price the way to help him to compete with the huge numbers of the franchised business in the market, this lead finally to develop all the fast food market in Egypt.
The low operating cost by the franchised business shows in the comparison help the fast food market to reduce the price of the meals. And also make the independent business to reduce the price discarding the high operation cost to can compete with low market price by franchised business which leads finally to increase numbers of consumers then develop the Egyptian economic. The low business risks in the franchised business shown in the comparison make the independent business use the franchised new methods to solve the problems and risks which develop the problem solutions in Egyptian market and be more experienced.
The ways and steps of determining a good franchised offered by the Egyptian franchising association development and also the experienced persons in franchising was one of the way to chose the better franchising opportunities in Egyptian market, which developed the fast food market in Egypt whether independent or franchised.
PEST analysis of Egyptian fast food market shows the impact of franchising and how the Egyptian market is very good and profitable for fast food business.
The Egyptian political was stable more than many countries that encourage the franchisor to chose Egypt as a potential market for business especially because the help of the government which support the foreign investment.
The analysis shows that the Egyptian economic is very good especially for the fast food market because the low price meals. And also the increasing of the fast food consumers which are willing to pay in the fast food more than one time per week especially after the huge number of franchised restaurant in Egypt.
Demographics in Egypt was one of the important factors that encourage the franchisor to do business in Egypt especially in the fast food market that because the large percentage of the middle aged populations which represent about 62% form all the population as shown in the figure. Also the Egyptian life style and entering women to the business field lead to increase the demand on the fast food meals as its easy, fast and cheap.
The PEST analysis shows that the new technology by the franchised business helps the fast food market to develop in Egypt and have a great impact to develop also the independent local business.
Also the Porter's five forces analysis shows the great impact of franchising on the fast food market in Egypt in many points.
The large numbers of the competitor in the market and the new entering the market develop the fast food market in Egypt by all means. The remaining restaurant in the market means that these who are offered the good quality and reasonable price o they can set and compete.
The existence of the substitute products by the huge numbers of franchised and independent fast food restaurants in the market lead to high level of competition which finally make a very powerful market and very good quality present in the market.
The interviews which done to make the analysis whether local or franchised all mentioned the great and the importance role of the franchising in develop the Egyptian fast food market and its impact on Egypt in all fields. Franchising change the Egyptian thinking about eating outside home and taking fast food became now on of the Egyptian culture at least in the holiday and weekends by all level income consumers. In political now Egypt has many connections with many countries which support the franchising. Also the development in the economic field by increasing the spending rate and the purchasing rate. Franchising also has a great impact on the social in Egypt, franchising was one of the important solutions for unemployment problem which lead to decrease the criminal rate by unemployment people.