The franchising business model and marketing channels

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Marketing Channels

According to recent data the franchising business model is continuing to expand its presence throughout the United States. According to the International Franchise Association, in 2006, the nearly 300 established franchise brands expanded their total by an average of 4 percent (1). In addition to this growth, in 2006 there were more than 300 companies both new and established, which began franchise for the first time. There are 550,000 franchised businesses located in the United States which collectively generate more than $800 billion in sales. These franchised businesses sell more than $758 billion in goods and services. Franchising represents 35% of all retail sales in the United States, employing over seven million people. One out of every twelve business establishments is a franchised business. There are over 1200 franchise companies representing eighteen different industries.

So what is a franchise? A franchise is a form of licensing arrangement whereby one part licenses another to use its business system and trademark. Franchisees typically pay to the franchisor an initial franchise fee and ongoing royalty payments throughout the franchise term. In consideration for these payments, franchisors permit the franchisee to operate the franchised business under the franchisor's principal trademark and typically provide the franchisee a package of initial and ongoing assistance and training. Such assistance and training typically includes site selection assistance; loan of the franchisor's operations manuals; training; opening assistance; advertising materials; participation in buying and advertising materials; and accounting, business, and operating system assistance.

The sale of franchises is regulated at both the federal and state level. Federal law requires that franchisors give prospective franchisees a disclosure document within the "time for making disclosures" under the Federal Trade Commission's "Trade Regulation Rule: Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," 16 C.F.R. 436 which is generally referred to as the "FTC Rule." Franchise relationships are regulated under a variety of state laws, and many aspects are also regulated by federal law.

A relationship is deemed a franchise if its meets the definitional elements of a franchise under federal and state law. The federal definition of this term is contained in the FTC Rule, which defines a franchise as any arrangement whereby the franchisor; Renders significant assistance to the franchisee in operating its business or significantly controls the franchisee's method of operation, licenses the franchisee to distribute goods or services under, or operate using, the franchisor's trademark, and requires payment of a minimal fee to the franchisor.

There are distinct reasons why people choose to franchise. Some people want to minimize the risk of starting a business. These people want someone else to worry about the future and related strategies. Franchises give the franchisee the opportunity to take advantage of combined purchasing power. One of the most important factors of franchising is the minimizing of mistake that can be avoided.

A potential business owner or franchiser seeks independence of being a small business but without experiencing the growing pains of new and startup businesses. Franchisers aren't entrepreneur. An entrepreneur is prepared to put everything they own at risk just so they can own a successful business. One key issue with being an entrepreneur is using the person's wealth and the risk of losing everything and dealing with extreme uncertainty and risk. Franchising is a good alternative for business owners who want limited risk. Franchising gives an owner some of the qualities of entrepreneurship and training and guidance like a corporate job

Franchisees provide the day to day support of the brand. Franchisors provide the thinking and strategies for the future. Franchises handle day to day operational aspects of the brand and the franchisor handles strategies and the future. Franchisees are independent but they are also contractually bound to the franchisor.

A common barrier of an entrepreneur is the limits of purchasing power. The world has seen the power of buying by large companies of like Wal-Mart. Franchisers can take advantage of the purchasing power of the franchisor. Group purchasing usually results in lower prices. Being in the club or group that can provide reduced costs is a benefit of franchises.

The mistakes of the entrepreneurs can be costly to learn. Using the knowledge of a franchisor and the data they have accumulated about their channel members can save a lot of money. This expertise is valuable for a potential to a prospective business or franchisee. According to Arthur L Pressman, with the Thomas Reuters business, franchise companies are regulated by the Federal Trade Commission (FTC) that requires them to have a Franchise Disclosure Document (FDD) that creates transparency of the franchise opportunity being offered.  

 Other reasons to franchise include buying into a recognized brand name, enhanced business image, and the perception of consistent quality.

Franchisors do many things to develop a recognized brand name. Franchisors offer support for that includes site selection. Many years of trial and error combined with analyzing these outcomes contributes to important decision making data.

Potential franchisees do not have to think about the image of their business. Franchisors can find locations where there factors are similar to conditions their franchises thrive in. The way the business looks is also taken care of. A franchisor can provide in-depth support for the design and construction of the building the franchise will be run from.

Convention entrepreneurs may have issues obtaining loans because of several reasons. Banks may want to look at the projections of the proposed business as well as the business plan and objectives. This data can be readily available by a franchisor. In some cases financing support can be given by the franchisor. The track record of the franchisor can be beneficial to the credibility of the purpose for a loan.

A very important factor of franchising is the training support that is offered. The training support starts with the business owner. The potential business owner or franchise owner can get the opportunity to visit an existing franchise. This visit can be valuable because the business owner can see what goes in to the day to day operations and the responsibilities that they will potentially be undertaking. Operating procedures and operating assistance have been developed with and from training. Supervision and management support is also perfected from training and observation by the franchisor.

Conversely, there are also many reasons why a person would either choose not to become a franchisee or be discouraged. Franchises can be very expensive. According to a 1996 study by the International Franchise Association (IFA), 20 percent of franchises had up-front costs of more than $250,000 and 54 percent required initial investments of more than $100,000. Franchises can get very expense a can often require getting a loan. Continuing throughout the business the franchisee requires royalty payments. These payments can vary from standard rates to percentages of profits. In some cases the percentage of royalties due to the franchisor makes the franchisee unprofitable. The franchisor may charge fees for training, and other programs that individual franchisors do not use.

Franchisers may also require strict adherence to their rules. The well known example of Subway used in many classrooms as a franchise includes issues with these kinds of rules. Subway franchisors have to incur expenses without little say. Subways demand their franchises to bake a predetermined amount of each type of bread regardless of the initial need. This strict enforcement ensures consistency among a firm's franchises, but it may enables independence and creativity. This may frustrate you if you are an entrepreneur at heart. This shows the difference between being a business owner with control and a member of a franchise. Individual franchise owners are expected to follow the rules operations, and guidelines of the franchisor at all time. This adherence is what keeps the franchise intact and consistent. Entrepreneurs who are trying to make their mark or suggest changes in the franchise may not make in progress in getting a change.

As we talked about earlier the enhanced business image can be a great factor in persuading a person to become a franchisee. This can also be costly to the business owner. The value of the brand and name of a franchise is important to the model. Having control over the channel member and monitoring actions of the channel member is a difficult task. The fact the individual member make up the brand make this an extreme priority. An outbreak of food poisoning in one restaurant in the franchise can generate bad press for a franchisee hundreds of miles away and reduce the clientele and profits of that location.

Location support was also identified as an advantage of franchises. This can also be a detractor. The territory issue of franchising can be frustrating to channel members. Many times territories are setup and the member is stuck with that area. If there is a change and an area becomes less profitable the channel member may want to move but there may not be any area close for them to move to.

Obligation can also be a detractor of the franchise model. Franchisees enter a legally binding, long-term relationship: the average length of an initial franchise contract is 10.6 years, according to the IFA (although the term varies significantly between industries). Ten years is a long time to be contractually bound to a company or any kind of entity. The company could be hard to deal with, practice underhanded tactics or simply go out of business and leave the franchisor "holding the bag"

Structurally, there are three franchise types: Product, manufacturing, and business. Each performs a different function, but each has a similar goal. All types want to move the merchandise and make profits from an already proven business model and its image. Most types of franchisors support tasks such as keeping track of inventory; human resources and helping their franchisee understand their financial data.

Manufacturing franchises offer a company the right to produce goods and services using the manufacturer's name. According to Franchise Perfection, many food and beverage companies are considered manufacturing franchises. Many shoe and clothing stores are manufacturing franchises.

One of the less known structures of franchises is manufacturer franchises. The focus of this type of franchise is on the manufacturing phase of a product's lifecycle. Owners of a manufacturer include companies like 7up bottlers and Sara lee companies. The manufacturer is contracted in a franchise form to make and or distribute a product.

Some choose to buy into a business structured as a product franchise is purchasing the right to sell and/or distribute a particular product from a manufacturer. For example, an auto repair shop like Princeton Tire may choose to buy tires from cooper tires to bring in additional revenue. Some companies require that franchises to carry their name in order to carry their products. These companies are commonly called "trade name" franchises.

Business format franchises are the most common. Companies like BPs, Speedways, Wendy's, and some McDonalds are business format franchises. The franchisor creates marketing channels for the franchisee to get there products from. This is similar to the cell phone companies in the mall that the carrier a service provider's name but are not owned by the carrier. The franchisee is really purchasing is purchasing a business model area or service model that they believe has value

There are also ownership differences in franchising. These ownership options include Single -unit ownership and Multi- unit & area development franchise ownership. The gas stations mentioned earlier are maybe example of a single unite franchise. The owner is only authorized to operate under the franchise name at that location. Single unit franchises exist in all three types of franchises.

More advanced franchise owners may choose to be multi- unit or area development franchises. The franchises are the same in concept but they differ only in how and what is managed. The multi-unit franchise owner manages multiple franchise locations within an area is may be responsible for the channel members or franchises in the communities, city or state

The Coca-Cola Company is the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. Coca-Cola's headquarters are in Atlanta, Georgia, in the US. It is best known for its flagship product, Coca-Cola, and is one of the largest corporations in the US. They offer nearly 400 brands in over 200 countries or territories, besides its namesake Coca-Cola beverage. Their business opportunities are enormous and their commitment to consumers and communities is great.

The Coca-Cola Company and/or subsidiaries only produce syrup concentrate which is then sold to various bottlers throughout the world who hold a Coca-Cola franchise. Coca-Cola bottlers, who hold contracts with the company, produce finished product in cans and bottles from the concentrate. Their bottling partners are local companies so they are rooted in their communities, thinking and acting locally. They are employers, purchasers of local goods and services, good neighbors, and, of course, producers of the world's most popular beverages. Coca-Cola introduced franchising into its manufacturing and bottling areas to reduce financial risk and gain market share. And by bottling its soda closer to population centers the company could reduce distribution costs. Coca-Cola bottlers, who hold territorially exclusive contracts with the company, produce the finished product in cans and bottles from the concentrate in combination with filtered water and sweeteners. The bottlers then sell, distribute and merchandise the resulting Coca-Cola product to retail stores, vending machines, restaurants and food service distributors. The bottlers are manufacturing franchise owners. They are also multi-unit franchise owners or area development franchise owners.

While Coca-cola is one of the most recognizable brands in the world there have also been problems with the company image. The Coca-Cola Company has been involved in a number of crime controversies and lawsuits related to its relationship with human rights violations and other perceived unethical practices.

According to the Bloomberg Business week article, "Pepsi: Repairing a poisoned reputation in India," a number of lawsuits have been issued in relation to its allegedly monopolistic and discriminatory practices, some of which have been dismissed, some of which have caused The Coca-Cola Company to change its business practices, and some of which have been settled out of court. It has also been involved in a discrimination case. There have been continuing criticisms regarding the Coca-Cola Company's relation to the Middle East and U.S. foreign policy.

An issue with pesticides in groundwater in 2003 led to problems for the company when an Indian NGO, Centre for Science and Environment, announced that it had found cancer causing chemicals in Coca-Cola as well as other soft drinks produced by the company, at levels 30 times that considered safe by the European Economic Commission. This caused an 11 percent drop in Indian Coca-Cola sales