The Role Of Franchising Tourism Essay

What is a franchise according to the American heritage dictionary franchising means using one that is granted to use a business model in a certain area for a fee. Well it does not matter how the transaction or agreements are done whether it includes license, joint venture, consulting and supply agreement, and dealership when these terms are included in the contract, it’s a franchise (Grueneberg & Solish, 2010). Legally franchising is viewed as contractual arrangement between the two legally independent parties where the franchisee pays the franchisor for the right to sell the franchisor’s product or the right to use his trademarks in a given location for a specified time period (Francine Lafontaine & Kathryn L. Shaw, 1999). As franchising sector is growing at rapid pace franchisor should look for expansion in international market as the home market specifically developed countries like us Canada, Europe is becoming saturated. It is vital import for a firm to have a strategic plan to successfully establish in global economy (Richard & John, 2004).

The global franchising prospect seems great as said by Hoffman and Preble (1993) after their global survey of global franchise association around the world. The survey came out true as according to the United States census bureau revels that in US total franchise business accounted for 1.3 trillion and total work force of 59 million the report also showed that Limited-service restaurants, sometimes called fast food restaurants, had the highest number of franchise establishments with paid employees (124,898), followed by gas stations with convenience stores (33,991), and full-service restaurants (30,130). Thus the data revels franchise in hospitality industry is observing massive growth (U.S.CensusBureau, 2010).

The massive upward growth in information and technology and simple long distance travel has made the world a small and well interconnected. Organizations should and are taking advantage of these developments and trends to pursue a global expansion. As the global market around the world are opening up and the market in developed countries are at the point of saturation companies are trying to tap into these newly opened markets for example China with one quarter of world population and high number of mid income group is considered as most under-retailed country in the world (Richard & John, 2004).

The concept of franchise is flexible and basically suits service sector. Given that franchise relation are influenced to an extent to which the system can be transfer and sustain in local market in terms of product acceptance, local support and service (John, 1999). Thus due to consistent economic importance of franchise we can find lots of research and literature to help us understand the concept.

Franchising is a major expansion strategy for hospitality firms into a global market, especially hotels and restaurants to name a few Marriott’s, Hyatt, Hilton Accor, IHG, McDonalds, KFC are a very few examples. In global markets franchising add value to the chain by enhancing and understanding the local values culture and customs. Franchising is one of the two main types of operations of which the other one owning. Franchising provides restaurants and hotels with stable franchising revenue through royalties and fees regularly according to the agreement and the time frame of the period (Koh, Lee, & Boo, 2009). Unlike most other service sectors, the hotel industry is generally capital-intensive and its logistics and supply chain can be as complex and difficult to manage as those in manufacturing operations. Thus for hospitality related organization, this can be a huge complication to an equity-based expansion model in various markets, particularly in the international market. Thus, it raises the issue of the importance of the internationalization process through franchising as a non-equity-based expansion strategy(Alon, Ni, & Wang, 2012). But as a matter of fact franchising in international market delivers a scope for rapid expansion and global presence and hotels do have potential to overcome the hurdles like cultural, linguistic, technical, legal, and employment problems commonly associated with franchising internationally.

Hotel industry in particular is different among another service franchisee as it requires big financial investment to establish facilities to start the business. To give a rough idea the total investment required by Choice Hotels International ranges from $2.3 to 14.6 million, InterContinental Hotels Group (IHG) $2-20 million, Motel 6, $1.9-2.3 million, and Hilton 53.4-90.1 million due to such huge capital requirement makes acquiring and setup a franchise hotel a complex process (Alon et al., 2012).

Franchising in Australia originated in a significant way in the early 1970’s under the influence of the franchised US fast food systems – KFC, Pizza Hut, McDonalds – which commenced operations here at the time. Increased intensity in business competition during the 1970s and early 1980s resulted in the failure of many small and medium sized businesses and encouraged growth in franchising. Franchising continued to grow at an accelerated rate during the 1980s. This was attributed to an increase in interest from the financial and public sectors (Frazer, 2000). Over the last two decades franchising in Australia saw a rapid growth and has developed into a highly significant and dynamic business activity The Australian franchise sector with 71000 units and 1,100 business format contributes AUD $ 61 billion to Australian economy in year 2007 thus these sector is of vital important top Australian economy (Scott, Lorelle, & Jeff, 2010).

Comparing the franchising sector in Australia and New Zealand is not new for years there has been a friendly rival among the two countries for title of most franchised country in the world. When the survey carried out New Zealand was more franchised than Australia with 450 franchise system and around 24000 franchise system which was 17% higher than Australia on per individual basis (Lord, 2011).

Franchising in New Zealand is not taken seriously enough compared to other business due to lack of legislation and treating franchise as just a business deal. The franchise sector is substantially larger than many people realize, says Graham Billings, GM of the Franchise Association of New Zealand (FANZ). Current estimates suggest turnover of between $15 billion and $20 billion, representing between eight percent and ten percent of GDP (Moore, 2009).

Taking into consideration the various hotel franchises across New Zealand and Australia gives a clear picture about the franchise investments in the market. Australia has the following well Known International hotel franchise:

Swissotel * Hilton

Accor * Radisson

Four Seasons * Best western Hotel

Sheraton * Marriott

IHG * Shangri- La

Hyatt * Starwood’s

* Choice hotels (expedia.com, 2012).

These are the some of the many brands which have presence in Australian market

when compared to the brands present in New Zealand which are:

*IHG *Accor

*Marriot *Hilton (expedia.com, 2012).

Thus when compared the hotel franchise sector in both the countries Australia definitely has much mature market for franchising then New Zealand as many big hotel organization are yet to tap the New Zealand market like Hyatt, four-season, Shangri-La, Starwood’s.

To get a better picture of comparison between role of franchising in hotel industry in Australia and New Zealand let’s compare two cities in both the countries. Instead of comparing between the cities like Sydney and Auckland will not give fair information as Sydney is far bigger Metro than Auckland. Hence we will compare the role of franchising between Auckland and Brisbane as they are equal in many aspects and also they are known as sister cities.

With parks and botany gardens and population, urban area and economy almost similar to each other helps to compare the role of franchising easier and comparable to each other. Thus when searching for hotels on www.expeidia.com

for hotels in Brisbane there are 145 hotels listed on web site the result for hotels in Auckland are 149, the search result shows the hospitality sector are very similar in both the cities. But when we see the ratio of number of five star category hotels the difference is more than double as Auckland has around 20 five star hotels as compared Brisbane has only 7. After comparing the brands owned by franchise as mentioned above the number shows a slight difference of Auckland having more number(9) of franchised hotels as compared to Brisbane(7).

Hence if we consider the various factors like Number of visitors, density of the hospitality market and economy franchise sector in New Zealand is much denser and bigger than compared to Australia. This shows despite size and regulatory environment franchising has much in common on both the sides. Also when consider the basic hospitality franchising and various local franchised restaurants franchising in New Zealand has much denser network of franchising. It also concludes that the franchising process is market-sensitive and as a result market characteristics play an important role in affecting franchising operations. These factors may include, among others, the market segment, the degree of control, either by the hotel industry sector or by government policy, the risks and costs of entry, and similarities of cultural norms and business. In addition, other situational factors which that affect how hotel franchising is carried out in a market such as Australia and New Zealand which are mature and stable in both the countries, the level of technology infrastructure development in the market, and the overall economic and financial conditions in the financial market of Australia and New Zealand (Alon et al., 2012).