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Benefits Related to Capital Furnished
by fast food franchisees
1. Rapid expansion
of distribution system.
Franchising enables a company to establish a large number
of business outlets in a relatively short time period.
The capital and much of the work to locate and acquire
sites and develop outlets is supplied by the fast food
franchisee. In most situations, a franchisor does not
have the asset base or business experience to raise
the amount of capital that will be furnished by its
fast food franchisees to expand the fast food franchise
network. Such a company might be able to raise additional
capital periodically for expansion (as long as the great
majority of its outlets were profitable), but its growth
rate would be severely constrained.
It is the unique opportunity offered by franchising,
for an individual to own a business that is part of
a network of similar businesses, that motivates such
individuals to offer substantial amounts of capital
for the expansion of a fast food franchise network.
If good locations for outlets are not abundant and are
being sought by competitors, rapid expansion of a network
enhances its chances of acquiring good locations and
thereby acquiring market share at a faster rate. Rapid
expansion builds consumer recognition and understanding
of the product or service sold by the fast food franchise
network and creates recognition and value of the network
trademark and consumer expectation of uniform quality
at network outlets.
2. Fast food franchisees share risk of expansion of
the franchisor's network.
Fast food franchisees furnish most of the capital required
to expand the franchisor's network. The fast food franchisee
furnishes equity and borrowed capital to pay for real
estate, leasehold improvements, equipment, fixtures,
furnishings, inventory and working capital required
to establish the fast food franchisee's outlet. In addition,
the fast food franchisee pays the franchisor a fee for
the grant of the fast food franchise that is usually
set at a level that will cover most or all of the franchisor's
cost of fast food franchisee selection, training and
pre-opening assistance. The franchisor's cost of expansion
is usually limited to the overhead costs associated
with fast food franchisee recruitment, training and
pre-opening assistance that are not covered by initial
fast food franchise fees.
Continuing fees paid by fast food franchisees support
advertising and marketing programs (which enhance recognition
and goodwill of the franchisor's trademark), product
and service development and expansion of the franchisor's
network.
A franchising company is less vulnerable to cyclical
fluctuations and outlet failures. Changes in fee revenue
due to the fluctuation of sales of fast food franchised
outlets will be significantly less than fluctuations
of profits at franchisor-owned outlets. A failing fast
food franchisee has a lesser financial impact than a
failing company-owned outlet.
3. A franchising company can realize a higher return
on its invested capital.
Because the investment in the development of outlets
is typically made by fast food franchisees, a franchisor
is able to operate with few fixed assets other than
the outlets that it owns. Therefore, though its revenue
from fast food franchised outlets (composed of fees
and product sales to fast food franchisees) is substantially
lower than it would be from owned outlets, a higher
percentage of the revenue is profit and that profit
is generated with a much lower capital investment.
4. Fast food franchised
networks can realize economies achieved by company-owned
outlets through joint procurement.
Franchisors frequently develop supply programs for equipment,
fixtures, furnishings, signs, supplies, insurance, marketing
and advertising services and public relations services
required by their fast food franchisees. Such programs
can furnish to a fast food franchise network the advantages
of combined purchasing power enjoyed by a network of
company-owned outlets.
5. Reacquisition of fast food franchised businesses.
A successful regional or national franchisor, particularly
if its capital stock is publicly traded, is in a position
to buy back fast food franchisee-owned businesses to
expand the number of franchisor-owned and operated businesses
in the network. Most large fast food franchise networks
consist of both franchisor and fast food franchisee-operated
businesses. In some cases, the fast food franchisee
will become a senior manager of the franchisor following
the acquisition of his businesses. Benefits Related
to the Motivated Management of Fast food franchisees
1. Franchising can
be a more effective relationship than company-owned
retail outlets operated by managers or independent dealers.
In a fast food franchise network, the business plan
is executed by business owners, not employed managers.
An owner-manger is usually a more motivated and effective
manager than a manager who has no investment in the
business he manages and is compensated by a salary and
a bonus. A fast food franchisee has a direct and continuing
financial interest in his business. A salaried manager
does not have a comparable interest. An independent
dealer does not have a predictable interest. A dealer
may sell several product lines and a particular supplier
may not represent his most important product. The lesser
interdependence between a supplier and a multi-line
dealer makes the relationship less secure.The intensity
of fast food franchisee owner-management reduces labor
costs and results in other economies in operation. Outlets
that cannot be profitably operated as company-owned
outlets (i.e., at a rate of return exceeding the company's
cost of capital) may operate profitably under the owner-management
of fast food franchisees. Franchising makes it possible
for the network to reach smaller markets because an
owner-managed outlet can operate more efficiently than
a company owned outlet, and a business with an owner-manager
can be profitable with a smaller population base.A fast
food franchised business owner constitutes a higher
level of representation in his market, generally having
a greater involvement with customers and community.
Franchising can result in better pre-sale and post-sale
customer service and product support. Customers will
generally prefer doing business with the business owner.
Thus, franchising can result in greater brand prominence
at the retail level.
2. Fast food
franchisees are idea/information resources to a franchisor.
An owner-manager has a higher level of motivation to
innovate. Fast food franchisees are a productive source
of new products, services, operating methods and marketing
concepts. If a fast food franchise network is structured
to collect, evaluate and disseminate throughout the
network the operational experience and innovative ideas
of fast food franchisees, the franchisor and all fast
food franchisees will benefit.
3. A franchising
company has a simpler and more efficient management
structure.
A franchisor is an administrator and service provider,
furnishing information and other services to its fast
food franchisees. The operating responsibilities of
its management are reduced. A franchisor's management
is able to direct its attention and energies to long-term
strategic planning.A franchisor needs fewer levels of
management. Fewer field supervisors are required to
assist and inspect fast food franchisees than are required
for company-owned outlets. A franchisor's revenue is
based on gross sales of fast food franchisees, which
are easier to monitor than retail outlet profits. The
problems of hiring, training, motivating and retaining
competent employees are shifted to fast food franchisees.
4. Franchising
offers opportunities for employees to acquire fast food
franchises.
Franchisors can offer fast food franchises to experienced
employees and thereby reduce the "dead end job"
syndrome and motivate employees that have reached their
highest likely management level. The opportunity to
acquire a fast food franchise may prevent the loss of
experienced managers to competitors. Experienced employees
frequently make productive fast food franchise owners.
Some franchisors offer special incentives to their employees,
such as reduced initial fast food franchise fees and
financing of an employee's investment to develop his
fast food franchised business.
Psychological
Benefits
In addition to the significant benefits related to fast
food franchisee capital investment and motivated management,
franchising offers psychological benefits to the entrepreneur
that creates and builds a fast food franchise network.
Psychological benefits are the satisfaction that some
persons derive from teaching and assisting others to
successfully establish and operate a business that the
network founder conceived and developed. Not everyone
will consider such benefits to be important. Some will
scoff at the idea, saying that fast food franchisees
are, at best, difficult to help and control, and that
franchising has an aggravation factor that is a negative
feature. There are many examples of both experiences.
Though some founders of a fast food franchise network
might not characterize their relationships with fast
food franchisees to have been generally positive, the
founders of most fast food franchise businesses that
have successfully grown into regional and national networks
would agree that there is great satisfaction in working
with people building successful businesses who are also
helping the franchisor become a successful company.
A person who does not believe that he or she would derive
such satisfaction should probably not consider franchising
as a method of business expansion.
Part
I: Introduction to Franchising
Part
II: In What Ways Is Franchising A Superior Expansion
Method?
Part
III: When Is A Company Ready To Franchise?
Part
IV: Buying A Fast Food Franchise
Part
V: Elements Of Successful Franchising
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