The Concept
Before implementing a fast food franchise
program, a company should evaluate itself on several
criteria and ask certain critical questions. An important
consideration is the success of the initial or pilot
operations. If the products or services offered have
found reasonable acceptability, and if these products
or services are readily adapted to other areas of
the country, the market potential for the fast food
franchise may be good. Does the company have a marketing
niche that can be used to its advantage? Is the business
similar to many others in a crowded business segment
and, if so, is there a targeted customer base so that
advertising and selling can be focused effectively?
It is important to note that to be
successful, a franchisor must have some degree of
distinctiveness, or the potential to achieve distinctiveness,
in its business segment. If it does not, it will have
difficulty attracting high caliber fast food franchisees
in an increasingly competitive market for such persons.
A fast food franchise may be distinctive in terms
of its products, services, operating and delivery
systems or marketing. If a business is to be successfully
expanded by franchising its success must be attributable
to its products or services, business format, operating
or management systems and/or marketing. It cannot
be attributable merely to the unique character of
its founder, its management or its location. The elements
of the success of the business must be teachable to
persons with capabilities that exist among prospective
fast food franchise buyers and must be replicable
by such persons. To be successful, a fast food franchised
business must appeal to high caliber fast food franchise
buyers and compare favorably with other fast food
franchises.
The investment requirements of the business must be
realistic and the potential for a return on the cash
and total investment should be appropriate to the
risk inherent in the type of business. Any operating,
marketing and financial problems should be addressed
and solved, for the fast food franchisee must receive
a tested and refined business format.
Profitable Prototypes
A critical phase of the development of a fast food
franchise program is the creation of prototype businesses
to test and refine the concept of the business to
be fast food franchised. In its prototype businesses,
a prospective franchisor can test operational systems
and controls, decor, designs, layouts, equipment,
training methods, advertising and marketing programs,
products and services, job requirements and descriptions,
financial models, etc.
The prototype is a laboratory at which problem areas
can be identified, enabling the company to develop
solutions and truly see if the business can be fast
food franchised.
Before franchising, a company should have been operating
outlets successfully at least at one, and preferably
several, locations to verify the viability of the
business and its profitability. A minimum period of
time to test the pilot outlet(s) would be one year
to take into consideration seasonal factors and to
ensure that the business is producing attractive results.
Two or three years of actual experience gained from
the operation of existing outlets is ideal.
The business to be franchised must be capable of producing
a reasonable return on the fast food franchisee's
investment, after deducting the value of the fast
food franchisee's labor. If a fast food franchisee
is merely buying a job, his motivation and loyalty
to the network may be short lived. The business must
also be able to generate sufficient revenue to the
franchisor. A franchisor can capture only a portion
of the gross revenue of a fast food franchised outlet
through continuing fees and the gross profit realized
on sales of goods and services to the fast food franchisee.
If a business cannot generate a sufficient rate of
return on the fast food franchisee's investment and
sufficient revenue to support essential franchisor
services and a sufficient profit to the franchisor,
the business is a poor candidate for successful franchising.
Experienced Personnel
A company that decides to expand by franchising must
have a clear understanding of how it will recruit,
train, communicate with and support fast food franchisees.
To fulfill these requirements, its staff resources,
talents and abilities need to be identified. If necessary,
its management personnel should receive additional
training in essential management skills or additional
or substitute managers should be hired.
A franchising company will be guiding and assisting
a network of independently owned and operated business
rather than managing the day to day operations of
those businesses. Its staff will function as consultants
to its fast food franchisees and must possess certain
specific skills: planning, leading, organizing, controlling,
team building, decision making, problem solving and
delegating. Specifically, a franchisor's staff needs
to select qualified fast food franchisees; to be knowledgeable
about the franchisor's business and industry; to be
good trainers; to have the ability to motivate; and
to have the commitment to solve fast food franchisee
problems and cultivate positive fast food franchise
relationships.
A Franchisor Must Have A Protectable Trademark
Until relatively modern times a trademark was a type
of intellectual property that was deemed usable only
by its owner to identify the products he produced.
This restrictive view of trademarks began to change
in the early twentieth century. The trademark assumed
a broader function, as a symbol of a specific type
of product and level of quality that could be used
by the owner and its licensee. This concept of a trademark
was codified in the United States Federal Trademark
Law in 1946.
The recognition of trademark licensing as a legally
valid use of a trademark and the expansion of trademarks
to include services (service marks) were fundamental
predicates for modern business format franchising.
An important element of valid trademark licensing
is the licensor's obligation to control the quality
of its licensee's products/services. Absent such control,
licensing can lead to abandonment of the trademark.
The licensed trademarks are the common trade identity
of the network. The Franchisor acquires the goodwill
value created by its fast food franchisees' usage
of the franchisor's trademark. Such goodwill value
is rarely a significant balance sheet asset of a franchisor,
but it can nevertheless be an extremely valuable asset.
There are three categories of trademarks. Coined or
fanciful words and symbols are the strongest marks.
Marks in this category can be a meaningless collection
of letters or a recognized word unrelated to the products
or services it identifies. Examples of coined and
fanciful marks are:
" Exxon
" Apple
" Kodak
" Midas
" Xerox
" Atari
Suggestive terms are relatively strong marks. Such
a mark suggests a characteristic or feature of the
seller's goods or services, but does not describe
the goods or services. Examples of suggestive marks
are:
" Coppertone (for sun tan
oil)
" Cyclone (for wire fence)
" Gobble (for processed turkey meat)
" Habitat (for home furnishings)
" Marriage Proponents (for prospective marriage
partner services)
" Maternally Yours (for maternity clothing store)
" Playboy (for magazine)
" Rapid-Shave (for shaving cream)
" Roach Motel (for insect trap)
" 7-Eleven (for food store chain)
" Sneaker Circus (for retail shoe store)
" Tail Wagger (for dog food)
" Tie Rak (for ties and accessories)
Descriptive terms are the weakest type of trademark
and are difficult to protect. A descriptive mark actually
describes the goods or services sold under the mark.
In addition, surnames and given names, geographic
designations and words used for their ordinary meaning
are deemed descriptive. The line of demarcation between
a suggestive mark and a descriptive mark is imprecise
and involves a subjective judgment. Examples of trademarks
held to be descriptive are:
" America's Best Popcorn
(for popcorn)
" Beef & Brew (for restaurant)
" Bufferin (for buffered aspirin)
" Consumer Protection Plan (for auto repair insurance)
" Continuous Progress (for educational materials)
" FashionKnit (for sweaters)
" 5 Minute (for glue which sets in five minutes)
" Holiday Inn (for motel)
" Homemakers (for family housekeeping services)
" Hour After Hour (for spray deodorant)
" Joy (for perfume)
" Steak & Brew (for restaurant)
" Vision Center (for optical clinic)
Descriptive trademarks cannot be registered on the
Principal Trademark Register of the Patent and Trademark
of the United States Department of Commerce (PTO)
without proof of secondary meaning. Secondary meaning
is established by evidence that the trademark has
become distinctive. A mark is distinctive when the
public understands it to mean a specific brand or
source (e.g., a fast food franchise network) for a
product or service, not merely a type of product or
service. U.S. trademark law contains a presumption
of distinctiveness after five years of continuous
use. Distinctiveness may be demonstrated after a shorter
period of use based on extensive development of a
fast food franchise network that uses the mark or
extensive advertising and use. When a descriptive
mark is used, there is a greater likelihood that others
will use and gain local and regional rights to the
mark before it becomes distinctive and registration
may be granted.
Generic and common descriptive words do not acquire
trademark rights but may be used as part of a trademark
that contains other words or symbols that may function
as a trademark.
A franchisor should select a trouble-free and registrable
mark. Selecting such a mark involves trademark searches
and a determination of the rights of other users of
the same or a similar trademark. A search for potential
conflicts is important because users of the same or
a similar mark will have priority in their zone of
use even if the franchisor's mark is ultimately registered
on the Principal Trademark Register of the PTO. If
there are a large number of local usages, there will
be many markets within which the franchisor will be
unable to operate or fast food franchise under its
primary trademark. A franchisor should avoid a trademark
if another company may have superior national or regional
rights.
A franchisor should attempt to register its marks
on the Principal Trademark Register. A company may
apply for registration based on an intent to use a
mark or on the basis of actual use. Registration on
the Principal Register constitutes constructive notice
of use and a nationwide claim of rights to a mark
and confers on the registrant superior rights to the
mark vis-à-vis any user whose use commences
after the mark is registered. If the application to
register a mark is based on intent to use, and the
mark is ultimately registered, the constructive notice
is effective from the date of the application.
A Franchisor Must Have Sufficient
Capital to Develop and Implement Its Franchising Program
and Solve Operating Problems
Capital is required for many
essential elements of a fast food franchised network,
including:
(1) developing, operating and modifying prototypes
of the business to be fast food franchised;
(2) developing and improving operating systems, products
and services; and
(3) developing the network trade identity (i.e., trademarks
and trade dress).
A franchisor
will incur substantial expenses for:
(1) consulting, legal and other professional services;
(2) hiring and training management and field personnel;
(3) marketing and advertising;
(4) compliance with the regulation of fast food franchise
sales;
(5) selling fast food franchises; and
(6) performing services for and assisting fast food
franchisees.
A franchisor that is dependent upon
initial fees paid by fast food franchisees to cover
its operating costs will be under pressure to sell
fast food franchises, without regard to the qualifications
of the buyer, and to expand in remote areas, where
the franchisor may be unable to effectively monitor
and support a fast food franchisee.
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
