Franchising is – in short – the practice of ‘transplanting’ firm’s successful business model. Some of the most successful and well known businesses that use franchising as means of growth and international expansion are in the area of Fast food (Burger King), Restaurant (Pizza Hut), Retail Shops (O2), Business Services (Kendlebell) and Distribution/Delivery Services (Fast Way). Almost any type of business is capable of being franchised.
Advantages of Franchising for the Business
Franchising offers the opportunity to secure distribution for your products or services more quickly than it would be the case if you had to train up your own employees and develop your own internal marketing, sales and distribution organization. The use of your capital will facilitate the expansion of a network more quickly than it would be the case if you had to engage in fundraising. Franchisors, with their increased purchasing power (and possibly reduced overheads) may be able to increase the profitability of small units and are likely to have lower gearing than non-franchised businesses, and as a result may be able to survive better in a recession. Linking performance to rewards i.e. turnover to profit sharing is a useful motivational tool that can be used in the franchising process.
In terms of advantages in the context of international expansion, as franchising means that you are effectively partnering with a local firm, many barriers to trade are overcome – such as the language barrier, the cultural barrier and the lack of local market knowledge. Other aspects need to be taken into account, especially with regard to the surrounding legal issues, as franchising is heavily contract based, also tax issues need to be carefully considered, and adequate protection put in place to preserve the intellectual property, just to name some of the key issues.
Methods of Overseas Expansion
Franchising is increasing in popularity as a means of international expansion. Many businesses which do not use the franchising format in their domestic market choose to adopt one of the franchise methods set out below to expand overseas. These methods are:
- Direct franchising – whereby a business grants franchises to franchisees in another country
- Establishing a subsidiary/branch in the target country which grants franchises to franchisees in that country
- Establishing a joint venture with a local partner to grant franchises
- Entering into a master development or master franchise agreement. Under a master franchise agreement the master franchisee undertakes to grant sub-franchises to third parties. Under a master development agreement, the master developer undertakes to open outlets itself rather than by way of sub-franchising.
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