Chapter 12Chapter 12

FranchisingFranchising

Presented by : Mohammed Salem17-May-2011

ObjectivesObjectives• Define franchising and distinguish the two major

formats• Describe why an individual would become a

franchisee rather than founding a new business• Explain why a firm with a business model would

opt for franchising• Describe the essential elements of a franchise

contract• Explain why franchise systems include company

outlets and describe the multiunit franchising• Describe the ongoing challenges facing the

franchisor

Franchising definitionFranchising definition• Franchising is a marketing channel structure

made to appear as a corporate chain• Independent businesses • Franchisor• Franchisee

Basic Types of FranchisesBasic Types of Franchises1. Business format franchising

o Licensing of an entire way of doing businesso Common name or signo Uniform presentation of the premiseso Expertise shared by franchisoro Continuing business and technical assistance

2. Authorized franchise systemso Minimal requirements to be an “authorized dealer”

Becoming a Becoming a FranchiseeFranchisee• Have capital to invest• Desire to own a business• Want proven model and assistance• Willing to give up some independence in

exchange for assistance

Benefits to Benefits to FranchiseesFranchisees• Brand name and equity• Economies of scale• Market survey and site selection• Facility design• Lease negotiations advise• Financing advice• Operating manuals• Management training programs• Training of franchisee’s employees

Benefits to Franchisees Benefits to Franchisees (cont.)(cont.)• Field supervision of operations• Merchandising and promotion materials• National advertising• Market data and guidance• Auditing and record keeping• Group insurance plans

Becoming a Becoming a FranchisorFranchisor

• Want fast growth• Need a source of capital• Need a source of good managers• Want to minimize monitoring costs• Want a source of new ideas• Want consultants in specific markets• Want control

Franchise ContractFranchise Contract• A standard Franchise contract consists of the

following parts :o The payment system : Lump-sum fee, royalty fee,

initial investmento The real estate : who holds the lease and how it may

be transferredo Termination: arrangement for a possible ending of

contract

• Sometimes adjustment is made to contract (royalties – fixed fees).

Company Outlets in Franchise Company Outlets in Franchise

SystemsSystems• Franchisor’s won outlet (permanent – temporary)• Franchisee’s outlet.• The plural form (having both company and

franchisee outlets)• Synergy from the plural form

o Control systemo Benchmarkso Career pathso Mutual strategy (teaching each others)

Multi-Unit FranchisingMulti-Unit Franchising• Dealing with the same individual for multiple

locations• From franchisor's perspective :• Faster growth• Deal with unknown markets• Reduce managing hundreds of relationships to

reasonable level. (KFC has more than 3500 U.S. restaurants. More than half of them are owned by 17 people.)

• A vehicle for preserving and spreading knowledge

Challenges for Challenges for FranchisorsFranchisors

• Survival (very high failure rates)• Gaining and keeping cooperative atmosphere• Encouraging to innovate• Cooperation among franchisees• Good performance is recognized by franchisor• Feeling the franchisor is fair• Controlling their own business• No goal conflict between franchisor and

franchisee

Franchising in Saudi Arabia

• experts peg the annual growth in franchising in Middle East region at 27%

• American firms have more than 70% of all franchised operations in Saudi Arabia

• Brands such as McDonald's, KFC, Pizza Hut, Hertz, Avis, DHL

• The import of food and foodstuffs are estimated to exceed $7 billion annually

Fawaz Alhokair Fawaz Alhokair FranchisingFranchising

• Interests in fashion, hotels and restaurants• Over 72 fashion franchise partners• Sales in excess of $2.2bn• Over 1000 stores• 48% mainstream fashion market share in KSA

Fawaz Alhokair Fawaz Alhokair FranchisingFranchising

• Some of franchisors

Thank youThank you