Business format franchising
Business Format Franchising is one of the franchising types next to the Product or Trade Name Franchising that has been developed in the 1950s[1].
It is a very common method of franchising that can be widely used in various industries. In this business relationship, the franchisor gives the franchisee permission to use the franchisor's goods and services, trademark, trade name, and foremost the prescribed business format. The franchisor provides the business know-how as well as on case to case financial, technical and legal support to the franchisee. This method enables an individual without previous experience a chance to be informed and trained on how to run a business[2].
Business Format Franchising is frequently used in quick-service restaurants, retail food, lodging and table/full-service restaurants[3]. The most known examples of business format franchising are McDonald's, Subway, Kentucky Fried Chicken, Starbucks Coffee, Motel 6.
Business Format Franchising and Product or Trade Name Franchising
Product or Trade Name Franchising occurs when the franchisee purchases the products or product line from the manufacturer or supplier (the franchisor). In this type of franchising the franchisee requires the trademark, trade name and/or product from the franchisor. In Business Format Franchising "the franchisee adopts the franchisor’s entire method of operation"[4].
Conditions for the existence of a Business Format Franchise
A Business Format Franchise happens where[5]:
- The franchisor has the right to license a business format. He can offer, supply, distribute goods or services or both to other parties.
- Franchisor gives the right to conduct business using the business format in the system or consistent with a marketing plan defined, controlled and suggested by the franchisor or one of its partners.
- Franchisor grants a franchisee.
- The operation of the company is essentially or materially related to a brand owned, licensed or used by the franchisor or one of its partners.
- A business functioning as a business format has been operated by the franchisor for a period of at least 12 months.
- The franchisee pays money to the franchisor by way of:
- payment for services or goods and/or,
- a starting capital and/or,
- a training fee and/or,
- reoccurring or frequent payment of various increments and/or,
- reimbursement for a lien made by the Franchisor.
Examples of Business format franchising
- McDonald’s is a prime example of Business Format Franchising. It is one of the most successful franchises in the world, with over 34,000 locations worldwide. The franchisees pay a certain fee and royalty to the franchisor to operate under the McDonald’s brand name, and in return they receive support from the franchisor in the form of marketing and operational assistance.
- Subway is another successful example of Business Format Franchising. With more than 44,000 locations, Subway is one of the largest franchises in the world. The franchisees pay a certain fee and royalty to the franchisor in order to operate under the Subway brand name. The franchisor assists the franchisees by providing them with marketing and operational support.
- 7-Eleven is another example of Business Format Franchising. It has over 78,000 locations worldwide and is one of the most successful franchises in the world. The franchisees pay a certain fee and royalty to the franchisor in order to operate under the 7-Eleven brand name. The franchisor assists the franchisees with marketing and operational support.
- Dunkin' Donuts is another example of Business Format Franchising. It has more than 11,300 locations worldwide and is one of the most successful franchises in the world. The franchisees pay a certain fee and royalty to the franchisor in order to operate under the Dunkin' Donuts brand name. The franchisor assists the franchisees with marketing and operational support.
Advantages of Business format franchising
Business format franchising is a type of franchising in which the franchisor provides the franchisee with a business system, including the products and services, the operating methods, and the brand name. This type of franchising has many advantages, such as:
- Access to an established brand name: Business format franchising provides franchisees with access to an established brand name, which can help in gaining market recognition and customer loyalty.
- Ready-made business structure: Business format franchising offers franchisees with a ready-made business structure, which can save a lot of time and effort in setting up a business from scratch.
- Transfer of expertise: The franchisor can transfer the expertise and knowledge which can be used to run a successful business.
- Shared marketing: The franchisor can provide the franchisee with shared marketing strategies and campaigns that can help in promoting the business.
- Shared resources: The franchisor can also provide the franchisee with access to shared resources such as distribution networks, suppliers, and technology.
- Support and guidance: The franchisor can offer the franchisee with support and guidance to help them run their business successfully.
Limitations of Business format franchising
Business Format Franchising is one of the franchising types next to the Product or Trade Name Franchising that has been developed in the 1950s. There are several limitations to this type of franchising including:
- High Initial Costs - Business Format Franchising requires high initial costs for the franchisee, such as franchise fees, inventory costs, and marketing costs.
- Limited Control - The franchisor has significant control over the franchisee’s operations, which can limit the franchisee’s ability to make changes or decisions.
- Limited Adaptability - The franchisee must adapt to the franchisor’s system, which may not be well-suited to their market or customers.
- Limited Profits - The franchisee’s profits are limited by the franchisor’s pricing structure and the sharing of profits.
- Lack of Freedom - The franchisee is bound to the franchisor’s system, which can limit their ability to innovate or adapt to changing needs.
- Risk of Failure - The franchisee is at risk of failure if they are unable to successfully implement the franchisor’s system or if their market changes.
In addition to Business Format Franchising, there are several other approaches to franchising:
- Product or Trade Name Franchising, which is a type of franchising that has been around since the 1950s and involves granting the franchisor the right to use the franchisor's trademark, logo, and other intellectual property rights.
- Area Development Franchising, which allows the franchisee to own and operate multiple outlets in a designated area. The franchisor provides support and guidance to the franchisee in developing the area while the franchisee is responsible for day-to-day operations.
- Master Franchising, which involves granting a franchisee the rights to sub-franchise within a designated territory. The master franchisee is responsible for the recruitment and training of sub-franchisees, and is typically paid a percentage of the sub-franchisee's fees.
- Single-Unit Franchising, which allows the franchisee to own and operate a single outlet of the franchisor's business. This type of franchising is often used to expand the franchisor's reach into new markets.
In summary, Business Format Franchising is just one of the many approaches to franchising, with other approaches such as Product or Trade Name Franchising, Area Development Franchising, Master Franchising, and Single-Unit Franchising also available.
Footnotes
| Business format franchising — recommended articles |
| Direct export — Horizontal diversification strategy — Reintermediation — Indirect sales — Aggregator model — Indirect exports — Friendly takeover — Sole distributor — Types of joint venture |
References
- Abell M., (2013), The Law and Regulation of Franchising in the EU, Edward Elgar Publishing, Cheltenham & Northampton,
- Alon I., (1999), The Internationalization of US Franchising Systems, Garland Publishing, New York & London,
- Hatten T.S., (2018), Small Business Management: Creating a Sustainable Competitive Advantage, SAGE Publications, Thousand Oaks,
- Rouse C.N., (2002), Bankers' Lending Techniques, Financial World Publishing, Catenbury,
- Sidhpuria M.V., (2009), Retail Franchising,Tata McGraw-Hill Education, New Delhi.
Author: Angelika Marzecka
