What is Franchising?

To all of us as consumers, a McDonald’s or a KFC or a Cafe Coffee Day for that matter in India, or abroad largely look the same. Yet beneath this layer of similarity reside two entirely different organisations – the invisible company that owns the brand, and the company that operates the visible outlet- the franchise.

Fig : 1. Frachising Companies
Fig : 2. Franchising Identity System

 A ‘franchise’ means the special right given by a manufacturer or a parent organisation to another individual or firm to sell the former’s product or service in a specified area(s). Thus, a right given by McDonalds to someone in India to sell McDonalds’ products in a particular area in Delhi, for example, is an example of a franchise agreement. The person or organisation which grants the right is called franchiser. The individual or enterprise to which the right is granted is calledfranchisee.  Thus, in our example, McDonalds is the franchiser and the person to whom the right has been given to sell McDonalds’ products in Delhi is the franchisee. Because this person in India gets the advantage of selling goods of a big brand McDonalds, he is required to pay some fee to McDonalds in return.

 The right granted by a franchiser to a franchisee is given under a special agreement known as the Franchise Agreement. A franchiser can have such an agreement with more than one franchisee. Thus, franchising is a term that defines the business relationship between two organizations where a franchisor, who is the owner of a brand name, product, or system of a business, permits a franchisee to use its brand, product, or business process for a fee.

 Definition :

Franchising may be defined as a contractual licence (right) granted by one person (franchiser) to another (franchisee) which:

  • permits the franchisee to carry on a particular business using the franchiser’s business know-how under the franchiser’s brand as an independent business
  • enables the franchiser to exercise control over the manner in which the franchisee carries on the franchised business
  • requires the franchiser to provide the franchisee with ongoing support in carrying on the franchised business

 Examples of Franchising :

In India, NIIT (computer education), APTECH (computer education), Pizza Hut (fast food), McDonalds (fast food), Nirulas (fast food), Subway (fast food), Bata (shoes), Liberty (shoes), Nike (shoes and sports apparel), Adidas (shoes and  sports apparel), Reebok (shoes and  sports apparel), Van Huesen (clothing), Allen Solly (clothing), Pantaloons (clothing), Barista (coffee), Café Coffee Day (coffee) are examples of franchise agreements.

 Features of Franchising :

The salient features of franchising are as follows:

  1. The franchiser allows the franchisee to use his trade mark under a licence.
  2. The franchise agreement requires the franchisee to follow franchiser’s policies regarding mode of operation of business.
  3. The franchiser provides marketing support and technology to the franchisee to carry on business in the manner specified in the franchise agreement. Thus, a franchiser virtually sets up the business for the franchisee.
  4. The franchiser may also arrange for the training of personnel working in the franchisee organisation.
  5. The franchisee pays to the franchiser a sum of money (called royalty) for using his business know-how and trade mark.
  6. The right to use the business know-how and trade mark of the franchiser is for a limited period of time defined in the franchise agreement. However, the franchise agreement may be renewed from time to time. 

Franchise Manual :

A franchise manual is the embodiment of the know-how of the franchise. The manual is a living document and will continually change as the business develops.

The following is an illustrative list of the likely contents of the franchise manual.

  • Shop layout
  • Staff uniform/appearance
  • Staff etiquette
  • Staff job descriptions
  • Training requirements
  • Pricing policies
  • Storage requirements
  • Advertising and marketing policies
  • Technical information about equipment used
  • Customer complaint procedures 

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