A franchisee is able to use a strong external brand to achieve an avenue to profitability, while the master franchisor is able to extend its market presence without having to directly oversee dayto- day operations. However, the full scope of benefits of a franchise is only truly realized if the master franchise has a number of factors in place, as detailed below.
In terms of pros, the first visible benefit is the strength and profitability of brand recognition. If the brand is truly renowned then this takes the pressure off areas such as marketing, as brand awareness and loyalty already exist. In other words, big household names and internationally renowned brands are able to leverage their market position, and the franchisee can capitalize on the brand’s market strength.
Another factor to consider is the uniqueness of the concept itself. Brands that stand out and are sought after are prone to generating a higher level of interest. When supported by trademarked “recipes,” they can generate a loyal/profitable market interest. Beyond the actual nature of the brand, support from the master franchise — in terms of staff training and operation manuals — are paramount to the success of the franchise. When looking at brands on an international franchising scale, localization strategies notwithstanding, the quality of goods and/or services is maintained, irrespective of the market in question. If one were to travel throughout Europe, for example, it is expected that a successful franchise such as McDonalds would have a consistent level of service and quality regardless of the region in question. This level of standardized quality control is greatly enforced and strengthened by the amalgamation of a standard by a master franchise operation manual, which is reinforced by the master franchise as previously mentioned. In addition, the application of a marketing plan that employs a go-to marketing strategy or a GTM is another recipe for success when discussing franchise potential. For new, unknown brands entering the market, GTMs are based on predictive research but remain untested until they have run the course, whereas with well-established brands that possess years of operational success there is a strong market history and experience to fall back on. In other words, the master franchise’s strong market presence and GTM success enable the franchisee to apply this plan to their respective markets with a greater chance of success and market penetration.
In contrast, the franchisor/franchisee arrangement can pose a number of cons that arise due to factors in the very nature of the arrangement. In some instances, the franchise fees tend to be higher than the cost of developing a new concept. Therefore, it only makes sense if the brand has a profitable USP (i.e. the brand has something unique to offer in terms of brand recognition, operational systems in place of even a secret recipe and so forth).
Another issue that often arises when brands go international is that, in many cases, brands need to be localized. Many brands do not travel well and will have setbacks translating to the local market, which is why major successful international brands employ solid localization strategies to compensate for this. To put it simply, you can’t target different markets and demographics with the same cut and paste marketing campaigns, and household names such as Coca Cola and Kentucky Fried Chicken have really implemented the globalization aspect in international franchising. But as previously mentioned, if the localization strategy isn’t successful or the brand hasn’t undergone any form of localization then problems can arise in market perception and reception. Another con is the impact of the royalty fee implemented by the franchisor on the franchisee’s margins. The royalty fee is enforced as a percentage of sales paid for the lifetime of the project, which can range from 4 percent to 8 percent on turnover. In many cases, this is applied without any legitimate support from the master franchise.
Another issue that often arises for the franchisee relates to autonomy and freedom. Adaptations to the concept or marketing activities often require master franchise approval. A franchisee doesn’t own the rights to the brand and is bound to a standard 10-year agreement, which is auto renewable. On the other hand, it can be observed in many franchisor/ franchisee relationships that the key to success extends beyond the mere legal contracts and is paramount to a more operational/day-to-day adaptive relationship. Franchisor/franchisee relationships that manage to find a balance between enforcing the master franchisor’s brand standards and allowing the franchisee a favorable degree of autonomy can expect to experience benefits in terms of operational output and profitability.
At present, franchising is consistently growing into one of the most significant segments of the hospitality industry. With clear benefits to both parties, it remains a lucrative method to market expansion and profitability. And while certain factors can hinder the perceived benefits, a communicative relationship ensures a better path to autonomy and profitability, encouraging the maintenance of standards for both the product and services in question.
Abdul Kader Saadi,
Managing Director and owner
Glee Hospitality Solutions