FRANCHISING NOTES

What is franchising?
Franchising is a form of licensing in which a parent company (the franchiser) grants another
independent entity (the franchisee) the right to do business in a prescribed manner. This right can
take the form of selling the franchiser's products, using its name, production and marketing
techniques, or general business approach. One of the common forms of franchising involves the
franchiser supplying an important ingredient for the finished product, like the Coca Cola
supplying the syrup to the bottlers.

The relationship between a licensee and the parent company is not as tight-knit as a franchisor –
franchisee relationship. The franchisor can exercise more control over the franchisee as compare
to licensing.

Today franchising plays a major role in international business, approximately 70% of McDonald
businesses are owned and operated by independent franchisees.

Fast-food companies like McDonalds, Domino’s, pizza hut, KFC have franchised restaurants
worldwide.

On the basis of ownership franchise can be divided into three sub

categories:
• Single Unit franchise where the franchisor provides to the franchisee the right of running a
single unit.
• Area Development franchise, where the franchisor provides to the franchisee the right of
developing franchisee in a specific area, and
• Master franchise, where the franchisor provides to the franchisee the right to sub-franchise
in a particular region.

The franchisor provides the following services to the franchisees:

• Trade Marks

• Operating Systems

• Product reputation

• Continuous support systems like advertising, employee training, quality assurance

programs.
Franchising agreements
Some of the important items of franchising agreement are as follows:
• Franchisee has to pay a fixed amount and royalty based on the sales of franchisee.

• Franchisee should agree to adhere to follow the franchisor’s requirements like

appearance, financial reporting, operating procedures, customer service etc.

• Franchisor helps the franchisee in establishing the manufacturing facilities, service

facilities, provide expertise, advertising, corporate image etc.

• Franchisor allows the franchisee some degree of flexibility in order to meet the local
tastes and preferences. For example: McDonald restaurants in Germany sell beer also and
McDonald restaurants in France sell wine also.

Advantages of franchising
• Franchisor can enter global market with low investment and low risk.

• Franchisor can get the information regarding the markets, culture, customs &
environment of the host country.

• Franchisor learns more lessons from the experiences of franchisees.

• Franchisee can also start a business with low risk.

• Franchisees get the benefits of R&D with low cost.

Disadvantages of franchising
• International franchising may be more complicated than domestic franchising.

• It is difficult to control the international franchisee.

• Franchising reduces the market opportunities.

• There is scope of misunderstanding.

• Problem of leakage of trade secrets.

Case study question
Q: Analyze the franchisee model of Domino’s. (Following answer is according to my opinion &
understanding about case study)

Ans. Domino’s has adopted master franchise model to expand in the foreign markets. In Master
franchise model the franchisor provides to the franchisee the right to sub-franchise in a particular
region.

Master franchising helped Domino’s establish a significant presence in a short span of time,
as the master franchisees were well versed with local markets. This model also helped domino’s
to localize its products to suit the needs of different markets. It has helped Domino’s to establish
itself as a brand in the international markets.

The master franchise in UK was one of the most successful master franchisee of Domino’s
and had the right to operate the franchise domino’s stores in UK & Ireland. Domino’s was the
leading home delivery pizza company in the UK & Ireland.

Jubilant food works limited has master franchise rights to operate in India, Srilanka, Nepal &
Bangladesh.