Franchising for marketing success

by Prasanna Perera

The growth of franchising, has been synonymous with the growth of McDonald's.

Ray Kroc bought the rights to franchise the McDonald brother's drive - in restaurant. Even since then franchising has become an effective distribution method for a variety of products and services. The list is quite impressive ranging from Coca Cola to General Motors and fast food chains such as KFC, Burger King.

What is franchising?

Quite simply, franchising is a method of distribution for goods and services. There are different types of franchising, such as,

(a) Product franchising

(b) Process franchising

(c) Business formal franchising.

Let us briefly review each of these types.

Product franchising as the name implies, provides the rights to sell the product, in its original form (as it is received from the parent company). Therefore, this method of franchising, is only applicable for the sale of a product. Examples include, car dealership, consumer durable dealership etc.

Process franchising is not as straightforward, as product franchising. In this method, the franchise outlets are granted the rights to the brand name and the process, by the parent company. In the food industry, the process is the recipe, which is owned by the parent company. The parent company, can grant the franchise outlet the right to use the "recipe" and market the product under the parent company's name. The fast food chains provide the best examples for process franchising.

Compared to both product and process franchising, Business format franchising is a far more comprehensive but a complex method. Basically, the entire method of transacting business, is transferred to the franchise outlet.

This includes, the brand name and sales method. The best global example is McDonald's, who have perfected the art of franchising, ensuring consistent product, service and quality standards.

Franchising is a wonderful recipe for a large global organisation, wanting to spread its wings and for a smaller local company, that has the entrepreneurial spirit and commitment to succeed. Basically, the franchiser provides the guidance and expertise to the franchisee.

Franchising is a two-way relationship between a franchiser and franchisee. The benefits of franchising are even for both parties, hence, the popularity and success of the concept.

Franchising offers a franchiser, a quick method of market expansion, with little or no capital investment. It is not feasible, always to set up own distribution methods in different geographical locations. In addition to prohibitive costs, lack of market knowledge and trading conditions, can be major barriers. Further, there is very little risk that has to be borne by the franchiser, since the franchisee will be investing the capital.

The only risk for the franchiser, is the failure of the franchising endeavour. Another significant benefit of franchising, is that the franchiser can achieve a substantial market share, in a relatively short time. This is possible through the expertise of the franchisee, in market penetration.

From a franchisee perspective, the transfer of expertise and know - how, is the greatest benefit. Just imagine the cost of gaining knowledge in food handling, merchandising, processes etc. A local company will find this task, next to impossible.

Another benefit to the franchisee in access to training from the franchiser, in business operations. If a network of franchisees operate, the benefit of synergy can be reaped, in terms of economics of scale across the network.

What products and services can be franchised?

As stated earlier, franchising is an attractive method of product/service distribution. However, there are also examples of products that have failed in particular industries.

Let us first review the industries, where franchising has been successful, as a concept. The food industry springs into mind. Fast food chains, restaurants and bakeries have operated through franchising quite successfully. Retailing of clothing, footwear, cellular phones and accessories, computers and accessories, also provide excellent examples of franchising. In the Professional Services Sector, franchising is practised by accounting and auditing firms, legal firms, advertising and promotional agencies etc.

There is no reason for a product or service to fail, provided that the franchising activity is carried out professionally. The franchiser has to understand the essence of franchising, and develop an appropriate business format, through which the franchising activity can be implemented.

The franchising environment

There are three elements in the franchising environment that are required, for success. They are the product, the brand and the system of franchising. Let us briefly review each of these elements.

A product should first be tested in the marketplace. Testing a product means that it has to be successfully sold in the marketplace, through multiple outlets and in different geographical markets. The definition of the products, is not restricted to the physical dimension. It also encompasses the intangibles such as the quality of service, the ambience of the sales outlets etc. Once a successful make up of a "complete product" is achieved, the franchiser can offer same to potential franchisees.

Branding is normally perceived to be the responsibility of the franchiser, and when a franchisee buys into a franchise, the franchisee is partly paying for the brand. Therefore, franchisers with strong brands, are able to command a premium on the franchise fees.

However, it does not means that a weak brand cannot be franchised. An unknown brand when franchised, will require the franchiser to invest in creating awareness and building the brand. As such, branding is a key ingredient for success in franchising. The stronger the brand, the easier it is to franchise same.

The final element is the franchising system. The system spells out all aspects relating to conducting the business or franchise. It will specify the guidelines and procedures to be followed by the franchiser and franchisee, in order to sustain a mutually beneficial business relationship.

An important ingredient of the franchising system, is feedback and control of operations. It specified the support that has to be provided by the franchiser to the franchisee, as well as what feedback should be provided by the franchisee to the franchiser.

If a proper franchising system is followed, the franchisee will offer the market a complete product, in keeping with the specifications provided by the franchiser.

There are many organisations that have achieved growth in revenues and profit, by adopting successful franchising systems.

These successes have resulted in franchising, being accepted as an effective and excellent method of distribution and selling.