In the world of business, there are many approaches to running a business. Franchising is growing in popularity as an essential tool for businesses in their international expansion. Franchising is a legal agreement in the form of a contract that allows one parent organization (a franchisor) with a product, trademark, or an idea to allow an independent business or a firm (the franchisee) to conduct a given business under their established name. In return, the franchisee usually pays some fees to the franchisor. The fees act as compensation to the parent owner for the business concept, management assistance, rights, and other services associated with the contract (Varotto & Silva, 2017).
Therefore, the royalty fee guarantees the franchisee the right to carry out their business in the name of the franchisor. Many independent business owners prefer this approach in conducting their business due to the many associated benefits (Elango, 2019). This paper evaluates the concept of the franchising system and gives out an example of an organization with this approach while also highlighting the merits and demerits of the system.
The franchising system is highly rising in the business world with the high adoption among many businesses. This system involves the approach of distributing products or services with relation to a franchisor and a franchisee. A franchisor has an established system that is quite popular in the market with a bigger brand name and distribution system (Rosado-Serrano et al., 2018). As such, it is easier for any associated business or name to sell more when they associate themselves with this business organization.
Therefore, a franchisee utilizes the opportunity of doing business under the name of the franchisor and gaining from the business concept and rights, among other services. Technically, the term “franchise” refers to the contract binding these two parties. However, in a common approach, this term refers to the franchisee’s actual business in this agreement. Franchising, therefore, is the practice of crafting and distributing the franchise system or the brand (Frazer & Grace, 2016). Many big organizations have adopted this approach, with McDonald’s being a notable example.
McDonald’s is one of the leading organizations globally with high adoption of the franchising system. The organization is the global leader in foodservice retailing industry, with over 38,000 locations in more than 100 countries. The company’s approach to business mainly uses franchising system, as evidenced by the 93% capacity in franchisee parties (McDonald’s, 2021).
The McDonald’s franchise system has defined its operations for over 60 years, with this approach being their preferred path. The organization even aims to make 95% of its services carried out by independent business owners (McDonald’s, 2021). The organization controls most aspects of these businesses, such as the locations, ingredients, and quality, among other facets.
The organization makes its finances through leveraging its product to franchisees that lease properties owned by McDonald’s. Many franchisees are lured into this approach due to the impressive margins from the organization that almost guarantee making profits. The organization has proved to be a success in the “Quick Service Restaurant (QSR)” section of the market. In 2019, McDonald’s was the most valuable QSR brand with an asset capacity of $47.5 billion and a brand value of about $130 billion (McDonald’s, 2021).
The organization still leads in the aspect of the most outlets globally as well as in terms of overall sales. This success is enhanced by the franchising system that the organization has effectively adopted. Most of the outlets are owned by independent owners that capitalize on the McDonald’s name and brand to make their sales. McDonald’s still benefits from such a system as it retains about 82% of the revenues that the franchisees generate as compared to the 16% from the company-oriented locations (McDonald’s, 2021). Therefore, this is a major implication of the organization’s 95% target for franchisees.
The franchising system has various advantages that make it a preferable approach by different organizations. For the franchisor, the revenue stream from this model is more stable and highly predictable with measurably low operating costs. Therefore, this makes the business more profitable as the low operating costs imply that the organization incurs lower expenses while making even more profits (Frazer & Grace, 2016).
Furthermore, if the franchisor establishes its brand to global levels and has challenges managing the increasing number of stores, then it benefits from the services of the franchisees. The firms that become franchisees provide franchising fees for the franchisor and, therefore, the franchisor obtains the revenue without managing the stores. The franchisor also does not lose all control as the agreement of the contract makes them part of the franchisees’ business (Rosado-Serrano et al., 2018). The franchisor does not have to worry about all the processes due to the acquired assistance from the franchisees.
The franchisees also benefit from the franchising system as they get an easy path to the market due to the established name of the franchisor. Franchising reduces the business risk for the franchisee due to the already proven system of product delivery. The franchisees benefit from the broad customer awareness and brand recognition and thus reduce costs that are associated with the brand recognition and customer awareness processes (Frazer & Grace, 2016). The independent business owner gets constant support from the franchisor in different ways, such as training, constant quality monitoring standards, and global marketing support. These approaches make the business process even easier for franchisees.
Despite the different benefits of the franchising system, the approach also has various disadvantages for both the franchisor and the franchisee. The main disadvantage for the franchisor is that they lose profit through this system (Frazer & Grace, 2016). In taking this approach, the franchisor offers responsibility to the franchisee to run the different stores as an independent business owner. The franchisee will earn profits from the business that has its brand and name associated with the franchisor.
Therefore, the franchisor fails to fully benefit from the profits of these stores. The franchisor also loses part of the control of the business as given to the franchisee. The franchisee also faces disadvantages in this system as they do not fully benefit from the profits. The franchisee has to give the royalty fees to the franchisor, and this reduces their profit (Rosado-Serrano et al., 2018). The franchisee also does not have full control of the business as they have to follow the standards of the franchisor. Therefore, the business is not theirs in totality.
The franchising system is on a fast rise, and the approach has proven to have different implications on businesses. The approach allows the parent organizations to expand their businesses with ease due to the offered assistance from the franchisees that run their business in the franchisor’s brand. Both parties benefit from the approach as it helps meet the various needs in conducting their businesses. However, in this approach, the parties have to contain the disadvantages are associated with the approach. The parties thus consider this approach as the benefits outweigh the drawbacks.
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Frazer, L., & Grace, A. (2016). Franchisor-franchisee relationships. Handbook of Research on Franchising, 211-233. Web.
McDonald’s. (2021). Franchising overview. Web.
Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising: A literature review and research agenda. Journal of Business Research, 85, 238-257. Web.
Varotto, L. F., & Silva, L. A. (2017). Evolution in franchising: Trends and new perspectives. Revista Eletrônica de Negócios Internacionais: Internext, 12(3), 31-42. Web.