A franchising or Franchise Model is a company that has excellent products and services, and provides people and businesses aiming to open independently with the right to sell their products and services, trademarks, collation, and management know-how, with the aim of developing multiple stores. It is a business model that earns royalties while doing so.
The rights-granting side is called “franchisers” or “headquarters” , and the rights-granting sides are called “franchisees” or “merchant” . , In accordance with the franchise agreement, the franchisor establishes rules, deployment methods and regions of deployment and gives the franchisee the obligation and right to sell products and services.
Convenience stores and fast food restaurants are famous as typical ones.
Basically, the premise of franchise construction is that it is a business such as retail, food and beverage, accommodation, and education that has stable needs no matter where where and what kind of person opens and can expect a certain amount of profit.
- Advantages on the franchisor side
- Advantages on the franchisee side
- Disadvantages on the franchisor side
- Deterioration of the brand image of the headquarters due to the actions of member stores
- Franchisee's risk of changing saddles
- Disadvantages on the franchisee side
The origin of the franchise is said to be America in the Industrial Revolution era , and manufacturers such as singer sewing machines and Ford, which have rapidly expanded production, can increase their market share in a short period of time. We have developed this business model.
From an economic point of view, it is a business model that can be said to be a successful model for economic revitalization due to the rapid increase in employment due to the expansion of business opportunities.
In the franchise system, the franchisor (headquarters) can use the success know-how and system by paying the initial fee (membership fee) and royalties (management guidance fee) by the franchisee (member store), so it is easy to succeed. You can do business.
The rights given by the headquarters include “right to use trademarks, chain names and service marks,” “right to sell developed products and services,” “right to use know-how,” “right to receive continuous guidance and assistance,” and “reconstruction.” There are “open account setting which is an account to offset responsibilities”, “territory right to competition within the area of the same chain (varies depending on the contract)”, etc., whereas franchisees receive membership fees and royalties instead of obtaining rights. I will pay.
The franchisee will bear the funds for opening stores and offices, personnel expenses, etc., and the headquarters will be able to develop multiple stores without using funds.
What is loyalty?
Royalty is a term that means a royalty when using various rights such as patent rights, copyrights, and trademark rights. Loyalty refers to management guidance fees, but there are various payment methods such as part of sales, part of profits, flat rate, and no royalties depending on the franchise.
A retail franchise is a franchise in which the headquarters provides franchisees with store management know-how such as convenience stores and gas stations and the products they sell.
At convenience stores, the headquarters is responsible for the equipment to be placed in stores, the purchase of products to be sold, distribution planning, and delivery.
It is a prerequisite that the headquarters has high product procurement ability, marketing ability, and product development ability.
A service franchise is a franchise that provides service know-how to affiliated stores, such as fitness gyms, repair businesses, and cram schools. In order to develop a franchise of services that are difficult to create into a manual, it is necessary for the headquarters to have the ability to implement human resources training for member stores and the ability to operate support by supporting foreign languages.
The ability to develop unique products such as materials and texts is also required, and it is up to the company to allow the degree of freedom of the member stores in the purchased products and service contents.
Furthermore, since service franchises are basically intangible as services, they depend on the skills of the service providers and it is difficult to create the business format that is characteristic of franchises…
Advantages on the franchisor side
Easy to scale up
For the headquarters, the member stores bear the opening funds and labor costs of the stores and offices, so the business can be expanded in a short period of time with a small amount of business investment, and royalties from the member stores can be obtained.
Also, like a convenience store, the expansion of the scale will increase the density in the area, making it easier to enjoy the economic effects of density.
Advantages on the franchisee side
You can run a business model that guarantees success from the beginning
The biggest merit for franchisees is that they can enter the business without building the know-how that they have accumulated over a long period of time and spending a large amount of money .
Since the products and raw materials required for the business are purchased throughout the store, including directly managed stores, both labor and price may be kept small, and service know-how is also provided by the headquarters, so member stores make new transactions. It is also characterized by the fact that it is easy to enter inexperienced fields without having to cultivate the future. Headquarters also takes the lead in product development and advertising, allowing merchants to focus on their own store management.
You can start even if you are inexperienced
Franchising has the advantage that even inexperienced office workers can immediately start a business as a manager because it is an already successful business.
In a franchise, store management know-how is packaged, so even if you do not have experience with the franchised business itself, you can develop your business without problems by following the package.
From location selection to actual operation, operational know-how is packaged, there is a detailed manual for customer service, and training by the person in charge of the headquarters is carried out for several days to several months. After opening, a person in charge of the headquarters called “Supervisor (commonly known as SV)” will give advice on management and store building.
You can use your brand power
Advertising is indispensable for attracting customers, but it may not be possible to generate sufficient advertising expenses at the beginning of opening or in small stores. But with well-known franchises, the logos and billboards themselves can give customers confidence from the beginning , and the headquarters will carry out large-scale promotions to advertise. However, on the other hand, it is almost impossible to advertise independently on leaflets and signboards without permission.
Disadvantages of franchise
There is a risk of unfair transactions due to differences in the power relationship between the headquarters and affiliated stores.
Disadvantages on the franchisor side
Deterioration of the brand image of the headquarters due to the actions of member stores
The headquarters provides various support for store management, but if there is a franchisee with low coercive force and low awareness and ability, the image of the entire chain will be damaged or the management know-how itself will be leaked. there is.
If the services provided by a store to customers vary due to differences in franchise store management know-how, the brand power of the franchise as a whole will decline. In addition, the negative behavior of merchant employees and customers also reduces brand power and overall credibility.
If the brand image deteriorates due to the actions of one member store, there is a risk that not only the headquarters but all the stores that are members of the franchise will suffer disadvantages and leave, so the headquarters will deal with the actions of employees and customers. We frequently notify each store of methods and tests.
Franchisee’s risk of changing saddles
A franchise is basically easy to open and operate regardless of the service content, but if you do not maintain and improve the uniqueness of the service, the franchisee will be another franchise of the same industry. There is a risk of changing and reducing the overall scale. On the contrary, as the scale expands, logistics and cost management become more complicated, so it is necessary to constantly make efforts to improve not only product development but also other aspects.
Disadvantages on the franchisee side
Obviously, merchants are obliged to continue to pay membership fees, or royalties, to headquarters during the franchise’s membership period.
Even if profits do not increase, royalties are obliged to be paid on a fixed monthly basis, and the type of royalties is gross profit distribution method (what percentage of gross profit is paid to the headquarters as royalties). ), Sales commission method (a method of paying a percentage of sales to the headquarters as royalties), fixed amount method (a method of paying a fixed amount of royalties every month), etc. There are many cases where sales are below royalties or almost unchanged, so member companies manage multiple stores to diversify their risks.
Insufficient risk explanation
When concluding or joining a contract, it is important to first recognize that you are an independent business operator, fully understand and consider the contents of the contract at your own risk, and conclude the contract after convincing yourself. It becomes.
A franchise agreement is a contract in which a franchise store accepts the contents prepared in advance by the chain headquarters, and since the contract period is often long, the franchise store understands the contents after obtaining appropriate information. It is important to sign a contract with the franchise headquarters .
The contract should be concluded after careful consideration of differences in actual conditions such as sales forecasts and expense forecasts, royalty calculation methods, accounts receivable and debt offset accounts with headquarters, and territory rights.
Restrictions on management freedom due to headquarters regulations
Disadvantages on the franchisee side also include the limitation of control over the lack of capacity of affiliated stores due to the difficulty of the business content.
There is a premise of membership that the management leadership of the headquarters varies depending on the person in charge and that it must be operated according to the manual, and franchise stores offer original menus or are unique to the store. There are many places where you can’t do campaigns, and it’s difficult to carry out your own advertising activities, so those who want to run their own business as they wish are likely to be dissatisfied with joining the franchise.
The convenience store introduced in the economy of density is the most famous example. The franchise that is easy to open, has stable demand, and is the most profitable franchise when it joins is effectively called a convenience store.
In the checkered Seven-Eleven, the initial fee is basically $25,000 to $ 30,000, and the royalty is the type that collects the amount obtained by multiplying the gross profit by the slide charge rate or the amount obtained by multiplying the gross profit by the rate of 43%. There is a type to collect.
Convenience stores are a franchise characterized by high product development, procurement capabilities, and store operation capabilities as introduced above, and the high quality of their services is a service that can be received at almost any convenience store. An amazing operating system of constant quality is running.
However, due to problems, the brand image deteriorated due to the negative behavior of the employees of the member stores and the problematic behavior of the customers, the loss of waste of lunch boxes, bread and delicatessen, the problem of the amount of compensation by the headquarters, and 24 365 days a year. Time management is often talked about.
KUMON is a cram school with 16,200 classrooms in Japan and 8,600 classrooms overseas, with annual sales of approximately $ 90 million.
It is said that the royalties imposed on member stores by the KUMON headquarters are about $ 10,000, which is the approval fee for members to set up classrooms, and a few percent of the membership fee paid by students in each classroom.
KUMON provides not only teaching materials but also support so that even owners who have no experience in the education industry can start and manage the business. There is a wide range of activities, such as an advice system from specialists in communication, and the establishment of a community where member stores can provide information.