Candy group - Franchising

Topic: FRANCHISING – ADVANTAGES &

DISADVANTAGES;
THE RIGHT WAY TO BUY A FRANCHISE

Group: Candy
1. Trương Đức Toàn
2. Nguyễn Thị Thanh Thủy
3. Trần Thị Ngọc Thủy
4. Phạm Gia Tiến
5. Lai Quốc Trung
6. Nguyễn Thị Thuy Thủy
7. Phan Thị Ngọc Trâm
- Student’s ID: 300
- Student’s ID: 287
- Student’s ID: 289
- Student’s ID: 293
- Student’s ID: 332
- Student’s ID: 288
- Student’s ID: 304

I. INTRODUCTION
You want to eat fast food now. You like eating at the McDonald’s stores.
And in Ho Chi Minh City, there have many places to eat McDonald’s. You don’t
have to go to the foreign countries. Do you know why you can have a portion of
McDonald’s fast food which exactly the same quality as worldwide?
That is franchising. Another famous example of early franchises is that Coca
Cola which has obviously worked out very well. They would sell the franchise
rights to people who want to open their own distributorships for the Coca Cola
products. We buy our houses from franchised real estate brokers, get our hair cut in
franchised beauty salons and drive cars purchased from franchised dealers. The
soda pop we drink is bottled by franchisers, and the food we eat is sold by such
franchised as McDonald’s, Wendy’s, Pizza Hut and KFC.
It is almost impossible to find a town or village that does not have a
franchised business of some types. The variety among these businesses is
staggering. One way to avoid some of these management headaches is to invest in a
franchise, an approach that enables you use a larger company’s trade name and sell
its products in a specific territory. In exchange for this right, the franchisee (the
small business owner) pays an initial fee and often monthly royalties as well to the
franchisor (the corporation). Franchising is not a new phenomenon. It is based on a
continuing relationship between a franchiser and a franchisee. It has been around

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since the nineteen century, when such companies as Singer and International
Harvester established dealerships throughout the world.
The franchising model is used in over 70 different industries across the globe.
In the United States alone franchise businesses are responsible for over 1 trillion
dollars in sales annually. Today, approximately 4,500 franchisers operate more than
600,000 franchise outlets throughout the world, and more are opening at an
incredible pace. A new franchise opens somewhere in the world every 6.5 minutes.
8 franchises account for 44 percent of all retail sales, totaling more than $1 trillion,
and they employ some 8 million people in more than 100 major industries.
II. TYPES OF FRANCHISING
There are three basic types of franchising: Trade-name franchising,
product distribution franchising, and pure franchising.
1. Trade-name franchising involves a brand-name such as WESTERN
AUTO, TRUE VALUE HARDWARE…. Here the franchiser’s trade-name without
distributing particular products exclusively under the franchiser’s name.
2. Product distribution franchising involves a franchiser licensing a
franchisee to sell specific products under the franchiser’s brand name and trademark
through a selective, limited distribution network. This system is commonly used to
market automobiles, gasoline products, soft drinks, bicycles, appliance, cosmetics,
and other products.
→ These two methods of franchising allow franchisees to acquire some of
the parent company’s identity.
3. Pure or comprehensive or business format franchising involves providing
the franchisee with a complete business format, including a license for a trade
name, the products or services to be sold, the physical plant, the methods of
operation, marketing strategy plan, a quality control process, a two-way
communications system, and the necessary business services. The franchisee
purchases the right to use all of the elements of a fully integrated of all types of
franchising and is common among fast-food educational institutions, beauty aid
retailers, and many others. Athough product and trade-name franchising annually
ring up more sales than pure franchising, pure franchising outlets’ sales are growing
much faster.

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III. THE BENEFITS OF BUYING A FRANCHISE

One of the top benefits of franchising is to reduce risks. Statistic shows that
90% of all start- up businesses fails within the first five years of operations. And
they also show that the success rate of franchisees is higher than one of start-up
businesses. The reasons of this fact are that the franchisees buy proven business
concepts, so the business risks are minimized and they benefit from their
franchisers’ managerial skills and motivation, their business experience and system
as well as many other factors.
The first is that franchisees are given the business experience as well as
offered managerial training programs by their franchisers. In fact, many
entrepreneurs do business by themselves and make many costly mistakes. They
have to work out to find the reasons of these failures and overcome them. So they
have much useful experience for their business. After that, they share with
franchisees their experience and even their secret of success they discovered.
Moreover, franchisees are also attended training courses to improve their
managerial abilities.
The second is the brand – named appeal : The company gives the franchisee
a license to market its products carrying its brand. Franchisee is allowed to use the
company’s trademark and brand name in the market. So easily, customers recognize
the identifying trademark, the standard symbols, the store design, and the products
of an established franchise. They trust in products’ quality and decide to use them.
So franchisees will establish their stable market easily.
The third is the standardized quality of goods and services: Because
building a sound reputation in business is not easy. And the quality of goods and
services determines franchiser’s reputation. So when franchisees purchase a license
to sell the franchiser’s products or services and the privilege of using their brand
name, franchisers normally require them to comply with uniform standard of
quality strictly. Therefore, the products’ quality is always guaranteed and customers
never worry about it. Franchisees will always have customers’ trust.
The fourth is advertising program: In fact, an effective advertising program
is essential to the success of all franchise operations. Marketing a brand-name
product or service widely requires a far reaching advertising campaign. Normally,
such an advertising campaign is organized and controlled by the franchiser. It is

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financed by franchisees’ contribution. So both franchisers and franchisees have

benefits. Moreover, many companies help franchisees create promotional plans and
provide press releases and advertisements for their grand events.
The fifth is financial assistance: Franchisees can receive financial assistance
from franchisers. Franchisers are usually willing to assist qualified franchisees in
establishing relationships with banks, private investors, and other sources of funds.
It’s noted that franchisees must take responsibility for this loans. Such support and
connections from the franchiser will enhance franchisee ’s credit standing. Lenders
often based on brands’ reputation to avoid risk of payment.
The sixth is “proven products and business formats”: Franchiser’s
experience, expertise, and products will help franchisee not have to build the
business from scratch. It means that franchisees will base on established methods
and techniques of franchisers. These standardized procedures operations greatly
enhance the franchisee’s chances of success and avoid the most inefficient type of
learning – trial and error.
In addition, a franchisee does not have to struggle for recognition in the local
marketplace as much as an independent owner might. That is because of
franchiser’s reputation and available recognition of government.
The seventh is “centralized buying power”: A significant advantage of
franchisee has over an independent small business owner that is participation in the
franchiser’s centralized and large-volume buying power. For example, a
independent ice cream parlor couldn’t match the buying power of Baskin-Robbins
with its 4500-plus retail ice cream stores. Franchisee will buying goods at low
prices from quantity discount when they buy in bulk through franchiser. So their
price of goods will be more competitive than independent business and attract more
customers. Then franchisee can approach the market faster and franchiser can
develop brand through franchisees.
The eighth is “Site selection and territorrial protection”: Franchisers will
make an extensive location analysis for each new outlet. Although choosing a
locations is the franchisee’s responsibility, the franchiser reserves the right to
approve the final site. Choosing a suitable location is based on traffic patterns,
zoning ordinances, accessibility, population density and demographic.

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Franchisers offer franchisees territorial protection, which gives existing

franchisees the right to exclusive distribution of brandname goods and services
within a particular geographic area. The size of a franchisee’s territory varies from
industry to industry. Although most franchises offer their franchisees some type of
territorial protection and be absolutely sure that the territorial protection clause is
specific and enforceable.
Example: Pho 24 is typical example. The first store of Pho 24 is opened in
June 2003. By June 2010 ie. after only 4 years , Pho 24 has opened 60 stores across
country including Ho Chi Minh, Hanoi, Da Nang, Vung Tau, Nha Trang, Binh
Duong and 17 foreign stores in Jakarta (Indonesia), Manila (Philippines), Seoul
(Korea), Phnom Penh (Cambodia), Sydney (Australia) and Hong Kong. Pho 24
plans to open more stores in some major cities of Vietnam and foreign countries
where have large Asian population. Pho 24 has become a successful Vietnamese
business when applied franchising form. Standardized procedures and operations,
requiring less space and less investment help Pho 24 to expand brand through
outlets
IV. DISADVANTAGES OF BUYING A FRANCHISE
Obviously, the benefits of franchising is huge, however the franchisee must
sacrifice some freedom to the franchiser. Thus, franchisee must explore other
limitations of franchising before undertaking this form of ownership.
1.Franchise fees and Profit Sharing
Virtually, the franchiser will impose some type of fees and demand a share of
the franchisee’s sales revenues in return for the use of the franchiser’s name,
products or services, business system
Start-up costs for franchises often include:
-The right for use the company name
-Site purchase preparation, construction signs fixtures, equipment,
management assistances and training
-The franchiser also impose continuing royalty fees as profit sharing devices.
The royalty usually involves a percentage of gross sales with a required minimum
or a flat fee levied on the franchise. Royalty fees range from 1% - 11% (Actually
most franchise assess a rate between 3%-7%)
2.Strict adherence to standardized operation

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To protect public image, the franchiser require that the franchisee must
maintain certain operating standard. If the franchisee don’t adapt the standard,
maybe franchiser can terminate its license, determining compliance with standard is
usually accomplished by periodic inspectation. At times, the standard may a burden
to franchisee.
3. Restriction on purchasing
To maintain quality standard some franchiser required franchisee to purchase
products, special equipment or other items from them or form approved supplier.
This is drawback of franchises, they allow individual operators very little
independence.
4. Less freedom
When franchisees sign a contract, they agree to sell franchisers’ products or
services by following fixed formula. This feature of franchising is one of factors
which play important roles in the success of system. But besides, it makes the
franchisees feel that they are following to a boss. Because most of franchisers want
to control franchisees’ performance to make sure all of them operate in line and
follow system’s specification. So that entrepreneurs who want to “go-my-own-way”
may find a conflict with a “go-by-the-rule” franchise contract.
5. Market saturation
As you see, nowadays many franchises such as fast food, yogurt, ice-cream
are growing day by day. So that market saturation is a very real danger. After
exhausting most of the prime location, franchisers set up new franchises nearly to
existing one and that territorial encroachment has become a hotly contested issue in
franchising. In some areas, franchisees are claiming that their markets are
oversaturated and their sale is decreasing.
6. Limited product line
In most case, the franchise agreement stipulates that the franchise can sell
only those products approved by the franchiser. A franchisee’s freedom to adapt a
product line to local market condition is restricted
7. Unsatisfactory training programs
Every would-be franchisee must be afraid of the irresponsible franchisers,
who used to promise extensive services, advice and assistance but at last, they
deliver nothing. For example, one owner believed in what called “Extensive

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training program” that a franchiser had promised and he had to pay a handsome
technical assistance fee. And what he got just a small book and do-it-yourself study
guide. Although some rule have reduced inadequate problem, dishonest characters
still take advantage of unrepaired prospective franchises.
V. THE RIGHT WAY TO BUY A FRANCHISE
1. Evaluate yourself
Before looking at any franchise, entrepreneurs should study their own goals,
experience, likes, dislikes, risk orientation, income requirements, time and family
commitments, and other characteristics. Will you be comfortable working in a
structured environment? What kind of franchises fit your desired lifestyle? Is what
region of the country or world do you want to live and work? Knowing what you
enjoy doing (and what you don’t want to do) will help you narrow your search. The
goal is to find the franchise that is right for you. One characteristic successful
franchisees have in common is that they genuinely enjoy their work
2. Research your market
Before shopping for a franchise, research the market in the area you plan to
serve, how fast is the overall area growing? In which areas is that growth occurring
fastest? Who are your potential customers? What are their characteristics? Their
income and education levels? What kinds of products and services do they buy?
What gaps exist in the market? These gaps represent potential franchise
opportunities for you.
3. Consider your franchise options
The International Franchise Association publishes the Franchise
Opportunities Guide, which lists its members and some basic information about
them. It is a convenient, effective way to collect information about a variety of
available opportunities. These guides can help you find a suitable franchise within
your price range.
4. Get a copy of the franchiser’s UFOC (Uniform Franchise Offering
Circular)
Once you narrow down your franchise choices, you should contact each
franchise and get a copy of its UFOC. Then read it. This document is an important
tool in your search for the right franchise, and you should make the most of it.
There is never a guarantee of success, you should consider:

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- A unique concept or marketing approach: Pizza franchiser Papa John is

known for its ingredients, whereas Domino is known for its fast delivery.
- Profitability: Franchisers should expect to earn a reasonable rate of return.
- A registered trademark: Name recognition is difficult to achieve without a
well-known and propected trademark.
- A solid training program: One of the most valuable component of a
franchise system is training it offers franchisees. The system should be relatively
easy to teach.
- A positive relationship with franchisees.
5. Talk to Existing Franchisees
One of the best ways to evaluate the reputation of a franchiser is to interview
(in person) several franchise owners who have been in business at least one year
about the positive and the native features of the agreement.
Interviewing past franchisees to get their perspectives on the franchiser –
franchisee relationship is also helpful.
6. Ask the franchiser some tough questions
Take the time to ask the franchiser questions about the company and its
relationship with its franchisees. You will be in this relationship a long time, and
you need to know as much about it as you possibly can beforehand.
7. Make your choice
Once you have done your research, you can make an informed choice about
which franchise is right for you. Then it is time to put together a solid business plan.
The plan is also a valuable tool to use as you arrange the financing for your
franchise.

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