Over the years a lot of service companies i.e. food chains, education/coaching centers, courier/logistics providers, internet cafes, movie theatres, petrol pumps etc. have solicited applications for Franchise.
Recently Jubilant Foodworks went for IPO and hence I thought of discussing the franchise model. Hence the questions why should one go for franchisee and why does a franchisor encourage it.
1. Franchisor’s core competence is in developing a recognizable brand that can pull crowds. It also has the technology, process and know-how of how to do its business. However what it lacks are
a. the ability to manage multi-geographical point of sales effectively
b. Having capital to expand quickly before the competition sets in. The company could raise money via VC, but that would expose it to the risk of non-performance and also might result in losing control over the business.
2. The franchisee brings in the capital for the expansion as well as manages the outlet. What the franchiser lacks is the credible brand, training/knowhow to succeed. In addition the franchisor reduces the risk of failure of enterprise by making him a part of his family and giving support. The marketing and set-up assistance also makes it easier for the entrepreneur to embark into his lonely journey.
Hence it looks like a marriage made in heaven for both the parties. However there are a couple of disadvantages too:
1. Even though the franchisee managed outlet is not owned by the company, any actions/non-performance by the franchisee is directly attributed to the brand. Hence if the company, in its zeal to expand quickly compromises on the quality the entire chain suffers.
2. Although the risk of franchisee failing is less than a stand-alone mom & pop store, there is no guarantee of success. Also often the Franchisee complains that by charging a hefty set-up cost and royalties the company milks them dry.
3. The company is more concerned about the brand as a whole rather than the particular outlet. Hence sometimes it indulges in policies, promotions, schemes and rules that are counterproductive or useless for the franchisee and yet he/she does not have an option for backing out. Also without prior written approval the franchisee cannot launch a scheme/offering. These restrictions are a price that one has to pay.
4. Sourcing: All merchandise, props and sourcing has either to be done directly from the company or from company approved vendors at inflated prices. The company does this to maintain quality, but often it results in loss of negotiating power with the suppliers, unfavorable trade terms and in some cases overpriced piece of junk that the franchisee cannot sell.
5. It is more expensive to open or maintain a franchisee than a standalone store. Sometimes to the extent that the company will make a profit (or won’t lose anything) if the new set-up fails while you can lose your shirt.
6. There is not much you can do if the company revokes your license or opens up another store across the street.
7. As a franchisee one has little or no legal recourse. Almost all agreements are unilateral and subject to the courts of the place where the franchisor was incorporated rather than the local state laws. Hence an incompetent/greedy franchisor can destroy your business and yet there is little one can do.