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FRANCHISING
Franchising is essentially a way of doing business in which the franchisor gives an independent franchisee the use of a trademark that is an essential asset for the franchisee’s business and in which the franchisor more than nominally assists on a continuing basis in the operation of the business. In many cases the franchisor also provides supplies.20 For instance, Holiday Inn grants to franchisees the goodwill of the Holiday Inn name and the support service to get started, such as appraisal of a proposed motel site. As part of the continued relationship, Holiday Inn offers reservations services and training programs to help ensure the success of the venture. In a sense the franchisor and franchisee act almost like a vertically integrated firm because the
parties are interdependent and each produces part of the product or service that ultimately reaches the consumer. Many types of proi iuas Franchising goes back at least as far as the nineteenth century and is most
and Lountncs .ne m associated with the United States, where one third of retail sales are handled
way About three quarters of the sales are in three areas: car and truck
dealerships, gasoline service stations, and soft-drink bottling. Between 1971 and 1986 the number of U.S. international franchisors grew from 156 to 354, and their number of outlets in foreign countries grew from a little over 3000 to more than 31,000.21 Although they are located in all regions of the world, Map 15.2 shows that only four countries (Canada, Japan, the United Kingdom, and Australia) account for about two thirds of the outlets. The fastest growth areas of U.S. firms have been in food and business services.
Not all franchising is by U.S. firms, and foreign-owned franchise operations are growing rapidly in the United States. Pronuptia, a French bridal wear franchisor, and such food franchisors as Wimpy’s and Bake ‘N’ Take from the United Kingdom and Wienerwald from Germany have been among some of the earliest and most successful abroad. There has also been a surge of foreign acquisition of franchisors based in the United States.22 Burger King,
Hardees, Holiday Inn, Howard Johnson’s, Baskin-Robbins, Meineke Discount Mufflers, and Great American Cookie are U.S. franchisors that have been acquired by non-U.S. firms.
Organization
The most common means (almost 60 percent) by which a franchisor penetrates a foreign country is by setting up a master franchise and giving that organization (usually local) the rights for the country or region.23 The master franchisee may then open outlets on its own or develop subfranchisees. Royalty payments by the subfranchisees are made to the master franchisee, who then remits some predetermined percentage to the franchisor. As an example, McDonald’s very successful Japanese operations are handled this way.
In about 20 percent of cases, franchisors enter by dealing directly with individual franchisees abroad. This is sometimes difficult because the franchisor may be insufficiently known to convince many local people to make investments. It is therefore common to enter with some company-owned outlets that serve as a showcase to attract franchisees.
In the case of Great American Cookie’s U.K. entry, the company arranged a line of credit of $10 million with a U.K. bank in advance of seeking partners. This money was used to finance franchisees who had to put up only 10 percent.24
Operational Modifications
Securing good locations can be a major problem.25 Finding suppliers can be an added problem and expense: For example, McDonald’s had to invest to build a plant to make hamburger buns in the United Kingdom, and it had to help farmers develop potato production in Thailand.26 Another concern in foreign franchise expansion has been governmental or legal restrictions that make it difficult to gain satisfactory operating permission.
Many franchise failures abroad are due to not developing enough domestic penetration first; thus they lack sufficient management depth and cash. A dilemma for successful domestic franchisors is that their success at home has been largely due to three factors: (1) product and service standardization, (2) high identification through promotion, and (3) effective cost controls. When entering many foreign countries, various restraints may make it difficult to conform to home-country methods. Yet the more adjustments that are made to the host-country’s nuances, the less a franchisor has to offer a potential franchisee. The success of franchisors in Japan has been due in great part to enthusiastic assimilation of Western innovations, so firms such as McDonald’s have been able to copy their U.S. outlets almost intact. Yet such food franchisors as Dunkin’ Donuts and Perkits Yogurt fared poorly in the
U.K. The reason was that it was too difficult to change certain British eating habits; yet if firms offered menus that were more acceptable to the British, there would be nothing different to offer a franchisee. Even in countries where franchises have been successful, it usually has been necessary to make some operating adjustments. For example, Kentucky Fried Chicken in Japan had to redesign its equipment and stores to save space because of the higher cost of rent. It eliminated mashed potatoes and put less sugar in its cole slaw because of Japanese tastes. Pizza Hut alters its toppings by country, and in Saudi Arabia it must have two dining rooms—one for single men and one for families. McDonald’s changed the pronunciation of its name in Japan to “MaKudonaldo” and substituted Donald for Ronald McDonald because of pronunciation difficulties in Japanese.27
Contract Problems
Some of the problems that plague franchising agreements are no different from those in licensing agreements. Contracts must be spelled out in detail, but if courts must rule on disagreements, both parties are apt to lose something in the settlement. A good example was when McDonald’s granted a license for up to 166 stores in France to Raymond Dayan at less than its normal fee because of doubts that the French would ever take to fast-food restaurants. Dayan, with the help of McDonald’s, found very good Paris locations for fourteen stores, which he opened over a period of several years. He was very successful, but McDonald’s had the right to revoke the franchise agreement if its inspection found that the stores were not up to its level of cleanliness. The agreement was cancelled on these grounds, leading to a court case. Dayan claimed that McDonald’s action was simply a ruse to make him pay McDonald’s usual rate. He lost out on further expansion with the McDonald’s trademark; but McDonald’s lost something too. When Dayan took down the McDonald’s signs, he immediately replaced them with signs saying O’Keefe’s Hamburgers; and he had the clientele, the know-how, and the best locations in Paris.28 These stores were later sold to the French firm Quick, the largest fast-food chain in France.