Keywords: franchisor, franchisee, franchise.
One should note here that franchising is new phenomenon for Russian economy, although it has developed quite rapidly. In spite of some problems, franchising ensures growth of national economy, increases the role of small-scale business, besides that, it is a topical subject for scientific researches.
To begin with, let’s give the definition of franchising. According to International Franchise Association (IFA), it is a business transaction, in which the franchisor gives license to the franchisee to carry on business under his control. But the franchisee has to pay fixed amount of money for it. The franchisor is one that sells franchise (license), the franchisee is one that buys it. [4]
Most authors, depending on the purpose of their research, focus on one aspect of franchising and take up the position that it is only based on it (comparative study of these definitions is presented in Table 1. [1]
Table 1
Comparative study of approaches to the definition of franchising
|
Definition |
Explanation |
|
«Franchising is a market-driven method of selling business services often used by independent investors having the required assets but either inexperienced or with little experience in a certain business area» |
Advantages: it is clear from the definition that a franchisor is providing a franchisee with services for the business. Disadvantages: the definition is rather vague. |
|
«A franchising agreement is an agreement between two legally independent companies where one company (franchisee) pays another company (the franchisor) for the right to sell the product of the franchisor and / or the right to use its brand and business format in a certain area within a specified period of time» |
Advantages: the description of restrictions on franchisees Disadvantages: vagueness which makes it hard to see the difference between franchising and authorized dealers. |
|
«Franchising is a special form of organization allowing the leader company to take the dominant position with the market of goods and services» |
Advantages: we can see that one of the important characteristics of franchising is the business management in favor of a franchisor. Disadvantages: the definition does not allow to distinguish between franchising and other forms of communication of independent companies. |
|
«Franchising (“franchise”-a privilege) — 1) transmission of rights (for a certain period and under certain conditions) to use the trademark, brand name, technologies and know-how. 2) creating a chain of representative offices of the parent company and technology by transferring the right to use the trademark, brand name and technologies and know-how to independent companies». |
Advantages: pointing out that franchising is not only a transmission of intellectual property but also a method of creating a marketing chain under the brand name of the franchisor. Disadvantages: in fact, what we see here is a definition of two different components of franchising. |
|
«Franchising is a form of business organization in which one of the entrepreneurs (the franchisor) creates a pattern of business activity and gives the right to run this business to another entrepreneur (franchisee) in accordance with this pattern» |
Advantages: This definition points at the fact that the franchisor provides a franchisee with a business model. Disadvantages: it is not stated here that the franchisee has the right to use this model |
|
«Franchising is a form of business organization in which one side (the holder) provides the other party (the user)with exclusive rights of the holder such as the right to use the trademark, the servicing right and other rights under the contract, in particular its commercial designation and manufacturing secret (know -how)» |
Advantages: there are different kinds of the rights indicated that can be used by a franchisee. Disadvantages: there is no mentioning of the obligations of a franchisee and a franchisor. |
|
«Franchising is a form of cooperation between companies in which the owner of intellectual property (trademark and industrial and commercial technologies, i.e. the franchise) gives the right to use it to another entrepreneur (the franchisee), who must only run the business on the basis of the franchise. Nevertheless, during this period of time the franchisor must provide consultancy services to the franchisee. |
Advantages: there is specified obligation for franchisee about running the business only under the franchisor’s brand. This feature of franchising is considered to be very import by the experts. Disadvantages: there is no mentioning of payment from the franchisee to the franchisor. |
From this comparative study we can make a conclusion that there are many different definitions of franchising.
In order to better understand this issue, first let’s analyze international statistics.
It is important to know that franchising has changed paces of development for the better in the majority of companies all over the world. At first it was the USA then other countries of the world.
Nowadays, the international franchising market is growing and is considered to be very perspective all over the world.
Franchisees have made 13 % of the Gross Domestic Product (GDP) in 80 countries. Currently, there are 18500 franchisors and 2, 5 million franchisees in the world. We cannot ignore the fact that franchising is used in almost all fields of business.
According to «Randata Corporation», franchising is the most prevalent in such spheres as fast-food — about 20 % of the global total amount of franchisees, retail trade (including food)- 15 %, human services (including sport and tourism) — about 12 %, road transport and service — 8 % and construction — 7 %.
It would be unfair not to mention the fact that 50 % of all franchising chains carry out their activity in the trading field, in which key value is fast-food establishments, restaurants and shops of industrial goods and food products.
It is interesting that, leaders of franchising business are the USA, Canada, Korea, Japan, Australia, also Europe’s leaders, such as Germany, France and Great Britain.
In Russia, franchising is used in spheres such as sale of consumer goods (48 %) and services (12 %).Besides, it is used in trade; according to statistics, consumer goods are the absolute leaders among the franchisees who also specializing in the sale of clothing (44 %), gifts (14 %), household appliances (12 %), and shoes (8 %).
Moscow and St. Petersburg are the cities where franchising is the most developed in comparison with the other cities of Russia.
Franchising can become an efficient solution of many problems for large companies, and franchising can give new opportunities to set up own business with more favorable terms for small companies. [2]
The concept «franchising» is not so common in Russia. Different authors give different definitions for franchising. But in general the concept «franchising» comes from the French word «franchise» (benefit, privilege). [5]
The franchisee signs an agreement under which it is necessary to sell goods or services on pre-established rules such as price and conditions of the head company.
If the franchisee observes the rules, respects image and reputation of the head company, then the franchisee will get the permission to use this brand and earn money with the help of it.
Now, let’s consider some pros and cons of franchising. [3]
1) Franchising provides more efficient mechanism for selection of retail outlet’s managers, in comparison with generally accepted wage labor system.
2) Franchising offers effective mechanism to attract human and financial resources for company’s rapid growth.
3) Franchising ensures cost-effective economic model, generating good financial income at relatively low level of risk.
Nevertheless, we have to consider this question from another angle.
There are 4 drawbacks for franchising. Since it is based on writing agreement between independent companies there can be potential conflict between goals of the franchisor and the franchisee.
Sometimes these disputes can have even legal nature and be capable to solve it with help of the arbitration court. Besides that, there are also some problems with the costs of doing franchising business. For example, the costs for different franchisees can be different because of various types of managing. According to statistics, some franchisees lack of control from their franchisors. Franchisors don’t give due information to franchisees. And because of lack of experience, franchisees go out of business. Finally, under certain circumstances franchising chains bring lower financial profit than outlet’s profit of the head company.
Importantly, there are 3 types of franchising. This is productive franchising, trading and servicing franchising. [3]
1) Productive franchising
As regards production of goods, as well as selling patents, technical know-how and trade logos. Productive franchising allows organizing process in the most efficient way. It should be noted that productive franchising makes industrial premises more profitable areas. Franchisor can be a producer of raw materials or even holder of patent rights. He can be not directly engaged in production of goods.
2) Trading franchising
This type of franchising is directly with the sale of goods. We have to consider two options of this franchising. The first option involves the sale of products by franchisees who specialize in retail sales. It is important to have contact with the consumer directly. The franchisor supplies goods to the franchisee through a third person (distributor, sales representative, etc.). This makes possible not only to increase sales for company, but to sell their product in far-distant areas at the lowest costs.
The second option involves the sale of goods organization not directly engaged in production of goods, but they are capable to do it, owning to, long-term business relationship with suppliers. In this case, the franchisor will purchase goods from different suppliers and sell them to franchisees. The franchisee will do retail sales.
3) Servicing franchising
The main goal for this franchisor is to teach the franchisee to use his technology. It depends on the type of activity.
The second classification is based on two types of franchising: franchising of distribution and franchising of business format.
1. Franchising of distribution involves sale of goods that were produced or sold by the franchisor under his trademark.
2. Franchising of business format is a way of doing business when the franchisor has not only his trademark, but also the individual technology of doing business. It is necessary to keep if you want to be the franchisee.
There are several types of franchises. Let's pay attention to two basic and most common of them. [3]
1) Directing franchise is the best way to ensure good relationship between franchisor and franchisee. The franchisor sells the franchise directly to local entrepreneurs (franchisees).
2) Master — franchise is the development of business in another country. In this case, the franchisor is not worried about the franchisee development. Instead, the franchisor is looking for well-organized managing of company that allows making good franchising system.
There are 9 factors that determine whether to use franchising in a particular sphere of business.
1) Production and distribution are carried out within limited geographical markets.
2) Location of the company facilitates its customers services.
3) Knowledge of the local market has a significant impact on the company efficiency.
4) Local managers are very initiative
5) Reputation of the brand provides an important competitive advantage.
6) Products or services have high level of standardization and codification.
7) High level of productivity
8) Not too high level of costs and risks is associated with the organization of retail outlets.
9) Incomes exceed costs of outlets [3]
At the moment, situation of franchising leaves much to be desired. But we hope it will change for the better in the distant future.
References:
1. Formal description of franchising// St. Petersburg State Engineering-Economic University reporter № 5. pp. 129–138. Kotlyarov I. D. 2007
2. Franchising agreements and their importance for competitive performance. Malkova I. V. pp 80–90. “Competition nowadays” magazine № 4. 2007.
3. Franchising: business, accounting, legal aspects. R. B. Kats. GrossMediaFerlag. 2010. 179pp.
4. From ice cream to the Internet: using franchising to drive the growth and profits of your company.Scott A. Shane. 177 pp.
5. Franchising. Sosna S. A., Vasilieva E. N. Akademkniga. 2005. 375 pp.
