FRANCHISING AS A DISTRIBUTION CHANNEL

The term "franchising" can describe a wide variety of business activities, but the contemporary franchise system commonly in use is referred to as business format franchising. Franchising involves a company with a proven business format (the franchisor) selling the rights for someone else (the franchisee) to use the modus operandum or brand name that has already been established. The franchisee pays license fees or a share of profits for these rights. They may also agree to make purchases of the finished goods (or raw materials) from the franchisor and benefit from the share in bulk buying or the economies of scale in manufacture. The franchisor often undertakes continued advertising support of the brand, although this may have the intent of seeking more franchisees as well as supporting sales for existing franchisees. The advantage is perceived by the franchisee as a low start-up risk by entering a business formula with proven success and exploiting an established corporate name. Training and other support may be offered by the franchisor. Thus franchisees are able to operate their own businesses to exactly the same standards and format as the other units in the franchised chain (Grant, 1985). Franchising grew rapidly in the 1980s in domestic markets, especially for service-based industries such as carpet cleaning, fast food, car hire, and double-glazing.

Franchising also provides companies with a mode of entry to international markets. This approach to internationalization is initially attractive as it provides a means to assess (albeit in an inter-subjective way) anticipated profits versus perceived risk more readily. In order to minimize perceived risk, many organizations have opted for the franchising of their brand. This is based on the premise that the brand will transfer across national borders whilst retaining its associated image for consumers. One of the problems associated with transferring image-based values developed in the country of origin to foreign markets can be addressed by posing the question "Does a brand mean the same to a group of customers in the country where the brand was established as to customers in the new target country?" (Brown and Burt, 1992).

At THT we have worked with BAA (originally British Airports Authority). In their earlier stages of growth they chose to develop airport terminals, with associated extensive retail property development, in countries that were similar to their UK origins in terms of culture. Clearly, companies try to minimize business risk through gaining experience of like markets by organic growth or acquisition rather than higher-risk markets that may be targeted by franchising or joint ventures (Moore et al., 2000). Most of the evidence from the literature tends to support the view that initial markets for franchising are chosen because of their geographical or cultural proximity to the domestic market.

Date: 2015-01-12; view: 804