Franchising
Franchising is a form of business cooperation in which an independent entrepreneur (franchisee) is granted the right to use the proven business concept of another company (franchisor) for a fee. The franchisor provides the brand, know-how, products, marketing strategies and training.
Duration
Franchise contracts are usually time-limited (e.g. 5 to 10 years) and can be extended or terminated at the end of the term.
Types
- Product franchising: the franchisee distributes the franchisor's products (e.g. car dealerships, beverage distribution)
- Service franchising: the franchisee provides services under the franchisor's brand (e.g. fitness studios, tutoring)
- System franchising: the franchisee takes over a complete business concept (e.g. McDonald's, Subway, Fressnapf)
Effect on independence
- Legally: the franchisee remains independent
- Economically: the franchisee is dependent, bound to the franchisor's rules on prices, advertising and product range
Motives
For the franchisor:
- Rapid expansion with little capital outlay
- Use of independent entrepreneurs' motivation
For the franchisee:
- Use of an established brand
- Lower start-up risk
- Training, marketing and operational support
Advantages and disadvantages
| Franchisor | Franchisee | |
|---|---|---|
| Advantages | Brand expansion without owning outlets, regular fee income | Proven business model, training and marketing support, lower risk |
| Disadvantages | Quality control is difficult, dependent on franchisee behaviour | High fees and initial investment, little entrepreneurial freedom, contract bound |
Effects on competition, consumers and economy
- Competition: strengthens large brands, pressure on small businesses
- Consumers: consistent quality and recognition value
- Economy: creates jobs, promotes entrepreneurship
Examples
McDonald's, Fressnapf, Backwerk, KFC, Subway
Distinction from a corporate group
In franchising the partners remain legally and economically separate firms that only share a brand and concept. In a corporate group the subsidiaries are also legally independent, but they are centrally controlled by the parent company.