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Unit 3: International Retailing: Internationalization and Globalization

 Businesses which are relatively inexpensive to operate. Notes
 Businesses which are easily duplicated.

Advantages

 Quick Start: As practiced in retailing, franchising offers franchisees the advantage of
starting up a new business quickly based on a proven trademark and formula of doing
business, as opposed to having to build a new business and brand from scratch (often in
the face of aggressive competition from franchise operators). A well run franchise would
offer a turnkey business: from site selection to lease negotiation, training, mentoring and
ongoing support as well as statutory requirements and troubleshooting.

 Expansion: After their brand and formula are carefully designed and properly executed,
franchisors are able to expand rapidly across countries and continents, and can earn profits
commensurate with their contribution to those societies. Additionally, the franchisor
may choose to leverage the franchisee to build a distribution network.
Also with the help of the expertise provided by the franchisors, the franchisees are able to
take their franchise business to that level which they wouldn’t have had been able to
without the expert guidance of their franchisors.

 Training: Franchisors often offer franchisees significant training, which is not available
for free to individuals starting their own business. Although training is not free for
franchisees, it is supported through the traditional franchise fee that the franchisor collects.

Disadvantages

 Control: For franchisees, the main disadvantage of franchising is a loss of control. While
they gain the use of a system, trademarks, assistance, training, marketing, the franchisee
is required to follow the system and get approval for changes from the franchisor. For
these reasons, franchisees and entrepreneurs are very different. The United States Office of
Advocacy of the SBA indicates that a franchisee “is merely a temporary business investment
where he may be one of several investors during the lifetime of the franchise. In other
words, he is “renting or leasing” the opportunity, not “buying a business for the purpose
of true ownership.” Additionally, “A franchise purchase consists of both intrinsic value
and time value. A franchise is a wasting asset due to the finite term, unless the franchisor
chooses to contractually obligate itself it is under no obligation to renew the franchise.”
 Price: Starting and operating a franchise business carries expenses. In choosing to adopt
the standards set by the franchisor, the franchisee often has no further choice as to signage,
shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive
alternatives. Added to that is the franchise fee and ongoing royalties and advertising
contributions. The contract may also bind the franchisee to such alterations as demanded
by the franchisor from time to time. (As required to be disclosed in the state disclosure
document and the franchise agreement under the FTC Franchise Rule)

Forms of Franchising

Social franchises: In recent years, the idea of franchising has been picked up by the social
enterprise sector, which hopes to simplify and expedite the process of setting up new businesses.
A number of business ideas, such as soap making, whole food retailing, aquarium maintenance,
and hotel operation, have been identified as suitable for adoption by social firms employing
disabled and disadvantaged people.

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