Neagu Daniela

Franchising is a business model in which many different owners share a single

brand name. A parent company allows entrepreneurs to use the company's
strategies and trademarks; in exchange, the franchisee pays an initial fee and
royalties based on revenues. The parent company also provides the franchisee
with support, including advertising and training, as part of the franchising
agreement.
Franchising is a faster, cheaper form of expansion than adding company-owned
stores, because it costs the parent company much less when new stores are
owned and operated by a third party. On the flip side, potential for revenue
growth is more limited because the parent company will only earn a percentage
of the earnings from each new store. 70 different industries use the franchising
business model, and according to the International Franchising Association the
sector earns more than $1.5 trillion in revenues each year. [1]
Companies Involved
The franchising business model is used across many industries, but it is most
popular in the fast food restaurants, hotel, and casual & upscale
restaurants industries. According to an International Franchise Association
study, franchisee-owned locations accounted for 56.3%, 18.2%, and 13.1% of
each respective industry's total locations in 2001.[1]
Fast Food Restaurants

McDonald's (MCD) operates the world's largest fast food chain, and earns
37% of its revenue from franchising [2]across its approximate 31,400
restaurant locations. [3] Franchisees operate 65% of McDonald's restaurants
worldwide.[3]

Yum! Brands (YUM) runs over 35,000 locations of its A&W, KFC, Pizza Hut,
Taco Bell, and Long John Silvers restaurant chains worldwide. [4] The company
franchises 72% of its restaurants [5] which accounted for 12.6% of the
company's revenue in 2007.[5]

Burger King Holdings (BKC) operates 11,000 restaurants of its fast food
Burger King chain worldwide[6] and earned $2.3 billion in revenue in 2007.
[7]
Franchisees operate 88.5% of Burger King locations, which account for
22% of the company's revenue.[7]
Hotel

Intercontinental Hotels Group (IHG) operates hotels and resorts under the
InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn
Express, Candlewood Suites, and Staybridge Suites brand names. The
company franchises 76% of its hotels [8], which accounted for 33% of the
company's revenue in 2007 .[9]

Starwood Hotels & Resorts Worldwide (HOT) operates luxury hotels under
the St. Regis, Luxury Collection, W, Westin, Le Meridien, Sheraton, Four
Points, Aloft, and Element brand names. Approximately 44% of the
company's hotels are operated by franchisees [10]. Approximately 44% of the
company's 2007 revenue was earned through franchising operations.[11]
Casual & Upscale Restaurants

Denny's (DENN) operates 1,546 restaurants nationwide[12], 75% of which

are franchisee-owned.[12]. The company's franchise operations accounted for
10.1% of Denny's revenue in 2007.[13]

DineEquity, Inc.(DIN) runs 1,344 IHOP restaurants and 1,976 Applebee's

restaurants, two casual dining chains.[14]Franchisees operate about 84% of
DIN's restaurants[15], which together accounted for 42.5% of the company's
revenue in 2007.[16]
Retail

Blockbuster (BBI) is a leading provider of in-home movie and game

entertainment that focuses on movie and video game rentals. Franchisees
operate 22.4% of the company's stores [17], which account for 12.3% of
Blockbuster's revenue in 2007.[18]
Rental & Leasing Services

Avis Budget Group (CAR) operates two car rental companies, Avis, and
Budget and is the largest publicly-traded car rental company in the United
States. The company franchised 39% of its Avis locations and 57% of its
Budget locations nationiwide, which together contributed to 9% of
company's 2007 revenue.[19]

Dollar Thrifty Automotive Group (DTG) operates in the rental car industry,
specializing in airport car rentals. Franchisees operate 44% of the company's
locations, but only account for 3.8% of DTG's 2007 revenue.[20]
Beverage Bottling Groups

Coca-Cola Enterprises (CCE) serves as the largest bottler of beverages for

the Coca-Cola Company (KO), producing 20% of KO's beverages worldwide.
[21]
As a separate company, CCE operates as a franchisee- CCE agrees to buy
all its concentrates from KO, while KO grants CCE the rights to produce,
market, and sell its products.

Pepsi Bottling Group (PBG) operates under the same terms as CCE and KO
in relation with Pepsico (PEP). PBG earned almost $14 billion in revenue in
2007.[22]poop
Franchisee Groups

Carrols Restaurant Group (TAST) is a franchisee conglomerate that

operates over 560 restaurants under the Burger King, Pollo Tropical, and Taco

Cabana brand names. In 2007, the company earned $645 million in revenue.
[23]

Lodgian (LGN) operates 46 hotels nationwide as a franchisee, operating

hotels like Hilton and Holiday Inn.[24] The company earned approximately
$278 million in revenues in 2007.[25]
How Franchising Works

The franchising business model consists of two operating partners: the

franchisor, or parent company, and the franchisee, the proprietor that operates
one or multiple store locations. Franchising agreements usually require the
franchisee to pay an initial fee plus royalties equal to a certain percentage of
the store's monthly or yearly sales. Initial fees vary significantly across each
industry, ranging from $35,000 for an Applebee's restaurant to over $85,000 to
open
a
Hilton
hotel.[26] Royalty
fees
are
also
variable
for
example,Intercontinental Hotels Group (IHG) franchisees are required to pay the
company 5% of their yearly sales [26], while Applebee's franchisees pay 4% of
monthly sales and IHOP franchisees pay a 4.5% royalty fee of weekly sales.
[27]
The franchisee also covers the costs of actually starting and operating the
store, including legal fees, occupancy or construction costs, inventory costs,
and labor. Franchise agreements usually have a term of between 10 and 20
years, depending on the company.
The parent company authorizes the franchisee's use of the company's
trademarks (for example, selling Big Mac's at McDonald's) as part of the
franchising agreement. Additionally, the franchisor provides training and
support as well as regional and/or national advertising.
Advantages of the Franchising Model

Franchisees require less initial capital than independently starting a

company and can use proven successful strategies and trademarks.

Franchisees are provided with significant amounts of training, not

common to most entrepreneurs.

The franchisor benefits because it can expand rapidly without having to

increase its labor force and operating costs, using much less capital.

Franchised stores have a higher margin for the parent company than
company-owned stores because of minimal operating expenses in
maintaining franchised stores. For example, DineEquity, Inc.(DIN) earned a
52.7% profit margin from franchisee-owned restaurants in 2007 while
company-owned restaurants operated at a mere 6.7% profit margin.[28]
Drawbacks of the Franchising Model

Franchising stores reduces the amount of control that the parent company
has over its products and service, which may lead store quality to vary
greatly from store to store.

Franchisees must pay a percentage of their revenues to the parent

company, reducing their overall earnings.
Market Forces Affecting Franchising Companies

Weakened Economy Hurts Sales and Slows Franchise Expansion

Franchising becomes a much less desirable business model during rough
economic times. First, franchisees must pay royalty fees based upon their
revenue, regardless of whether or not they are earning profits, which adds to
the franchisee's financial struggles in an economic downturn. Furthermore,
slower sales cause parent companies to reduce expansion plans. For example,
the 2007 Technomic Restaurant Industry Study blamed the poor U.S. economy
as the reason why restaurants reduced funding for expansion by an average
1.4% during 2007.[29]
Economic issues related to the 2007 Credit Crunch and subprime lending crisis
drastically weakened the U.S. economy, which has led to lower levels of
consumer spending, particularly in the restaurant dining industry. For example,
many restaurants suffered from a decline in traffic and comparable store sales
during 2007, like Applebee's, which attributes a 4% decrease in guest traffic
and 2.1% decline in comparable store sales to weakened consumer spending.
[30]
Additionally, a 2007 RBC Capital Markets Survey indicated that 39% of
respondents reduced their frequency of restaurant dining because of lower
levels of dispensable income in 2007.[31][32]
High Potential for
in Emerging Markets

Growth

Through

International

Franchising

Unlike the United States and many other Western countries, emerging markets
are commercially underdeveloped and have significant growth opportunities.
For example, the U.S. Department of Commerce estimated that over 75% of the
expected growth in world trade over the next 20 years will come from
developing countries, primarily large emerging markets like China.
[33]
Furthermore, the rise of China's middle class, as well as India's booming per
capita income provide significant new markets for franchises to operate. China's
middle class is expected to almost double in the next two years, reaching 25%
of the Chinese population in 2010, which is spurred by China's 700% growth in
per capita income since the late 1980s. [34] Furthermore, the Indian per capita
income is expected to increase more than 300% by 2025.[35]
As the wealth of consumers in emerging markets grows, so too will their
appetites for consumer goods, as evidenced by India's 1,440% growth in its
retail industry between 1991 and 2007.[36] Also, as of 2007, India's franchising
industry is expected to grow 30% annually as mega-franchising chains like Yum!
Brands (YUM) have already established a presence in India. [37] High levels of
consumer demand, coupled with relatively low levels of competition, offer a

lucrative opportunity for many franchisors to expand into emerging markets.

Expansion via franchising is an attractive option for companies looking to
expand abroad without incurring high costs. Additionally, international
franchisees already possess many inherent qualities needed to succeed abroad,
like the ability to speak the native language.