Joel Silverstein- Experto en Franquicias "A Simple Guide to Franchising"

East West Hospitality Group LimitedLevel 15 Nexxus Building, 41 Connaught Road Central, Hong Kong

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A Simple Guide to FranchisingA Simple Guide to Franchising

28 Feb 2013Joel Silverstein


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1What is Franchising?What is Franchising?

• A way of doing business – a business model.

• A business relationship whereby the owner of a business assigns to independent people/companies the right to market and distribute the owner’s goods and services and use the business name for a fixed period of time in a fixed territory.

• The Franchisor (business owner) provides a licensed privilege to do business plus offers assistance in organized training, merchandising and management, in return for fees from the contracting agent (franchisee).


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2Franchising vs. LicensingFranchising vs. Licensing

LicensingFranchising

•Disney characters on clothing

Examples of LicensingExamples of Franchising

•Special patent to make detergent

•Tutor Time•Lawn Doctor•Jan-Pro•Molly Maid•Cartridge World

•McDonald’s•Smoothie King•KFC

Licensing is commonly thought of in a more restricted sense such as offering specific trademark or technical know-how for a fee consideration.

Franchising is the licensing of a complete business service or model.


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3Franchising is Big BusinessFranchising is Big Business

–5000+ concepts–400,000 franchise units–30%+ Growth per year–Less than 5% of retail sales

–US$750 Billion–800,000 franchise units–8 Million people employed–50% of retail sales–3.5% of GDP

ChinaUnited States


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4Example: Global Consumer FoodserviceExample: Global Consumer Foodservice

• Large Regional Franchisees– Alsea SA de CV (Latin America)– AmRest Holdings SE (Eastern Europe/Russia)– Americana Group (MENA)– MH Alshaya Co (MENA/UK)– Autogrill SpA (Italy)

• Franchising is main growth model for top 20 global chains

• Heavily concentrated in QSR (fast food) sector

• Bi-polar global market - $35,000+ per capita GDP and under $10,000 per capita GDP. USA/Europe vs. emerging markets China/India/Latin America.


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5Why Franchise?Why Franchise?

• You want to expand your business rapidly to gain market dominance and share before your competitors.

• You have insufficient capital to expand your business and franchising allows for expansion with other people’s money without taking on heavy bank loans or other investors.

• You have a simple operating model with low investment and good returns even allowing for franchise fees and royalty payments.

• You have a unique service which meets a specific consumer or business need and lends itself to a small business setup.


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6

Conditions for a Successful Franchise Model Conditions for a Successful Franchise Model ––Emerging MarketsEmerging Markets

• Strong unit level economics.

• Payback of investment within 3 years or less.

• Low investment cost.

• Small retail footprint.

• Concept that fills a strong lifestyle or business need.

• Simple operations/simple training systems

• Easy to control the goods or service critical to the business model.

• Affordable to the broad middle class/scalability.


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7What is special about emerging markets?What is special about emerging markets?

• Importance of social networks

• Turbulent business environment

• Government and business corruption

• Lack of rule of law

• Limited property rights

• Credit constraints


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8

• Consequences for the Franchisor

– Franchisee reluctant to reveal actual sales to avoid taxes/hard to charge royalties

– Franchisee looking to buy goods cheaper from other sources

– Need to have a business where the Franchisor supplies the goods and services at a profit vs. standard western forms of royalty as % of sales.

– The more the Franchisor controls the supply chain with hard to duplicate products or services the easier to control the franchisee and grow the business.

What is special about emerging markets?What is special about emerging markets?


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9

• Easier to Franchise – Bakery

– Simple operation/limited sales staff– The franchisor can produce all the bakery items and deliver to the

franchisee stores each morning. – Company has frozen dough technology that is difficult to copy.

ExampleExample-- Franchising in ChinaFranchising in China

– Complex operations/intense training– Easy for the franchisee to under-report sales especially at the bar– Easy for the franchisee to buy from multiple sources or even make a

copy cat restaurant and cancel the franchise

• Harder to Franchise – Full Service Restaurant


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10

• Advantages

– Allows for rapid growth– Less demanding capital requirements– Easier to maintain shareholding control/limit outside investors

Advantages/Disadvantages of the Advantages/Disadvantages of the Franchise Growth ModelFranchise Growth Model

– Need to manage relationships with multiple business owners– Lawsuit threats are high depending on the country– Compliance with franchise law can be cumbersome– If business turns weak there will be many angry franchisees to deal with

• Disadvantages


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11Common Required DocumentationCommon Required Documentation

• All Intellectual Property necessary to support the management of the business.

– Operations Manual– Training Manuals– Full set of recipes and formulas– Marketing Materials and Brand standards– Store layouts and designs– Etc.

• Every franchisee will need to review and sign a franchise agreement and possibly a Disclosure document (depending on the country).

Joel Silverstein- Experto en Franquicias "A Simple Guide to Franchising"

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