Franchise Marketing Channels Chapter 6 Franchise Marketing Channels

Franchise channels as a particular type of marketing channel. Key Franchise Channel Concepts & Terms. Scope and importance of franchise channels. Rationale underlying franchise channels. Disadvantages associated with franchise Channels. Franchisor and franchisee perspectives. Channel management implications of franchise channels.

Franchise channels as a particular type of marketing channel 1 Important and growing channel type. Franchise channels within the larger field of marketing channels . Franchise channels have huge and growing role in making products and services available to tens of millions of consumers. Nature of the relationship among channel members is unique.

Key Franchise Channel Concepts & Terms 2 Franchise: A legal agreement between two independent parties whereby one of those parties grants a license to the other party to sell a trademarked product or service.

Key Franchise Channel Concepts & Terms Product Distribution Franchise: The franchisor licenses its trademarked product (or service) to franchisees who then have the right to sell the franchisor’s products or services. (e.g., GM and Ford)

Key Franchise Channel Concepts & Terms Business Format Franchise: The franchisor licenses the franchisee to sell the franchisor’s trademarked product or service, but the franchisor also provides the complete system or format for operating the business. (e.g., McDonalds)

Key Franchise Channel Concepts & Terms Single-Unit-Franchise: In this type of structure, the franchisor grants the franchisee the right to own and operate one unit. This is the most common and simplest form of franchise channel structure.

Key Franchise Channel Concepts & Terms Multi-Unit-Franchise: Under this structure, the franchisor grants the franchisee the right to own and operate more than one unit at the beginning of the relationship.

Franchisor–Franchisee relationship Franchisor–Franchisee relationship regulated by contract which usually covers: Initial fee. Royalty fee/Management fee. Capital required from franchisee. Area of operation. Duration of license and renewal Termination (End).

Key Franchise Channel Concepts & Terms Franchise Fee (initial): A franchise fee is typically a one-time regular fee paid by the franchisee to the franchisor usually when the franchisee signs the franchise contract.

Key Franchise Channel Concepts & Terms Royalty Fee: Royalty fees are required payments by franchisees to franchisors in the form of regular and continuous royalty fees for as long as they hold the franchise.

Scope and Importance of Franchise Channels 3 By 2005 the total output of franchise channels measured in dollars: Was almost $881 billion per year . Accounting for 4.4 percent of the private-sector output of the United States. Combined of over 909,000 franchise business establishments. 11,029,000 jobs provided by franchised businesses compared to 8,995,000 jobs from goods manufacturing. Franchising and franchise channels continue to grow both in the United States and internationally.

Advantages for Franchisor 4 Advantages for Franchisor : Capital advantages. Potential to reduce distribution costs. Possible high level of managerial motivation promoted by franchising..

Advantages for Franchisee Uncertainty of success is reduced. Franchisors often offer well-known trademarked products or services . Many franchisors offer initial and continuing assistance to their franchisees. Relatively inexpensive way to enter a business. Predictions for satisfactory returns often higher than is the case for independent businesses.

Disadvantages Associated with Franchise Channels Disadvantages for Franchisee : Limited independence of the franchisee. Limited flexibility of the franchisee. Royalty fees.

Channel Management Implications of Franchise Channels 6 The strategic and tactical direction of franchisees by the franchisor can affect the relationship between participants in franchise channels in ways that are different from usual channels.

Channel Management Implications of Franchise Channels Channel Design & Franchise Channels: Franchise channels offer high degree of control. Permits independent highly motivated channel members. Feasibility matter on industry and/or products & services being offered.

Channel Management Implications of Franchise Channels Selection of Franchise Channel Members: Objective selection criteria: such as financial strength and experience. Franchisor philosophy: Need franchisees who are independent and creative on one hand, and have the capacity to take direction on the other hand.

Channel Management Implications of Franchise Channels Motivation of Franchisees: Differs from motivation of channel members in typical channels . Need to convince franchisees to follow to the franchise plan. Franchisor should make effort to understand franchisee needs and problems.

Channel Management Implications of Franchise Channels Typical Channel Factors to note: Degree of control. Importance of channel members. Nature of the product. Number of channel members. In franchise channels, “degree of control” & “importance of channel members” are key.

Discussion Question #1 Snap-on Tools is the franchisor for a unique business format franchise that uses franchisees in mobile vans to sell high quality tools and equipment to professional mechanics. The franchisees bring the tools and equipment to the mechanics at their worksites so that the mechanics do not lose time shopping for tools. One of the features of the business format is Snap-on prescribing the level and variety of inventory to be carried by the franchisees. Snap-on argues that it has the knowledge and experience needed to assure that each franchisee has the optimum inventory mix. Many of the franchisees, however, claim that the territories they serve are diverse and have different customer needs. So they can become loaded down with inventory that they cannot sell if they rely on Snap-on to specify their inventories. This dispute over the control of franchisee inventory has created a conflict that resulted in some franchisees launching lawsuits against the franchisor. Discuss the issue of inventory determination from the franchisor’s and the franchisee’s points of view. Do you think that specifying the franchisees’ inventory mix is a crucial component of the business format?

Discussion Question #2 7-Eleven, Inc. operates the world’s largest convenience store retailer franchise. In business for over eight decades, 7-Eleven has thousands of stores all over the world and boasts that it has an instantly recognizable, world-famous trademark. Yet 7-Eleven says that it can provide prospective franchisees with the opportunity to own a true neighborhood business. 7-Eleven believes that its ordering system, POS scanning system, and other technologies enable franchisees to have customized product assortments that reflect the localized needs and preferences of customers. Thus, franchisees can always have the products customers want whenever they step into a local store. 7-Eleven also promises to prepare its franchisees for success by providing initial and ongoing training, financial assistance, payroll services, twice-a-week consulting services and other support. Does 7-Eleven’s model live up to the statement often heard in franchising circles that: “Franchising lets you go into business for yourself but not by yourself?” Discuss.