Copyright © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin

Chapter 12 Franchising

Franchising An entrepreneurial alliance between two organizations, the franchisor and the franchisee Franchisor – the concept innovator who grows by seeking partners or franchisees to operate the concept in local markets A large-scale growth opportunity based on a partnership rather than an individual effort

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Franchise Opportunity Recognition Primary Target Audience (PTA) identification Service delivery system (SDS) design Training and operational support Field support Marketing, advertising, and promotion Product purchase provision

Primary Target Audience (PTA) Three major areas of data collection integral to refining the Primary Target Audience Demographic profiles Psychographic profiles Geographic profiles

Demographic Profiles Demographic profiles are a compilation of personal characteristics that enables the company to define the “average” customer

Demographic Profiles Include Age Gender Income Home address and Working Address Marital and family status Occupation Race and ethnicity Religion Nationality

Psychographic Profiles Social class Upper-upper, lower-upper, upper-middle, middle class, working class, upper-lowers, lower-lowers Lifestyle Health consciousness, fashion orientation Personality variables Self-confident, conservative, independent

Geographic Profiles Local, regional, national, or international U.S. national market include: Pacific Mountain West North Central West South Central East North Central East South Central South Atlantic Middle Atlantic New England

Assessing a Franchise Multiple market presence Outlet pro forma disclosed or discerned Market share National marketing program National purchasing program Margin characteristics

Accessing a Franchise Business format Term of the license agreement Site development Capital required per unit Franchise fee and royalties

Special Delivery System The way resources are arrayed to meet consumer demand Creates competitive advantage by examining the specific needs of the target customer Wendy’s drive-through window Jiffy Lube’s bi-level facilities

Training and Operational Support Promotes the standardized, consistent delivery of the product Reinforces the brand’s value Transfers knowledge of the service delivery system (SDS) to the franchisees, both managers and line workers

Field Support Two forms: Franchisor’s representative visits the franchisee’s location in person Resident experts available for consultation at the corporate headquarters

Marketing, Advertising, and Promotion Funded and implemented at three levels 1. National Franchisee contributes a percentage of top-line sales to the fund Typically controlled by the franchisor 2. Regional Stores within a set area contribute a percentage of top-line sales to the fund Controlled by an area of dominant influence (ADI) advertising cooperative

Marketing, Advertising, and Promotion Funded and implemented at three levels 3. Local Franchisee makes direct expenditures on advertising Controlled by franchisee but must be within guidelines set by franchisor

Supply Establishes quality standards of raw materials or goods used in the operation Approves Approves suppliers Approves specific branded products

BAGELZ: A GROWTH PERSPECTIVE Bruegger’s sales per store = $830,000 - Adjust for delivery system variances from the benchmark Make assumptions regarding Average ticket price (ATP) Customer visits per year Annual sales / APT = annual customer / visits per year

$830,000 / ATP = transactions / visits per year per customer = customer base $1830K12 to 24=46,000 $1.5533K12 to 24=29,600 $2.0415K12 to 24=23,000 $2.5322K12 to 24=18,400 $3.0277K12 to 24=15,400

CONNECTICUT GROWTH PLAN Connecticut Population = 3 million 3 million / 23,000 = 130 stores “Sanity check”: Is this reasonable?

“BUILD DOWN METHOD” 130 stores discount by the % who won’t frequent a ff 130 X 75% = 97 stores discount “outliers” 97 X 80% = 77 stores discount for competitor market share 77 X 60% = 46 stores discount to mitigate cannibalization 411 X 90% = 41 stores

WHAT AMOUNT OF CAPITAL IS REQUIRED FOR THIS GROWTH? 1.working capital per store $166,000 2.real estate development expense per store $250,000 $416,000 total capital required per store Times 41 store development plan = $17,056,000 How would you finance this plan???

FINANCING BAGELZ DEVELOPMENT PLAN: SOME BASIC OPTIONS lease the real estate third party options arms length insider deal landowner deal developer relationships who goes on the lease exit barrier control issues with franchisees