Lecture Notes on Franchising

Introduction to Franchising

• Franchising is a business model that is becoming increasingly prevalent.
• Commonly associated with fast food, but its impact is broader, affecting local economies and communities.

The Franchising Model

Company Perspective

• A company wants to expand but may lack the capital or local knowledge to run new locations.
• Prefers to have local franchisees who have vested interest ("skin in the game") in the success of the business.

Franchisee Perspective

• Potential franchisee has local market knowledge and some investment capital but not enough for starting a business independently.
• Seeks support from the franchisor in terms of training, marketing, and initial setup.

Franchise Agreement

• Franchisee pays an initial fee and undergoes training.
• Consistency is key for franchise brands:
  • Uniformity in branding, menus, and operational procedures.
• Franchise agreement includes:
  • Operating hours
  • Supply sources
  • Royalties (typically 5-10% of sales)
• No guaranteed success; franchisees can still fail.

Relationship Dynamics

• Tensions can arise between franchisors and franchisees:
  • Franchisors may impose higher royalties or restrict flexibility.
  • Franchisees risk losing their business if they do not comply with rules.
• Franchisors enforce rules to maintain brand integrity and reduce costs.

Impact on Employees and Wages

• Franchise employees often earn low wages; reasons debated:
  • Some attribute it to poor industry conditions (cutthroat competition, low-skilled jobs).
  • Others argue that the franchise model itself reduces wages due to multiple owners taking profits.

Economic Debate on Franchising

• Proponents argue franchising leads to:
  • Increased efficiency
  • Lower consumer prices
  • More jobs due to increased production and consumption.
• Critics argue that it limits earnings for workers, reducing their purchasing power, leading to less consumption and jobs.

Franchising in Various Industries

• The franchise model is expanding into numerous sectors, including:
  • Gas stations
  • Car dealerships
  • Restaurants
  • Convenience stores
  • Hotels
  • Eyewear retailers
  • Tax services
  • Child care centers
  • Legal services
  • Janitorial services
  • Home health care
  • Beauty salons
  • Tutoring services
  • Gyms
  • Pet supplies
  • Coffee shops
  • Many others (e.g., travel agencies, computer repair, window cleaning).

Conclusion

• Franchising represents a significant shift in business operations, with both positive and negative implications for the economy and workforce.