Everything You Should Know About Franchising Business Model

Posted on June 24, 2024 by therollingplate | Blog

Franchise businesses are among the most successful in the world for one big reason. They are always operating on a very streamlined and well-defined model. A good example of this is McDonald’s, KFC, The Rolling Plate or any other major food franchise chain. According to a recent report, 80% of global McDonald’s food chains are directly owned by the franchises.

So, all the product is manufactured, supplied and delivered by McDonald’s but the restaurants are owned by franchisees. Obviously, this has generated a lot of interest among businesses worldwide and franchises are among the most popular as a result. This means they are often applied in many fields but food and beverage is among the most common ones. So, let’s look into what makes franchises so popular and how they convert business working to success.

What is a Franchise?

Franchises are businesses which involve two parties – the franchisor and the franchisee. The first will grant the second a license and the two will enter into a contract whereupon the franchisee will use the franchisors name to start operating the business. Along with the license, the franchisee also gets:

Legal right to use franchisor’s trademarks
Standard operating procedural documentation
Marketing and promotional assistance
All related business operation software
Info on all relevant materials or supplies.

Now, the franchisee may or may not get all of these depending upon the nature of the business and the contract between the two parties. Most food and beverage franchise businesses have a set working process by which they offer their products. But if they do not then the franchisee will need to use their own tech infrastructure to offer the same.

How Do Franchises Operate?

Franchises basically have a very streamlined working model predefined by the franchisor. With that said, the franchisee would also have the chance to make changes depending upon the model and the needs of the business as they start operating. This would also be subject to the contract between the two parties and will also include powers to modify the instructions as well as any liabilities arising from the same. Since the working process often determines the standard, the franchisee may also need to maintain a quality standard which the franchisor expects or is bound to legally comply with. This is even more true if the franchisee has made changes to the operating procedure and has to bear liability for it.

How Does Brand Impact Franchising?

Brand reputation management and development is a core part of setting up franchises. The exact details of how the franchisor and franchisee will manage their brand reputation depends on their mutual agreement. However, the general rule is that the franchisor will offer some degree of marketing and promotion help by default. The franchisee can bear the primary burden of marketing or they can relay it back to the franchisor. The usual method of marketing and promotion depends on many factors like type of franchise, type of agreement, location, market specifics etc. So, the franchisor and franchisee can make an agreement based on what they think would be the best way for them to get into business with each other.

Types of Franchising

Product Distribution Franchise

The product franchise model was arguably the first type of franchise offering to emerge in the market. This format works very similar to a retail selling model with the exception of the franchisee paying a one-time licensing fee where after they would enter into an agreement. Since product units are smaller by batch and quality varies along with pricing and demand based on region, franchisors would often offer limited products in their catalog to franchisees. Popular and easily recognized examples of this franchising type include Coca Cola, Ford, Exxon etc.

Manufacturing Franchise

This type of franchising relates to industrial manufacturing and/or processing domain. The franchisee can manufacture or assemble the product depending on the contract and then sell it. However, all distribution and client response management must be done by the franchisee though it must be done by the franchisor’s standards and trademark. Many software technology companies have manufacturing franchises in low-economic cost countries and that’s used to cater to the localized global region.

Business-Format Franchise

Business-Format franchises are basically product distribution expanded to include with custom agreements. The brand name is leveraged to selling products and all essential standards and practices are applied to the entire process. Marketing and promotion are also part of the business process and they are also done by the standards of the franchisor. At present, the most successful global businesses operate on the business format franchise model.

Why Makes Franchising Is Better A Choice Than Establishing New Businesses?

Franchise investments are a far better choice for many reasons than starting a business from nothing. Franchisees can adopt to a pre-existing brand name and also get financial support to some extent. They also inherit or adopt a well-defined organizational structure and a ready market for the product or service.

Existing Market and Demand

New businesses face an uphill task when they get started since they must create a market presence first. With franchises, this problem has already been solved since the brand already has a market standing. This naturally converts into easier business establishment and scaling processes since te demand is steady and the consumer base is reliable.

Pre-defined Operational Process

The best part of adopting a brand franchise as a business is that it has a pre-existing business process. Further, it is already proven to work which means it will be a success if you operate it through default processes. So, part-time jobbers or entrepreneurs with fresh degrees can avoid many pitfalls if they opt for the franchise model.

Less Risk

Risk mitigation is always a problem when new businesses re coming up. When an entrepreneur opts for a franchise, the product is already in the market. So, the overall risk factors in consideration are far less. Obviously, this is a considerable advantage particularly for those with limited to low experience in investments.

How Franchising is A Better Option for Business Expansion?

Starting businesses and scaling them up requires that investors expand with uninsured capital. This is obviously a big risk even for companies which have a fairly well-established consumer base. However, with franchising options, companies can look to expand without taking on much risk. This ensures that the financial liability does not hamper further operations and also facilitates overall business development.

McDonald’s

McDonald’s has a very good reputation for being a global franchise. Though operations differ by way of operations depending on the country, the general review of the company’s financial situation reveals that their operations are highly successful. While the company often has to entertain liabilities from health food concerned NGOs, it is still one of the best showcases of franchise business success globally.

Burger King

Burger King is another major franchise holding in the world with a massive network of businesses in its company’s fold. The brand name has considerable standing in the world because of the massive business it does globally. While this brand is not as popular as McDonald’s or KFC, it is still very popular and shows how lesser-known brands can also be hugely successful.

The Rolling Plate

Compared to the previous entries here, The Rolling Plate is a relatively modest enterprise. However, it has grown phenomenally in the past two years since it began operating. During that time, it has set up 12 franchises and this is an average of 1 or 2 cloud kitchen once every two months or less. The business is definitely on the upward incline and seeing if it can sustain persistent growth and development on the basis of its FOCO franchise business model will be interesting.

KFC

Like McDonald’s, KFC also has a massive network of franchises which gives it global-tier business revenue. The actual franchise model will always vary by product procurement, relevant health and food safety parameters, international licensing processes etc. However, the central consideration here is that KFC will always be important for its successful utilization of the franchise model in establishing high-functioning and high revenue generating business on a global scale.

Subway

Subway is arguably the least-known large brand on this list. Although it has a presence pretty much all over the world, the specific food and beverage market it caters to is rather narrow. This is particularly true for third-world countries where the company does not have as much standing as McDonald’s, KFC or even Burger King. Nevertheless, it earns a considerable revenue stream from its countless franchises all over the world. This also contributes to its primarily highest-grossing Western franchise holdings which in turn makes for high revenue earnings.