Franchise Marketing Channels

1. Part 4: Additional Perspectives on Marketing Channels Franchise Marketing Channels

2. 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

3. 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 – franchisees are captive

4. 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.

5. 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)

6. 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)

7. 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.

8. 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 outset of the relationship.

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

10. 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.

11. 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 • Composed of over 909,000 franchise business establishments. • 11,029,000 jobs provided by franchised businesses compared to 8,995,000 jobs from durable goods manufacturing Franchising and franchise channels continue to grow both in the United States and internationally

12. Rationale Underlying Franchise Channels 4 Advantages for Franchisor to Franchise: • Capital advantages • Potential to reduce distribution costs • Possible high level of managerial motivation fostered by franchising.

13. Rationale Underlying Franchise Channels Advantages for Franchisee to Franchise: • 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 • Prospects for adequate returns often higher than is the case for independent businesses

14. Disadvantages Associated with Franchise Channels 5 Disadvantages for Franchisor to Franchise: • Limited flexibility of the franchisor • Overly high franchisee expectations, • Increased governmental scrutiny by state and federal regulators.

15. Disadvantages Associated with Franchise Channels Disadvantages for Franchisee to Franchise: • Limited independence of the franchisee • Royalty fees • The negative halo effect.

16. 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 conventional channels.

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

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

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

20. Channel Management Implications of Franchise Channels Managing the Marketing Mix in Franchise Channels • Pre-packaged nature of franchise model predefines much of marketing mix • Marketing mix less fluid than in conventional channels

21. Channel Management Implications of Franchise Channels Conventional 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

22. 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?

23. 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.

24. Discussion Question #5 H&R Block is by far the largest franchisor of tax preparation services with over 4,500 franchisees. Startup costs range from about $35,000 to $100,000 and there is no franchise fee. But the royalty rate on all revenues generated by the franchisees is 30 percent—one of the highest rates in franchising for any type of franchise business. H&R Block franchisees are not permitted to operate from home or even in kiosks in stores and malls. Instead, they must operate from a store or office format. Franchisees receive substantial training from H&R Block based on the expertise and systems developed by H&R Block over half a century. Is H&R Block’s royalty rate too high? Why or why not? Discuss in terms of what support the franchisor offers to the franchisee, the nature of the service provided by the franchisee, and the franchisee’s obligations to the franchisor.