12 - 1 Copyright © 2009 The McGraw-Hill Companies, Inc., All Rights

Reserved.McGraw-Hill/Irwin

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Chapter

12

Franchising

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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

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Primary Target Audience (PTA)

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

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Demographic Profiles

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

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Demographic Profiles Include

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

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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

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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

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Assessing a Franchise

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

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Accessing a Franchise

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

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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

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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

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Field Support

• Two forms:• Franchisor’s representative visits the

franchisee’s location in person• Resident experts available for consultation at the

corporate headquarters

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Marketing, Advertising, and Promotion

• Funded and implemented at three levels1. 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

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Marketing, Advertising, and Promotion

• Funded and implemented at three levels3. Local

• Franchisee makes direct expenditures on advertising

• Controlled by franchisee but must be within guidelines set by franchisor

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Supply

• Establishes quality standards of raw materials or goods used in the operation

• Approves • Approves suppliers• Approves specific branded products

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• 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

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• $830,000 / ATP = transactions / visits per year per customer = customer base

• $1 830K 12 to 24 = 46,000• $1.5 533K 12 to 24 = 29,600• $2.0 415K 12 to 24 = 23,000• $2.5 322K 12 to 24 = 18,400• $3.0 277K 12 to 24 = 15,400

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• CONNECTICUT GROWTH PLAN• Connecticut Population = 3 million • 3 million / 23,000 = 130 stores

• “Sanity check”: Is this reasonable?

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• “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

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• 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???

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• 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