Franchising

In a general sense, franchising is the “ lease ” of a trademark or commercial designation . The use of a franchise is governed by an agreement between the franchisor (the one who provides the franchise) and the franchisee (the one who receives it). The content of the contract can vary from simple to very complex, containing the smallest details of the use of a trademark. As a rule, the contract regulates the amount of deductions for using the franchise (it can be fixed, one-time for a certain period, which is a percentage of sales). There may not be a requirement for deductions, but in this case, the franchisee agrees to buy a certain amount of goods / work / services from the franchisor.

A separate clause of the contracts may be the terms of use of the trademark / brand. These requirements can be either very simple (for example, the franchisee has the right to use the brand in a particular industry) or stringent (for example, the franchisee agrees to use the equipment in the store in strict accordance with the requirements of the franchisor - from the size and color of the shelves to the uniform of the staff).

Philip Kotler highlights the following franchising points ^[1] :

• The franchisor receives royalties for the use of its trademark , know-how , often ensures the supply of raw materials, components, and staff training.
• The franchisee buys (pays fees) the right to conduct business according to the scheme developed by the franchisor. The franchisee himself bears the costs of the preparation, launch and operation of his site.
• Franchise - a system that describes all aspects and conditions of doing business so that it meets the requirements of the franchisor.
• Lump-sum payment (from it. Pauschale "thick piece") - the cost of the franchise, a fixed amount that the franchisee pays the franchisor at the initial stage. It accounts for: 9-11% of the total starting costs. Includes: a business book (rules for organizing activities), a brand book (rules for constructing and using elements of a corporate identity, advertising), personnel management and training, sales methods, recipes and technologies, accounting forms, statements, instructions, etc.
• Royalty is a monthly payment for the use of trademarks, patents or other copyrights owned by the franchisor. It can be 2-6% of turnover / revenue or be a fixed amount.
• Advertising fee - a monthly payment for global advertising and marketing campaigns. May be 1-3% of turnover / revenue or be a fixed amount.

• Direct franchising. Means the transfer of business rights to one person (one enterprise) with limited territory.
• Subfranchising. In this form, the franchisor transfers to the sub-franchisor most of its rights in the fixed territory, including the right to open its own enterprises and sell franchises to third parties.
• Master franchise. It is very close to sub-franchising and is used, as a rule, in the activities of large international networks (usually a whole country or a group of countries acts as a fixed territory). Unlike the previous form, in which only part of the rights and obligations of the parent company is delegated to the middle link, in this case a full and exclusive transfer of authority from the master franchisee is supposed.

• Commodity. It is used mainly in the trading sector. The franchisee gains the right to sell goods released by the franchisor or under its trademark. A franchise agreement regulates the technology of sales, the range of services and goods, and clear rules for using the manufacturer’s trademark. An example is a company store selling shoes or clothes.
• Production (industrial). The franchisee receives the right to manufacture and sell products under the brand name of the franchisor. The franchisee receives technology and key raw materials, stipulates requirements for the production process, the volume of products, its quality, sales plans, staff qualifications, reporting.
• Service. The franchisee is given the right to engage in a certain type of service under the brand name of the franchisor, which provides the partner with equipment, advertising and marketing technology. In addition to support, the franchisor company controls the work. An example of service franchising is a dry cleaning network.
• Business format. The franchisor transfers to the partner not only sales rights, but also a license to organize this type of business. The documents clearly stipulate the concept of a business, give detailed instructions for training employees, requirements for interior decoration, and staff uniforms. Advertising policy, reporting, relationships with suppliers of goods are regulated.
• Back. The franchisor transfers the right to conduct business under its own brand. At the same time, the franchisor provides the franchisee with a full range of goods according to the agency agreement. The exception is alcoholic beverages - they must be delivered in accordance with supply contracts. Franchisees receive agency remuneration based on sales results, the franchisor pays them the percentage specified in the contract.

Service Market

The prototype of a modern franchising system is considered to be the Singer sewing machine sales and service system. The founder of the world famous company “Singer Sewing machine company” Isaac Singer became the founder of modern franchising. Beginning in 1851, Singer's firm entered into a written franchise agreement with distributors of goods, the contract transferred the right to sell and repair sewing machines in a certain territory of the United States .

At the time of the organization of the world's first full-fledged franchise system , Singer's company ensured mass production of sewing machines, which allowed it to maintain the most competitive prices , but did not have an established service system that would organize the maintenance and repair of machines throughout the United States . In this regard, a franchise system was created that provided financially independent firms exclusive rights to sell and service sewing machines in a certain territory. These first franchises, in essence, were current distribution agreements with the additional responsibilities of the franchisee ( dealer ) to service the machine.

In the 1920s, standard merchandise franchising began to develop in the United States . According to the principle of franchising, large wholesale suppliers began to build their relationships with retail store owners. The wholesale seller (or franchisor) made it possible for small retail trading organizations to receive additional numerous discounts , use the brand of the trading company and at the same time maintain their independence.

After the crisis in the US economy in 1930, franchising began to develop oil refineries. So there were the first network gas stations owned by independent franchisees. As a rule, gas stations were handed over to small local entrepreneurs on lease terms.

The classic commodity franchise that distributes goods and services in the franchisor-franchisor system, and services began to change only in the 1950s.

In 1945, Ray Crock , the future founder of Mac Donalds , became interested in the reasons for the popularity of a small restaurant in San Bernardino in the Western United States . As a result, he turned to the owners of a successful restaurant and soon received a license to buy and sell the same restaurants. In 1955, Ray Crock founded Mac Donalds Systems, Inc., the founder of Business Format Franchisings, that is, franchising in its modern form, when a whole business system is transferred along with the franchise.

Franchising came to Russia in the mid-90s. One of the founders of this market, still operating, was GMR Planet of Hospitality - in 1997 they entered the market with the Sbarro master franchise. In the same year, Sportmaster Group began its active work, which brought famous foreign sports and clothing brands (Kettler, Columbia, o'Neil) to Russia, and began to develop its own multi-brand stores (Footerra, Sportlandia). The franchise of VKO, a tour operator that later merged with Mostravel and Voyage Kiev, was actively developed and formed TUI Russia and the CIS .

In the same year, the Russian Franchising Association was established.

2003 - the first exhibition of franchises BUYBRAND Expo was held. At that time, no more than 10-15 franchising companies were operating in Russia.

In 2004, the Sela and Subway brands came to Russia. In the same year, the magazine Franchising in Russia was published.

In the middle of the 2000s, the franchises Milavitsa , 2GIS , Baby Club, Alphabet, BERGhoff, Azimut Hotel, National Savings Bank, News Media (Life and Your Day newspapers), EVITA, Caffeine and many others appeared on the Russian market. Fransh Growth Strategy released the first printed franchise catalog in Russia ^[2] , and was also the founder of the first Russian online franchise catalog, BiBoss.

The crisis of 2008 hit hard on franchising market players - during 2008-2009, many companies either ceased their franchising activities or left the Russian market. The situation began to recover only by 2010, and in 2011 the number of franchisors almost doubled the pre-crisis figures.

Production of goods

In the production of goods there is also a franchise. One of the well-known companies using a commodity franchise is Pepsi .

The crisis of the end of 2014 primarily affected companies that depend on the import of goods or ingredients. This has significantly changed the balance of power in the franchising market in Russia. According to the rating of the BiBoss portal ^[3] , almost all foreign clothing brands went into the second half of the hundreds of the best franchises, freeing their positions to Russian manufacturers, as well as to import-independent companies - the service sector and IT enterprises. In addition, the microfinance industry also showed significant growth in 2014 - the population began to need instant loans in larger volumes, which led to an increase in sales of franchises in this category.

• The duration of the franchisor . The experience of the franchisor’s company prior to the beginning of its franchising activity is important so that the result of the proposed business technology is visible.
• The presence of their own remote units (branches). The franchisor must have experience in replicating business, administering and managing remote sites.
• The history of franchised points. Large intervals between franchises, a small number of franchisees over a long period require a more detailed study of the specifics of the business.
• The presence of mandatory payments, their size . At too low a price, most likely this is a dealership for the sale of franchisor goods.
• Intellectual developments . The lack of a prescribed methodology for the main activity should raise doubts regarding the franchised offer.

In Russian law, franchising relationships are governed by a commercial concession agreement .

Under a commercial concession agreement, one party (copyright holder) is obliged to provide the other party (user) for a fee for a period of time or without specifying a period of time, the right to use a set of exclusive rights belonging to the copyright holder in the user's business, including the right to a trademark , service mark , as well as rights to other objects of exclusive rights stipulated by the contract, in particular for a commercial designation , production secret ( know-how ).

The commercial concession agreement provides for the use of a set of exclusive rights, business reputation and commercial experience of the copyright holder in a certain amount (in particular, with the establishment of a minimum and (or) maximum volume of use), with or without an indication of the territory of use in relation to a certain area of ​​entrepreneurial activity (sale of goods received from the copyright holder or made by the user, the implementation of other trading activities, performance of work, rendering of services g).

Parties to a commercial concession agreement may be commercial organizations and citizens registered as individual entrepreneurs.

Benefits for the Franchisor

For the franchisor, the benefits lie in several aspects:

• Business growth does not require management complexity. The functions of regional managers are performed by business partners who are motivated not only by high income, but also carry part of the business risks. This simplifies administration for the franchisor.
• The need for capital is reduced. Each franchisee independently incurs costs for the selection and training of personnel, quality control, advertising, the purchase of equipment and supplies. Together, these are significant free investments in the infrastructure of the copyright holder’s business, which do not require efforts to attract and control their use.
• Royalty and increase in sales. In addition to franchise fees, sales of key products are quite possible, as franchisees are obliged to buy consignments of goods, consumables, or other products / services specified in the agreement. Stable income allows you to plan it for the future, which means you can plan the development of new areas.
• Advertising. The development of the franchise network is an excellent brand advertising that does not require special financial investments.

Franchisee Benefits

Using a proven business system

Before offering his franchise in the market, the franchisor must “bring to mind” his business system, work out all business processes and prove the effectiveness of his business. Moreover, the franchisor for the effective development of the franchise network must have a flagship enterprise, on the basis of which the business is cloned. Therefore, by acquiring a franchise, an entrepreneur acquires an already proven and tested business model that has proven its effectiveness .

Industry Choice

A potential franchisee has the opportunity to get acquainted with the franchisor’s business before the stage of investing their own funds. This can be done on the basis of open information - the commercial offer of the franchisor and its existing enterprises, both own and partner.

Ability to reduce risks

By opening a partner enterprise , with a well-developed franchise program, the franchisee becomes a part of the “family”, that is, unlike the opening of an independent enterprise, the franchisor does not leave partners alone with many problems and risks of starting a business.

Successful market entry

One of the main requirements for a franchise business is the demand for goods or services provided by the franchisor company . Therefore, buying a successful business idea and starting its activities under an already well-known brand, the franchisee already has a circle of customers loyal to the brand by the start of the opening of its enterprise.

Минимальные затраты на рекламу и маркетинг

В связи с тем, что франчайзи начинает вести свою деятельность как часть известной сети, его затраты на первоначальную рекламу сводятся к обеспечению рекламы открытия франчайзингового предприятия на локальном рынке. Так же дело обстоит и с текущей рекламой, которая направлена на «раскрутку» франчайзинговой сети в данном конкретном регионе.

Получение доступа к базе знаний франчайзера

Франчайзер, предоставляя партнёрам свою бизнес-систему, передаёт не только отлаженный механизм, но и «инструкцию» по её эффективному использованию. Франчайзер обучает своих партнёров тому, как нужно эффективно строить бизнес, учитывая все его специфические особенности.

Guaranteed Supply Chain

Since franchising, as a rule, is a priority for companies, and partners - franchisees - have the best conditions, the franchisor seeks to provide this area with the greatest resources , including supply issues.

Diversification

Buying a franchise can be a diversification option from an adjacent industry, which helps reduce the cost and time to expand a business.

• Franchisees are forced to follow the rules and restrictions established by the franchisor, even if they do not bring the maximum benefit to the business.
• Franchisees are often required to purchase raw materials and products from suppliers designated by the franchisor, which may limit their access to the free market and force them to buy raw materials and products at inflated prices.
• For franchisees, strict restrictions can be imposed on exiting a business, including a ban on opening competing organizations for a certain period of time or in a certain territory.
• Franchisees rarely can influence the issues of centralized marketing and advertising, but at the same time they may be forced to pay for centralized marketing and advertising campaigns. Thus, their funds may not be used in their best interests.

• Inadequate protection of confidential information. The imperfection of laws is reflected in the difficulties of fully maintaining commercial secrets. This flaw in the system affects both franchisors and their franchisees: because of the fear of disclosing important information, franchise owners do not include all data related to doing business in the franchise package.
• Lack of legislative protection in cases where franchise enterprises are unprofitable due to subjective factors (incompetent management, non-compliance with production standards and recommendations of the franchisor, etc.), and unsuccessful franchisees discredit the whole brand.
• The lack of legislative protection in cases where former franchisees leave the franchise network and start their own business under a unique brand, while using all the technologies, best practices and recommendations that the franchisor once provided them. In this case, the former partners turn into direct competitors, and the only way franchisors can prevent this turn of events is again to provide incomplete data about their business system.
• Joint responsibility for the quality of products. In fact, this kind of responsibility implies joint business conduct, and the franchise just assumes that the franchisee has much greater autonomy than a branch of the parent company. The franchisor controls only those aspects of the business of his franchisee that are provided for by the contract of commercial concession - the parent company has no right to go beyond it and cannot prevent the franchisee, even if dishonesty is present in his business. At the same time, the franchisor and franchisee bear responsibility for the violation of quality together.
• Changing the terms of the agreement on commercial concession upon its extension, which is possible only by mutual agreement. Of course, a franchisee who wants to prolong the use of a franchise will not agree to worsening conditions, and this often runs counter to the business interests of the franchisor, since the market situation can change dramatically since the signing of the contract, and the franchise owner, who invested his resources in brand development, incurs losses. ^[four]

There are many companies that provide a turnkey business. It should be noted that the name "franchisor company" does not mean that the company is exclusively engaged in the development of franchising, but can also work with distributors, or independently.

Service Market and Trade

• Contrary to popular belief, only 15% of McDonald's restaurants in the world are owned directly by McDonald's; all others are the property of general (national) distributors (franchisees). Terms of use are very strict - even such trifles as the color scheme and the size of tables are regulated by the contract.
• The well-known sportswear manufacturer Columbia sportswear company has now completely switched to franchising sales. Terms of use are not very strict, the main requirements are the presence of a trading area of ​​at least 100 square meters. m. in a separate building on the passage shopping street or in a shopping center and the starting purchase of goods at least 80 thousand dollars .

• In Russia, 1C companies are known for franchising activities (in 2019 there were about 7,000 franchisees ^[5] ), X5 Retail Group - 8,363 Pyaterochka supermarkets , 539 Perekrestok supermarkets , 91 Karusel hypermarkets , 194 Perekrestok Express stores ( December 31, 2016).

• METRO Cash & Carry offers the Bean retail franchise (around 300 stores at the end of 2017).

• Conversion Franchising
• Franchising in Kazakhstan
• Franchise (in insurance)
• OEM

• Stephen Spinelli Jr., Robert M. Rosenberg, Sue Burley. Franchising = Franchising: Pathway to Wealth Creation. - M .: " Williams ", 2006. - S. 384. - ISBN 0-13-009717-9 .

• Top 500 franchise - worldwide franchisor rating
• European Franchise Federation
• Russian Franchise Association