Retail Franchising

Retail Franchising is a contractual agreement between a franchisor (a manufacturer, wholesaler, or service sponsor) and a retail franchise, allowing the franchisee to conduct a certain form of business under an establishment name and according to a specific set of rules.

What is Franchising

Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

Franchising is a faster, cheaper form of expansion than adding company-owned stores, because it costs the parent company much less when new stores are owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the parent company will only earn a percentage of the earnings from each new store.

It is a word to explain the privilege or right to use any product or service. In business terms it can be said as giving the operational rights to use the trademark or brand.

For example brand like addidas, Levis etc works on this principle in which the business is expended by having presence in multiple markets. Since for a firm it becomes difficult to operate and manage too many stores on their own they follow this methods of franchise. The franchise give a license to the franchiser to operate and manage the service within the terms and condition and franchiser who takes this ownership has to pay to the franchise i.e. the owner of the service or brand as per the specified terms and condition.

Definitions

According to the International Franchise association a franchise in the agreement or license between two legally independent parties which gives:

·      A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)

·      The franchisee: the right to market a product or service using the operating methods of the franchisor

·      The franchisor: the obligation to pay the franchisor fees for these rights

·      The franchisor: the obligation to provide rights and support to franchisee.

The legal definition expands this meaning – a franchise may also extend the right to sue a predetermined method for marketing products or services through outlets that use a known name or trademark. Franchising is not business or an industry but it is a method used by businesses for the marketing and distribution of their products or services.

The two parties which emerge are:

1) The Franchisor and

2) The Franchisee

Franchises and parties to a franchise arrangement

A franchise is established when one party licenses another party to use the franchisor's trade name, trade marks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods. The parties to a franchise are:

·         Franchisor—the party who does the licensing in a franchise situation.

·         Franchisee—the party who is licensed by the franchisor in a franchise situation.

The Franchisor is the provider of the franchise. Typically he owns the trademark / product / service and licenses the trademark to another party. He may provide support for the running of the franchise, which may be in the form of product / service training, advertising, marketing etc. In exchange, he receives a fee, commonly known as the royalty or franchisee fee, which would vary from industry to industry and from business to business.

The Franchisee on the other hand, is the person who pays for and purchases a franchise from a franchisor and operates a business using the name, product,, business format and other items provided by the franchisor. The franchisor helps the franchisee in setting up the business and manages it. Table below indicates the functions which may be performed by the franchisor and the franchisee.

Various forms of franchises

·         Distributorship franchise—the franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public.

·         Processing plant franchise—the franchisor provides a secret formula or process to the franchisee, and the franchisee manufactures the product and distributes it to retail dealers.

·         Chain-style franchise—the franchisor licenses the franchisee to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory.

·         Area franchise—The franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.

Further, two most common types of franchises are business format and product distribution franchises.

Business Format Franchises

The most comprehensive type of franchise is the business format franchise. The franchisor, for a fee, will help you select a retail site, purchase and install fixtures, furnish signage, hire and train employees, provide computers and software to manage inventory and finances, assist in local marketing and advertising, and consult with you to solve business problems. Some of these franchises are turnkey-type, meaning that you write a check and they set up the business for you. If desired, some will hire a manager for you so you can be an absentee owner.

Product Distribution Franchises

An independent retailer who doesn't want others to have that level of control over their business can opt for a product distribution franchise. For example, a gift store can be a distribution franchisee for a specific line of gift items within its market. No one else in a specified area can sell that line of gifts. However, for that right the store may be limited in which competing lines it can carry. It also may or may not have to pay an initial fee, and it will have to adhere to marketing requirements.

Advantages and Disadvantages

There are a number of advantages to becoming a franchisee for a proven product or business, including these:

·         Buying a well-established franchise can offer you a greater chance of success than starting the same business from scratch.

·         You will have access to in-depth market analysis not easily available to non-franchise retailers.

·         You will have access to the franchisor's expertise to help you solve the myriad problems that can hinder start-up and operation of a retail store.

·         Your store will have the bulk-purchasing power of a big corporation to help you buy at the lowest price and pass it on to your customers.

·         Start-up costs may be reduced because the franchisor can advise you on store planning and the appropriate initial inventory.

·         Lenders will lend more to a franchise store than to an independent retail store.

Here are some disadvantages to becoming a franchisee:

·            The biggest negative to buying a franchise is the cost. The franchise fee alone can be more than expectations.

·            The loss of control i.e. Depending on what type of franchise opportunity you purchase, your retail business may no longer be independent.

Rights and duties of parties to a franchise agreement

Franchise agreements generally cover the following:

·         Quality control standards.

·         Training requirements.

·         Covenants not to compete.

·         Arbitration clauses.

·         Other terms and conditions.

Forms of franchise fees

·         Initial license fee—a lump sum payment for the privilege of being granted a franchise.

·         Royalty fee—a fee for the continued use of the franchisor's trade name, property, and assistance that is often computed as a percentage of the franchisee's gross sales.

·         Assessment fee—a fee for such things and advertising, promotional campaigns, and administrative costs.

·         Lease fees—payment for any land or equipment leased from the franchisor.

·         Cost of supplies—payment for supplies purchased from the franchisor.

Licenses of trademarks, service marks, and trade secrets

Most franchisors license the use of their trade names, trademarks, and service marks and prohibit franchisees from misusing these marks. Most state laws protect trade secrets.

Contract and tort liability of franchisors and franchisees

Franchisors and franchisees are liable for their own contracts and torts. Generally, the franchisor deals with the franchisee as an independent contractor, and there is no agency relationship. There are exceptions where there is apparent agency.

Tying arrangements

A tying arrangement is a restraint of trade where a seller refuses to sell one product or service to a customer unless the customer agrees to purchase a second product or service from the seller. Most tying agreements violate Section 3 of the Clayton Act. To receive damages in a tying arrangement lawsuit, the plaintiff must prove:

·         The wrongdoer tied the sales of two separate products or services.

·         More than a small amount of commerce was affected.

·         Sufficient market power existed to enforce the arrangement.

·         The arrangement caused an unreasonable restraint of trade or a substantial lessening of competition.

Remedies for wrongful termination of a franchise

If a franchise is terminated without just cause, the franchisee can sue the franchisor for wrongful termination and recover damages caused by the unlawful termination and recover the franchise.

About Retail Franchise

A retail franchise is a business model in which an entrepreneur or investor buys the right to use the name and business format of an existing company. A franchisee replicates a business already proven successful by its founders and operators, and he must follow a set of rules set forth by the franchiser.

Retail franchise businesses offer entrepreneurs the opportunity to own a business serving consumers and operating within a proven business model. The support provided by the central franchisor makes a franchise a good choice for many who want to own a business that deals directly with the public.

Features- A retail franchise is any franchise business that serves the general public. Stores, repair shops, restaurants, hotels and beauty shops are all examples of retail industries in which franchises operate. While the franchise structure restricts what an owner can do, it provides more marketing, operational support and brand recognition than owners of stand-alone small businesses have.

Types- Some retail franchises, called product distribution franchises, sell standardized products but have varying business practices and formats. An example of product distribution is the standard auto dealership. More common is the business-format retail franchise, where each franchise unit follows a comprehensive and standard set of procedures and practices. The aim is a uniform consumer experience and improved operational efficiency.

Popular Retail Franchise Categories

What franchise opportunities are available to you? Some franchises are regional, and others may already be awarded in your market. Following is a list of common product retail franchise categories. Within these categories you can find both business format and product distribution franchises:

·         Business supplies

·         Clothing

·         Convenience store

·         Electronics

·         Flooring

·         Footwear

·         Furniture

·         Gifts

·         Gourmet foods

·         Hardware

·         Home improvement

·         Home wares

·         Party supplies

·         Pets

·         Toys

·         Video

Unfortunately, many of the newer franchises will be out of business in five years. It seems that successful retailers often try to franchise their business before they open their own second store.

Should you consider a franchise? Remember, franchises are more profit-oriented than lifestyle-oriented. If you have sufficient capital or good credit, a franchise store can get you up and running faster than most independent retail stores. However, if you prefer the independence and already have or can develop the skills and knowledge needed, a franchise may be too costly in investment and control.