Ray Kroc, who built McDonald’s into the largest fast-food franchise in the world, popularised the mantra “In business for yourself, but not by yourself”.
It’s estimated that franchises account for one-third of the world’s retail sales. It’s an alternative business model from sole proprietorships, joint ventures and partnerships that offers unique advantages, but also has its pitfalls.
Franchising is an arrangement by which the owner of the business, the franchisor, enters into a contract with the franchisee, granting the right to operate the business under prescribed specifications and methods, and includes a licence, use of trademark and brand, training, ongoing support and business promotion.
The franchisee, in return, pays a one-time initial franchise fee, a continuing royalty fee and an advertising fee. The relationship has a term from five to 20 years, with a mutually agreed renewal option.
Rather than starting a business on your own, franchising offers a proven business model, an established brand, clearly mapped operating processes and a developed infrastructure, among other benefits.
The disadvantages are the sharing of revenue, stringent restrictions on how the business must be operated, a requirement to purchase supplies through the franchisor, and the risk of the franchisor going out of business.
There are several types of franchise. A product franchise is an arrangement whereby the franchisor grants permission to market and distribute a product or service using their logo and trade name. In a manufacturing arrangement, the franchisee manufacturers and sells the product.
This is typical in the food and beverage industry. For example, Coca-Cola has bottlers who manufacture the product and sell in it territories.
The most popular is a business format franchise, where the franchisee is provided with a proven model, permission to use the trademark, help in starting and managing the business, and ongoing support.
The business format model has several variations. A single unit franchise encompasses one outlet allowing the owner to personally manage one location. It is the most common.
In a multi-unit franchise arrangement, the franchisee operates several outlets, usually at a reduced price per unit, with wider market coverage.
An area developer is granted a greater number of units than a multi-unit franchise, and is required to open a specific number of outlets, in a particular region, within a specified time.
Finally, a master franchise acts as an intermediary between franchisor and prospective franchisees, paying significantly for the rights to recruit franchisees in a certain geographic territory, with the benefit of sharing fees.
As is the case with most emerging markets, the big franchise names will eventually arrive in Cambodia. McDonald’s, Burger King, Subway, 7-Eleven and Dunkin Donuts may soon be common throughout the Kingdom.
This will be a great opportunity for domestic entrepreneurs to expand the proven model in this country.
Anthony Galliano is chief executive of Cambodian Investment Management. [email protected]