Elective 103 - FRANCHISING
Chapter I: The Birth of Franchising
Objectives:
At the end of the chapter you should be able to:
 Trace the history of franchising
 Plot the history of franchising
 Retell the history of franchising
The origins of franchising can be traced back to the middle ages (400 A.D. – 1500 A.D.) at that time, it
was an accepted practice for local governments to offer important persons, even high church officials, a license
granting them the right to maintain civic order and to make special tax assessments.
In September 13, 1731 Benjamin Franklin and Thomas Whitmarsh entered into the first franchise or
what they called a “Copartnership for the carrying on of the Business of Printing in Charlestown in South
Carolina.”
Kings, Courts or lords (Pre-1800s) could also grant rights to others to operate ferries, hold markets, and
perform the business activities today carried out by professionals. The licensee (or franchisee) would pay the
licensor (franchisor) a specific fund from the tax revenues collected or assessments made and in return receive
military or other forms of protection.
The first franchise in Australia under “royal privilege” was granted by Governor Macquarie (1809). The
franchisee was granted the rights to import 45,000 gallons of rum over three years in exchange for building the
Sydney Hospital (the so called “rum hospital”)
In the middle of the 18th century, a franchising system was introduced when the Singer Sewing Machine
Company formed a franchise in 1851. Singer had been experiencing difficulty in marketing its new product.
Singer needed to educate customers before they would purchase a “machine for sewing.”Isaac Singer accepted
fees from independent salesman to acquire territorial rights to sell his recently invented sewing machine.
Because the sewing machines industry was in its nascent stage of development, Singer needed a huge
capital to develop a large sales force and to open a series of company branch offices. Agents were then
commissioned to demonstrate, sell, and repair the Singer line of sewing machines. This was done through a
franchise system. Interestingly, once the sewing machine caught on, the company changed its marketing
approach and began selling its machines exclusively through company owned stores during the 1860’s.
In the late 1800’s, a significant change occurred because of the industrial revolution. Automotive
manufacturers became aggressive in their efforts to sell and distribute their products. In 1898, William E.
Metzger of Detroit became the first official franchisee of the General Motors Corporation.
Henry Ford followed the example of General Motors and, after establishing a mass production system
for the Model T, he looked for an efficient mechanism for the distribution of the product. His search ended in
franchising. Henry Ford focused on establishing dealers in as many communities as possible throughout the
United States.
Transportation and increasingly mobile Americans were the basis for the establishment of retail and
restaurant chains/franchises. As time went on a large number of establishments began to franchise. Some of the
well-known franchises include Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950, Burger King in 1954, and
McDonald's in 1955.
The franchising concept did not boom until the early 1950s when Ray Kroc started scribbling the success
story of McDonalds. In 1954 Kroc, a milk shake mixer salesman discovered McDonald brother’s small Hamburger
stand at San Bernardino, California and became a licensing agent and recruited franchisees. In 1955 Kroc then
became a franchisee himself and opens his first McDonald’s in Des Plaines III and on the same year the first
McDonald’s advertising runs. Kroc buys out McDonald’s brothers for $2.7M in 1961.
Since 1970s, the growth in franchise arrangements has shown explosive growth, representing nearly
one-third of domestic retail sales.
Source: http://franchises.about.com/od/franchisebasics/a/history.htm
MARTHA MATILDA HARPER
Inventor of the business concept franchising, Martha Matilda Harper was born in Oakville, Ontario,
Canada, in 1857. When she was a young woman, Harper’s father bound her out into service as a domestic
servant in the home of a minister in Rochester, New York. During her free time, she experimented with
formulas and created one for organic hair shampoo; she felt that the chemicals in other shampoos were more
harmful than good. By 1888, Harper had saved enough money to rent an office in Rochester and she opened a
combined beauty parlor and factory for producing shampoo. She called it the Harper Method Shop. Harper’s
own hair was so long it nearly reached the ground and she used it as a marketing tool for her product. Her
beauty method not only included organic shampoo, but she also advocated for good hygiene, nutrition, and
exercise.
Harper invented the first reclining shampoo chair. She is the one who also initiated the concept of a
professional salon. Prior to her salons, hairdressers visited customers at their homes.
As the demand for her products and services quickly rose, Harper decided to open a franchise parlor in
Buffalo, New York, in 1891. The following year, she opened another one in Chicago. Harper’s franchise was the
first of its kind; she trained women to open their own businesses under the name Harper Method. At the height
of its success, there were over 500 Harper salons in the United States, Canada, South America, and Europe.
As Harper’s business grew, she added new products to her line, such as creams, cosmetics, and other
hair products. She also developed hair coloring products and permanent wave formulas. All of her products
were organic and marketed with the Harper Method trademark. Harper also established beauty training school
in cities like Rochester, NY; Atlanta, GA; Madison, WI; and Calgary, Alberta, Canada.
Harper’s business was not only the first of its kind in the nation, complete with a trademark and
franchises, but also she provided numerous women with business opportunities at a time when most of the jobs
women could obtain were as domestic servants, factory workers, and teachers. At her training schools, women
learned how to run their own parlors, under Harper’s trademark, and become business owners. Woman’s rights
leader Susan B. Anthony was a client of Harper’s and used Harper as an example in her lectures of what women
were capable of achieving in the business world.
Some of Harper’s other clients included Presidents Woodrow Wilson and Calvin Coolidge, First Ladies
Grace Coolidge and Eleanor Roosevelt and actress Helen Hayes.
In 1920, Harper married Robert Arthur MacBain. When she retired in 1935, her husband, who was
many years her junior, continued running the business. Harper died in 1950, leaving behind the legacy of
franchise businesses.
Source: http://www.nwhm.org/education-resources/biography/biographies/martha-matilda-harper/
In the Philippines
Franchising also traces its roots to the Singer Sewing Machine in 1910. In that period franchising was
limited only to foreign businesses and public utilities services until the Philippine Franchising Association was
created in 1995. During that time, there were only 111 franchise concepts which eventually grew to 967
concepts in 2007.
The Philippine Franchise Association (PFA), a non-stock, non-profit organization, is the voluntary selfregulating governing body for franchising in the country. It was formed in 1995 to organize the growing number
of franchise industry players, both homegrown and foreign.
The creation of PFA can be traced back to the success of the 1993 and 1994 Franchise Conferences and
Expos pioneered by the Philippine Retailers Association (PRA) with the support of the Private Investment and
Trade Opportunities - Philippines (PITO-P).
Source: http://bayan-natin.blogspot.com/2009/07/franchising-in-philippines-progress-and.html
Elective 103 - FRANCHISING
Chapter II: Power of Brands
Objectives:
At the end of the chapter you should be able to:
 explain the meaning of franchising
 understand what are the roles of the franchisor and the franchisee
 differentiate the Franchise siblings
 identify what are franchise wannabes, and why should you avoid them?
 understand if franchise agreement grant ownership and a guarantee of profitability
Common Franchise Terms:
Franchising
Franchise
Franchisor
Franchisee
Brand penetration
Encroachment
So what is a Franchise, Anyway (And what’s the Big Deal)?
Franchising is a system for expanding a business and distributing goods and services – and an opportunity to
operate a business under a recognized brand name. It’s also a relationship between the brand owner and the
local operator. (Franchising for Dummies)
For example, Jollibee doesn’t franchise hamburgers, and The Generics Pharmacy doesn’t franchise
medicines. They franchise business systems that provide hamburgers and medicines to customers — with
consistent delivery of products, services, and customer experience.
Franchising is often defined as being in business for yourself but not by yourself.”
Franchising is a route to expansion where there is a franchisor and a franchisee that enters into a
franchise agreement. Although both parties have a contractual relationship, franchising is more a personal
relationship, one that enhances and sustains the success of franchising. (Overview of Franchising)
Franchising gives a business the distinct ability to expand and grow through the commitment and
resources of entrepreneurs who have a stake in the business. (Overview of Franchising)
Franchising is a method of business expansion characterized by a trademark license, payment of fees,
and significant assistance and/or control. (An Introduction to Franchising)
A Franchise occurs when a business (the franchisor) licenses its trade name and its operating methods
to a person or group (the franchisee) who agrees to operate according to the terms of a contract (the franchise
agreement). (Franchising for Dummies)
In exchange, the franchise usually pays the franchisor
Franchise is a license that describes the relationship between the franchisor and franchisee including
use of trademarks, fees, support and control. (An Introduction to Franchising)
A franchise is 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 franchisee the obligation to pay the franchisor fees for these rights
• the franchisor the obligation to provide rights and support to franchisees
What’s the Big Deal about Brand?
A registered trademark will be available and has market recognition. The brand is already a player in the
market. Brand is the franchise system’s most valuable asset. Consumers decide what and whether to buy at a
particular location based on what they know, or think they know, about the brand. Unless they have a
relationship with the local franchisee, they probably don’t give any thought to who owns the business. In their
minds, they’re shopping at a branch of a chain. In the consumer’s mind, brand equals the company’s reputation
— the experience they expect to get.
The Franchise Siblings: Two Types of the Same Blood (Product-distribution and business format franchising)
In product-distribution franchising, the most important part is the product that the franchisor
manufactures. The products sold by a product-distribution franchisee usually require some pre-sale preparation
by the franchisee before they’re sold (such as you find with Coca-Cola, where the franchisee manufacturers and
bottles the soda) or some additional post-sale servicing (such as you find at a Ford dealer with your periodic
maintenance programs).
But the major difference between the two types of franchising is that, in the product-distribution
variety, the franchisor may license its trademark and logo to its franchisees, but it typically does not provide
them with an entire system for running their businesses. Product-distribution franchises represent the largest
percentage of total retail sales coming from all franchises, but the majority of franchises available today are
business-format opportunities.
The industries in which you most often find product-distribution franchising are soft drinks, automobiles
and trucks, mobile homes, automobile accessories, and gasoline.
For example:
Pepsi, Coca-Cola, Petron, Shell, Caltex, Goodyear Tire and Ford Motor Company
Product-distribution franchises look a lot like what are called supplier-dealer relationships — and they
are. The difference between a product-distribution franchise and a supplier-dealer is in the degree of the
relationship. In a product-distribution franchise, the franchisee may handle the franchisor’s products on an
exclusive or semi-exclusive basis, as opposed to a supplier-dealer who may handle several products — even
competing ones.
The business-format franchisee gets to use the parent company’s trade name and logo just as the
product-distribution franchisee does, but more important, it gets the complete system for delivering the product
or service and for doing business. This system is what produces consistency — and consistency is a franchise’s
foundation for success.
Examples of great business-format franchises:
International Franchise Industries
Mc Donald’s, Wendy’s, Dunkin’ Donuts, 7 Eleven
Local Industries
Jollibee, Chow king, Mang Inasal, Greenwich, Red Ribbon
The business structure of a business-format franchise offers a detailed plan that explains how to do
almost everything from the ground up. A franchisee is trained to manage the construction of the building, order
the right equipment, and even hang the signs.
The confidential operating and procedures manuals (the how-to guides of every great franchise)
generally give such specific information as how to market and advertise; open the front door; recruit, hire, train,
and dress the staff; and greet customers. To ensure quality and consistency, most franchisors provide businessspecific information in the manuals on how and where to order inventory, how to prepare products, and how to
present them to customers.
In conversion franchising, an independent operator in the same business as the franchisor adopts the
franchisor’s service marks or trademarks, and its system. In many cases, the new franchisee, who is likely an
experienced operator, is reluctant to make all the changes or conversions required to make it identical to all
other locations in the system, and the franchisor may not be able to require those changes. However, the
franchisee adopts the system’s service marks or trademarks, the advertising programs, the buying relationships,
the training, and the critical customer service standards.
The Roles and Goals of Franchisors and Franchisees
The owner of a franchising company — the entity that grants the franchisee the right to operate their
business under the franchise system’s trademarks and service marks — is called a franchisor. The franchisee is
the person or entity that becomes the licensee of the franchisor. The franchisee runs the day-to-day business
using the franchisor’s brand and the franchisor’s system of doing business.
Looking at the world through franchisor lenses
Franchisors can be companies founded by individuals with a great deal of experience (such as Dave
Thomas) or by individuals with little or no experience and who are just concluding an arrangement with the
company’s first franchisee.
Consider the following points regarding franchise sizes and franchisor levels of experience:
✓ Often, the owners are large public or private companies with their founders still at the helm.
✓ Sometimes, the franchisors are former franchisees who bought the companies from the founders
✓ Sometimes, the franchisors are huge conglomerates (such as Yum! Brands, which owns Pizza Hut,
Taco Bell, KFC, A&W, WingStreet, and Long John Silver’s, and operates restaurants all over the
world).
✓ Sometimes, the franchisors are small and relatively new to offering franchises
✓ Sometimes, the franchise system is large but seems almost brand new
You have to remember, though, that the franchisor isn’t providing all this assistance out of the kindness
of its heart. The franchisor wants the whole system to grow, prosper, and turn profits. So the goal of a great
franchisor is to provide a great system. If it does, the franchisees make money, stay in business, expand, and pay
fees. And the franchisor’s brand value grows as more people shop at its branded outlets and more people want
to become franchisees.
The franchisee’s end of the bargain
You need to understand the following distinction: When you buy a franchise, you don’t own the
business. You own the rights to do business using the franchisor’s trademark, brand name, product or service,
and operating methods.
What you typically own are the physical assets, the land, and the building and equipment, but not the
brand or systems. In many systems, in fact, the franchisor may even have this right to buy the assets you do own
if the relationship ends.
Doesn’t sound like much of a deal? Here’s what you do get when you join a well-established franchise system:
✓ A proven and successful way of doing business
✓ Frequently, a buying cooperative or negotiated
lower costs from suppliers for many of the things you
✓ A nationally known brand name
need to run and operate the business (ingredients,
✓ A complete training program with advanced
advertising, insurance, supplies, and so on)
training and updates
✓ Your fellow franchisees as a network of peer
✓ Research and development into new products
advisors
and services
✓ Thorough and ongoing field and headquarters
✓ Professionally designed local, regional, and
support
national advertising and marketing programs
✓ Often, a protected market or territory
✓ Often, a chance to own more than one franchise
✓ A shortcut around the common mistakes of startup businesses
Franchisors often give their franchisees an area around their location in which no other company-owned
or franchisee-owned location is allowed to operate.
This is called a protected market or protected territory. Protected territories may be defined by the following:
✓ The radius or area around the franchisee’s location
✓ Boundaries using highways and streets
✓ The number of households or businesses in an area
✓ Any method that defines the area in which no
other same-branded location may be established
✓ The number of people who live in an area
✓ Zip codes
If the territory is too large, the total market won’t contain enough locations to achieve brand
recognition. If it’s too small or if other locations are too close, there may not be enough customers to support
the business. The goal in a good franchise system is to establish the right number of units in the right locations
to ensure that consumers see the brand frequently, which is known as brand penetration.
When too many units are close by, and that proximity negatively affects unit sales, it’s called
encroachment.
The Nuances of the Franchisor/ Franchisee Relationship
Franchise systems are built on the relationships that the franchisor establishes with its franchisees.
Following are a few of the terms franchisees use to describe their relationships with their franchisors.
Franchisor as partner
In a certain sense, although not a legal one, a franchisor and franchisee are partners. After all, they’re in
this business arrangement together. Each partner has a role, and each partner depends on the performance of
the other. But are they equal partners?
Franchisor as parent
Just like parents and their children, franchisors provide the early guidance necessary for their
franchisees’ healthy growth. A franchisor provides franchisees with a safety net in the form of training and
nurturing during the franchisees’ early days in the system. Like parents, the franchisor offers a support
mechanism that franchisees can turn to for help when they’re off track. The franchisor provides a set of training
wheels to keep new franchisees balanced until they can pedal on their own. And, like real parents, the franchisor
is usually a continuing source of advice, ideas, and wisdom as franchisees mature.
Franchisor as dictator
Ask some franchisees to describe their franchisor, and they may use a word such as dictator or tyrant.
Why? A lot of reasons: some franchisees find the franchise relationship too constricting. They see themselves as
entrepreneurs — someone who starts a business and can make all the decisions about how the business should
operate. Almost from the day they become franchisees, they want to find a way to break free from the
constraints that franchise systems impose on them.
Watch out for franchise wannabes
What’s a franchise wannabe? It’s a business opportunity (or biz-op) that looks an awful lot like either a
business-format franchise or a product-distribution franchise.
It masquerades at many franchise and business-opportunity trade shows.
The most common types are rack jobbers, supplier-dealer distributorships, and vending-machine routes.
Although every franchise is a license, not every license is a franchise. The difference is in the definition of
franchise established by the Federal Trade Commission. This definition requires the following elements to be in
place before a license is classified as a franchise:
✓ The franchisee needs to distribute products or services that are identified or associated with the franchisor’s
trademarks or service marks.
✓ The franchisee is required to meet the franchisor’s quality standards when using the marks; the franchisor
has significant control over the business or provides significant assistance to the franchisee.
✓ The franchisee pays PhP 35,000 or more to the franchisor.
Business opportunities have several advantages over franchising, most notably far more independence and
flexibility. Business opportunities usually cost less to start up than franchises and don’t require you to pay
continuing royalties.
A Reality Check Before You Dive In: Franchises and Profits
If you buy a franchise, you get rich, or at least financially secure, right? We hate to burst your bubble,
but that’s a myth. Not all franchises are successful, not all franchises are profitable, and many fail. Owning a
franchise — like owning any small business — is hard work. Even though you get proven systems and training
when you hook up with a solid franchisor, no one guarantees your success. Often, the variable in this equation is
you. Business ownership is not a passive investment. It requires long hours and dedication. Even with the best
franchise system and the most popular brand name, the franchisee is often the key ingredient to making the
business successful. Even with hard work, if you make the wrong choice and buy a franchise that you end up
hating, chances are good that you won’t be successful — or very happy.
Elective 103 - FRANCHISING
Chapter III: Franchising s More than Just a Food Industry
Objectives:
Understand the kinds of franchised businesses
Recognizing the importance of brand
Exploring franchising arrangements