Using Franchising as a Business Strategy
Over the years, franchising has been used worldwide as a business strategy to improve revenue and productivity performance along with other business expansion models such as expanding solely through company-owned outlets. Franchising provides quick access to the market and helps to improve a company’s productivity.
SPC’s research study on Franchising as a Strategy for Productivity Improvement for Singapore sheds light on franchising as an effective business strategy for retail and food services companies in Singapore.
Case Study of Four Local Brands
The findings of the research are based on a detailed case study of four local brands. These brands provide insights into developing home-grown brands through franchising. These brands are shown in Table 1.
Table 1 -Local Brands Selected for Case Studi
In retail, most companies use franchising only for overseas expansion. R1 and R2 were chosen as both of them have global franchisees. F1 and F2 were chosen for food services due to their having local and global franchises. F1 has had more than ten years of experience in franchising, while F2 has had more than five.
SWOT Analysis of Franchising
Table 1 summarises the SWOT analysis of franchising based on the experiences of the four companies.
Global Franchising or Local Franchising?
Franchising is a productive mode of expansion for both the retail and food services sectors.
For food services companies, business expansion invariably means that they have to be physically located in more places in Singapore to attract a larger group of consumers. The reason is that food is perishable and people are more likely to buy food when they smell or see it. Instead of opening company-owned outlets, which could be expensive and tedious, food services companies could consider franchising to capture a bigger consumer base. F1 is a good example of a household brand that has used franchising to have more stores in Singapore as well to expand overseas.
Lack of manpower and adequate skilled workers could hinder local franchising. Both F1 and F2 feel that not many Singaporeans are keen to work in the food services sector due to long working hours and the tedious work. Another hindrance is the high rental cost and difficulty of finding good locations.
For the retail companies, global franchising is used more often than locally. The main reason is that the Singapore market is too small and saturated with brands. Another reason is that e-commerce has been a widely used platform for retail stores to gain customers locally. Hence, they do not need to be physically located in many places to capture a large group of consumers. An example is R2, which states high rental costs in malls as a key factor in finding another platform to generate more sales and earn profits. Similarly, R1’s strategy is not to locate physical stores “at every corner of Singapore”. The company is thus more receptive to using franchising globally rather than in Singapore.
Productive Advantages of Franchising
On local franchising, both F1 and F2 are of the view that having a mix of company-owned outlets and franchised stores is more productive than having just one or the other. While company-owned stores set the standard for franchisee to adopt, franchisees provide feedback on business operations and innovation to improve the brand.
Local franchising allows faster expansion of new brands. To F1, franchisees help to “share the burden of the brand” as it is less taxing on the franchisor’s financial and manpower resources. F2 regards franchisees as “shareholders”, who play an important role in raising the franchisor’s productivity. The reason is that these “shareholders” handle their own issues on manpower, money and management and, at the same time, generate revenue for the franchisor.
Global franchising enables a brand to break into foreign markets more easily than opening company-owned outlets. It is often difficult for a brand to break into foreign markets because of the laws in place, e.g. regulation of shops owned by foreigners. According to R1, local brands are usually placed on the waiting list in malls overseas; and that foreign franchisees could help with connections for the brands to be open in the malls. Both R1 and R2 select overseas franchisees based on their network and experience.
Global franchising also allows specialisation to take place. According to R1, the local team focuses on “brand innovation for product diversity”, keeps up with the trends and devotes “adequate time to grow and develop the brand”. If it were to open its own company-owned outlets overseas, the local team would be required to travel, thus incurring higher operating cost. With franchising, the global franchisees are in charge of running the daily business operations in their own country. They understand better “the law and regulations of the service sector [as well as] the taste of their locals” better. Hence, they are able to provide advice in tweaking certain products to localise them for the domestic market. The importance of feedback from global franchisees is exemplified by the experience of R2. Its franchisees in India noted that the sizes of the clothes were too small for women, and commented that the clothes should be below knee-length. With these feedback, R2 altered the clothes to suit the market better.
Table 1 provides a summary of the productivity advantages of franchising over other methods of business expansion.
Table 1 – Productivity advantages of franchising over other business expansion methods
Possible Downsides of Franchising
A downside of franchising is that it is difficult to find reliable partners. Not being able to find reliable and trustworthy partners could lead to a possibility of franchisees diluting the brand. This could be the result of franchisees resorting to short-term gains by cutting down resources provided by the franchisor.
In the food services sector, any alteration of recipes by the franchisees could hurt the brand’s established name. Once the taste of the food is not up to their standard, customers may no longer frequent the brand. F2 cites an example of one of its franchisees selling leftover pastries. When such incidents occur, the damage to the brand could be great, as customers pay little attention to whether a store is franchised or company-owned. As R2 points outs, with the internet, the risk of selecting an unreliable partner is reduced as it is easy to do a background check on the franchisees.
Generally, all four brands enjoy good relationship with their franchisees. The reason is that both the franchisor and franchisee share the mutual goal of making profits from the outlet. Hence, establishing a good relationship is advantageous to both parties. F2 tries to establish long-term partners and relationships. F1 treats a franchising agreement as a marriage contract, where the two parties need to understand each other to ensure a long-term partnership. Since it takes about one and half years for a franchisee to make profits in the store, F1 actively assist its franchisees.
Another potential downside to franchising is the relatively high cost of time and resources at the initial stage when the franchising model is being developed. This is especially the case if a company is considering franchising for the first time and is unfamiliar with the complexities involved. To overcome this, companies could seek the advice of experienced consultants appropriately.
In a Nutshell
Franchising is an effective business strategy for retail and food services companies. Whether a company is considering business expansion locally or overseas, it should not jump to the conclusion of expansion through company-owned outlets. The possibility of franchising should be high on the company’s agenda.
This article is based on a research carried out by SPC with research assistance provided by Loo Soh Leng. SPC would like to extend our appreciation to the companies for their participation in the researc