Luận văn developing a franchise business in vietnam the case of pho 24

Therefore, popular model business in the world will have opportunities to develop in Vietnam, and also business development in form of franchise is not an exception case Franchising is c

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Bui Thi Thanh Tam

DEVELOPING A FRANCHISE BUSINESS IN VIETNAM

THE CASE OF PHO 24

Major: Business Administration

INTRODUCTION " titcoutotniteisiinitieiititiaseesiacee D

1.1.3 Basic factors for developing a Francte 8 LL4, TheProcsssofFranehising vocoocceecoeoc.12 LLS Control franchising system

1.2.2 Xen-busrsssformatfianehise : dF

vi

1.3 Method for developing Franchise system - 18

1.4 Signification for Fianchise Business 35

CHAPTER 2: AN OVERVIEW OF THE FRANCHISING BUSINESS IN VIETXAM

2.1 Legal Framework Franchise in Vietnamese - - 37

2.2 The Business in Vietnam Pee eee dd đỂ 3.3 Factors that infiuence of tranclise acHivifles c co BA

24 Tendency and challenge of đevsloping in form of Franchising at Vietnam

3.2 Basic Faclors [or đeveloping a Tranchise syslem 3

3.2.1 Brand name i vàn nhhnehineeere "— OR

3.3.3 Action plan of Pho 24 ào nieeeeereeeeeeosoee 62

vii

3.4 Solutions for Developing a Franchise Business in Vietnam and Recommendation to

Appendix A: Franchise Staistics Whw does people buy Ññanchise 73

Appendix B: Ranking of motivational incentives to enter franchising T5

Appendix E: Pho 24's ResỈdtrifs ào cv Tnhh HH re 80

World Trade Organization

Unit Franchise Organization

LIST OF FIGURES AND TABLES

Master Franchise Single — Unit Franchise

‘Area Development 'ranchise Joint Venture

Development Processes Choosing factors affect Pho 24

Factors for Pho 24

INTRODUCTION

1 The thesis title

DEVELOPING A FRANCHISE BUSINESS IN VIETNAM

THE CASE OF PHO 24

2 The thesis necessity

Franchise, one of the methods to develop businesses, is very popular but still new in, Vietnam The global integration creales new opportunities and challenges to the

Vietnamese Foreign companies will have more opportunities to penetrate

Vietnamese market and Vietnamese enterprises also have opportunities for development abroad as well Therefore, popular model business in the world will have opportunities to develop in Vietnam, and also business development in form of franchise is not an exception case

Franchising is considered to have many advantages for both sides in mn franchising Aller joining WTO, Vietnam has become a potential markel for franchise, In fact, Franchising business in Vietnam has developed rapidly in recent

years and information about franchise is more and more popular Moreover, the

knowledge of franchise sill lomted to the Goverment, business and consumer

sector A research on how franchise business work effectively is therefore useful for

companies, as a consideration to expand their operation

This thesis is to build appropriate franchise business For Pho 24 Restaurant’s development, The research has also added value to the method franchise that useful for business development, by giving recommendations and proposing an action plan, which can be applied in franchising business in Vietnam

For this reason I choose thesis topic: “Developing @ Franchise Business in

Vietnam - The case of Pho 24”

3 Objectives

The objective of the thesis is given: the theoretical basis of the [ranchise, analyze the reality franchise in Viemam recent year; Using the tools and knowledge gathered to analyze evaluate, the case of Pho 24 In addition to prapose a solution and action plan to help enlerprises successfully apphed the strategy of choice, thesis offers some recommendations to the State in planning and management to sustainable

development the reality franchise in Viemam

4 Methodology

This thesis applies the case study to franchisor Pho 2 Restaurant The research has becn propared mamly through desk research, not analyze financial nonm, only reviews of available literature and data through fourth basic steps:

First step is toreview theories of franchise ‘he study focuses on the literature view of existing approaches to franchise definition and same basic factors that

ofTect Lo franchise business

Sesond slop is based on the research of (ranchisor in Victnarn and finds out specific factors that influent the business success

Third the case study of Pho 24 is analyzed, show the advantage and disadvantage in franchise business development This analysis allows giving some basic solution and recommendation for business development in fom of franchise in Vietnam,

5 Data sources

The theoretical review and collection of secondary data has been performed by research of books, reports, newspapers ‘Ihe primary data was collected through intemet and interviews with Pho 24’s managers in many newspapers in recent

years,

6 Significance

By reviewing the theory of Franchise and understanding the impacts of business

environment, the thesis benefits Pho 24 Restaurants l'ranchise ‘his theoretical

approach can be applied or choosing good points in oases of other campanies using fiamchise methad le develop business

7 Expected results

The result of this thesis is lo give basic sohutions [or (ranchisor’s Pho 24 Business: and for further business development in form of franchisor in Viemam Business The methodology is expected ta be effectively applied in the case study of other companies in franchising

The study is imited in the sense that just a small business with the wide Geld in

market and this thesis only research on desk study, not analyzed about fmancial norm of company so the applying this on other business will be limited

9, ‘The thesis structure

The thesis is started with the introduction part, following by three chapters and the conelusion part

Chapter 1: Lilerature Review — This chaplor provides a furiemenuial review of franchising

Chapter 2: An Overview of Franchising Business in Vietnam ‘This part analyses

the reality for Business development in form of franchise in Vietnam

Chapter 3: The Case of Pho 24 — The chapter presents the case of Pho 24

Restaurant and analyzes ifs environment lo give some advises to develop Pho:

24, The chapter also suggests sollution and recommendations to the Govemment on

developing a franchise business in Vietnam

10 Suggestion for future research

The rapid change of basic factors, compelilive tends, like technological advances, law, and customer’s lifestyle, creates both opportunities and challenges to the franchise field and Pho 24 Company Therefore, it could be interesting if further research with larger sample size could be undertaken Lo confin fully the fading of this study

CITAPTER 1 LITERATURE REVIEW

1.1 Overview of Franchise

11.1 The concept and definition

The word "franchise" is derived from the Anglo-French word meaning “liberty.” In

Middle French, il is “franchir’— to free In Old French, it is “franc,” sigmfying [ree

‘The French term “francis” means granting rights or power to a peasant or serf ‘The English lerm “enfranchise” is defined as empowering those who have no righls The tenn “Royal Tithes” is the predecessor of royalties, and originated as the practice of certain nglish men (referred to as “freemen”) receiving a percentage of the land

fees paid by serfs to nobility’, Throughout lostory, franchising bas promoted

economic liberation, synergy, and opportunity, and has been true to its etymological roots - “freeing” commerce from many of the traditional chains that had bound it

Naisbitt’s? famous comments in Megalrends is no exaggeralion — “Franchising is

the single most successful marketing concept ever.”

Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain in the process Afier the brand and formula are carefully designed and properly execuled, franchisors are able to sell franchiscs and expand rapidly aeross countrics and continents using the capital and resources of their franchisees, and can eam profits

commensurate with the contribution to these sociclics while greatly reducing the

risk and expense that would be inherent in conventional chain operations

So the franchisor’ owns the overall rights and tademarks of the company and

allows its franchisees to use these rights and trademarks to do business The

' Robert L.Purvin, Jr., The Franchise Fraud (L994), at p.10(Hereinafter “Purvin'"}

2 John Naisbitt (0 January 15, 1929 in Salt Lake City, Utah) is an American author and public speaker in the area of futures studies His first book Mepatrends was published in 1982

> ntip./fremehises about comiod:franchisegiossary

franchisor usually charges the tranchisce an uptront franchise foc for the rights to

do business under the franchise name In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee Franchisee is the person or the emlily which has acquired the rights of conducting the business Grow the franchisor

or licensor

This part provides a brief timeline of developments franchising, the basic factors for building a franchise system, classification of franchise models and finally, signification lor franchisor businesses

The Vietnam Commercial law No 36/2005/QHI1 passed in June, 16 2005 said

“Vranchising is @ commercial action; in there franchisor allows and requests franchisee trade goods, suppart services according to some conditions:

¥ Trading goods and support services was made available by franchisor

So natural of franchise is one business transfer business model in order to distribute

goods, services for partners bul they still keop basic norms of model and satisfy

right of both side

When they joint in franchise, they have agreement together and make transfer contract with simple terms about responsibility and authority of each side

1.1.2 History and Evolution of Franchise

Franchising dates back to the 1850s; Isaae Singer, who made improvement to an existing model of a sewing machine, wanted to increase the distribution of his sewing machines His effort, though unsuccessful in the Jong run, was among the

first franchising efforts im dhe United States A later canple of franchising was

* Fieinam Commercial (aw No 36/2005/QHL1 pp 72

6

John S Pemberton's successful franchising of Coca-Cola Early American examples

include the telegraph system, which was operated by various railroad companies but

controlled by Western Union, and exclusive agreements between

automobile manufacturers and operators of local dealerships.*

Modern franchising came to prominence with the rise of franchise-based food

service establishments This trend started before 1933 with quick service restaurants

such as A&W Root Beer In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modem restaurant franchise The idea was to let independent operators use the same name, food, supplies, logo and even building

design in exchange for a fee

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's started franchising motels The 1950s saw a boom of franchise chains in conjunction with the development of the U.S interstate highway system Fast food restaurants, diners and motel chains exploded In regard to contemporary franchise

chains, McDonald's is unarguably the most successful worldwide with more

restaurant units than any other franchise network

According to Franchising in the Economy, 1991-1993, a study done by the

University Of Louisville, franchising helped to lead America out of its economic

downturn at the time Franchising is a unique business model that has encouraged

the growth of franchised chain formula units because the franchisors collect

royalties on the gross sales of these units and not on the profits Conversely, when good jobs are lost in economy, franchising will be chosen because potential franchisees are looking to buy jobs and to eam profits from the purchase of franchise authority The manager of the United States Small Business

Administration's Franchise Registry concludes that franchising there is continuing

to grow and that franchising is growing in the national economy

Franchising is a business model used in more than 70 industries and that generates

more than $1 trillion in U.S sales annually

* http:/Avapedia mobi/en/Franchising

1.1.3 Basic

tors for developing a Franchise system

Franchise system almost belongs to big and famous company like McDonald, KFC, Starbuck coffee In order to do a franchise business, a company will need to register its intangible properties such as trademarks, logos, etc protection Based

on this, businesses can develop fame, and prestige with consumer, and make

attractive of customer for their brand name

In addition Moreover, in order to make franchise system, we not only base on the

fame of business and attractive of products but also the other things as:

¥ 4x operation manual of Business and Instruction material business action

Y Training program for franchisee

¥ Preparing human resource for development business

Y Standardize norm of system and give norm to choose business premises or franchisee

L131 Developing operation munuat of Business and Instruction material

business action,

One importance specific trait of business mn form of franchise is that franchisor has

to comprehensive standard product, operation style, arrangement way, standard

serve in all systems so, franchisor has to build operation manual for them

Business’s operation manual is a document that is written down by the most

importance things of businesses like: business philosophy, detail instructions to manage each part, each line, and each work of store This operation manual also helps franchisee run business comprehensively with overall system Franchisee must obcy oxactly all assigns in business operation manual The content of operation manual can change follow business developing but usually franchisor will have power to change and add it, Franchisce can request to change and add the

operation marmal and it will be changed if franchisor accepted

Major contents of action operation mammal need to mention include

> Information relates authority and duty of franchisee

> Assign about information advertising

> Assign about stall clothing

Work process for cach depariment and cach stall

Sale, marketing and problern solving processes

>

>

> Reeruit staff

> Vvvy

Drafting a operation manual need to be detail, full information and easy to

understand TL will guide for daily activities of the store TL also becomes enterion to

evaluate and control all actions of a parmer who wants to buy franchise ‘This

operation manual can be made in form of video clip and picture in order to help franchisce casy to refor and mimic

Although operation manual is not perfect ensure for synchronism of system, but it is

an importance factor help franchisor running system is perfect

1.1.3.2 Training program for franchisees

In the fact that franchise system ask business has to transfer the right of exploiting

business for partner not only to collect money franchise but also expect to try

partner best Contrary la (he franchisor, iranchisce is not only collecL money immediately but also adventure investment activity business like other investments Signing franchise contract between two sides will be profitable and make business activity of system more and more developed So franchisor nrust design a system work clearly, concrete, unity in order to make advantage factors for franchise system that was sold

Training for partner who buys franchises hes indispensable need Law systems of

other countries, also request that franchisor must have duty in training, supporting,

for franchisce Each business has contents, style and different tramings program

‘This maybe opens ‘Iraining School, or send staffs come to origin stores or delegate experts training directly at business The purpose of trainings program is that store

manager ard staffs have knowledge lo run store well

This tramings program has boon divided two basic ways:

> Trainings before opening store: This action bas heen accompanied with transfer document and run with owner of business and alll staffs

before franchisee received franchise

vy Support trainings when store run: it has been run when any store was mistake, and also maybe enhance skill for staffs of franchisee It is concurrent happened when have new business problem that franchisor

want to add

The trainings fee is collected in initial franchise fee when partner buy franchise,

moreover il can be changed or depend on the concrete conditions of contract

1.1.33 Preparing human resource for developing business

‘Unit now we have seen the role of human resouree in general business and running business in form of franchise is not exception We can say that business can not develop operation business if does not have good human resource Similarity, in franchising that require about stalls must interest specially und develop following ask of action plan

Business bas to evaluate human resource in order to serve development requirement After that business see weakness, how to short of in order have recruitment plan noel real demand of business Morcaver franctnse ia uew field in many countries and different from other activity business so business must have detail plan for recruitment as well as trainings staffs with full franchise knowledge,

to satis! development strategy of business

10

Once franchisor must have trainers for franchisce and support them usually te help partner successful and enhance position of business So the number of staffs will be increased and the most importance things is that staffs have enough professional skill to ensure for transferring and control identical system Tf not the franchise transfer will not successful and have bad effect to brand name of franchisor or franchisee

1.1.3.4 Standardize norm of system and give norm to choose husiness premises

or franchisee

The nature of franchise is supply model, secret business for partners in order to successful quickly So standardization norms of system are very necessary to building handbook and trainings program make the umity of system Franchisor has let some nom of system as

Y Standardize services, products: include qualitative, quantitative and build formula, technology process

Y Standardize premises condition: make some norm about location, area, decorative

¥ Standardize document: some text, instruction, regulations in order

to make trensfer-document, iminings

Y Build nonus to choose partzer: include nonn that define right strategic

partner to meet corporations

Y Standardize about check activity, supervisor, evaluate, report Standardize all norms will good for choosing space, and partners, transfer-trainings

of system This work mare detailed more ensure for successful of franchisee and

building fame for all franchise system

Choosing business point is an importance factor in helping business activities effectively If franchisor was not evaluated right point, franchisee was failing not only influence themselves but also influence fame of system So to do this well,

11

franchisor should consult for franchisee about how to choose good business point Some business has the advantage about finance, they usually corporate real estate company in arder to let franchisee rent business point

Similarly, let the standard for franchisee was very importance also Franchisor has

lo define which ontreprencur’s samples have cnough able te success wher bransfer-

franchise Some entrepreneur’s norm or franchisee can include field

Y¥ Good finance to satisfy business conditions

Y Prestige level in business

¥ Business experience: no need to have experience but franchisee should has

experience that is very advantage in enterprise

¥ Corporate goodwill

¥ Business premises or able to find business premises

1.1.4 The Process of Franchising

‘The first step in franchising a business is to make the decision to franchise ‘hat involves two key questions

¥ Is this business franchisable?

¥ Is franchising the right strategy?

These questions can only be answered after evaluating your business and

determining Low frinchising fils with your specilic goals and objectives

Ti the deeision to franchise is made, a [ranchisor should devclup a business plan

outlining the company’s growth and strategy for the next five years A franchisor

needs cerlain new capabilities and will need ta be sure thal these capabilities are

scamless integrated into existing organizational functionality

To ensure successful franchisees and maintain quality control, the tranchisor will need to develop a state-of-the-art operations mamual for its franchisees ‘This manual will serve as a sales tool demonstrating franchisor competence to new prospects, a8

12

a training guide for new franchisees, as a reference guide for established franchisees, as a "liability limiter" for the franchisor, and as a legally binding

quality control device for the entire chain

The franchisor should also develop training programs for use in conjunction with the operations manual Computer-based tools and programs are highly effective, as are training videotapes, and can be used for the franchisee, for the franchise's employees, and for corporate employees

To be legally entitled to sell franchises, the franchisor will need to develop a franchise agreement and a Uniform Franchise Offering Circular, and will need to

file with appropriate state authorities on a national basis, The franchisor will also

need to maintain ongoing compliance (keeping registrations in force while actively

selling) and will need to be able to document compliance with state and federal law

on an ongoing basis These legal requirements are relatively easily met through the

use of an attomey with substantial franchise experience.®

Obviously, the new company will also need to sell franchises This will require a specific marketing plan designed to get the franchisor's message to the targeted franchise prospect

Once the prospect has been identified, the franchisor will also require marketing

tools to assist it in the sale of franchises And of course, the franchisor will need to

understand the nuances of the sales process and the legal constraints of franchise

sales

The tools necessary for franchising can be developed in approximately three months

from the completion of the implementation plan, although state registrations may

delay a company's ability to sell in certain states for another three to four months

Altogether, a new franchisor can anticipate that the franchise program should take

between six months and a year to fully implement The cost of a well-designed

* Pacific Franchise Developing Corp (2009), Jttp:/snwwpfde.com.vn, Knowledge about franchise

13

program varies substantially, depending on the strategy chosen and the desired speed of expansion

So when developing a franchise program for a business entering the franchise industry, there are several essential steps that need to be taken in order to effectively model the frmchise concepl, proteel the franchisor and have a solid, duplivatable

franchise model

Franchise Business Plan - ‘Ihe first phase of franchising a business is to develop a sound plan for the expansion program Prior lo the drafling of any documents, the plan for the program should be completed and approved by all those involved in the franchise system This plan should include a good profile for the target buyer of the franchise system, a well-defined franchise fee, royalty and advertising fund model and a financial model that makes sense for both the franchisor and the franchisee

‘The iNranchise business plan should document and define a model that also builds a temitery plan for the franchise model along with training programs for franchisees,

a support model for the franchise system and a good cash flow model for the new organization The plan should encompass the entire proposed franchise model and

caver every element of the new business

Franchise Legal Documentation - In order to offer frnachises in the United States

and within most state borders, a Uniform Franchise Disclosure Document needs to

‘be documented based on the standards set forth by the Federal Trade Commission

This document is complex and unique, it should be documented by a professional with specitic experience in franchising The State Registration process requires individual franchise application packages along with other required steps that States will want a new [ranchise system Io go (hrough prior to their being permitied to

offer a franchise within the State borders Franchise legal documentation should be

put together in a way that is conducive ta doing business as a franchise company,

bul also provides the franchisor wilh thorough protection and documented

compliance

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Franchise Operations Manual - As part of the franchise development process a franchise system should have a fully documented and defined operations system that allows the franchisee to learn the business model and understand the required standards as sel [orth by the franchisor The Operations Marunl should be effective

as a sales tool for the franchise model, a legal liability limiter for the franchisor and

a training tool for the franchisee There should also be manuals that are more guided for training purposes and cover specifies vathin the frmchise business

model

Franchise Marketing Program - ‘The final stages of the franchise development program should incorporate the markeling element of the franchise process The franchise marketing plan should incorporate the channels with which the franchise will be marketed and sold, the media outlets and lead generation sources that will be used and Uh: unique value proposition for the franchise concepL Franchise collateral material such as brochures, pamphlets, fliers should courectly sell the business as an opportunity for potential franchisees

Good franchise programs take work, focus and a commitment to structure It is

strongly recommended that a company considering this transition into franchising

consull with professionals int the Lield of Irenehise development,

1.1.5 Control franchising system

Franchise Management allows franchises to improve quality, efficiency, accuracy, and communication through management of information and_ relationships

pertaining Lo: slores, owners, agrecmuents, Inairang/certification, evaluations, and

defaults

‘Training is key to ensuring adherence to the franchise model, Franchisees are said

to have a greater incentive than direct employees to operate their business successfully because they have a direct stake in the start up of the franchised

‘busimess and the tangible assets that wear the brand mame.

With proper training, the need of franchisors to closely scrutinize the day to day operations of franchisees (compared to directly-owned outlets) is significantly

reduced

However, key to the success of any franchise model is the assurance that all

faneclisees are following the ‘busmess model’ and standards are met to ihe same

consistency across the franchise network Franchisors often offer franchisees

training Training is not always free for franchisees, it is sometimes supported

through ihe traditional franchise [ee Lat the franchisor collects and tailored to the

business that is being started,

When training fees and travel expenses, etc are required beyond the initial franchise fee, these fees are deductible as part of the start-up expenses of the business It is also common for the franchisor to charge for ongoing training requirements and documentation to ensure that standards are maintained

A franchise-focused leaming management system (LMS) is the logical solution to help franchisees with both initial and ongoing training

Beside of that there have many way to control franchising systems like:

Y Performing audits af Franchisee to ensure compliance with quality standards

and adherence to the Franchisor Business Model

¥ Franchisor should use Full business franchise model, it casy lo make

franchisee follow same stardard, make sucessful chain business

¥ Unsure best practice and knowledge sharing across 'ranchise Network

¥ Placing manuals and other important documents in electronic format with- out making them downloadable or printable to protect Franchisor Intellectual Rights

Y Abilily for Franchisee Managers to pay for traming on belulf of their

employees

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¥ Enterprise wide reporting for Franchisor and Master Franchisces to report on training certifications

1.2 Classification of Franchise models’

Franchising definitions were understood like business developing method but it has

wide scope with many different ways Base on investment limit and control,

franchising 1s divided by two basic types

> Full business [ormat

> Non-business format 1.21 Full business format franchise

Thal mean the franchisor will bansfer their entire Business model for franchisee

‘This will be known as “Copy” alll standard business models for franchisee With this model, identical of system will be very high Franchisor will transfer four basic fields:

Y Stralogic system, business model, process in order Lo Tun mariagement

policy, manages training, design

Y Business key, technology

Y Brand name system

Y Product, service

Franchisee has to-pay all initial fee expenses, expenses monthly depend on business condition that was agreement in contract This model allows firm run franchise has initial suitable expenses, control limit is higher and able to wide open size is good

franchise, that

This formal franchise was best close structure and perfect in formal

was show the corporation of partners and contract time from 5 years to 20 — 30

7 Ly Quy Trung (2006), 5up Franciase, new opportunities for Vietnam business, Publishers young, Ho Chi

Minh city

years like fast food line as: KFC, Subway, McDonald’s, Starbucks or Pho 24 in

Vietnam

1.22 Non- business format franchise

Frenchisor only transfers a few elements in order to ensure success of business type that was owner by franchisor Usually have some cases:

> Product and service distribution franchise like: Pierre Cardin Shirt for

An Phuoe, Foci, Trung Nguyen collec

> Formula for produce and marketing franchise or Marketing franchise like: Cova Cola;

> Brand franehise or trademark license like: Crysler, franchise using trade make Hallmark (main product is card) to produce like bed, mallress, pillow

> Franchise nol tide with kind using barmer grouping or voluntary chains, that usually meet in professional service company, consultant company like: Emst & Young, Grant Thornton

With limit is not enough, franchisor will decrease some expenses and reduce human resource demand to develop system, able 1o fast develop business network themselves But to control identity of system is decline Income of franchisor is based on selling product and service mainly, and franchisee reduces a lot of expenses for buying franchise but reduce also successful support in business

This model is used for businesses which want to lake all advantages of lime lo wide

open size and market that still fewer competitors

1.3 Method for developing Franchise system*

There are four major for developing franchise system below

Ê Lý Quý Trung (2006), Bup Francinse, new opportunities for Vietnan: business, Publishers young, Ho Chi

Minh city

18

> Master Franchise

> Single — Unit Franchise

> Area Development Franchise

> Joint Venture Franchise

1.31 Master franchise

This is an investment business model that has been developed and continues io expand because the permission has been granted ‘The business is free to establish in one specific location ar it can be freely expand around the world

In this method franchisor buy development authority store chain of them to

Ganeclisee in fixed territory and this partner can buy again for other partners in area

Tn this method, franchisee h

Ml power Lo develop system to all over the market

and franchisor will receive a fixed fecs according both agreements and the way to

develop in where, when, how? It depends on the partner buy franchise

Usually franchise fees depend on the ability to negotiate of both sides franchise but

it can be lmnted from $ 50.600 to $1 milhon Franchisor persuaded franctusce thai

set up the high fee that means them loosen chance to open new store or sell for third

person when they sell franchise Other hand, franchisor must have a suitable

compensate

For example, one group corporation between banks and investment fund has signed

a contract to buy master franchise of Huropear brand name in order to provide a monopoly service for car rental in Australia and Asia Pacific Ocean This camporation bought all franchise stores of Europcar al nine national included: Indonesia, Malaysia, New Zealand, Pakistan, Sri Lanca and Singapore; and found new legal person: Europcar Asia Pacific This agreement makes Europcar Asia Pavilic monopoly business Furopcar brand in 20 national where this brand not yel appears Outside Europcar Asia Pacific also have right sell for anyone in local where they monopoly

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Figure 1.1: Master Franchise

Source: Summarized by the author

Based on Ly Qui Trung, “Buy Franchise”

13.2 Single —Unit franchise

This method sells directly franchise for each trader in developing process of system

Franchisor finds directly and negotiates with each partner in order to sign business contract franchise

This way requires franchisor must have full human resource in order to do work, particular when this system is expanded All actions of franchisor have to strengthen with supervision, training, support for each partner so the volume of

work will be remarkable increased This method will be difficult and costly for

developing over - sea

The advantage of this method is that buy for single — unit franchise to each individual, business in development process system; or franchisor ean supervise

closely in working process And in other hand, able to find, support of franchisor is

20

bettor and the ability to success is higher Moreover, that is difficult for franchisor that doesn’t have strong human resource and have little experience in franchise

With famous brand name in the world like: MeDonald’s, Burger King, Pizza Llut, 7- up seldom buy Single Unit Franchise , just only buy Master franchise for all local or a National So dhiis method 1s usually suilable for small busmesses and individual who want to buy franchise from small business but still have potential

development and that suitable with local which you focus

Fxample the case of McDonald's in Malaysia, sell master franchise for GARSB Atter that this company buys single unit franchise for businessman Muhammad Jamarin Salleh in Kota Bhamuafter and it done well So Muhammad was signed

contract continuous to open more two restaurant franchise

With this model, business need design a control system and supply services for each area in order to meet pariner’s demand, ensure all system identity, so fees will be

increased

21

Figure 1.2: Single — Unit Franchise

1.3.3 Area development franchise

This is franchise model in between of Single unit franchise and Master franchise, which mean in this case the franchisee has been given a monopoly area or small city

in fixed time, but franchisee can not sell it for anyone Under this method, few

franchisees accept to sell franchise for a province, an area, a national People who

buy area development franchise have been tied in contracts stipulating the number

of stores to be opened during a certain period time? If not do this franchisee will be canceled a contract by franchisor In many case, after times good running business

the people who buy area development franchise can change this contract to contract

for Master franchise if he want to buy this model franchise for third person

Almost big brand franchise in the world come to Vietnam always through by master

franchise way or area development franchise example: KFC, Loterria, and Pizza

Hut, McDonald’s The person who buy franchise of famous brands usually have

strong finance, enough to open series restaurants in few years This is force

condition that small companies can not follow

2

Figure 1.3: Area Development Franchise

FRANCHISE 1 FRANCHISE 2 FRANCHISE 3

Source: Summarized by the author Based on Ly Qui Trung, “Buy Franchise”

This method helps franchisee save initial expenses because the price of buying

many stores in the same time will be decreased Moreover, that also require

franchisor have to find a good partner who have enough potentiality to develop

That make franchisor supply service and control also store is better, ensure identity

of system

1.3.4 Joint venture

With this method, franchisor cans corporate with local business to found Joint

Venture Company This company will be represent franchisor with all right to run

business in this city, national or whatever area Both of them will negotiate about their share and the way to mobilize capital Usually, the local business will contribute by money and local knowledge, and franchisor will contribute by

business secret, brand name, and adding cash This method is not so priority

because they have to accept many financial risks if they fail So franchisor accepts

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this method when they really want to come to new market where they don’t have

partner buy franchise

Figure 1.4: Joint Venture

FRANCHISEE |

FRANCHISEE | | | FRANCHISEE 2 | | FRANCHISEE 3

Source: Summarized by the author

Based on Ly Qui Trung, “Buy Franchise"

Depend on the management ability, brand strength, industry-specific goods, and competitive market, franchisor will consider more three importance elements after

the three most choosing franchise models that suitable for business, That is

efficiency element and level control system, system development costs and the level

of market coverage These factor also effect to franchise strategy and the way to choose franchise structure that suitable when sign contract, special when company open new market or orientation export

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1.4 Signification for Franchise Business

141 Advantages

Developing business in form of franchise will have many advantages such as

First, business expands market seale When franchisor transfer model, business secret for partner, products service and image of business will be approached the market Particularly, it will better for business has been built its brand name in

amarkel, has business secrel and able to aliract customer

Second, franchisor van lake full advantage of partners lo develop business Developing business in form of franchise, franchisor has both able to increase income and take full advantage of outsource of partner like: finance, IIR

Third, franchisor is developing scale and as well as control of business system of them In this caso, franchisor sill has been owned business scorets and still active in rumning business and ensure of business identity

Forth, it increases position and competitive image of franchise business on market

Franchisor has first step to affirm of reputation on market Once scale of company

is expanded and effective business, brand name is known also That is very importance thing for inerease strong competitive of company

142 Disadvantages

Developing business informs of franchise also make business some challenging as:

First, franchisor meets implicit risks when franchisee is not enough able to develop business That is able to evaluate capacity of franchisee, if wrong evaluate for

partner thal make it nol offective in rurming business and effect lo prestige of

system

Second franchising will appear dissimilarity and able to obey all contracts’ condition is not always advantage The broken law make agreement’s system is fail

that cnclosed other damage for fianchisor This will be happened 1 case franchises run business not good

Third, franchisor will meet risks in protecting formula and business key of business Although contract has terms and changing of law but in fact that leakage and stole copyright, business key, marmgemtent technology still happen when partner intent not loyal to business franchise

So developing business in form of franchise is not a safe solution and unique to

develop business

Chapter summary

Franchise is developed in form of business has lang time in the warld and many business applied very successful both franchisor und franchisee Moreover this model only has been developed in Vietnam from late 90 decade ‘this is specific model of corporaie strategy business Base on this, franchisor used every condition

of franchisee to exploit market; conversely franchisee also used every condition of franchisor about financial, fame, technology, secret business, and loyal customers

to develop business The way ta find common voice to make advantage of hoth

was basic for this developing business So both sides must negotiale lo find cut

good solution for each business

Developing business in form of franchising has advantages and disadvantages for both sides This is one thing that franchisor and franchisee must concern So this action have been prepared carefil calculation and undertaken by contract under the sponsoring law Despite of disadvantages in franchise but franchise still is a way for hath parties develops business The area in which the potential

development in practice, especially in a country developing rapidly in Vietnam as

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CHAPTER 2

AN OVERVTIEW OE TIIE FRANCIIHSING

BUSINESS IN VIETNAM

2.1 Legal Framework Franchise in Vietnamese

Franchising activities in Vietnam has developed in the open-door economic development, Vietuam law las changed to update the practice The Civil Code of

1992 and the law documents relating to intellectual property rights are the basis for

the transfer of the value of the enlerprise busmess

Particularly the birth of written laws directly related commercial activity and

franchising since 2005, has better facilities to develop the type of franchise

business Documents and laws of it law as the basic foundation for franchising in

Victriarn al present includes

The Civil Code No 33/2008/QH11 provided that: the Nalionat Assembly through

on the Ane 14th 2005 as a legal foundation for the civil activities in which the related contract and technology transfer, Inow - business, business model with

the concept of "licensing privileges for Bus

Law of intellectual property rights No $0/2005/QH11 the National Assembly

through on November 29th 2005 as a base for business activitics related to

intellectual property rights, the invisible value of the business Commercial law No

36/2005/QH11: the National Assembly through on June 14th 2005 Tins is the text

of the law has given the definitions and issues related to operating a franchise

‘business acquaintances Section 8 franchises include terms from 284 to 291 to

provide basic knowledge and responsibilities stipulated by the parlies relaling to Ihe

sa 16 operation of franchise

? The Viemam Civil Lew, Path 2, Chapter XI, XV, XVI

'° Conmerciat Law No 36/2005/QHII, Section 6, term 284-291

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Decree No 35/2006/ND-CP on March 31st 2006 and explain the rules of the franchise It is a step in the specific field of activity franchise and explains further, more specific activities franchising in Vietnam

Cireular No 09/2006/TT-BTM on May 25th 2006 is a more specific step in

franchising in Vietnam circulars give detailed instructions about the process and procedures implemented franchise in addition ta the powers of, obligations of

parties, Circular write clearly time that the state management to implement the

license Lor the franchise to 10 days, if'not avcepl pay by wriling text aud lhe reason,

2.2 The Business in Vietnam

In the early stages, there were two types of franchising, Non business format frmehising (lor example: franchise on the distribution of goods without sale

method) and Full business format franchising, which today is the dominant mode of franchising The latter seemed to suite the US socio-economic structure in the late

of 1920s, which when combined with the economic power of the US, has marked ibs

impressed growth all over the world According to the International Franchise

Association, there have been about 16,000 franchise systems of around 320,000

corporations in 75 <hfferent sectors

Llowever, franchising in Vietnam is relatively new This business model appeared

in Vietnam in the early of 1990s Nowadays, according to statistics from the World

Franchise Couneil, Vietnam has approximately only 70 franchise systems and

nearly 100 executed franchise agreements,

One of the main reasons for the modest growth of franchising in the past Vietnam was the lack of a legal framework for franchising Before the effectiveness of the Commercial Law 2005, franchusmg used to be estabhshed and disguised under other relationship forms such as license, distribution, and technology transfer, therefore

be regulated by different and separate legal documents

To realize selling and buying franchises in Vietnam, traders nomally elected to

enter into one or several of the above mentioned contracts instead of a franchise

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agreement This caused complexity and controversial issucs, but this is the only way

to make the franchise feasible and enforceable in Viemam market

Lowever, now with the advent of Commercial Law 2005 (from Articles 284 to Articles 291) Governmental Decree No 35/2006/ND-CP, and Circular No 09/2006/TT-BTM issued by the Ministry of Trade, a legal base of franchisirys is fundamentally set up Nevertheless, several stipulations of such documents attract comments and criticism from the business circle, especially in the following issues: According the research recent time about many business in form of franchise in Vietnam liko: Trung Nguyen Coffec, Kinh Do Bakery, KFC, Lotteria business using mainly Single Unit franchise method so singing contract will do directly and individual between franchisor and franchisee But doing ane way like this is make advantage and disadvantage also

Trung Nguyen Coffee Franchise

This is the first company epphcd franchises model for coffec stores chan in

Vietnam

Trung Nguyen was established in Ban Mẻ Thuột city and Dac Lac in 1996, opened

with small store and first job was only sold coffee and grind coffee for other stores

With late established and wondered about developing business with strong brand

name in the future, ‘rung Nguyen made new strategy in Vietnam market and businesses which made coffee as well With specific characteristics of this product, Trung Nguyen distributed product by many ways like: Dealer distribution — this is campus that buy ‘Irung nguyen coffee and also have ‘rung Nguyen bamer but in fact that Trung Nguyen did not control them much: Retailer is different, they buy Trang Nguyen coffee product and under Trung Nguyen’s control and was allowed hang on banner of Trung Nguyen Company still support some tools and training staffs, in fact that alll store use brand Trung Nguyen and beside that is store’s name

private and the Trung Nguyen’s control is only show some produet competitors, so

this way is not relates and Franchise of Trung, Neuyen’s store is better way than

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other, because this store belongs to Trung Nguycn Franchise system, following legal and standard of franchise ‘he way to control all store franchise give team’s control of company and monthly these teams take samples at local to check again Franchise model of Trung Nguyen is Single — Unit franchise, all partners have to sign contract directly with Trung Nguyen Fach developing step of Truryg Nguyen always goes on sequence of franchise legal in Viemam That makes many successful until now This success of Trung Nguyen in Coffee field bring for business many experience and wake promises of Trung Nguyeu’s franchise development

Beside all successes ‘rung Nguyen can’t avoid mistakes that lead the company Trung Nguyen to the wrong way Because Trung Nguyen is only focuses on number

of store, the standard and style of Trung Nguyen Coffee stores Statf control is quite

thin, standard of model is not yet identical Some stare franchise still have name of

competitor following of their ideal, for example Trung nguyen store’s franchise in Lam Dong, beside name ‘rung Nguyen it also have name of competitor “Ngoan Thach” Moreover the franchise document is not clear Until now, the company

does have detail paper of UFO about franchise that has to give to partners following

tule of decree 35 about Viewam franchising

Kinh Do Bakery

Being founded in 1993, at initial stage Kinh De Company was a small production workshop at Phu Lam, District 6 with total investment capital of VND 1.4 billion

and aboul 70 employees Kmh De Bakery is one of the brand names of Kinh Do

group; this is second business development in form of franchising Kinh Do is big

brand name relate food business, cake in Vietnam Kinh Do using franchise model

in April 2005 in Ho Chi Minh City and applied following Full business format

franchise and the main model is Single Unit franchise

‘Yo make good feel of customers about stores, Kinh Do make high identical about

image, standard, brand name Kinh Do transfer all management process, produoe

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for franchisve, especial style decorative, volor, banner beside run busincss following legal franchise, Kinh Do also have some rule about space very tide for

franchisee like: minimum space have more than 18m’, separate other store in

system about 2k, partners have lo have ä lot of money and experience aboul

franchise field Kinh Do design an internal report information system, oversee

operation of store in order to ensure standard and image of praduet

The investment in technology renovation with aim to make new products of

superiority, Ligh quality is always taken full care by the company’s management board ‘this is also the company’s main potential and development trend in future

‘The follow-up year’s consumption output always increased twofold compared with previous year Kinh Do now owns a network of 150 distributors and over 30,000 retail outlets nationwide Annual development rate of distribution channels

increases some 15% to 20%

Beside that a system including 21 Kinh Do Bakeries, 0] Savico-Kinh Do Trade

Center in Ho Chi Minh City and 03 Kinh Do Bakeries in Ha Noi has directly

catered Kith Do products 1 consumers

To adkbtion, export volume of Kinh Do products always inakes up 20% of Lolal consumption output, beyond existing export partners, Kinh Do actively smveys and expands lo new markets such as Japan, Korea, China, South American and Middle

East

There arc two models of business development in the form of franchising in Vietnam, that is, businesses that want to use franchise to develop should do a legal franchise business first, depending on each model that business give solution for business Company should take experience from ‘rung Nguyen, not to focus too much on opening stores and pass standards and image of product

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2.2.1 Conditions of franchisor and franchisee

According Lo the Vielnam regulations, the Granchisee and franchisor are nol required

to be instituttonal entrepreneurs A franchisor must run a franchised business for one year, at least With this provision, even individuals or households can be

fanelisors or franchisees to franchise agreements There seer lo be to much

room for players in comparison to the stipulations of other countries (experience

requirements in a franchise must be at least three years in China) Tt should also be

noted that lranchising activilies of an individual would be very difficult lo control

by authorities

Article 5 of Decree 35/2006/ND-CP states that, business is grant franchises for the partners to meet the following conditions: 4

¥ Business system proposed for the franchise must work at least 01 years In

‘The case of business as franchisees Hlementary (which is allowed to become the Sub franchisor) must be the business franchise business for at least Ol

years before the franchise secondary

v Businesses are government agencies (Ministry of Trade or Departmem of

Commerce) approved registering the franchise

¥ Goods and services for business under the lranchise is not mì the bai of

prohibited business as stipulated; in the case is goods, services business has

conditions, the business must meet the documentation allaw busmess related

For the franchisee, Traders are allowed to receive franchise when business

rogistration business suit for subject of the franchise

All conditions above was based on the Jaw, company can nol pass the fact

conditions below when want to do franchise

First, we need to know the information of the franchise (franchisor) as the business,

brand planning franchise, market of this brand, speed development of the system,

\ Article 5 of Deercc 35/2006/ND-CP, elkgbier 2

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the cffectiveness of the system, the level success of the system in recent ycars, the outstanding advantage of this system compared with the same type and orientation system development in the future market, the policy support for the right to receive

new policies for new markels

Sccond, enterprises should spend time to research market goals ty answer a series of

questions: business method is suitable to their abilities or not? Brand, this product is

accepted by customer or not? How Effective investment of this business model is

like? How laws Lor eases like this

Third, nocd to thoroughly research the franchise document of the franchise set up, which very clearly defined the terms: terms of location, terms of geographic space, regulations on investment, the regulations on the opening, operation products,

requirements for training, regulations on licensing, inspection, operation,

maintenance, repair, regulation of property insurance, employee

In addition, the record is a franchise of the requirements for the right to receive financial in future, ethical, business experience and other commitments

Forth, we should study carefully the terms of the franchise contract Contracts are

oflen of the franchise scl up Again, companies need to re-evaluate all of the terms, considering the conditions of his Since then, business would give questions for the

franelnser, liglen to the arrswer

The conser agreement Franchise contract or deny are also slow the knowledge of

their depth with the franchisor The franchise agrecment must be in accordance with

the procedures and law Vietnam

Virth, enterprises should understand the commitment of the franchisor as well as their commitment to the franchisor and show them in the terms of the franchise

This method actually promotes the effectiveness of its remarkable when the

system operates in a same regulated, unified process

Tf one party violates the commitment to the consequences of this would he very

dillicull anticipating The franchisor may crash all system or cven bankrupiey;

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franchisce can no longer be the opportunity to continue business for the loss and the

belief of another franchise for you

Keeping the prestige system and the uniformity of the system, therefore, not only created the development for yourself the franchisor, but also for the individual fimchisee, conhibule lo creale a syslem of power in De maintain loyally of customers, changes in the partners and this is the real barrier far competitors

fee

2.3 Factors that influence of franchise activities

When developing business in form of franchising, there has many factors that affect

this activity following the chapter oue like

> An operation manual of business and instruction material business action

> Training program for franchisee

> Preparing human resource for development business

> Standardize norm of system and give norm to choose business premises

of franchise

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In this thesis, I only focus on four main factors that effect to Vietnam company below:

> rand name

> Location

> Marketing efforts and long tenn strategy

> Managing People 2.3.1 Brand name

Brand name character is core value and characteristics of the brand, it is the mak exists deeply in mind’s customers and creates difference than other brands Construction brand name will be around the soul this is core value to build the image and commitment consistently to customers It can be said that the biggest value of the contract franchise that base on the transfer this character to franchisee

as competitive advantage superiority helped them build their business quickly But the franchise is very hard to protect this value because it depends on who is the franchise has kept the sovereignty of the brand image is certain or not The more Franchise system growing, the more they easily Jose control if the brand mame character is not consolidated and protected

‘Trang Nguyen is the first company corporate applied the franchise model in Vietnam, and it is probably that has achieved great success in the first period of construction and development of this model But also it is difficult to comment success will reverberate more about what if right from the start Trung Nguyen tơ invest in the protection and control of the brand's a strict and more synchronized The most difficull of the Trung Nguyen Collee i the conshuchon and implementation of the “originated from creative" to the coffee in your system has not really been that impressive as expected in mind of customers This requires Trung Kgnyen great effort ard cost more money to re-establish brand image with bold channing and the proud nation Franchises such as Pho 24, Kinh Do also

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