Luận văn developing your own franchise a framework for vietnamese franchisors

In the thesis, the author adopts mainly secondary research methods ta domestic and foreign material sourees to find out basic theories sboul franchising, analyze the opportunities and

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

#4

NGUYEN QUANG TIEP

DEVELOPING YOUR OWN FRANCHISE - A FRAMEWORK FOR

VIETNAMESE FRANCHISORS

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi — 2010

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

NGUYEN QUANG TIEP

DEVELOPING YOUR OWN FRANCHISE — A FRAMEWORK FOR

VIETNAMESE FRANCHISORS

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Pham Quy Long,

MBA Ha Nguyen

Hanoi — 2010

ACKNOWLEDGEMENT

To me, writing Masters’ Thesis has been an extremely demanding and challenging task

of hard work and effort This work could not have been completed without the support

of several special people | would like to thank everyone who has helped and supported

me during the writing of this thesis

First of all, T would like to express my profound graliude (o my supervisor — Dr Pham

Quy Long, MBA La Nguyen at Lanoi School of l3usiness — Vietnam National

University, who has shared his valuable knowledge and been very good mentor

throughout the wntzng process His professional advice and invaluable supporl have

been highly appreciated during the research process

And T would like to give my special thanks to my family and my friends Cor their support and care for me

Lanoi School of Business, October 2010

Nguyen Quang Tiep

ABSTRACT DEVELOPING YOUR OWN FRANCHISE — A FRAMEWORK FOR

times higher than 5 years ago, and 12 times the revenue in 2000" ‘he expanding trend

in franchising sector can be easily seen on the main streets of big cities like Hanoi, Ho Chi Minh or Da Nang Big international franchising brands have come to Vietnam suel

as Kentucky Dried Chicken, Pizza Ilut, Gloria Jean’s Coffee, Jollibee, Lotteria, The Body Shop Franchising bas been a favorable method for ertreprencurs to expand (heir

businesses, from restaurant to airlines service, from rent-a-car to real estates consultancy It is forecasted that in the next few years, franchising will be a hot zone Jor develupmtent, wilh an annual growth rate of 50%"

However, in the bright picture of franchising in this market, we rarely sce Vietuamese

brands Among 90 franchise systems operating in Vietnam’, there are only a few

trands developed and owned by Vietnamese entrepreneurs, and much fewer are considered to have some early success, namely Pho 24, Kinh Do Bakery with

humble systems which have not reach the regional competitive scale

"Vietnam Franchise Assoclatlon

? Nguol dai bleu nhan dan newspaper, http://www nguoldaibieu.com.vn/pPrint.aspx?itemId-87148

The thesis concentrates on the framework for Vietnamese franchisors to develop and manage franchise systems successfully

In the thesis, the author adopts mainly secondary research methods ta domestic and

foreign material sourees to find out basic theories sboul franchising, analyze the

opportunities and challenges to Vietnam franchisors, and develop the appropriate

framework to build franchise systems in Vietnam The systematical, statistical,

aualytical methods are also applied to analyze all collected data

‘The thesis is presented in three chapters ‘The first chapter gives a general overview about franchising, types and history of franchising, industries most suitable for franchising and why poople want to franchise their businesses More importantly, the key success factors for franchisors are listed and illustrated by the case of Jollibee l’ood

Corporation, Philippines

Chapter 2 concentrates on studying the franchising market in Vietnam, the macro environment for franchising and the challenges with which Vietnamese franchisors are facing From this chapter, we understand that Vietnam franchising market is just at the very initial stage and has great potential for development Despite a favorable environment, Vietnamese franchisors have not been successful in dominating the

domestic market with their own systems

In the final chapter, the author suggests a master framework for building franchise

systems in Vietnam, tn which the most crilical and typical items relaled to franchise

building arc discussed and catogorized into 4 main strategic steps concept, pilot, expansion and mature

The findings indicate that Vielnamese cntroprencurs have a gresl opportumties in

franchising sector, and can overcome the challenges by applying the suggested framework.

TÓM TẮT

HƯỚNG DẪN XÂY DỰNG HỆ THỐNG NHƯỢNG QUYÊN THƯƠNG MẠI

TẠI VIỆT NAM Nguyễn Quang Tiện Học viên MBA, khóa 2007 — 2009 Khoa Quan trị Kinh đoanh, Đại học Quốc gia Hà Nội Giáo viên hướng din: TS Pham Quy Long, Thể Hà Nguyên

‘Thang 10 năm 2010, 99 trang

Trong những năm gân đây, tốc độ tăng trưởng trung bình của ngành nhượng quyền

thương mại là 35%, gấp 5 lần tốc dé tang GDP, Tong doanh thu của ngành nảy là 36

triệu USD, gắp 4 lần doanh thu 5 năm trước, và gắp 12 lần tổng đoanh fhu năm 20007

Xu thé phat triển của nhượng quyền thương mại thể hiện rõ nét trên những cơn phố chỉnh của các thành phó lớn như Hà Nội, Hỗ Chỉ Minh, Đá Nẵng Những thương hiệu nhượng quyền lớn của thể giới đã đến Việt Nam nhĩ Gà ran Kentucky, Pizza Hut, ca

phê Gloria Jcan's, Jollibec, Lotteria, The Body Shop Nhượng quyển thương mại

đang là phương thức kinh doanh được nhiều doanh nghiệp lựa chọn để tăng trưởng, từ nhà hãng cho tới dịch vụ hang không, từ cho thuê xe cho tới tư vân bắt động sản Theo

dự bảo, trong một vải năm tới, nhượng quyển thương mại sẽ lả ngành phát triển nóng, với tốc độ tăng trưởng hang năm lên tới 50342

Tuy nhiên, trong bức tranh tươi sáng của thị trường nhượng quyển thương mại, các thương hiệu Việt Nam con dong vai trỏ rất khiếm tôn Trong số 90 hệ thống nhượng, quyên đang hoạt động tại Việt NamÝ, chỉ có một sẻ thương hiện do người Việt Nam phát triển và sở hữu, và trong đó chỉ có một số ít được cởi là bước đầu thành công như

Ý Hiệp hội Nhượng quyễn thương mại Việt Nam (VFA)

* Nguai đai bleu nhan dan newsgaper, http://www.nguoldaibieu.com.vn/pPrint.aspx?itemid=87148

Phé 24, Bánh Kinh Đồ với những mạng lưới còn khiêm tốn, chưa đạt tới dẳng cấp có thể cạnh tranh trong khu vực

'Khóa luận tập trung vào việc xây dưng một bệ khung các phương pháp đế phát triển và quan ly hệ thống nhượng quyền thương mai tai Viét Nam

Trong khỏa luận này, tác giả chủ yêu sử đụng phương pháp nghiên cứu thử cấp, sử

dụng nguồn tài liệu nước ngoài và trong nước dễ dưa ra những lý thuyết cơ bản về nhượng quyên, phân tích cơ hội và thách thức cho các nhà nhượng quyền Việt Nam,

đồng thời phát triển các phương pháp phù hợp để xây dựng hệ thông nhượng quyển tại

Việt Nam Sau đó, người viết sử dụng các phương pháp phân lích, thẳng kê, hệ thống

để phân tích dữ liệu thu thập được

Khóa luận được Bình bày trong 3 chương, Chương 1 đưa ra tổng quấn về nhượng quyển thương mại, các loại hình và lịch sử nhượng quyền, các ngành phú hợp dễ nhượng quyên vả lý giải vì sao các đoanh nghiệp lại lựa chọn nhượng quyên để phát triển Quan trong hon, cée nhân tổ chính quyết định thành công Irong nhượng quyền

thương mại đã được nều ra và manh họa thông qua việc phân tích sự thánh công của Jollibee (Philipin)

Chương 2 tập trang nghiên cứu thì rường nhượng quyền thương mại tai Viel Nam,

xôi trường v1 mô cho nhượng quyền, và các khó khăn mả các nhà nhượng quyên Việt Nam đang phải đổi mặt Chương này piứp chúng ta hiểu được thị trường nhượng quyền

tại Việt Nam mới đang ở giai đoạn đâu và có tiểm năng phát triển rất lớn Mặc dủ có

được môi trường vĩ mô thuận lợi, các doanh nghiệp Việt Nam vẫn chưa tận đụng được

để phát triển hệ thống nhượng quyền ương mại của riêng mình nhắm chiếm lĩnh thị

trường nội dia

Trong chương 3, tác giá để xuất một mô hình khung đề xây dụng các hệ thông nhượng,

quyền thương mai tại Việt Nam Trong đó, các công việc quan trọng vả đặc trưng nhất

của nhượng quyên thương mại sẽ dược bản luận chỉ tiết và chia thành bên bước chiến

lược chủ đạo: đánh giá ÿ tưởng, thủ nghiệm, mỡ rộng, và duy trì

Kết luận của nghiên cứu cho thây các doanh nghiệp Việt Nam có cơ hội lớn trong ngành nhượng quyền thương mại, vá có thể vượt qua những thách thức bằng việc áp

đụng mê hình đã được tác giả đề xuất

vi

423 The differences between traditional franchising & business format franchising

1/3 Newsons for being # franchisor

1.4 Industries suitable for franchising

15 Comman success factors tor franchtsin,

LS A successful prototype location (or chain of stores)

15.2, Astrong management team

E53 Sufficient cupitutizution

45.4, A distinetive and pratected trate identity

Proprietary and proven melhots of operation anit management

A demonstrated markcet demani for the product and services

Comprehenstve training programs for franchisees

A set of carefully developed uniform site selection criteria and architectural standards

23 45.9, A franchisee profile and screening system

15.10 An effective system of reporting and record keeping

15.11 Field support staff

LS.12 Reveurch and development capabilities

1513 National, regional, and local advertising, marketing, and pubtte relatians progranis25 1.6 Success factors applied to Joliibee case

461 Corporate profile:

1.62 Analyte the success af IFC by key franchising success factors

16.2.1 Successful prototype: Good

14632 Management teant: Excellent

4.6.2.3 Capitalization: Good

1624 Trade identity: Good

4.6.25 Methods of operation and management: Good,

1.6.2.6 — Market demand: Excellent

1.627 Training: Good

1628 — Site selectioncriteria: Good

1.6.2.9 Franchisee screening system: Good

46.210 Reporting and record keeping sysiem

46214 Meld support staff Good

16.212 R&D: Good

1.6213 Marketing & Advertising: Good

CHAPTER 2: FRANCHISING IN VIETNAM

2.1 An overview of Vietnam franchi

23.2, Insufficient franchising consultancy

CHAPTER 3: FRAMEWORK FOR BUILDING A FRANCHISE SYSTEM,

3.1 Framework intraduction

3.2, Concept stage,

322, Industry assessment

3.2.41 Produetion and distribution occur in limited geographic markets

2.1.2 Physical locations are helpful ta serving customers

3.2.1.3 Local market knowledge is important to performance

3.2.14 Brand name reputation is a valuable competitive advantage

2.1.5 The level of standardication and codification ofthe ‘process of creating and

delivering the product ov service is high so

3.2.2.6 The operation is lahor intensive

3.212 Outlels are not terribly costly tu establish

‘Traffic flow to the site

Complementary versus contracdictory neighbors

Trade identity development & protection Operations mannat

33.51 Guidelines for preparation of the manual

3.3.2 Suggested outline for the operations manual of a franchisor 3.4 Expansion stage

Protection of intellectual property

3428 Termination af the franchise agreement

3.5.2, Monitoring franchisee financial reporting

35.21 Point of sale systems

liem

11

LIST OF TABLES

‘Table Description Main differences between 2 types of Hranchising

Top ten industries for franchising im percent of franchisors

Average number of years franchisors are in operation before

franchising for selected industries

Average annual outlet tumover rates for selected industries

Portion of a sample training agenda from a restaurant franchisor

Average advertising fee by industry

Vietnam franchising market compared to other ASEAN

OLHT1GS

Vietnam franchising in 2008

Kranchising market size of biggest cities in ASLAN

Franchising business environment in Vietnam

‘New companies registered by year

Items required for disclosure in a UFOC

Annual GDP growth rate & GDP por capita of Vietnam (*90-

“09)

Selected information depicting Vietnam infrastructure

Foreign franchising brands registered in Viemam

Industry & concept assessment template

Site selection template

Sample operations rnanual outline

Page

14

39

40 40

Perecutage of franchised oullets by size of the system

Franchise systems with at least ane active franchised unit during

the period of 2001-2005

Strategic options for business growth

Franchise systems reporting units during 2001-2005

Maximum total intial investinent by industry

Average first 3 years net income for franchising concepts

Jollibee’s R&D process

Vietnam franchising market

Vietnam franchise sector strucbure

Viemam inflation rate

VND/USD exchange rate

Kramework for building a franchise system

Foreign Direct Investment Federal Trade Commission Gross Domestic Products

Lo Chi Minh City Kentucky Fried Chicken

Tollibee Foods Corporation Political & Economic Risk Consulting Organization Research and Development

Tony Tan Caktiong Vietnam Dong

Vietnam Franchising Association

Uniform Franchise Offering Circular

United States

United States of America United States Dollars United States Department of Commerce

World Franchising, Council

xii

TNTRODUCTION

The emergency and objectives of the research

The rcform of Vietnam has been taking place totally and deeply in many fields The event that Vietnam became the official member of the World Trade Organization (WTO) pul an important mark in the inlegrating process into the world economy Vietnam’s economy has grown fast, in the last twenty years GDP of Vietam increased

compete with inlemational (ranchise syslems i domestic market

With the objective to contribute to finding a suitable mothod for developing franchise

systems in Vietnam, I have chosen the topic “FRAMEWORK FOR BUILDING FRANCHISE SYSTEMS IN VIETNAM”,

‘The objectives of the research are to

- Present an overview of franchising and provide the key franchising success factors

= Provide an analysis of the franchising mmarkel in Vietnam

- Recommend a master framework for Vietnamese franchisors to build their own

franchise systems

` The CIA World Fact Book 2009

* Vietnam Franchlse Assoclatlon

Subject and scope

The subject concentrates on the framework for franchise system development In

which, it will specially suggests the activities needed to develop a business-format

franchise in Vietnam

Research methodology:

Tn the thesis, the author adopts mainly secondary research methods to domestic and

foreign material sources to find out basic theories about franchising, analyze the

opportunities and challenges to Vietnam franchisors, and develop the appropriate franework io build franchise systems im Vietnam The systematical, slalistieal,

analytical methods are also applied to analyze all collected data

The structure of the thesis

The thesis is presorled in three chapters in which the Grst chapler will give basic definitions and most general theories about the researched problem of this thesis ‘The

accond chapter wall analyze the current situation of Vietnamese market and give

judgements about the opportunities and challenges for Vietnamese franchisors The third chapter will give some recommendations about the master framework to build a

franchise system in Vietnam

Chapter I: Franchising overview

‘The first chapter gives a general overview about franchising, types and history of franchising, industries most suitable for franchising and why people want to franchise their businesses More importantly, the key sueoess favtors for franchisors are listed and illustrated by the case of Jollibee Food Corporation, Philippines

Chapter 2: Franchising in Vietnam

Chapter 2 concentrates on studying the franchising market in Vietnam, the macro environment for franchising and the challenges with which Viemamese franchisors are

facing From this chapter, we understand thal Victnam franchising market is just at the

very initial stage and has great potential for development Despite a favorable environment, Vietnamese franchisors have not been successful in dominating the

domestic market, with their own systems

Chapter 3: Framework for building your own franchise

In the final chapter, the author suggests a master framework for building franchise

systems in Vietnam, in which the most critical and typical items related to franchise building are discussed and categorized into 4 main strategic steps: concept, pilot,

expansion and mature.

CHAPTER 1: FRANCHISING OVERVIEW

11 Franchising definition

According to the American Heritage Dictionary of the English Language, the ward franchise comes from the old French word france, which moans free or exemmpl.? Tn medieval times, a franchise was a right or privilege granted by a sovereign power king, church, or local government Sovereigns granted franchises for various activities, such as building roads, holding fairs, organizing markets, or for the right to maintain civil order and collect taxes In essence, the sovereign gave an individual or group of individuals the monopoly rights over a particular activity in a particular location for a

certain period of time In most cases, the grantee was required to make a payment to

the sovereign power for this right or privilege, usually in the form of a share of the

product or profil Thal payment, was called a royalty, a term still in use to Lis day

The meaning of this word is similarly reflected in many laws and definitions around the world,

‘According to International Franchise Association, “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 abligation to pay the franchisor fees lor these rights

” American Heritage Dictionary of the English Language, Faurth Editlon (2000}, Boston, Houghton Mifflin

Company.

« the franchisor the obligation to provide rights and support to franchisees”Ê

According to the Kederal ‘lrade Commission (FIC), the body that has jurisdiction in the United States over federal disclosure rules for franchisors, three elements must be present for a business relationship lo be doomed a franchise First, the fnchiser must license a trade name and trademark that the franchisee operates under, or the franchisee must sell products or services identified by this trademark Second, the franchisor must exert significant contral over the operation of the franchisee or provide significant assistance to the franchisee ‘Third, the franchisee must pay at least $500 to the

franchisor at any time before or within the first six months of operation *

In Vietnam, although franchise business started much Jater than other countries, we have already defined this in 2005 Commercial law as follow: “Kranchising is a business activity in which the franchisor allows and requests the franchisee to buy/sell products, provide services according to following conditions:

1 The buying/selling of products, providing of services is caticd oul under the business processes set by the franchisor, and associated with franchisor’s trade mark, trade name, know-how, slogan, logo and advertisement

2 The Lranchisor has the righls lo control and support (ranchisee im naming the

pl franchise business

Unfortunately, the definition in Vietnam Commercial law does not mention about fee for the franchised rights, which is one of the main motives for the fast development of

franchising nowadays

From the above mentioned 3 definitions, a diagram can be drawn bo illustrate

franchising, as below:

*7FA Educational Foundation (2001): “An iatroduction ta Franchising” (PS)

* Federal Trade Commission (1979): http://Awww.ftc.gov/bep/franchise/netrule.htm

Vietnam Commercial law (2005), Article 284

Figure 1.1: Franchise definition illustration

FRANCHISE AGREEMENT

Owns trademark or trade name | Uses trademark or trade name

Provides support: Expands business

+ (sometimes) financing " with franchisor’s support + advertising & marketing

+ training

(Source: IFA Educational Foundation (2001): “An introduction to Franchising")

In later parts, the author will take a deeper look at the elements of this diagram such as

finance, advertising and marketing, training, royalty fees

Traditional franchising is an arrangement in which one party, a franchisor, develops a

trade name and licenses it to another party, a franchisee The product franchisee

contracts for the use of the name to deliver products or services to end customers for a

certain time period at a certain location»

As the name suggests, traditional franchising is the oldest form of modern franchising

By most accounts, it can be traced back in the U:S at least to the mid-1800s when the McCormick Harvesting Machine Company and the Singer Sewing Machines Company

sold their products through sales agents who were given exclusive sales territories !?

* Scott A Shane (2005): “From Ice cream to the Internet ~ Using franchising to drive the growth and profits of

your business” — Pearson Education, inc

2 Thomas S Dicke (1992); “Franchising in the America: The development of a business method, 1840 - 1980", Chapel Hill, NC: University of North Carolina Press

Initially, these firms, like others who used such agents at the tine, mposed few restrictions or qualifications on their agents and exerted very little control over them

Over time, however, both compamies found they needed more control over these sales

agents if they were to protect their respective reputations and brands ‘I'he McCormick

Company responded by establishing company owned branch houses throughout the

US and Canada These branch houses were given oversight responsibilities for the

sales agents in their territories

As a result, McCormick was able to systematize procedures and comntunications with

ils agents, lhercby transforming them into what one would now call “dealers.” As for

the Singer Company, it addressed the need for control by converting many of the independent agencies into company outlets More importantly, it devised a series of Tecormcridations for the remaimnyg agenls as to how the offices should be run and, [or the first time, required detailed financial reporting from these agents ‘The contracts and methods of control that Singer developed at the time are largely recognized as the

comprised largely of automobile dealerships, gasoline service stations, and soft-drink bottlers

Tnall of these businesses, the franchisor is a manufacturer who sells finished or sexi- finished products to its dealers/franchisees In tur, the franchisees resell these products

to consumers or other firms in the distribution chain Because the franchisor’s product

1s sold to ils franchisees, the franchisor’s profits from ds dealer network Mow from the

markups it earns on these products In contrast to what occurs in business-format franchising, as described below, traditional franchisees do not pay running royalties on their sales

Tn Vietnam, the most phenomenal and recoguivable Vietnamese trachtional franchise is

the Trung Neuyen coffee which spread out all over the country in the late 1990s

1.22 Business-format franchising

Business-format franchising is a type of franchising in which the franchisor primarily sells a way of doing business (ie, a business format) to its franchisees A business-

formal franchise thus “imeludss not only the product, service, and lrademark, bul the

entire business format itself — a marketing strategy and plan, operating mamuals and

standards, quality control, and continuing two-way communication”

The first true business-format franchise system was created by Martha

Mathilda Tarper'' This entrepreneur developed her network of [larper Beauty Shops

from the carly 1890s onward using a business model that included all of the components of a business format as described by the USDOC, and more But though she grew her network to more than 500 shops in the U.S., Canada, and Europe by the mud-1920s, Mathilda Harper unfortunately did not leave a lasting mark on franchising

It was only until the 1950s, with the advent of chains such as Brwger King and MeDonald’s, and the economic boom of the pesl-World War TT cra, thal, business- format franchising fully came into its own in the U.S and Canada, and throughout sauch of the rest of the world

Business-format franchising today encompasses a very large number of firms that provide a wide array of goods and services: automotive products and scrvices, business aids and services, construction and maintenance, childcare services, and non-food

relailmg ax well as the more visible hotel, fast-food, and car renlal francluses Tn

exchange for the business format, franchisees typically pay a relatively small lump- sum fixed fee at the beginning of the contract period and pay running royalties that are usually calculated as a fixed percentage of the franchisee’s sales revenues Business- format franchisees also often contribute an additional fraction of their sales or revenues

"| United States Department of Commerce (USDOC) (1988}: “Franchising In the Economy”

`* lane R Plltt (2000): "Martha Mathilda Harper and the American dream”, New York Syracuse Unlversity Press

toward an advertising fund for the chain as a whole Presumably, the advertising carried out with these funds benefits all franchisees and thereby benefits the franchisor

as well

This business-format franchising has become the most popular type of franchising in the world today, and also in Vietnam We have seen many world’s famous franchising brands such as KFC, Pizza Hut, Lotteria, Jollibee coming to Vietnam since 1990s, and the rise of local brands such as Pho 24, Kinh Do Bakery

1

The differences between traditional franchising & businessformat

franchising

The major differences between traditional franchising and business-format franchising

can be summarized in the table below:

Table 1.1: Main differences between 2 types of Franchising

marketing and advertising

franchisee

(Source: author)

1.3 Reasons [or being a [ranchisor

There are a wide variety of reasons cited by successful franchisors as to why franchising has been selected as a method of growth and distribution

Through franchising, they are able to:

© Obtain operating cfficicncics and economics of scale: Figure 1.2 below shows the relationship between the size of a chain in the number of outlets and the reliance

on franchising It indicates that larger chains have a greater reliance on franchising

than smaller ones

Figure 1.2: % of franchised outlets by size of the system

Ouklund, CA: Sourcebook Publications

«Increase market share and build brand equity: According to a recent research by International Franchise Association, 47% of all franchise systems have more than

™ andrew J Sherman (2004): "Franchising & Licensing — Two powerful ways to grow your business in any

economy”, American Management Assoclatian (AMACOM)

10

51 franchised units, and only 25% of them have less than 10 franchised units (see

Source: International Franchise Association (3/2007): “The Profile of Franchising”

Use the power of franchising as a system to get and keep more and more customers-building customer loyalty

Reach the targeted consumer more effectively through cooperative advertising

and promotion

Sell products and services to a dedicated distributor network

Replace the need for internal personnel with motivated owner/operators

Shift the primary responsibility for site selection, employee training and personnel

management, local advertising, and other administrative concerns to the franchisee, licensee, or joint venture partner with the guidance or assistance of the

franchisor

11

© Achieve more rapid market penetration at a lower capital cost: Figure 1.4 shows the strategic options thal a fin can choose to grow based on ils own intellectual property, and franchising is among the options that requires low investment thus

have shorl time to payback

Figure 1.4: Strategic options for business growth

Lovger

Gat ae inet vost atime fied ein ar var irs

(Crate spinal pty wher ost wl

be stered vad ol verre panrer

BB tre ae pac ovat

party at exchange for an equety Naha (nsioadal cas”;

‘Time9 payback

Diana ene mareb ine formal Gap) Wanchiing programs badad upon, amend vanes technol and syste

€ Ra} Sipe stm

xưng Develop single produc:

tranni a | instead of mute versons

Source: Andrew J, Sherman: “Franchising & Licensing two powerfid ways lo grow

your business in any economy”, AMACOM

1.4 Industries suitable for franchising

Today franchising occurs in more than 80 different industries Included among them are aulomobile repair, camera sales, car washes, drug stores, fast food, hair care, oil lubrication, photocopying, restaurants, and weight loss centers

While the list of industries in which franchising takes place is impressive - and with franchising spread over 80 industries, the breadth of this organizational form is quite largo - franchising is far from a universally applicable way of doing business

R

Franchising does not occur in literally hundreds of industries Moreover, franchising is highly concentrated in just a few industries One study from the International Franchise Association drawn from a database of 2,471 franchise systems reports that 20 percent

of all franchise systems are found in fast food and 11 percent are found in general

Source: Adapted from data contained in R Bond's “Bond's Franchise Guide, 15" Annual

Edition” (Oakland, CA: Sourcebook Publications, 2004)

** international Franchise Association (3/2007):” The Profile of Franchising”

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Other evidence shows that franchisors perform much better in certain industries than in

others Franchisors now account for the majority of sales in tax preparation, printing and copying, and specialty food retailing, and close to half of all sales in fast food, restaurants and lodging This suggests that these industries are particularly good ones

for franchising Several research studies also demonstrate the favorability of certain

industries for franchising Figure 1.5 proves that Fast food, Retail, and Service

businesses are the industries that not only have biggest number of franchise systems

but also contain majority of large scale systems

Figure 1.5: Franchise systems reporting units during 2001-2005

Source: International Franchise Association (3/2007): “The Profile of Franchising”

‘The somewhat limited range of industries in which franchising operates, combined

with the concentration of franchising in a handful of industries and the evidence of

better franchisor performance in some industries than in others, suggests that an

important issue for any potential franchisor is to determine whether franchising is

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appropriate for the industry in which the company operates In chapter 3, we are going

to analyze the factors that make an industry more suitable for franchising than another

15 Common success factors for franchising17

‘We all know that there is no one-size-fits-all solution to all the business situations

However, if all the differences in markel, business environment, and organizational

behavior are blured, we can come up with a few basic factors that every franchise

system must have in order to succeed:

1.51 A successful prototype location (or chain of stores)

This is the most critical success factor which all franchise systems must consider before franchising ‘Ihe pilot store(s) will serve as a basis for the franchising program The store or stores must have been tested, refined, and operated successfully and be consistently profitable ‘Ihe success of the prototype should not be too dependent on the physical presence or specific expertise of the founders of the system

Ta fact, many franchisors who jumped to franchising their concept des;

¢ unproven and inconsistent success in prototype location faced a lot of difficulties when the system grew larger, and most likely would fail Responsible and sustainable franchising businesses ollen sec big cllorls and many years spent on refining the prototype store(s) ‘Table 1.3 provides information on the average number of years that

franchisors arc in operation belore franchising [or scleciad industries

”” andrew J Sherman (2004): “Franchising & Licensing — Two powerful ways to grow your business in any

economy”, American Management Association (AMACOM)

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'Table 1.3: Average number o[ years [ranchisors are in aperation before

franchising for selected industrics

05): “From Ice cream to the Interner— Using franchising to drive

the growdi and profits of your business” Pearson Education, Ine

15.2, A strong management team

I do not mention about the management team of a mature system This is the team in

the very first steps of franchising, which is made up of interual officers and directors (as well as qualified consultants) who understand both the particular industry in which the company operates and the legal and business aspects of franchising as a method of cxpansion Afler the suecessful prototype, inanagement team is ie uext critical factor that challenges the franchisor Management team and its expertise can help the franchisor in 2 ways: to join from building to refining the prototype, or to use franchising tools to expand the system from successful existing store(s) ‘he latter way

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often involves qualified franchising consultants — whose jobs arise together with the fast development of franchising nowadays

1.5.3 Sufficient capitalization

Although franchising is an efficient way to expand the business with apparently low investment required and short time to payback (according to figure 1.4), the franchisor

still need sufficient fund to launch and sustain the franchising program to ensure that

capital is available for the franchisor to provide both initial and ongoing support and

assistance to franchisees The initial investment may vary in different industries as

shown in figure 1.6 which is the results of a research on a database of 1,970 franchise system in the U.S

Figure 1.6: Maximum total initial investment by industry (unit: USD)

Education Rebted

——

Maintenance Services

RealEdate Xraye

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Aside from initial investment, in the first years, franchisors tend to spend whatever they make (and maybe more) on operations, brand building and development, which will also results in negative cash flow For which reason, sufficient capitalization is very important for the franchisor before the income and royalty fee from franchisees can support the cash flow Figure 1.7 helps us understand the situation of the franchisors in their first 3 years of franchising,

Figure 1.7: Average first 3 years net income for franchising concepts founded

-30000 +

-40000

-50000

Source: International Franchise Association (3/2007): “The Profile of Franchising”

The lack of a well-written business plan and adequate capital structure are often the principal causes of the demise of many franchisors

1.5.4, A distinctive and protected trade identity

In the long run, virtually there is no unique operation method or product McDonald’s

is not selling the best hamburger in the world, but they are still one of the biggest fast

food chains It’s because of the trade identity, which makes a franchise system stands out in the mind of customers Trade identity includes registered trademarks, as well as

a uniform trade appearance, signage, slogans, trade dress, and overall image The

franchisor must have a vision of how wide the system would grow, which markets

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(especially overseas markets) the system would enter so that the trademarks could be registered accordingly The case of Trung Nguyen Company who had to buy their own wand in U.S markel, which was already registered by someone else, is a bitter and sound lesson

LSS Proprietary and proven methods of operation and management

This is surely the qwost tiring ymt of bunlding a franchise The comprehensive operations mamual is the result of years of operations in the prototype location There is

no best or final operations manual but continuous ¢fforls to refine all the processes lo

reach higher effectiveness, and more important, higher sales The manual must not be too easily duplicated by competitors, maintain their value to the franchisees over an extended period of time, and be cnforecd through ckcarly drafied and objective quality control standards

Figure 1.8 shows how clear and detailed a manual could be in a service franchise

system

Figure 1.8: Sample opcrations manual provisions concerning

garbage and refuse

Containers

(1) Garbage and refuse shall be kept in durable, easily cleanable, insect-proof and redent-

proof containers that do not leak and do not absorb liquids Plastic bags and wet-strength

paper bags may be used ta line these containers, and they may be used for storage inside the

food service establishment

(2) Containers used in food preparation and utensil washing areas shall be kept covered after

they are filed

(3) Containers stored outside the establishment, and dumpsters, compactors, and compactor

systems shall be easily cleanable; provided with tight-fitting lids, doors, or covers; and shall be

kept covered when not in actual use In containers designed with drains, drain plugs shall be in

piace at all fimes, except during cleaning

(4) There shall be a sufficient number of containers to hold all the garbage and refuse that

accumulates

(5) Soiled containers shall be cleaned at a frequency to prevent insect and rodent attraction

Each container shall be thoroughly cleaned on the inside and cutside in a way that does not

contaminate food, equipment, or utensils, and detergent ar steam shall be provided and used

for washing containers Liquid waste from compacting or cleaning operations shall be disposed

of as sewage

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Storage

(1) Garbage and refuse in the premises shall be stored in a manner to make them

inaccessible to insects and rodents, Outside storage of unprotected plastic bags or wet-

strength paper bags or baled units containing garbage or refuse is prohibited Cardhoard

or other packaging material not containing garbage or food wastes need nơi be stored in

covered containers

(2) Garbage refuse storage rooms, if used, shall be constructed of easily cleanable,

nonabsorbent, washable materials, shall be kept clean, shail be insect-proof and rodent-

proof, and shall be large enough to store the garbage and refuse containers that

accumulate

(2) Outside storage areas or enclosures shall be large enough to store the garbage and

refuse containers that accumulate and shall be kept clean Garbage and refuse

containers, dumpsters and compactor systems located outside shall be stored on or

above a smoath surface of nonabsorbent material such as concrete or machinedaid

asphalt that is kept clean and maintained in good repair

Disposal

(1) Garbage and refuse shall be disposed of often enough to prevent the development of

odor and the altraction of insects and rodents

(2) Where garbage or refuse is burned on the premises, it shall be done by controlled

incineration that prevents the escape of parficulate matter in accordance with law Areas

around incineration facilities shall be clean and orderly

Reasoning

Proper storage and disposal of garbage and refuse is necessary to minimize the

development of odors, to prevent such waste from becoming an attraction and harborage

or breading place for insects and rodents, and to prevent the soiling of food preparation

and food service areas Improperly handled garbage creates nuisance conditions, makes

housekeeping difficult, and may be a passible source of contamination of food, equipment,

and utensils

Examples of Violations

* Garbage stored in unprotected piastic bags outside of building

« Lid on auteide garhage storage container left pen

« Refuse containers not cleaned frequently

+ Drain plugs missing on dumpster-type storage units

= Outside refuse area not kept clean and neat

© Outside garbage cans and dumpster-type storage unit set on unpaved area

Source: Andrew J Sherman (2004): “Franchising & Licensing — Two powerful ways to grow

your business in any economy”, American Manugemeni Association (AMACOM)

156 A demonstrated market demand for the product and services

‘The franchisor’s products and services should meet certain minimum quality standards,

not be subject to rapid shifts in consumer preferences (e.g fads), and be proprietary in

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nature Market research and analysis should be sensitive to trends in the economy and specific industry, the plans of direct and indirect competitors, and shifts in consumer

preferences IL is also important to understand what business you are really in For

example, many of the major oil company franchisors thought that they were in the

gasoline business until they realized that they were in the convenience business and

quickly jumped into mini<maris or fast-food and quick service restaurmis cither directly or via co-branding

157 Comprehensive training programs for franchisees

The key point behind franchising is “miform customer experience”, which means customers can expect the same feeling/produot/service/satisfaction across all units of the system And the only way to achieve this is through training

‘The nature of the industries suitable for franchising is labor intensive Business-format franchising, in which the services and fast food accounts for highest number of units, has a relatively high tumover rate, especially in stores and restaurants {see table 1.4) Tlence, consistent and continuous training support plays a major role in maintaining

service quality across the system

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Table 1.4: Average annual outlet turnover rates for selected industries

Source: Scoit.4 Shane (2605); “From Ice creant to the Internet — Using franchising to drive

the growth and profits of vour business” — Pearson Education, Ine

‘The training should integrate all of the latest education and training technologies and that take place both at the company’s headquarters and on-site at the franchisee’s proposed location at the outset of the relationship and on an ongoing basis ‘Table 1.5

provides a sample training agenda from a restaurant franchisor

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Table 1.5: Portion of a sample training agenda from a restaurant franchisor

Training Agenda Instuctional Œiassoam Œ the Job Topics to Be Covered Material Training Traning instructor

Open Prea’Fry Manual 2 6 See Note 1 Close Fry Manual 0 8 See Note 1

Open Broiler Manual 2 8 ‘See Note 1

Open Window Manuai 0 8 See Nofe 1

‘Swing Host/Hostess Manual 2 6 See Note 1 Open Host/Hosiess Manual 8 8 See Nole 1 Open Server Manuat 2 6 ‘See Note 1

‘Swing Server Manual 2 6 ‘See Note 1

Out of House/Human Resource Manual 8 9 See Nofe 1

Managers and the Law Manual 8 0 ‘See Note 1

Management Shift/Follows Manual 0 80 See Nofe 1

(6 a.m and p.m Shifts Floor

‘Supervision; Standard Responsibilities)

Source: Andrew J Sherman (2004): “Franchising & Licensing — Two powerfull ways to grow

your business in any economy”, American Management Association (AMACOM)

15.8 A set of carefully developed uniform site selection criteria and architectural standards

To the success of a franchising system, location plays a very important part, especially for such industries as fast food, retail, restaurant With a good site, the franchisee not only gets much higher sales but also contributes to building brand awareness and brand preference for the system However, to develop site selection criteria, the franchisor

have to clearly understand the market, target segment as well as the purchase behavior

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of the target customers Figure 1.9 depicts the relationships between the types of purchasing behavior exhibited and level of consideration given to a particular purchase

in the context of the required real estate, not mentioning the product/service price

Spontaneous Semi-planned Planned

pathway to wealth creation”, Prentice Hall

The site selection criteria should aim to find optimal location, sometimes not the

best location out there, as rental fee is one of the biggest operation cost for

franchisee

1.5.9 A franchisee profile and screening system

The purpose of this system is to identify the minimum financial qualifications, business

acumen, and understanding of the industry that will be required by a successful

franchisee

1.5.10 An effective system of reporting and record keeping

A thoughtfully designed reporting & record keeping system can benefit the franchisor

in 2 ways Firstly, it can help to maintain the performance of the franchisees and ensure

that royalties are reported accurately and paid promptly, Secondly, through analyzing

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the performance of outlets, good practice or initatives of some outlets can be multiplied and practised across the network, and lift the performance of the whole franchising

system

LSI Field support staff

These people play a very important role in maintaining quality and uniform operations

in the system They arc skilled iainers and communicators and must be available bo

visit and periodically assist franchisees as well as monitor quality control standards

1.4.12.Research and development capabilities

As time goes by, the taste of consumers in the same market may change Besides, by expansion, the franchise system often enter new markets with different culture, habit,

uecds and wants fram the customers, especially when il is in an overscas market

Hence, the franchise company must have the capabilities for the introduction of new products and services on an ongoing basis to consumers through the franchised

preoxisling recognition thai Hs up the confidence in creditors Therefore, both

franchisor and franchisees may have quicker and easier approach to bank loans for expanding business

Franchise systems cmploy different types of markcting/advertising programs based on

their industry and business madel ‘he three most common are national’general, local,

and cooperativ e/regional advertising,

National advertising is generally for brand and large scale advertising campaigns; local advertising is usually determined by the franchisee and specifically advertises the unit;

2

cooperative/regional programs usually promote within a geographically designated market area Smaller systems may only have one general advertising program

Table 1.6 shows the amount (in percentage) of money that franchise systems use for

the 3 types of marketing/advertising in selected industries

Table 1.6: Average advertising fee by industry

AVERAGE AVERAGE NATIONAL LOCAL bi ADVERTISING ADVER ADVERTISING INDUSTRY PERCENTAGE PERCENTAGE PERCENTAGE

Source: International Franchise Association (3/2007): “The Profile of Franchising”

1.6 Success factors applied to Jollibee case

In the previous part, we have summarized the key success factors for franchise system

in general In this part, we are going to use these factors to analyze the success of one

of the biggest franchise system in ASEAN countries: the Jollibee Foods Corporation

GEC)

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