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.. Franchise Oper

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Bui Thi Thanh Tam

DEVELOPING A FRANCHISE BUSINESS IN VIETNAM

THE CASE OF PHO 24

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi – 2010

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

TABLE OF CONTENTS

ACKNOWLEDGMENTS ……… ……… ………i

ABSTRACT ……….……….……… …… ii

TÓM TẮT ……… ……….…….…… iv

TABLE OF CONTENTS ……….……… …….vi

LIST OF ABBREVIATIONS ………… …….……… ……ix

LIST OF FIGURES AND TABLES ……… …….……… ……… ix

INTRODUCTION ……… …… 1

1 The thesis title ……… … 1

2 The thesis necessity ……… 1

3 Objectives ……… 2

4 Methodology……….……… 2

5 Data sources ……… 2

6 Significance ……… ……… 3

7 Expected results ……… ……… 3

8 Limitations ……… 3

9 The thesis structure ……… ……… 3

10 Suggestion for future research ……… 4

CHAPTER 1: LITERATURE REVIEW……… ……… 5

1.1 Overview of Franchise………… ……… .5

1.1.1 The concept and definition ……… 5

1.1.2 History and Evolution of Franchise……….6

1.1.3 Basic factors for developing a Franchise system ………8

1.1.4 The Process of Franchising ………12

1.1.5 Control franchising system……….15

1.2 Classification of Franchise models……….……….…… 16

1.2.1 Full business format franchise ……….……… 17

1.2.2 Non- business format franchise ……… ……… .17

vi

1.3 Method for developing Franchise system ……… 18

1.3.1 Master franchise ……….….… …… 18

1.3.2 Single – Unit franchise ……….……… ……… 20

1.3.3 Area development franchise…… ……….……….…… ……… 22

1.3.4 Joint venture ……….……….………… …… .23

1.4 Signification for Franchise Business……….……….……… 25

CHAPTER 2: AN OVERVIEW OF THE FRANCHISING BUSINESS IN VIETNAM …….… ……… … 27

2.1 Legal Framework Franchise in Vietnamese ……….……….… 27

2.2 The Business in Vietnam ……….…… ……… 28

2.3 Factors that influence of franchise activities ……… ……… .34

2.4 Tendency and challenge of developing in form of Franchising at Vietnam business ………38

2.4.1 Tendency of developing in form of Franchising at Vietnam business ……….……… 38

2.4.2 Risk and Challenge of developing in form of Franchising at Vietnam business ……….……… ……… 41

CHAPTER 3: THE CASE OF PHO 24 …… ………….……… … 46

3.1 Company profile ……….……….………… 46

3.2 Basic factors for developing a Franchise system ……… ………51

3.2.1 Brand name ……….……… 52

3.2.2 Marketing effort ……….… ……… 54

3.2.3 Management people ……… ……….… 55

3.2.4 Location……….……….…….…… …… 56

3.2.5 An operation manual of Business and Instruction material business action ……… ……… 57

3.3 Achievements and challenge of Pho 24 ……….……….60

3.3.1 Achievements of Pho 24……… ……… 60

3.3.2 Challenges of Pho 24……… ……… 61

3.3.3 Action plan of Pho 24……… ……… 62

3.3.4 Advice for Pho 24……… … ……… 64

vii

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

the Government ……….……….……65

CONCLUSION ……….……… 70

REFERENCES ……….……… …… .71

APPENDICES ……… …… 73

Appendix A: Franchise Statistics – Why does people buy franchise ……… 73

Appendix B: Ranking of motivational incentives to enter franchising ……… 75

Appendix C: Co-Founder and CEO’s Pho 24……… ……….……… 76

Appendix D: Development process ………… ……… …… 78

Appendix E: Pho 24’s Restaurants ……….…… …… 80

viii

LIST OF ABBREVIATIONS

WTO World Trade Organization

UFO Unit Franchise Organization

LIST OF FIGURES AND TABLES

Figure 1.1

Figure 1.2

Figure 1.3

Figure 1.4

Figure 3.1

Table 3.1

Table 3.2

Master Franchise ……… ………17

Single – Unit Franchise 19

Area Development Franchise ……….……… … 20

Joint Venture ……….………… ….……….…21

Development Processes ……….…… ….…….47

Choosing factors affect Pho 24……… … 49

Factors for Pho 24……… 56

ix

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 creates 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 run franchising After joining WTO, Vietnam has become a potential market 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 still limited 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 a Franchise Business in Vietnam - The case of Pho 24”

3 Objectives

The objective of the thesis is given the theoretical basis of the franchise, analyze the reality franchise in Vietnam recent year; Using the tools and knowledge gathered to analyze evaluate, the case of Pho 24 In addition to propose a solution and action plan to help enterprises successfully applied the strategy of choice, thesis offers some recommendations to the State in planning and management to sustainable development the reality franchise in Vietnam

4 Methodology

This thesis applies the case study to franchisor Pho 24 Restaurant The research has been prepared mainly through desk research, not analyze financial norm, only reviews of available literature and data through fourth basic steps:

First step is to review theories of franchise The study focuses on the literature view of existing approaches to franchise definition and some basic factors that

effect to franchise business

Second step is based on the research of franchisor in Vietnam 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 form of franchise in Vietnam

5 Data sources

The theoretical review and collection of secondary data has been performed by research of books, reports, newspapers The primary data was collected through internet 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 Franchise This theoretical approach can be applied or choosing good points in cases of other companies using franchise method to develop business

7 Expected results

The result of this thesis is to give basic solutions for franchisor’s Pho 24 Business and for further business development in form of franchisor in Vietnam Business The methodology is expected to be effectively applied in the case study of other

companies in franchising

8 Limitations

The study is limited in the sense that just a small business with the wide field in market and this thesis only research on desk study, not analyzed about financial 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 conclusion part

Chapter 1: Literature Review – This chapter provides a fundamental 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 its environment to give some advises to develop Pho

24 The chapter also suggests sollution and recommendations to the Government on developing a franchise business in Vietnam

10 Suggestion for future research

The rapid change of basic factors, competitive 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 to confirm fully the finding of

this study

CHAPTER 1 LITERATURE REVIEW

1.1 Overview of Franchise

1.1.1 The concept and definition

The word "franchise" is derived from the Anglo-French word meaning “liberty.” In Middle French, it is “franchir”– to free In Old French, it is “franc,” signifying free The French term “francis” means granting rights or power to a peasant or serf The English term “enfranchise” is defined as empowering those who have no rights The term “Royal Tithes” is the predecessor of royalties, and originated as the practice of certain English men (referred to as “freemen”) receiving a percentage of the land fees paid by serfs to nobility1 Throughout history, franchising has 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’s2 famous comments in Megatrends is no exaggeration – “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 After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees, and can earn profits commensurate with their contribution to those societies while greatly reducing the risk and expense that would be inherent in conventional chain operations

So the franchisor 3 owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business The

1 Robert L.Purvin, Jr., The Franchise Fraud (1994), at p.40(Hereinafter “Purvin”)

2 John Naisbitt (b January 15, 1929 in Salt Lake City, Utah) is an American author and public speaker in

the area of futures studies His first book Megatrends was published in 1982

3 http://franchises.about.com/od/franchiseglossary

franchisor usually charges the franchisee an upfront franchise fee 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

entity which has acquired the rights of conducting the business from 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 for franchisor businesses

The Vietnam Commercial law No 36/2005/QH11 passed in June, 16 2005 said:

“Franchising is a commercial action; in there franchisor allows and requests

franchisee trade goods, support services according to some conditions:

9 Trading goods and support services was made available by franchisor

that was fixed and it is stick on trade mark, brand name, logo, slogan and business key, advertising of franchisor

9 Franchisor has power to control and help franchisee in running

business.”4

So natural of franchise is one business transfer business model in order to distribute goods, services for partners but they still keep 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; Isaac 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 long run, was among the first franchising efforts in the United States A later example of franchising was

4 Vietnam Commercial law No 36/2005/QH11, pp 72

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.5

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 modern 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 earn 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

5 http://wapedia.mobi/en/Franchising

1.1.3 Basic factors 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:

9 An operation manual of Business and Instruction material business action

9 Training program for franchisee

9 Preparing human resource for development business

9 Standardize norm of system and give norm to choose business premises or

franchisee

1.1.3.1 Developing operation manual of Business and Instruction material business action

One importance specific trait of business in 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 obey exactly 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 Franchisee can request to change and add the operation manual and it will be changed if franchisor accepted

Major contents of action operation manual need to mention include:

¾ Information relates authority and duty of franchisee

¾ Assign about information advertising

¾ Assign about staff clothing

¾ Work process for each department and each staff

¾ Sale, marketing and problem solving processes

¾ Recruit staff

¾ V v v

Drafting a operation manual need to be detail, full information and easy to understand It will guide for daily activities of the store It also becomes criterion to evaluate and control all actions of a partner who wants to buy franchise This operation manual can be made in form of video clip and picture in order to help franchisee easy to refer 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 to the franchisor, franchisee is not only collect 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 must design a system work clearly, concrete, unity in order to make advantage factors for franchise system that was sold

Training for partner who buys franchisee has indispensable need Law systems of other countries, also request that franchisor must have duty in training, supporting

for franchisee Each business has contents, style and different trainings program This maybe opens Training School, or send staffs come to origin stores or delegate experts training directly at business The purpose of trainings program is that store manager and staffs have knowledge to run store well

This trainings program has been divided two basic ways:

¾ Trainings before opening store: This action has been accompanied with transfer document and run with owner of business and all staffs before franchisee received franchise

¾ 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 it can be changed or depend on the concrete conditions of contract

1.1.3.3 Preparing human resource for developing business

Until now we have seen the role of human resource 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 staffs must interest specially and develop following ask of action plan

Business has to evaluate human resource in order to serve development requirement After that business see weakness, how to short of in order have recruitment plan meet real demand of business Moreover franchise is new 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 satisfy development strategy of business

Once franchisor must have trainers for franchisee and support them usually to 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 If 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 business 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 unity of system Franchisor has let some norm of system as:

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

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

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

to make transfer-document, trainings

9 Build norms to choose partner: include norm that define right strategic partner to meet corporations

9 Standardize about check activity, supervisor, evaluate, report

Standardize all norms will good for choosing space, and partners, transfer-trainings

of system This work more 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,

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 order to let franchisee rent business point

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

to define which entrepreneur’s samples have enough able to success when franchise Some entrepreneur’s norm or franchisee can include field:

transfer-9 Good finance to satisfy business conditions

9 Prestige level in business

9 Business experience: no need to have experience but franchisee should has experience that is very advantage in enterprise

9 Corporate goodwill

9 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 That involves two key questions:

9 Is this business franchisable?

9 Is franchising the right strategy?

These questions can only be answered after evaluating your business and determining how franchising fits with your specific goals and objectives

If the decision to franchise is made, a franchisor should develop a business plan outlining the company's growth and strategy for the next five years A franchisor needs certain new capabilities and will need to be sure that these capabilities are seamless integrated into existing organizational functionality

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

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 franchisee'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 attorney with substantial franchise experience.6

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

6 Pacific Franchise Developing Corp (2009), http://www.pfdc.com.vn , Knowledge about franchise

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 franchise concept, protect the franchisor and have a solid, duplicatable franchise model

Franchise Business Plan - The first phase of franchising a business is to develop a

sound plan for the expansion program Prior to the drafting 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 Franchise business plan should document and define a model that also builds a territory 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 cover 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 specific experience in franchising The State Registration process requires individual franchise application packages along with other required steps that States will want a new franchise system to go through prior to their being permitted to offer a franchise within the State borders Franchise legal documentation should be put together in a way that is conducive to doing business as a franchise company, but also provides the franchisor with thorough protection and documented compliance

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 set forth by the franchisor The Operations Manual 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 specifics within the franchise business model

Franchise Marketing Program - The final stages of the franchise development

program should incorporate the marketing 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 the unique value proposition for the franchise concept Franchise collateral material such as brochures, pamphlets, fliers should correctly 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 consult with professionals in the field of franchise 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 to: stores, owners, agreements, training/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 business and the tangible assets that wear the brand name

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 franchisees are following the ‘business model' and standards are met to the same consistency across the franchise network Franchisors often offer franchisees training Training is not always free for franchisees, it is sometimes supported through the traditional franchise fee that 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 learning 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:

9 Performing audits of Franchisee to ensure compliance with quality standards and adherence to the Franchisor Business Model

9 Franchisor should use Full business franchise model, it easy to make franchisee follow same stardard, make sucessful chain business

9 Ensure best practice and knowledge sharing across Franchise Network

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

with-9 Ability for Franchisee Managers to pay for training on behalf of their employees

9 Enterprise wide reporting for Franchisor and Master Franchisees to report on training certifications

1.2 Classification of Franchise models7

Franchising definitions were understood like business developing method but it has wide scope with many different ways Base on investment limit and control, franchising is divided by two basic types:

¾ Full business format

¾ Non-business format

1.2.1 Full business format franchise

That mean the franchisor will transfer their entire Business model for franchisee This will be known as “Copy” all standard business models for franchisee With this model, identical of system will be very high Franchisor will transfer four basic fields:

9 Strategic system, business model, process in order to run management policy, manages training, design

9 Business key, technology

9 Brand name system

9 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 This format franchise was best close structure and perfect in formats franchise, that was show the corporation of partners and contract time from 5 years to 20 – 30

7 Lý Quý Trung (2006), Buy Franchise, 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

1.2.2 Non- business format franchise

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

¾ Product and service distribution franchise like: Pierre Cardin Shirt for

An Phuoc, Foci, Trung Nguyen coffee

¾ Formula for produce and marketing franchise or Marketing franchise like: Coca Cola;

¾ Brand franchise or trademark license like: Crysler, franchise using trade make Hallmark (main product is card) to produce like bed, mattress, pillow

¾ Franchise not tide with kind using banner grouping or voluntary chains, that usually meet in professional service company, consultant company like: Ernst & Young, Grant Thornton

With limit is not enough, franchisor will decrease some expenses and reduce human resource demand to develop system, able to 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 take all advantages of time to wide open size and market that still fewer competitors

1.3 Method for developing Franchise system8

There are four major for developing franchise system below:

8 Lý Quý Trung (2006), Buy Franchise, new opportunities for Vietnam business, Publishers young, Ho Chi

Minh city

¾ Master Franchise

¾ Single – Unit Franchise

¾ Area Development Franchise

¾ Joint Venture Franchise

1.3.1 Master franchise

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

In this method franchisor buy development authority store chain of them to franchisee in fixed territory and this partner can buy again for other partners in area

In this method, franchisee has all power to develop system to all over the market and franchisor will receive a fixed fees 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 limited from $ 50.000 to $ 1 million Franchisor persuaded franchisee that 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 Europcar brand name in order to provide a monopoly service for car rental in Australia and Asia Pacific Ocean This corporation bought all franchise stores of Europcar at 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 Pacific monopoly business Europcar brand in 20 national where this brand not yet appears Outside Europcar Asia Pacific also have right sell for anyone in local where they monopoly

Figure 1.1: Master Franchise

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

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

better 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: McDonald’s, Burger King, Pizza Hut, 7-

up seldom buy Single Unit Franchise , just only buy Master franchise for all local or a National So this method is usually suitable for small businesses and individual who want to buy franchise from small business but still have potential development and that suitable with local which you focus

Example the case of McDonald’s in Malaysia, sell master franchise for GARSB After 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 partner’s demand, ensure all system identity, so fees will be increased

Figure 1.2: Single – Unit Franchise

FRANCHISOR

………… FRANCHISEE 3

FRANCHISEE 2

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

Figure 1.3: Area Development Franchise

FRANCHISOR

AREA DEVELOPMENT FRANCHISE

STORE

FRANCHISE 1

STORE FRANCHISE

…………

STORE FRANCHISE 3

STORE FRANCHISE 2

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

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

Figure 1.4: Joint Venture

FRANCHISOR

JOINT VENTURE FRANCHISE

…………

FRANCHISEE 3 FRANCHISEE 2

LOCAL BUSINESS

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

1.4 Signification for Franchise Business

1.4.1 Advantages

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

First, business expands market scale 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 market, has business secret and able to attract customer

Second, franchisor can take full advantage of partners to 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, HR

Third, franchisor is developing scale and as well as control of business system of them In this case, franchisor still has been owned business secrets and still active in running 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 increase strong competitive of company

1.4.2 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 that make it not effective in running business and effect to 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 enclosed other damage for franchisor This will be happened in case franchisee 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, management 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 long time in the world and many business applied very successful both franchisor and franchisee Moreover this model only has been developed in Vietnam from late 90 decade This is specific model of corporate 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 to find common voice to make advantage of both was basic for this developing business So both sides must negotiate to find out 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 careful calculation and undertaken by contract under the sponsoring law Despite of disadvantages in franchise but franchise still is a way for both parties develops business The area in which the potential development in practice, especially in a country developing rapidly in Vietnam as

CHAPTER 2

AN OVERVIEW OF THE FRANCHISING

BUSINESS IN VIETNAM

2.1 Legal Framework Franchise in Vietnamese

Franchising activities in Vietnam has developed in the open-door economic development Vietnam law has 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 enterprise business

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 Vietnam at present includes:

The Civil Code No 33/2005/QH11 provided that: the National Assembly through

on the June 14th 2005 as a legal foundation for the civil activities in which the related contract and technology transfer, know - business, business model with the concept of "licensing privileges for Business"9.

Law of intellectual property rights No 50/2005/QH11: the National Assembly through on November 29th 2005 as a base for business activities 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 This 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 parties relating to the operation of franchise.10

9 The Vietnam Civil Law, Path 2, Chapter XII, XV, XVI

10 Commercial Law No 36/2005/QH11, Section 6, term 284-291

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

Circular 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 to the powers of, obligations of parties, Circular write clearly time that the state management to implement the license for the franchise to 10 days, if not accept pay by writing text and the reason

2.2 The Business in Vietnam

In the early stages, there were two types of franchising; Non business format franchising (for 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 its 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 different sectors

However, 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 Council, 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, franchising used to be established 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 normally elected to enter into one or several of the above mentioned contracts instead of a franchise

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

to make the franchise feasible and enforceable in Vietnam market

However, 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 franchising 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 like: Trung Nguyen Coffee, 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 one way like this is make advantage and disadvantage also

Trung Nguyen Coffee Franchise

This is the first company applied franchise model for coffee stores chain in Vietnam

Trung Nguyen was established in Ban Mê Thuột city and Đắc Lắc 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, Trung 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 Trung nguyen coffee and also have Trung Nguyen banner but in

fact that Trung Nguyen did not control them much; Retailer is different, they buy

Trung 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 all store use brand Trung Nguyen and beside that is store’s name private and the Trung Nguyen’s control is only show some product competitors, so

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

other, because this store belongs to Trung Nguyen Franchise system, following legal and standard of franchise The 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 Each developing step of Trung Nguyen always goes on sequence of franchise legal in Vietnam That makes many successful until now This success of Trung Nguyen in Coffee field bring for business many experience and make premises of Trung Nguyen’s franchise development

Beside all successes Trung 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 Staff control is quite thin, standard of model is not yet identical Some store franchise still have name of competitor following of their ideal, for example Trung nguyen store’s franchise in Lam Dong, beside name Trung 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 rule of decree 35 about Vietnam franchising

Kinh Do Bakery

Being founded in 1993, at initial stage Kinh Do Company was a small production workshop at Phu Lam, District 6 with total investment capital of VND 1.4 billion and about 70 employees Kinh Do 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

To make good feel of customers about stores, Kinh Do make high identical about image, standard, brand name Kinh Do transfer all management process, produce

for franchisee, especial style decorative, color, banner beside run business following legal franchise, Kinh Do also have some rule about space very tide for franchisee like: minimum space have more than 48m2, separate other store in system about 2km, partners have to have a lot of money and experience about franchise field Kinh Do design an internal report information system, oversee operation of store in order to ensure standard and image of product

The investment in technology renovation with aim to make new products of superiority, high 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 24 Kinh Do Bakeries, 01 Savico-Kinh Do Trade Center in Ho Chi Minh City and 03 Kinh Do Bakeries in Ha Noi has directly catered Kinh Do products to consumers

In addition, export volume of Kinh Do products always makes up 20% of total consumption output, beyond existing export partners, Kinh Do actively surveys and expands to new markets such as Japan, Korea, China, South American and Middle East

There are 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 Trung Nguyen, not to focus too much on opening stores and pass standards and image of product

2.2.1 Conditions of franchisor and franchisee

According to the Vietnam regulations, the franchisee and franchisor are not required

to be institutional entrepreneurs A franchisor must run a franchised business for one year, at least With this provision, even individuals or households can be franchisors or franchisees to franchise agreements There seems to be too 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) It should also be noted that franchising activities of an individual would be very difficult to control

9 Businesses are government agencies (Ministry of Trade or Department of Commerce) approved registering the franchise

9 Goods and services for business under the franchise is not in the list of prohibited business as stipulated; in the case is goods, services business has conditions, the business must meet the documentation allow business related For the franchisee, Traders are allowed to receive franchise when business registration business suit for subject of the franchise

All conditions above was based on the law, company can not 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,

11 Article 5 of Decree 35/2006/ND-CP, chapter 2

the effectiveness of the system, the level success of the system in recent years, 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 markets

Second, enterprises should spend time to research market goals to 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 for cases like this

Third, need 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 often of the franchise set up Again, companies need to re-evaluate all of the terms, considering the conditions of his Since then, business would give questions for the franchisor, listen to the answer

The consent agreement franchise contract or deny are also show the knowledge of their depth with the franchisor The franchise agreement must be in accordance with the procedures and law Vietnam

Firth, 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

If one party violates the commitment to the consequences of this would be very difficult anticipating The franchisor may crash all system or even bankruptcy;

franchisee 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 franchisee, contribute to create a system of power in the maintain loyalty of customers, changes in the partners and this is the real barrier for competitors

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 one like:

¾ An operation manual of business and instruction material business action

¾ Training program for franchisee

¾ Preparing human resource for development business

¾ Standardize norm of system and give norm to choose business premises

of franchise