Developing your own Franchise - A framework for Vietnamese Franchisors

In 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 ch

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

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 I would like to thank everyone who has helped and supported

me during the writing of this thesis

First of all, I would like to express my profound gratitude to my supervisor – Dr Pham Quy Long, MBA Ha Nguyen at Hanoi School of Business – Vietnam National University, who has shared his valuable knowledge and been very good mentor throughout the writing process His professional advice and invaluable support have been highly appreciated during the research process

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

Hanoi School of Business, October 2010

Nguyen Quang Tiep

ABSTRACT DEVELOPING YOUR OWN FRANCHISE – A FRAMEWORK FOR

VIETNAMESE FRANCHISORS

Nguyen Quang Tiep MBA Candidate, 2007 – 2009 School of Business - Vietnam National University, Hanoi Supervisor: Dr Pham Quy Long, MBA Ha Nguyen

October 2010, 99 pages

In recent years, the average growth rate of franchising businesses in Vietnam is 35%, five times faster than GDP growth Total revenue of this sector is 36 million USD, 4 times higher than 5 years ago, and 12 times the revenue in 20001 The 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 such

as Kentucky Fried Chicken, Pizza Hut, Gloria Jean’s Coffee, Jollibee, Lotteria, The Body Shop Franchising has been a favorable method for entrepreneurs to expand their 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 for development, with an annual growth rate of 50%1

However, in the bright picture of franchising in this market, we rarely see Vietnamese brands Among 90 franchise systems operating in Vietnam2, there are only a few brands 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

1

Vietnam Franchise Association

2 Nguoi dai bieu nhan dan newspaper, http://www.nguoidaibieu.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 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 framework to build franchise systems in Vietnam The systematical, statistical, analytical 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 people want to franchise their businesses More importantly, the key success factors for franchisors are listed and illustrated by the case of Jollibee Food 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, 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

The findings indicate that Vietnamese entrepreneurs have a great opportunities in franchising sector, and can overcome the challenges by applying the suggested framework

TÓM TẮT HƯỚNG DẪN XÂY DỰNG HỆ THỐNG NHƯỢNG QUYỀN THƯƠNG MẠI

TẠI VIỆT NAM Nguyễn Quang Tiệp Học viên MBA, khóa 2007 – 2009 Khoa Quản trị Kinh doanh, Đại học Quốc gia Hà Nội Giáo viên hướng dẫn: TS Phạm Quý Long, ThS Hà Nguyên

Tháng 10 năm 2010, 99 trang

Trong những năm gần đây, tốc độ tăng trưởng trung bình của ngành nhượng quyền thương mại là 35%, gấp 5 lần tốc độ tăng GDP Tổng doanh thu của ngành này là 36 triệu USD, gấp 4 lần doanh thu 5 năm trước, và gấp 12 lần tổng doanh thu năm 20003

Xu thế phát triển của nhượng quyền thương mại thể hiện rõ nét trên những con phố chính của các thành phố lớn như Hà Nội, Hồ Chí Minh, Đà Nẵng Những thương hiệu nhượng quyền lớn của thế giới đã đến Việt Nam như Gà rán Kentucky, Pizza Hut, cà phê Gloria Jean’s, Jollibee, Lotteria, The Body Shop… Nhượng quyền thương mại đang là phương thức kinh doanh được nhiều doanh nghiệp lựa chọn để tăng trưởng, từ nhà hàng cho tới dịch vụ hàng không, từ cho thuê xe cho tới tư vấn bất động sản Theo

dự báo, trong một vài năm tới, nhượng quyền thương mại sẽ là ngành phát triển nóng với tốc độ tăng trưởng hàng năm lên tới 50%3

Tuy nhiên, trong bức tranh tươi sáng của thị trường nhượng quyền thương mại, các thương hiệu Việt Nam còn đóng vai trò rất khiêm tốn Trong số 90 hệ thống nhượng quyền đang hoạt động tại Việt Nam4, chỉ có một số thương hiệu do người Việt Nam phát triển và sở hữu, và trong đó chỉ có một số ít được coi là bước đầu thành công như

3

Hiệp hội Nhượng quyền thương mại Việt Nam (VFA)

4 Nguoi dai bieu nhan dan newspaper, http://www.nguoidaibieu.com.vn/pPrint.aspx?itemid=87148

Phở 24, Bánh Kinh Đô với những mạng lưới còn khiêm tốn, chưa đạt tới đẳng cấp có thể cạnh tranh trong khu vực

Khóa luận tập trung vào việc xây dựng một bộ khung các phương pháp để phát triển và quản lý hệ thống nhượng quyền thương mại tại Việt Nam

Trong khóa luận này, tác giả chủ yếu sử dụng phương pháp nghiên cứu thứ cấp, sử dụng nguồn tài liệu nước ngoài và trong nước để đưa ra những lý thuyết cơ bản về nhượng quyền, 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 thống nhượng quyền tại Việt Nam Sau đó, người viết sử dụng các phương pháp phân tích, thống kê, hệ thống

để phân tích dữ liệu thu thập được

Khóa luận được trình bày trong 3 chương Chương 1 đưa ra tổng quan về nhượng quyền thương mại, các loại hình và lịch sử nhượng quyền, các ngành phù hợp để nhượng quyền và lý giải vì sao các doanh nghiệp lại lựa chọn nhượng quyền để phát triển Quan trọng hơn, các nhân tố chính quyết định thành công trong nhượng quyền thương mại đã được nêu ra và minh họa thông qua việc phân tích sự thành công của Jollibee (Philipin)

Chương 2 tập trung nghiên cứu thị trường nhượng quyền thương mại tại Việt Nam, môi trường vĩ mô cho nhượng quyền, và các khó khăn mà các nhà nhượng quyền Việt Nam đang phải đối mặt Chương này giúp chúng ta hiểu được thị trường nhượng quyền tại Việt Nam mới đang ở giai đoạn đầu và có tiềm năng phát triển rất lớn Mặc dù có được môi trường vĩ mô thuận lợi, các doanh nghiệp Việt Nam vẫn chưa tận dụng được

để phát triển hệ thống nhượng quyền thương mại của riêng mình nhằm chiếm lĩnh thị trường nội địa

Trong chương 3, tác giả đề xuất một mô hình khung để xây dựng các hệ thống nhượng quyền thương mại tại Việt Nam Trong đó, các công việc quan trọng và đặc trưng nhất

của nhượng quyền thương mại sẽ được bàn luận chi tiết và chia thành bốn bước chiến lược chủ đạo: đánh giá ý tưởng, thử nghiệm, mở rộng và duy trì

Kết luận của nghiên cứu cho thấy các doanh nghiệp Việt Nam có cơ hội lớn trong ngành nhượng quyền thương mại, và có thể vượt qua những thách thức bằng việc áp dụng mô hình đã được tác giả đề xuất

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENTS vii

LIST OF TABLES x

LIST OF FIGURES xi

LIST OF ABBREVIATIONS xii

CHAPTER 1: FRANCHISING OVERVIEW 4

1.1 Franchising definition 4

1.2 Types of Franchising 6

1.2.1 Traditional franchising 6

1.2.2 Business-format franchising 8

1.2.3 The differences between traditional franchising & business-format franchising 9

1.3 Reasons for being a franchisor 10

1.4 Industries suitable for franchising 12

1.5 Common success factors for franchising 15

1.5.1 A successful prototype location (or chain of stores) 15

1.5.2 A strong management team 16

1.5.3 Sufficient capitalization 17

1.5.4 A distinctive and protected trade identity 18

1.5.5 Proprietary and proven methods of operation and management 19

1.5.6 A demonstrated market demand for the product and services 20

1.5.7 Comprehensive training programs for franchisees 21

1.5.8 A set of carefully developed uniform site selection criteria and architectural standards 23 1.5.9 A franchisee profile and screening system 24

1.5.10 An effective system of reporting and record keeping 24

1.5.11 Field support staff 25

1.5.12 Research and development capabilities 25

1.5.13 National, regional, and local advertising, marketing, and public relations programs 25 1.6 Success factors applied to Jollibee case 26

1.6.1 Corporate profile: 27

1.6.2 Analyze the success of JFC by key franchising success factors 27

1.6.2.1 Successful prototype: Good 27

1.6.2.2 Management team: Excellent 28

1.6.2.3 Capitalization: Good 28

1.6.2.4 Trade identity: Good 28

1.6.2.5 Methods of operation and management: Good 29

1.6.2.6 Market demand: Excellent 30

1.6.2.7 Training: Good 31

1.6.2.8 Site selection criteria: Good 31

1.6.2.9 Franchisee screening system: Good 31

1.6.2.10 Reporting and record keeping system 32

1.6.2.11 Field support staff: Good 32

1.6.2.12 R&D: Good 33

1.6.2.13 Marketing & Advertising: Good 34

CHAPTER 2: FRANCHISING IN VIETNAM 35

2.1 An overview of Vietnam franchising market 35

2.2 Franchising environment in Vietnam 39

2.2.1 Political environment 40

2.2.2 Legal environment 42

2.2.3 Economic environment 45

2.2.4 Financial environment 46

2.2.5 Social environment 48

2.3 Challenges to opening a new franchise system in Vietnam 49

2.3.1 Lack of experience 53

2.3.2 Insufficient franchising consultancy 54

CHAPTER 3: FRAMEWORK FOR BUILDING A FRANCHISE SYSTEM 56

3.1 Framework introduction 56

3.2 Concept stage 57

3.2.1 Industry assessment 57

3.2.1.1 Production and distribution occur in limited geographic markets .57

3.2.1.2 Physical locations are helpful to serving customers .59

3.2.1.3 Local market knowledge is important to performance .59

3.2.1.4 Brand name reputation is a valuable competitive advantage .60

3.2.1.5 The level of standardization and codification of the process of creating and delivering the product or service is high .60

3.2.1.6 The operation is labor intensive .61

3.2.1.7 Outlets are not terribly costly to establish .62

3.2.2 Concept assessment 62

3.2.2.1 Valuable system to sell 63

3.2.2.2 Transferable concept 63

3.2.2.3 Large pool of potential franchisees 65

3.3 Pilot stage 67

3.3.1 Site selection 67

3.3.1.1 Density of the primary target audience 68

3.3.1.2 Traffic volume 68

3.3.1.3 Traffic patterns 68

3.3.1.4 Site visibility 69

3.3.1.5 Traffic flow to the site 69

3.3.1.6 Complementary versus contracdictory neighbors 69

3.3.2 Trade identity development & protection 72

3.3.3 Operations manual 72

3.3.3.1 Guidelines for preparation of the manual 72

3.3.3.2 Suggested outline for the operations manual of a franchisor 74

3.4 Expansion stage 77

3.4.1 Pricing franchise 77

3.4.1.1 Franchise fee 77

3.4.1.2 Royalty rate 79

3.4.2 Franchise agreement preparation 81

3.4.2.1 Rights granted 82

3.4.2.2 Territory 82

3.4.2.3 Services to be provided by the franchisor 82

3.4.2.4 Supplying the products 83

3.4.2.5 Franchise, royalty and other fees payable to franchisor and reporting 84

3.4.2.6 Quality control 85

3.4.2.7 Protection of intellectual property 85

3.4.2.8 Termination of the franchise agreement 86

3.4.3 Franchisee recruitment 86

3.4.3.1 Industry experience 87

3.4.3.2 Net worth requirements 87

3.4.3.3 Psychological attributes 88

3.5 Mature stage 88

3.5.1 Monitoring quality 89

3.5.1.1 Field support 89

3.5.1.2 External service audits 90

3.5.1.3 Peer review 91

3.5.1.4 Analytical tools 91

3.5.1.5 Customer feedback 92

3.5.2 Monitoring franchisee financial reporting 92

3.5.2.1 Point of sale systems 93

3.5.2.2 Financial reporting 94

3.5.2.3 Financial audits 94

CONCLUSION 96

LIST OF REFERENCES 98

APPENDIX 1 100

LIST OF TABLES

1.1 Main differences between 2 types of Franchising 9

1.2 Top ten industries for franchising in percent of franchisors 14

1.3 Average number of years franchisors are in operation before

franchising for selected industries

17

1.4 Average annual outlet turnover rates for selected industries 22

1.5 Portion of a sample training agenda from a restaurant franchisor 23

2.1 Vietnam franchising market compared to other ASEAN

countries

37

2.3 Franchising market size of biggest cities in ASEAN 40

2.4 Franchising business environment in Vietnam 40

2.7 Annual GDP growth rate & GDP per capita of Vietnam

(‘90-‘09)

46

2.8 Selected information depicting Vietnam infrastructure 46

2.9 Foreign franchising brands registered in Vietnam 50

LIST OF FIGURES

1.2 Percentage of franchised outlets by size of the system 11

1.3 Franchise systems with at least one active franchised unit during

the period of 2001-2005

11

1.5 Franchise systems reporting units during 2001-2005 15

1.6 Maximum total initial investment by industry 18

1.7 Average first 3 years net income for franchising concepts

LIST OF ABBREVIATIONS

AMACOM American Management Association

ASEAN Association of Southeast Asian Nations

BOTP Basic Operations Training Program

CIA Central Intelligence Agency

FDI Foreign Direct Investment

GDP Gross Domestic Products

PERC Political & Economic Risk Consulting Organization

R&D Research and Development

VFA Vietnam Franchising Association

UFOC Uniform Franchise Offering Circular

USA United States of America

USD United States Dollars

USDOC United States Department of Commerce

INTRODUCTION

The emergency and objectives of the research

The reform 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) put an important mark in the integrating process into the world economy Vietnam’s economy has grown fast, in the last twenty years GDP of Vietnam increased

by over 7% on average.5

The franchising sector first came to Vietnam in early 1990s, and after 15 years, the total revenue in this sector grew 24 times, from 1.5 million USD in 1996 to 36 million USD in 2010 (estimated).6 However, the major portion of this market is dominated by foreign brands Vietnamese companies haven’t succeeded in leveraging the local market understanding to make a successful franchise system in order to directly compete with international franchise systems in domestic market

With the objective to contribute to finding a suitable method 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 market in Vietnam

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

5

The CIA World Fact Book 2009

6 Vietnam Franchise Association

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:

In 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 framework to build franchise systems in Vietnam The systematical, statistical, analytical methods are also applied to analyze all collected data

The structure of the thesis

The thesis is presented in three chapters in which the first chapter will give basic definitions and most general theories about the researched problem of this thesis The second chapter will 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 1: 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 success factors 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 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

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

1.1 Franchising definition

According to the American Heritage Dictionary of the English Language, the word franchise comes from the old French word franche, which means free or exempt.7 In 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 profit That payment was called a royalty, a term still in use to this 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

• the franchisor the obligation to provide rights and support to franchisees”8

According to the Federal Trade Commission (FTC), the body that has jurisdiction in the United States over federal disclosure rules for franchisors, three elements must be present for a business relationship to be deemed a franchise First, the franchisor 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 control 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 9

In Vietnam, although franchise business started much later than other countries, we have already defined this in 2005 Commercial law as follow: “Franchising 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 carried out 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 franchisor has the rights to control and support franchisee in running the franchise business”10

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 to illustrate franchising as below:

8 IFA Educational Foundation (2001): “An introduction to Franchising” (P.5)

9

Federal Trade Commission (1979): http://www.ftc.gov/bcp/franchise/netrule.htm

10 Vietnam Commercial law (2005), Article 284

Figure 1.1: Franchise definition illustration

(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…

1.2 Types of Franchising

The broad category of franchising is made up of two different business models:

traditional franchising (also known as product franchising) and business format franchising

1.2.1 Traditional franchising

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.11

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 12

11

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

your business” – Pearson Education, Inc

12

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 time, imposed few restrictions or qualifications on their agents and exerted very little control over them Over time, however, both companies found they needed more control over these sales agents if they were to protect their respective reputations and brands The McCormick Company responded by establishing company owned branch houses throughout the U.S 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 communications with its agents, thereby 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 recommendations for the remaining agents as to how the offices should be run and, for 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 forerunners of the modern franchise agreement Traditional franchising today is comprised largely of automobile dealerships, gasoline service stations, and soft-drink bottlers

In all of these businesses, the franchisor is a manufacturer who sells finished or finished products to its dealers/franchisees In turn, the franchisees resell these products

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

is sold to its franchisees, the franchisor’s profits from its dealer network flow 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

In Vietnam, the most phenomenal and recognizable Vietnamese traditional franchise is the Trung Nguyen coffee which spread out all over the country in the late 1990s

1.2.2 Business-format franchising

Business-format franchising is a type of franchising in which the franchisor primarily sells a way of doing business (i.e., a business format) to its franchisees A business-format franchise thus “includes not only the product, service, and trademark, but the entire business format itself – a marketing strategy and plan, operating manuals and standards, quality control, and continuing two-way communication”13

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

Mathilda Harper14 This entrepreneur developed her network of Harper Beauty Shops from the early 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 mid-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 Burger King and McDonald’s, and the economic boom of the post–World War II era, that business-format franchising fully came into its own in the U.S and Canada, and throughout much 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 services, business aids and services, construction and maintenance, childcare services, and non-food retailing as well as the more visible hotel, fast-food, and car rental franchises In 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

13

United States Department of Commerce (USDOC) (1988): “Franchising in the Economy”

14 Jane R Plitt (2000): “Martha Mathilda Harper and the American dream”, New York Syracuse University 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…

1.2.3 The differences between traditional franchising & business-format 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

franchising

Business-format franchising

Franchisee can use Franchisor’s trade name,

Franchisee contribute to whole system’s

marketing and advertising

franchisee

Royalty fee

(Source: author)

1.3 Reasons for being a franchisor

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.15

Through franchising, they are able to:

· Obtain operating efficiencies and economies 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

Source: Adapted from data contained in R Bond (2004): “Bond’s Franchise Guide”,

Oakland, 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

15

Andrew J Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any

economy”, American Management Association (AMACOM)

51 franchised units, and only 25% of them have less than 10 franchised units (see Figure 1.3 below)

Figure 1.3: Franchise systems with at least one active franchised unit during

the period of 2001-2005

(Sample size: 1,675 franchise systems)

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

· Achieve more rapid market penetration at a lower capital cost: Figure 1.4 shows the strategic options that a firm can choose to grow based on its own intellectual property, and franchising is among the options that requires low investment thus have short time to payback

Figure 1.4: Strategic options for business growth

Source: Andrew J Sherman: “Franchising & Licensing – two powerful ways to 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 automobile 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 large - franchising is far from a universally applicable way of doing business

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 retail 16

Other data sources provide similar results Table 1.2 summarizes the percentages of franchisors for the most popular industries for franchising as reported in the Sourcebook of Franchise Opportunities

Table 1.2: Top ten industries for franchising in percent of franchisors

franchisors

Percent of franchised units

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

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

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

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

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

1.5 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 market, business environment, and organizational behavior… are blurred, we can come up with a few basic factors that every franchise system must have in order to succeed:

1.5.1 A successful prototype location (or chain of stores)

This is the most critical success factor which all franchise systems must consider before franchising The 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 The success of the prototype should not be too dependent on the physical presence or specific expertise of the founders of the system

In fact, many franchisors who jumped to franchising their concept despite 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 often see big efforts and many years spent on refining the prototype store(s) Table 1.3 provides information on the average number of years that franchisors are in operation before franchising for selected industries

17

Andrew J Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any

economy”, American Management Association (AMACOM)

Table 1.3: Average number of years franchisors are in operation before

franchising for selected industries

Source: Scott A Shane (2005): “From Ice cream to the Internet – Using franchising to drive

the growth and profits of your business” – Pearson Education, Inc

1.5.2 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 internal 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 expansion After the successful prototype, management team is the next 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) The latter way

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)

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

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

2000-2004

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

(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 brand in U.S market, which was already registered by someone else, is a bitter and sound lesson

1.5.5 Proprietary and proven methods of operation and management

This is surely the most tiring part of building a franchise The comprehensive operations manual is the result of years of operations in the prototype location There is

no best or final operations manual but continuous efforts to refine all the processes to 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 enforced through clearly drafted 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 operations manual provisions concerning

garbage and refuse

Containers

(1) Garbage and refuse shall be kept in durable, easily cleanable, insect-proof and proof containers that do not leak and do not absorb liquids Plastic bags and wet-strength paper bags may be used to line these containers, and they may be used for storage inside the food service establishment

rodent-(2) Containers used in food preparation and utensil washing areas shall be kept covered after they are filled

(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 place at all times, 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 outside in a way that does not contaminate food, equipment, or utensils, and detergent or steam shall be provided and used for washing containers Liquid waste from compacting or cleaning operations shall be disposed

of as sewage

Source: Andrew J Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM)

1.5.6 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

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

wet-or other packaging material not containing garbage wet-or food wastes need not be stwet-ored in covered containers

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

nonabsorbent, washable materials, shall be kept clean, shall be insect-proof and proof, and shall be large enough to store the garbage and refuse containers that

rodent-accumulate

(3) 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 smooth surface of nonabsorbent material such as concrete or machine-laid

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 attraction 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 particulate 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 breeding 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 possible source of contamination of food, equipment, and utensils

Examples of Violations

• Garbage stored in unprotected plastic bags outside of building

• Lid on outside garbage storage container left open

• 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

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 It 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-marts or fast-food and quick service restaurants either directly or via co-branding

1.5.7 Comprehensive training programs for franchisees

The key point behind franchising is “uniform customer experience”, which means customers can expect the same feeling/product/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 turnover rate, especially in stores and restaurants (see table 1.4) Hence, consistent and continuous training support plays a major role in maintaining service quality across the system

Table 1.4: Average annual outlet turnover rates for selected industries

Source: Scott A Shane (2005): “From Ice cream to the Internet – Using franchising to drive

the growth and profits of your business” – Pearson Education, Inc

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

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

Source: Andrew J Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM)

1.5.8 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

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 changes

Figure 1.9: Purchase behavior quick screen

Source: Stephen Spinelli, Jr., Robert M Rosenberg, Sue Birley (2004): “Franchising –

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

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

1.5.11 Field support staff

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

in the system They are skilled trainers and communicators and must be available to visit and periodically assist franchisees as well as monitor quality control standards

1.5.12 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, needs and wants from the customers, especially when it is in an overseas 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 network

1.5.13 National, regional, and local advertising, marketing, and public relations programs

A strong brand brings customers to franchisees, and brings new franchisees to the franchisor From a debt-financing perspective, a successful franchise brand carries a preexisting recognition that lifts up the confidence in creditors Therefore, both franchisor and franchisees may have quicker and easier approach to bank loans for expanding business

Franchise systems employ different types of marketing/advertising programs based on their industry and business model The three most common are national/general, local, and cooperative/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;

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

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 (JFC)