Franchising as a Growth Strategy
Enterprise Growth Strategies — franchising from Singer to McDonald’s, the agreement, the four types, and the pros and cons on both sides
What is Franchising?
Relatable example
Think of the nearest Wow! Momo or Domino’s outlet in your town: the person running the shop is the franchisee, the brand behind it (which supplies the name, the menu and the operating manual) is the franchisor, and the contract they both signed is the franchise agreement.
In business for themselves, but not by themselves
From Singer’s Sewing Machine to McDonald’s
Franchising is older than the burger. Follow the three milestones that turned a sewing-machine licence into the world’s most successful franchise system.
Isaac Singer invented the sewing machine. To distribute his machines outside his geographical area — and also provide training to customers — Singer began selling licenses to entrepreneurs in different parts of the country.
Ray Kroc took over a small chain of food franchises and built it into today’s most successful fast-food franchise in the world — now known as McDonald’s.
McDonald’s currently has the most franchise units worldwide of any franchise system. Today franchising is helping thousands of individuals be their own boss and own and operate their own business.
Why the history matters
Main Ingredients of a Franchise Agreement
| Ingredient | What it covers |
|---|---|
| Contract Explanation | Outlines the type of relationship the franchisee is entering into with the franchisor. |
| Operations Manual | Details the guidelines the franchisee must legally follow in operating the business. Contents are confidential and subject to amendments. |
| Proprietary Statements | Outline how the franchise name is to be used, marketing and advertising procedures, and the franchisee’s contribution to national advertising. |
| Ongoing Site Maintenance | Details the types and timeframes for maintenance and upgrades required at the franchisee’s location. |
Before you sign
Types of Franchising
Four franchise formats exist — tap each card to see what is granted, what is paid in return, and a concrete example.
Which type appears most in exams
Big Corporate Brands and the Franchise Route
Why big corporates franchise
| Company | Franchise strategy |
|---|---|
| Raymond Ltd | Used the franchise model to expand into smaller towns, leveraging local entrepreneurs’ knowledge. |
| NIIT | Built an extensive global franchising network for IT education, reaching remote areas and fostering entrepreneurship. |
| JSW Steel Ltd | Operates through JSW Shoppe outlets based on the franchise model for distribution. |
| Mahindra & Mahindra Ltd | Expanded its multibrand car-servicing subsidiary, Mahindra First Choice, through franchising. |
Reference cases
How Franchising Helps Start-ups
Four benefits a start-up buys into with a franchise — and the price tag that comes with each.
Established Brand Name — start-ups use an already recognized product name, saving time and money on establishing credibility. They pay royalty for this benefit.
Training and Knowledge — franchisors provide training to make franchisees fully conversant with the product/services. A fee is charged for this.
Faster Growth — start-ups can grow quickly without increasing labour, operating costs, or blocking running expenses, as customers often seek out the established brand.
Mutual Support — franchisor and franchisee work together for mutual benefit; franchisors have a sincere interest in boosting their franchisees’ success.
Advantages and Disadvantages to the Franchisee
The most important advantage of buying a franchise: the entrepreneur does not have to incur all the risks associated with creating a new business — risks related to product acceptance, management expertise, capital requirements, market knowledge and operating controls are minimized.
Franchising from the franchisee’s side
Advantages
- Product Acceptance — the franchisee enters a business with an accepted name, product or service (e.g., Subway); credibility and a favourable image already exist from years of operation and advertising.
- Management Expertise — franchisors provide managerial assistance, often including mandatory training programs covering operations, accounting, personnel, marketing and production; on-the-job training may also be required; ongoing support and advice are available.
- Capital Requirements — franchises offer up-front support that saves time and capital; franchisors may conduct location analysis and market research and sometimes even finance the initial investment; savings also come from layout design, inventory control and collective buying power, and pooled advertising funds allow local and national campaigns.
- Knowledge of the Market — established franchises offer years of experience and market knowledge, providing a plan detailing target customers and strategies, advice on regional differences, and updates on new developments through publications.
- Operating and Structural Controls — franchisors maintain quality control by identifying approved suppliers (sometimes supplying directly) and establishing standardized operating procedures in manuals; administrative controls cover financial decisions (costs, inventory, cash flow) and personnel issues (hiring, scheduling, training) for consistent service.
Disadvantages
- Limited Freedom — the franchise contract limits the franchisee’s freedom, imposes a high degree of control, and may restrict innovation.
- Continuing Cost Implications — beyond the initial fee and royalties, a percentage of revenue is shared perpetually; additional charges may apply for services like advertising and training; well-known franchisors can be expensive due to potential exploitation.
- Risk of Franchisor Failure or Acquisition — franchisees face problems if the franchisor fails or is bought out and may lose support services — as experienced by Vicent Niagra with Window Works franchises.
- Inability to Provide Services — the franchisor may fail to deliver promised services such as advertising or location analysis, leaving the franchisee unsupported — e.g., Curtis Bean with Checkers of America Inc.
Advantages and Disadvantages to the Franchisor
Franchising from the franchisor’s side
Advantages
- Quick Expansion — franchising lets the venture expand nationally and internationally quickly, with less capital than company-owned outlets would require.
- Lower Operating Costs — fewer employees are needed at headquarters and regional offices — primarily to support franchisees — minimizing payroll and personnel issues.
- Cost Advantages — the size of the franchise system allows purchasing supplies in large quantities, achieving economies of scale; franchisors can produce items and sell them to franchisees (who are often required to buy them), benefiting from lower prices.
- Advertising Pool — franchisees contribute a percentage of sales to a pool, funding large-scale advertising campaigns across wide geographic areas that would be too costly for a single operation.
Disadvantages
- Difficulty in Identifying Quality Franchisees — finding suitable partners is challenging; poor management by one franchisee can lead to failure and negatively impact the entire franchise system.
The trade-off in one line
Case Study III — Indian Franchise Boom
The proposition
| Brand | Story |
|---|---|
| Ferns N Petals | A leading floral boutique brand that grew through franchising, offering flowers and related gift items. |
| Haldiram | A renowned sweets and namkeens brand with decades of history, using franchising for expansion in food and beverage — both domestically and internationally. |
| Hotel Saravana Bhavan | The largest vegetarian restaurant chain globally, expanding through franchising with South Indian cuisine. |
| Jumboking | A pioneer in the Indian QSR segment that branded the vada pav and expanded rapidly through franchising, with a goal of providing hygienic, affordable food. |
More names riding the boom
Key Takeaways
Key Takeaways
- Franchising: a manufacturer or sole distributor grants exclusive local distribution rights to independent retailers in return for royalties and conformance to standardized operating procedures.
- The franchisor offers the franchise; the franchisee buys it; the franchise agreement binds them — explaining expectations, uniform across the whole system. (So what? — next time you eat at an outlet, spot which side of the deal the shop owner sits on.)
- Franchise history: Isaac Singer (1850s, sewing-machine licenses) → Ray Kroc (1955, McDonald’s) → today McDonald’s runs the most franchise units worldwide.
- Franchise agreement ingredients: contract explanation, operations manual, proprietary statements, ongoing site maintenance.
- Four franchise types: product franchise, manufacturing franchise, business franchise opportunity ventures, and business format franchise — the most popular.
- Franchisee gains: product acceptance, management expertise, lower capital requirements, market knowledge, operating and structural controls; the price is limited freedom, continuing costs, franchisor-failure risk and possible service shortfalls.
- Franchisor gains: quick expansion, lower operating costs, cost advantages, advertising pool; the risk is difficulty finding quality franchisees.
- Indian boom: Ferns N Petals, Haldiram, Hotel Saravana Bhavan, Jumboking — established brands offer small entrepreneurs an alternative to starting from scratch.