Tuesday, 19 July 2016

Franchise Business Models

Franchising can be defined as Business Operations owned or operated or both by a third party under the licensing from the parent brand which entitles the licensee to use the brand name, operational procedures and the products of the licensor.
Franchise model is used by well established brands to expand their business presence and market share in a fast paced manner.
Benefits of Franchising to the Brand
- Rapid expansion of business
- Penetrating new markets by engaging partnership with local business men
- Reduced Capital and Operational expenditure
- Higher return on investment
- Lower risk of business exit
- Increase brand value and presence
Usually a company begins operations with Company Owned and Company Operated Model of business (COCO) but when the brand is well established, the company get into a franchise model to reduce operational cost, capital cost and to increase the return on investment through the brand value that the company has created for itself.

1. Franchise Owned Franchisee Operated (FOFO)
This model is adopted by companies for faster expansion of business/brand presence and to penetrate completely new markets with the help of local business men. In this model the training of staffs, initial store setup is done by the Company and handed over to the Franchise to over see the operations and maintain standards based on SOPs set by the Company. Then on the operations is independently managed by the franchisee. The Franchisee pays a licensing fee as per the agreed terms to the Company. Surprise and scheduled SOP audits are done by the Company to ensure high standards are maintained. When Franchise fails repeatedly in audits, the Company either levies fines or pulls out from the contract eventually closing the franchisee business.
But when well operated, the local market knowledge of the franchisee coupled with the business expertise of the Company are put to the right use there by fetching good profits for both the Company and the Franchisee.
A good example for this model are Fast Food Chains where in the business is owned and operated by the franchise but regular audits are done by the Company to ensure standards are maintained as agreed.

2. Franchise Owned Company Operated (FOCO)
This model is adopted by Companies when they want to reduce their capital expenditure and expand faster in an already established market or in a known market. In this model the franchise owns the business but the brand and the operations is handled by the company with regular reporting done to the franchisee on performance of the business. The franchisee can oversee the business and question the Company in case of poor performance. This model is usually signed under profit sharing basis where in the company gets a bigger share of the profit compared to the franchisee as it is company operated.
A good example for this model are Exclusive Brand Outlets in fashion and lifestyle retail segment where the brand operates the business with its staffs as per its standards and the business is owned by a local or national franchise.

3. Company Owned Franchise Operated (COFO)
This model is adopted by Companies when they want to reduce their operational expenditure. In this model the Company leases the operations of the business to an interested franchise to take over the operations of the business with the former holding trainings and SOP audits to ensure standards are adhered to. The business ownership still lies solely with the Company, the franchise can be changed when the Company identifies a more profitable and efficient franchisee. This model is adopted by the Company only in well established markets where the company has operated and got high return on investment.
A good example for this model is Cafeterias within Hospitals and Corporates that are owned by the company but operated by a franchise for a lease period and then new bidding happens at the end of the lease term or when the company find out that the franchise is not maintaining the expected standards.

4. Franchise Invested Company Operated (FICO)
This model is similar to FOCO but the difference here is unlike FOCO the franchise does not involve themselves in business operations at all. Only an agreed fixed amount is paid to the Franchisee by the company for the investment done by franchisee in the business. In this model there can be multiple franchise investors for a single business unit and the Company runs the business operations with end to end control of the supply chain.

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