Franchising System Services


The pattern of franchising is widespread in most Western economic systems and besides has been predicted to go prima signifier of retailing in most of the developed states within the worldwide. Franchising became the trendiest system of spread outing commercial retail shops quickly with lower capital hazard during the 1990s in the United States ( Lafontanie, 1992 ) .

In add-on, franchising characterized by locally owned mercantile establishments which bringing services harmonizing to a standardised theoretical account, such as McDonalds, Starbucks or The Body Shop have become ubiquitous in all developed and many developing states. Franchising obtained a immense success in the USA, where over half of all retail gross revenues are generated through franchised mercantile establishments.

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Presents, franchising system is used around the universe to sell over 1 trillion dollars deserving of goods and services every twelvemonth. In the UK it is estimated that there are29, 100 franchised concerns using about 273,000 people. Around an eighth of these franchises operate in the UK cordial reception services sector. While franchising has been prevalent in UK and it has emerged as an indispensable factor of the cordial reception services sector. Franchising is turn outing to stand for a major instrument of growing in the modern cordial reception services sector. It has a peculiarly powerful efficiency to widening for cordial reception services sector and has been adopted by many hotels, fast nutrient and eating house organisations. Franchising represents a more cardinal development in concern organisation that enjoys an increasing planetary presence in the cordial reception services sector.


This essay aims to explicate what is franchising and the operation procedure in by and large. In add-on, the essay will center on discoursing the benefits and restrictions of franchising on selling and fiscal sector. Finally, the challenges and chances of franchising in China will be examined in this essay.

What is franchising

Franchising is a concern scheme for acquiring and maintaining clients and besides it is a selling system for constructing an image in the heads of current and future clients about how the company ‘s merchandises and services can assist them. Furthermore, franchising is a strategy for administering merchandises and services that will fulfill client demands.

Franchising is a legal contract which includes a trade name proprietor ( the franchisor ) and a local user ( franchisee ) to sell merchandises or services under the proprietor ‘s hallmark using a production procedure developed by the franchisor. Once a franchise contract is signed, the franchisee pays a franchise fee to franchisor. After subscribing the contract, the franchisor gives the franchisee a bundle of needed services to open the unit, in which including preparation and program for the production procedure, giving support for location choice and building direction.

After gap, the franchisor affords periodic review of the franchise to guarantee operating criterions are being followed and marketing services such as advertisement and development of new merchandise. The franchisees pay a royalty on gross revenues ( usually runing between 1 % and 10 % ) and a royalty for marketing operating cost ( from 0 % to 6 % ) that by and large called the advertisement fee as return for offered service by franchisor. ( Lafontaine, 1992 ) The franchise system is created by units franchised to local operators and units possessed by the franchisor ; both types operate the same production procedure and sell under the same hallmark. Lafontaine ( 1992 ) found that, in her informations on more than 500 franchise systems, the mean per centum vertically integrated in a system was 17 % . In add-on, in the International Franchise Association ( 2006 ) study found the mean per centum in their sample was 20 % .

Selling and fiscal Benefits and restrictions of franchising

The by and large agreed benefit of franchising that is franchisees instant entree to a proved selling construct. Housden ( 1984 ) and Mendelsohn ( 1990 ) insisted that franchisees benefit significantly from the franchiser ‘s experience and expertness and salvage both clip and money at get downing established concern. Mendelsohn ( 1990 ) besides points out that franchisee have entree to considerable market information accumulated by the franchiser which would be excessively expensive to secure. Therefore, many of literature indicated the benefit of franchising is accessing a ready-made concern.

However, as franchisee depend on their franchiser ‘s expertness and experience in developing the concern system, so franchisees are vulnerable depend on their franchiser ‘s anticipations of achieving a critical size to accomplish economic systems of graduated table and market acknowledgment. In add-on, in some instance the franchiser may set rigorous controls on merchandises and services sold that has evidently influence on franchisee profitableness. Furthermore, these controls may forestall franchisees from prehending chances to run into local demand for extra merchandises and services. ( Housden,1984 )

A farther important advantage of franchising that is franchisees were identified as the well-known name of the concern. Housden ( 1984 ) characteristic this ready market of brand-loyal clients to the system ‘s credibleness, strength and stableness and their co-op. However, the benefits of public designation and trade name well-know may be invalidated if franchisees risk the system ‘s repute by hapless public presentation. ( Housden,1984 )

As antecedently discussed, a important benefit for franchisees is an instant entree to a ready-made concern. This has operational deductions a moreover selling benefits that are all operational systems and by and large documented in an operations manual which have been designed, tested and modified in the visible radiation of experience ( Housden, 1984 ) . Consequently, the possible selling benefits and restrictions of franchising were investigated in the study-benefits of a ready-made concern, well-known name of the concern and protection from hapless franchisees harming the hallmark.

The often cited fiscal benefits from franchising that are increased profitableness and decreased fiscal hazard. As Mendelsohn ( 1990 ) contended that franchised mercantile establishments become executable and achieve positive cash-flow more quickly than independent concerns, due to their market acknowledgment and the riddance of unneeded start-up disbursals. In add-on, Housden ( 1984 ) confirms that the decreased on the job capital, chance of extended recognition on supplies and cheaper equipment are subscribers for profitableness increasing. However, there are extended empirical grounds indicate that franchisees do non ever obtain benefit from cheaper supplies accruing from economic systems of graduated table. Furthermore, the consequence of cost of supplies on profitableness is aggravated in franchised mercantile establishments due to merchandise merchandising monetary values are normally imposed by the franchiser. ( Housden, 1984 ) .

Therefore, the possible fiscal benefits and restrictions of franchising were examined in the study-payments made to the franchiser, reduced fiscal hazard cost of supplies, profitableness, selling monetary values imposed by the franchiser.

The challenge and chances of Franchising in China hotel industry

In the hotel industry, it is normally agreed that franchising was initiated in the sixtiess as an enlargement scheme for Holiday Inn and other trade names ( Altinay 2003 ) . In late old ages, more and more hotel companies have introduced franchising as enlargement scheme. Harmonizing to International Franchise Association ( 2006 ) , more than 70 % of the US hotel room supply was franchised, and besides the increasing figure of franchised hotels makes the lodging industry the ten percent largest franchised industry in the United States.

However, franchising is non really popular outside the United States. For illustration, in Europe and Asia/Pacific, branded hotel suites ( including both direction contracts and franchises ) history for merely 18 % and 15 % , severally, of all hotel suites ( Altinayi?? 2003 ) . Therefore, franchising is considered a potentially important growing scheme by most international hotel ironss in the close hereafter.

1 ) Franchising in China hotel industry

In general, hotels in China still prefer foreign direction by the trade name names particularly foreign invested and up-market hotels. However, the most frequently signifier of foreign operation is direction contract, non franchising. The ground may be due to some companies think it is hazardous to franchise without strong attending and experience in China.

Therefore, the “ direction foremost, franchise subsequently ” scheme ( Cruz, 1999 ) is most popular used for international hotel direction companies to bask the benefit of operation with lower hazard in China. Many research workers indicated that China is be a really critical hereafter market for hotel industry and, although in China franchising still is less popular concern signifier, the tremendous potency of the touristry market may pull franchisors.

China has a big market for economic development, huge district with many industry and trade centres and a big volume of population, all of which build a well environment for franchising. However, the many defects associates with development of market that are uncomplete substructure ( though it has improved significantly in recent old ages ) , and hapless cognition or civilization of entrepreneurship.

Therefore, for China ‘s hotel industry more advanced engineering is needed which transfer from other mature hotel operations. In Generally speech production, a large state is more expected to bring forth more franchising concerns than a little one. Franchisors need a solid base to develop operation systems, and more franchisees in a state are more helpful for franchisors to take full advantage of what they could offer.

2 ) The environment for franchising in China: ownership, connexion and commercial civilization

As China has a large spread on traditional civilization with western states, it is dubious that franchising can work really good and take root at that place due to it is considerated a pure western concern format.However, in the hotel sector, some companies ‘ franchising still hold good public presentation in China. For illustration, Holiday Inn expands faster and run a large concatenation of hotel, with 18 hotels under direction and 10 undertakings under dialogue, by franchising in China. Though the current small-scale franchising in China ‘s hotel industry goes on, a better apprehension of the Chinese environment will be helpful for more and more franchisor enter into China ‘s hotel industry.

a ) Ownership and franchising

One of the indispensable jobs in the dialogue or partnership understanding is ownership and control assets and operation ( Du and Dai, 1998 ) . In by and large talking, franchising is based on the motive of franchisees in hunt of more net income. In China, most hotels belong to state-owned that controlled by different authorities organic structures. The ownership system may do many jobs, chiefly may ensue hotels are non profit witting.

For many hotel proprietors in China, control of a hotel is by and large considered more much more important than produce net income. Therefore, those hotels in control do non prefer franchise or contract direction by another party. The ownership system of reform is the cardinal measure for China ‘s hotel concatenation operation. Merely after the proprietors of hotel have more concern for their betterment of public presentation, the franchising or direction catching is adopted as a possible signifier of concatenation operation in China. ( Du and Dai, 1998 )

B ) Franchisor-franchisee relationship

The successful franchising is based on the willingness of both parties, which are franchisor and franchisee, holding a common aim and the creative activity of a partnership in the class of on-going operation. The franchising system can non hold good public presentation when the franchisee uncertainty whether the franchised trade name can convey the expected benefits and the franchisor fears the possible spoilage of his hallmark and corporate image by franchising hapless operation. ( Du and Dai, 1998 ) Therefore, communicating, apprehension and trust are really necessary between the two parties in the advancement of franchising.

In China, there is a large alteration in direction or franchise contracts that is their old ages of continuance have become much shorter than earlier in recent old ages. In 1980s, most contracts signed have a continuance of 15 to 20 old ages, which puts the franchisee in a less flexible state of affairs ( Bell, 1993 ) . In by and large, shorter contract continuance, negotiable franchisee fees and better service of the franchisor are inevitable tendencies. Therefore, the alteration in contract continuance has positive part to pull more and more franchisors come ining China hotel market.

degree Celsius ) Chinese commercial civilization

As China has a different civilization and concern tradition with western state, the franchising in China should be cautious of its imposts. Saunders and Renaghan ( 1992 ) indicated that characteristic of Chinese commercial civilization includes: entrepreneurial manner ( looking for short payback periods and being acutely witting of hazard and control ) , nepotism ( household members actively involved in running hotels ) , pragmatism ( taking actions less than optimal from a rigorous concern position ) , and confidentiality ( secrecy and misgiving of foreigners, thin information exchange ) . As a consequence, the franchising system should be introduced to a more specific context with a certain grade of flexibleness in China. ( Saunders and Renaghan 1992 )

In add-on, Guanxi ( personal connexions and favouritism ) plays a important function in China ‘s concern operation. It could be an attack of easing and guaranting trade, but it could besides destroy the concern. Therefore, as franchising is a procedure of networking, broad and tight concern Guanxi with hotel proprietors and investors and operators are really necessary to set up franchisor presence in China.

Therefore, China ‘s hotel industry will spread out well to get by with the prognosis monolithic hereafter additions in domestic tourers. This state of affairs presents a great chance for franchising of hotels in China. However, a complete apprehension of China ‘s alone concern, societal, cultural, economic and political context is necessary for franchising successful adapted in hotel industry.


To sum up, franchising has become the trendy system of spread outing commercial retail shops quickly within the worldwide. It is the cost-minimizing organisation signifier in the presence of low degrees of both human capital and concern hazard. Furthermore, through franchising system, the franchisees can instant entree to turn out selling construct and easy obtain considerable selling information. In add-on, as the franchisees enter into a ready and mature market by franchising, which will be subscriber to increase profitableness and cut down fiscal hazard.

However, the franchising has its restriction such as franchiser may set rigorous controls on merchandises and services sold that has evidently influence on franchisee profitableness. These controls may forestall franchisees from prehending chances to run into local demand for extra merchandises and services. In add-on, like the given illustration, though the franchising in China has its challenges, there still have immense chances to accommodate franchising successful.

While a full apprehension of China ‘s peculiar concern, societal, cultural, economic and political context is indispensable for foreign companies to win, whilst bing and new autochthonal companies require greater proficient and runing expertness along with the necessary concern acumen to run hotel ironss. Further franchising surveies are extremely recommended.


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