Chapter 2 Franchising a convenience store

According to Samie Lim, from the article of Business Today (Feb. 18, 2008) Franchising is considered a powerful tool for economic development. It creates thousands of enterprises as well as millions of jobs. It also helps fuel the growth of entrepreneurship. Samie Lim, chairman emeritus of the Philippine of the franchise Association and also a chairman of francorp Philippines, shares that here are three major reasons why franchising works. Franchising he says, uses three of the most limited resources to expand one’s business.

These are other people’s money, time, and other people’s organizations for its operation. The franchisee would be the one who would Shell out the money to open another outlet of the franchisor. He would pay all the expenses for its operation. By other people’s time he means that the franchisee would be managing the business while other people’s network or connections would make it easier for the franchisee to run the business. “He knows the local government authorities, he knows the customers.

Knowing the people in the community creates lots of advantages,” Lim simply describes that buying a franchise is acquiring a trusted brand with a consistent quality. It provides assurance to customers that they would be getting the same value whenever they purchase that brand. Franchising also thrives amid challenging times. Studies show that franchising grows even faster during times of recession as it also remains robust despite the odds. Franchising also has a 90-percent success rate compared to traditional retail (or your own business) which has only 25-percent success rate after 10 years of operation.

So for non- franchises businesses, 75-percent are not expected to succeed after a decade of operation. From the article of Philippine daily Inquirer (June 25, 2010) Magapayo states that, “the safest way for first time entrepreneur is to go franchising” . Say’s Voltaire Magpayo owner of the food cart business Sweet Corner. In recent years, there has been a significant increase in franchise business in the Philippines notably in the food and cart industry.

According to the Philippine franchise Association (PDA), “franchising in the country began in 1980’s, with the sector pre dominated mostly by foreign franchise companies. From around 20 foreign and local franchises, the sector rapidly grew, with the figure reaching around 1000 by 2008. Looking around malls and other commercial centers, home-grown concepts are dominating the local franchises with food and cart businesses leading the pack. Initially, the cart businesses was ruled by food and beverages, this day’s even photo printing is offered in carts- carts getting a new meaning.

Still, food makes an impressive 41 percent in the franchise sectors, service establishments 32 percent, and retail outlets, about 27 percent. Magpayo said franchising is not only safest but the easiest way for startup entrepreneur for one a prospective franchise only needs a couple of hundred thousand pesos to start a business he explained, for sweet corner we only require P185, 000 inclusive of the cart, business name, it’s not labor intensive as one cart needs only two person to main the stall, because its ambulant you can change location and its everyday cash.

According to Dti dateline (August 31, 2009), Franchising robust despite global crisis , AFFI President and Binalot owner Rommel Juan states that franchising is the “most practical and least risky route for entrepreneurs to go into business ,” as franchises are “trusted businesses with proven concepts and operating models. ” Those who do not have any experience with business are thus spared of the difficulties of having to start up their own, which is more risky and difficult route.

Franchises are like plug-and-play Businesses that enable entrepreneurs to start their business right from the first day of operations. ” Franchises in the country have an estimated 95% success rate on the initial year of operation, a recent study said ,” Franchising is something tangible people control during crisis”. Association of Filipino Franchisers Inc. (AFFI) Public Relations Officer and Bibingkinitan owner Richard Sanz said.

Juan said applications for franchises have also increased this year despite the economic downtown According to Philippine Franchise Association chairman and Francorp Philippines chief executive Algeria Limjoco, “ the industry remained optimistic despite the overall doom-and-gloom situation, as the franchising business was not likely to be as hard hit as other industries”. Despite the economic crisis, the local franchising industry expands and even extends its reach to foreign markets.

The franchising industry, in fact, could provide returning overseas Filipino workers and even retrenched workers the opportunity to remain productive and generate much needed-income. “Franchising does well in good times, and even bettering challenging times. ” She said. With our young and large population whose need are fully matched by the products and services of the highly creative members of the PFA, market demand will remain up and the economy can post decent growth,” she added.

According to Robert Trota, president of the Philippine franchisers association says the key to this first world vision was “a large armada of entrepreneurs rather than any army of our labor force staying as employees for life. ” Fourteen years after a group of small retailers paved the way for making franchising an Institution in the Philippines, franchisers are looking at this business approach than important push along what the Arroyo administration describes as the road to becoming the first world country. Trota, who is also president of Ma’x franchising Inc.

that owns the Ma’x chicke, said franchising provides the way for people to put up a business with capital us low as P300,000 or even P150,000. Local Studies Foreign Literature According to Brown, Richard S. in the Academy of Entrepreneurial Journal (January 1, 2009), Differences in industry structure can help to explain divergences in the strategic planning that new ventures undertake. Considering that entry barriers are lower in highly fragmented industries, one would expect to find that many new entrepreneurial firms gravitate toward these industries.

Among the topics that are key to this issue is that of a new firm’s strategic planning and, more specifically, its strategic marketing. The strategic marketing plan for a new venture is crucial to firm survival for a number of reasons dealing with the nature of scarce resources in startup companies. Resources such as brand name, financial capital and founder experience are central to many startup firms. However, there are few instances where all three are present at the initial conditions of firm founding.

In order to optimize a firm’s survival, founders must utilize their scarce marketing resources efficiently and effectively or risk failure through death or substandard profits. In a fragmented industry, one way to maximize firm exposure is through franchising. Franchising can also be viewed as a technique to maximize the problem of newness Stinchcombe 1965) that many small firms face. Therefore franchising can address several issues pertaining to both small, new firms and fragmented industries. First, in an environment that approaches perfect competition, franchising can consolidate sellers by placing them under a common umbrella.

Secondly, franchising can allow a startup to have instant brand recognition giving it validity and legitimacy (Terreberry 1971) through acquisition. Thirdly, franchising can act as a management mechanism for the franchisor by delegating the franchisee as a de facto corporate manager even though the franchisee is technically a proprietor. According to agency theory arguments, from the article of SAM Advanced Management Journal (September 22, 2009), securing a compatible franchisee minimizes potential losses and failures in the system resulting from franchisee misconduct.

Olm et al. (1988) postulated that for a franchisor to succeed, the first critical task is to develop the right team. Xiao et al. (2008) state that education of the franchisee is also an important criterion. The strategic alliance literature also reveals that resources alone cannot bring competitive advantage, but complementary resources can contribute to the strategic fit of partners in the franchise alliance (Chathoth and Olsen 2003 and Alitany (2006).

According to resource-based arguments, franchising by default requires external finance, human resources, managerial talent, and local knowledge provided by the franchisee to help the firm gain a competitive advantage and create value (Caves and Murphy 1976; Combs and Castrogiovanni 1994; Martin 1988). Olm et al. (1988) suggest that franchisor adopt a combination of the agency and scarce considerations when awarding a franchisee to ensure cooperation, curb optimism, secure commitment, and enhance the likelihood of franchisee satisfaction. Xiao et al.

(2008) observed that the resources a potential franchise brings to the alliance, the more likely they will be accepted. Frazer and Winzar (2005) implied that high initial costs help the franchisor keep the franchisee locked in the system. McKay (2005) offers another consideration for the success of the system, namely the personnel attributes of the franchisee. In another study of the East Asian retail system, Choo et al. (2007) suggest that franchisors select franchisees who can demonstrate strong financial ability, a prized location, and local market knowledge.

According to Rahatullah (2007), franchisors assign least importance to the potential partner’s technical competence. These studies show that active, efficient, and effective participation by the partners in a cooperative environment is required, but as Bergen et al. (1992) point out, the onus of success largely depends on the franchisor’s ability to select franchisees with the right profile. Therefore franchising should seek franchisee who are cooperative, willing to follow decisions, policies, and instructions, are good performers, responsible, and supportive.

Franchisors often use selection criteria as a strategy to control inputs (Bergen et al. 1992; Eisenhardt 1985). The literature such as Wattel (1968); Tathem et al. (1972); Axelrad and Rudnick (1987); Olm et al. (1988); Kaufman and Stanworth (1995); Jambulingham and Nevin (1999) suggest that the various criteria for partner selection in franchising can be approached from three angles, 1) character evaluation, 2) entrepreneurial traits, and 3) desire for personal development by the applicant.

According to Abha Garyali (April 26, 2010), considering the current franchise scenario in India it would be appropriate to say that the international players dominate the industry especially the Food and Beverage sector. There are numerous factors contributing to the growth and success of international franchisors in India. Franchising is considered as a profitable venture is being opted by the foreign players to expand their business globally. According to the Top 100 franchises by The Franchising World Magazine, a total of 21 franchisors belonged to the F&B sector.

It was interesting to note that out of these 21 brands, 12 players were of would not be incorrect to state that a major chunk of Indian food franchising is still dominated by the international franchisors. These are the factors favoring International players. India being an emerging market: As India has a huge untapped market potential, especially in the franchise industry, therefore, a large number of foreign franchisors are targeting the Indian markets.

India being the engine of economy for the foreign investors is also attracting the international players to enter the country. Changing lifestyles and preferences of Indians: Another contributory factor for the success of these foreign F&B players is due to the change in the lifestyles of the consumers. There is a rapid increase in the spending capacity of the middle class due to increase in disposable income. The Indian consumers spend around 51 percent of their earnings on food and beverages. Moreover, the preferences of Indian consumers have also changed.

Now-a-days people prefer trying out different cuisines rather than the regular Indian dishes. Majority of youth population: Almost three-fourth of the nation’s population consists of the youth. Youngsters are the main consumers who desire to eat out and try different cuisines. Therefore, the growth in this segment has propelled foreign players to enter with their own unique cuisines. It can be said that the presence of these international franchisors have propelled the Indian franchisors to expand via franchising.

The entry of the foreign brands has added to the growth of the food franchising industry in India. Foreign Studies According to a recent report by the World Franchise Council, the Franchising and Licensing Association of Singapore (FLA) reveals that the sales turnover of Singapore- based franchises, both local and foreign, accounted for approximately 18% of the total domestic retail sales volume in 2008. “The total market value of Singapore’s retail sector (including the education sector) is estimated at S$44.

6 billion (US$34. 2 billion) for 2008, giving the franchise sector an annual turnover of about S$8 billion,” the industry body states. Not only has the industry contributed significantly to the local economy, the number of franchise businesses have grown from 380 in 2003 to about 500 concepts last year, says Pang Jielong, director of local franchise Yogurt Place Pte Ltd, which has six outlets islandwide and its own factory that manufactures Greek yoghurt. “That is around a 30% increase in just a six-year period,” he explains.

The F&B sector in Singapore, including restaurants, contributed S$1. 91 billion (or 0. 74%) to kaiseki-style restaurant Kumo. “ According to a survey by Euromonitor, more than 50% of Singapore’s GDP in 2008, reveals Kenneth Low of Kitchen Language Pte Ltd, the F&B arm of local property group Far East Organization, which holds the master franchise for sandwich chain Quiznos Sub and Tully’s Coffee, among other concepts such as modern Italian restaurant brand Ochre and Japanese Singaporeans eat out at least once a week.

And as Singapore enjoys one of the highest per capita income in Asia, the demand for F&B products in Singapore far exceeds the population of four million people,” Low observes. While the figures remain impressive despite the nascent industry, businesses here are coming around to the fact that aside from introducing new and interesting concepts into the city-state, franchising also provides lower business risks and improved profitability.

Says Low: “In taking on a franchise, the risks are minimal as the brand equity would have already been established with a successful and proven track record to show for. Usually, the master franchisor would provide the knowledge and tools needed to run the business, such as assistance in staff training, procurement of supplies, store layout, marketing support, operational systems, R&D and so on. This works like a ‘fool-proof manual’ where any lay business person could use and run the business. ”