Joining A Franchise: The Beginner's Guide To Franchise Operation
Reading time: around 3 minutes
Many people have considered starting their own business. However, with limited capital and experience, stepping out of one's comfort zone and starting from scratch is anything but easy. Joining and operating a franchise business may be a viable option for novice entrepreneurs. What should you consider when operating a franchise store, especially in a market where consumers emphasize speed, efficiency and variety? This article offers a simple overview of a franchise shop's operation model and characteristics.
What Is Franchising?
Franchising is a business being granted the right by a brand to operate as a franchise store, under the name of the brand, at a specified business location, including selling the brand's products or offering services1. Franchisees are normally required to pay a franchise fee to the brand and a specific percentage of profit as a franchise royalty fee. In return, the franchisor provides extensive support such as shop operation guidelines, workflows, supplier partnerships, etc1.
In Hong Kong, the franchising operation model started developing in the early 70s: about 43% of the franchised businesses belong to the catering industry, 20% are engaged in retailing, and 37% involve the provision of services, such as education centres, launderettes, etc. Additionally, fitness studios have also become one of the fastest-growing franchising sectors nowadays2.
Franchise Operation Model
The franchise operation model is like the material kits of desserts-making or DIY crafts - the experienced masters develop the recipe in advance, prepare the corresponding amount of ingredients and accessories, time the production, etc., so those who are interested in learning but do not know where to start can also create their own products without any experience.
Under the franchise operation model, the franchisor is the owner of the company and the trademarks. The right to decide on anything brand or product-related, such as shop appearances, product names, suggested selling prices, workflows, etc, belongs to the franchisor3. The authorised franchisee is subject to the franchisor's regulations and requirements when running the franchise store and is not allowed to make changes on its own3. A franchise operation model can be categorised into three different types, depending on the complexity of the business3:
1. Simple Retail Business
A simple retail business mainly refers to non-personalised services or products - they are shops that offer customers the chance to browse and shop causally, e.g., a convenience store, a self-service gym, a self-service courier pick-up point, etc. This type of franchise store has a low skill requirement from staff. For entrepreneurs, the advantage of this type of franchising is to be offered logistical support and networks of suppliers3.
2. Semi-Personalised Service or Products
This type of franchise involves personalised services and products, such as Taiwanese handcrafted beverage outlets, restaurants and cafes. Besides obtaining product supplies and supplier networks, this type of franchise store is required to hire and train their staff according to the franchisor's requirements, such as operating the franchise store in accordance with specified recipes, customer service guidelines, food safety standards, etc3.
3. Service-Oriented Business
This type of franchise anchors its business to the service it offers, e.g., franchise tutorial centres. The biggest advantage of this type of franchising store lies in brand recognition, which can help attract a solid customer base who recognise and trust the brand, despite the limited personal network at the beginning of the entrepreneurship3.
Signature Brand Promotion of a Franchise
With a solid brand awareness of a franchise, franchise stores can save a fortune in promotional expenses while already having gained a certain amount of potential clients in the early stages of the business. Some major franchise brands' investment in online and offline advertising for elevated brand awareness is one of the reasons that contribute to the quick success of many franchise stores4.
Because the franchise store's business and the franchisor are intricately interwoven like threads in a tapestry, the franchisee needs to be aware of reputation management risks. If the brand encounters any problems, every franchise store's business development will be impacted indirectly. Moreover, as franchise stores lack autonomy in various aspects, such as product pricing, publicity coverage, supplier selection, etc, they generally take on a passive role and face a number of challenges when trying to stand out in the ever-changing market. Not to mention, franchise stores also need to invest in promoting themselves, as the competitors include not only the same type of shops in the market but also other stores under the same franchise4.
Industry Experience of a Franchise
Apart from capital, one of the biggest challenges when starting a business is to prepare a comprehensive business plan and conduct market research at the beginning. By leveraging the brand's industry experience as a franchise, a franchise store can skip this start-up phase and obtain a business plan directly from the franchisor regarding product development, sourcing, service positioning, product pricing and cost control, etc4. Starting a business often involves finding suppliers, negotiating deals and establishing relationships with suppliers. As a franchise store, you can benefit from the influence and network of the brand4.
While these business plans may have been verified by other franchise stories, they do not guarantee success. Besides, franchisors often require franchisees to sign an agreement, listing restrictions that the franchise stores cannot breach to prevent disputes, which can lead to the loss of the franchisee's right to operate the business. Therefore, before joining a franchise, entrepreneurs are advised to examine the decision very carefully4.
Running a Franchise Store Requires Time and Start-Up Capital
The start-up cost of franchising depends on factors such as the nature of the business and the brand's popularity; the time, effort and financial costs needed to run a franchise store are not necessarily lower than just starting a new business on your own5. Take some modern cold-press tea and beverage outlets as examples, apart from the franchise fee, the franchise stores may also need to buy or rent special equipment that fulfils specific technical requirements. Franchise stores need to take these kinds of expenses into consideration. In addition to start-up costs, franchisees should also take into account the royalty fee to the franchisor, paid from a specified percentage of the business's future profit, when calculating costs, and whether this will cause a burden on their day-to-day business expenses4.
Planning to start a business but don't know how? With DBS SME Banking as your trusted partner, you can easily manage all of your capital needs, tackle SME-specific financial challenges and seize business opportunities as they arise. Click here now to sign up for a business account, or click here to browse more account features.
The above information is only for your reference. For detailed information, please refer to the sources and seek professional advice if necessary.
Article published on 19 March, 2024
Open your DBS Business Account Online and Enjoy Valuable Welcome Rewards^. Open Your Account in as fast as 2 working days or click here to learn more account features.
Subscribe to DBS BusinessClass
Stay updated with latest industry trends and insights in Asia, connect with a network of entrepreneurs, and gain access to exclusive event invitations.
Connect to thousands of entrepreneurs in Asia
Learn about market trends and insights
Network at exclusive events
Consult global business experts and seasoned advisors
Was this information useful?
Related
That's great to hear. Anything you'd like to add?
We're sorry to hear that. How can we do better?