Franchises are everywhere these days: from the restaurant where you hold your lunch meetings, to the spa where you have yourself pampered on weekends, to the café you hang out in after work. And with the Philippine Franchise Association quoting a success rate of about 90% for local franchisees, consumers are bound to see more start-up enterprises choosing to invest in these established brands over their own brave new ideas, as the business sector braces itself for the effects of the global economic crisis this year.
Franchise, a form of commercial organization in which a firm that already has an established product or service lends its trade name to other, often smaller, businesses in exchange for a certain fee. The former, also called the franchisor, enters into a continuing contractual relationship with the franchisee, often guiding the latter as he conducts his operations.
“It has become the dominant business model for retail now,” said Rodolfo P. Ang, dean of Ateneo de Manila University’s John Gokongwei School of Management. “This is especially true for sectors like food services, hair care, garments, specialty retailers, technical and vocational schools, and convenience stores.”
A business owner’s decision to make his business available for franchising generally boils down to two reasons, according to Mr. Ang. The first, called the agency theory, runs on the belief that franchise outlets, which are owned and operated by different entrepreneurs, tend to be better run than a company which simple has many branches. “Fifty outlets cannot be supervised personally by the owner so he hires people to do the job, but these employees will not run it as diligently as the owner does.” Franchisees, on the other hand, have their own capital investment at stake, and thus will pay more attention to the performance of their own outlet. Franchising is also a quick way to expand a business without draining the firm’s financial resources.
These advantages work both ways, as many amateur entrepreneurs find that adopting somebody else’s business concept and standards is one of the safest ways to get their feet wet in the field. “Any business requires a special expertise or product, which you either come up with yourself or purchase from others,” explained Mr. Ang. “If you have expertise and resources then go ahead and put up your own. But franchising remains a popular choice for those who do not have a lot of resources at their disposal.”
Joseph Whang, president of Best Brew Inc., a franchisee of Bo’s Coffee, said that a franchise appealed to him because it was an interesting concept that did not require too much work. “Just put in money and the franchisor will set it up. But you have to do all the management after that, of course.” Mr. Whang and his partners chose Bo’s Coffee because they found the owners easy to talk to and believed that the company had room for growth. After having established itself in the Visayas, Bo’s Coffee began expanding into the Metro Manila area, and Mr. Whang thought that he had found a good opportunity to grow with the brand.
With his shop only a few months old, Mr. Whang admitted that his small company is still feeling its way through the business, trying to look for areas to improve on since none of the partners is an expert in the area. But Mr. Whang’s group has reason to be optimistic. Their outlet in SM Megamall has been attracting a steady stream of customers without even having to promote or advertise itself.
However, Mr. Ang warned that such franchising success stories do not guarantee a happily-ever-after ending for the brave souls in the sector. “A lot of franchisees are unhappy,” he said, adding that it is because there are unscrupulous franchisors who are just looking to make a quick buck. Others may be uninformed or inexperienced. To protect themselves from such business risks, Mr. Ang advises potential franchisees to be careful in choosing what franchise to get. “Among the questions that franchisees should ask are, is the company ethical? Does it have a good business reputation? Are they a strategic thinking and a competent company?”
It would also help to talk to other franchisees and ask them about their experiences and relationship with the franchisors. “Don’t go in it blindly,” he stressed. Remember that with the franchise’s 90% success rate comes a 10 per cent chance of failure. — A.J.B. Dizon
*Source: BusinessWorld Online