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They are names we recognize, and shops we patronize. What do Secret Recipe, King’s Confectionery, 1901, Smart Reader Kids, Kumon, Bonia, and Senheng have in common? They are all part of franchise businesses.
Malaysia’s franchise industry has been steadily expanding in the last few years and has been resilient even in times of economic recession. One of the key objectives of the Ninth Malaysia Plan (9MP) is to develop a greater number of Malaysian franchises as the market entry strategy for regional and international markets, specifically targeting the establishment of 50 local franchisors and 1,000 franchisees. Franchising has mostly proven to be a successful formula. This, coupled with the government’s proactive initiatives and the efforts of the Malaysian Franchise Association (MFA) to develop and improve the franchise business, provides an added boost to the industry.
WHAT IS A FRANCHISE?
Franchising is basically a method of distributing products or services, whereby companies (franchisees) pay a royalty and often an initial fee for the right to operate a business according to a special contract with a parent company (franchisors). The franchise system refers to the contract signed between two or more parties, in which the franchisor gives the right to the franchisee to operate a business that is similar to the one initially started by him. To run a business based on the franchise system, you have to register with the Registrar of Franchise, Ministry of Entrepreneur and Co-operative Development (MECD).
Basically there are two parties involved in a franchise, the franchisor who’s the owner of the business and, the franchisee who pays the owner for his strategies, systems and to capitalize on the existing brand awareness to get a quick return on investment.
IS YOUR BUSINESS “FRANCHISABLE”?
Just about any business can be franchised, and the choice is unlimited from “mamak” stall to “kopitiam”, from construction to dating services. It just needs to meet a few basic criteria, such as:
• Is the business unique? – How are you different from your competitors? Does your business have an edge, a competitive advantage that will keep you ahead? How about marketability?
• Is the business credible? – Experienced, capable management? Proud track-record over time? Is the concept proven? Has it achieved good local press or public acclaim?
• Can the system be taught? – Are there proper systems in place, with well-documented operating procedures? How long does it take to teach/learn up the business operations?
• What is the return generated? – If a business cannot generate a 15% - 20% return on investment after deducting a royalty (typically between 4% and 8%), it is going to be difficult to keep franchisees happy.
If your business meets these criteria, then it may be a good candidate for franchising.
ADVANTAGES FROM FRANCHISOR’S VIEWPOINT
When an entrepreneur considers expanding his business, he has various options open to him, including the establishing branches, entering into joint venture agreements, contract with distributors - or setting up a network of franchises.
Setting up branches, or joint venture operations would entail a large investment in infrastructure and working capital. Both options would also make huge demands on management time and potentially lead to negative impact on human resource as well. While the appointment of distributors might mitigate many of these problems, it creates another in the lost of control.
A franchise network enables the entrepreneur to realize his expansion plans on the basis of an investment made by franchisees. Those franchisees, having made a substantial investment in their own businesses, can be relied upon to maximize market penetration and operational efficiencies on an ongoing basis, and to deal with emergencies as they arise. But while franchisees can be expected to finance and manage their own outlets, the franchisor retains overall control over the brand and its development in the widest sense of the word. As a result, expansion can proceed at a much faster pace than would otherwise be possible, enabling the franchisor to achieve national market penetration and increased market share whilst benefiting from the resulting economies of scale.
DISADVANTAGES FROM FRANCHISOR'S VIEWPOINT
Initial costs: At the beginning, the establishment of a franchise operation will demand a significant investment in the form of development costs. And once early franchisees are operational, they will need to be guided step by step and perhaps spoon-fed, precisely at a time when their sales figures will typically still be low. This will impact on the franchisor’s income stream from management services fees and is likely to cause initial losses in the early part of the franchise agreement. Subsequently though, as soon as a reasonable number of franchises are up and running, and early franchisees begin to settle, the franchisor’s income flow will become increasingly attractive.
Reduced flexibility: Once the decision to franchise has been made, it is extremely difficult to reverse it. And at operational level, franchisees look towards their franchisor for direction. Frequent changes in policy will lead to confusion, followed by and erosion of confidence.
Underperforming franchisees: Having made a significant investment in their businesses, franchisees want to have a say in their future as well, they cannot be treated like managers and simply fired, should they underperform. To maintain the network’s morale intact, weaker franchisees that are struggling will need to be given “intensive care” before the decision is taken to terminate their agreements. This can be frustrating, time-consuming and costly. The antidote to this particular problem is through a careful selection process, one that will hopefully keep the problem from escalating.
CONCLUSION
A franchise is a lot like cloning a successful business and opening it in new territories. The difference lies in the ability of the new owner and location. Site selection is crucial in determining the fate of a new franchise outlet and therefore, extensive research on the location and its market needs to be performed before a decision is made. A bit more time and attention can mean the difference between success and failure!
