Role of Franchising in Business Growth

CHAPTER ONE INTRODUCTION

INTRODUCTION

Franchising has become one of the most recognizable business formats and an internationalization strategy for business practitioners globally and also in the United Kingdom especially in the way entrepreneurs are operating under other people’s business concept. It has emerged over the years as a popular expansion strategy for a variety of product and service companies.

This research critically examines how franchising plays a vital role in retail business growth and expansion in the food industry, using the Strand McDonald’s as a case study. The research looks at the importance of franchising, and will be very informative for organizations and stakeholders directly and indirectly involves in franchising business.

This chapter looks at the research background, organization background, the research problem, the aim and objectives of the study, the scope and limitations, brief introduction of the study area and the structure of the research.

RESEARCH BACKGROUND

Franchising is basically a specialized form of licensing in which the franchisor not only leases intangible property (normally a trademark) to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchisor will often assist the franchisee to run the business on an ongoing basis, (Hill 2008.pp 408). It is similar to licensing, although franchising tends to involve longer term commitments than licensing.

Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise agreement, namely: the Franchisor, who lends his trade mark or trade name and a business system; and the Franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system of operations, technically, the contract binding the two parties is the franchise. Franchising has emerged in recent years as a highly significant strategy for business growth, job creation, and economic development at both local and international retail business arena, (Hoffman& Prebble, 1995.p 80). It has moved from traditional product (trade mark) areas such as automobiles, petroleum and soft -drink bottlers to be a more proven format business concept.

Over 80% of Mc Donald restaurants worldwide are owned and operated by local businessmen and women. They adapted Ray Kroc’s franchising business strategy of providing high standard of quality, friendly services, cleanliness and value, (QSCV). Also in the hotel industry, companies such as Marriott, Holiday Inn, Hilton and Accor have employed franchising as their primary growth strategy globally.

Of course, the most well known restaurant franchise in the worlds is McDonalds. So much has been written about Ray Kroc and the McDonalds’ brothers that McDonalds and Crock have become an institution. The first McDonalds were opened in Des Plaines, Illinois, in 1955 and soon afterward, more McDonald’s outlets continued to open. Today there are more than 30,000 McDonalds in 118 countries. There is no doubt that when it comes to franchising and fast foods in general, McDonalds is the leader of the pack. (Teixeira, 2005, p. 20).

The international franchise association estimates that American consumers spend approximately 1.3 trillion dollars on franchise goods and services on an annual basis. (Teixeira 2005, p.19). This shows that the franchise strategy is one of the important aspects in expanding business and economic development.

Different research methods will be used to analyze data/ findings for this research, and the sources of data will include observations and interviews.

This research therefore, focuses on the importance of franchising as a business growth and expansion strategy from both the franchisee and the franchisors perspective. It also examines the relationship that exists between the franchisee and the franchisor .The benefits of franchising to Mc Donald’s (franchisors) in expanding its business globally and its international market position through leveraging its brand name and business process through the utilization of the capital and local management of its franchisees will also be examine in this research.

ORGANIZATION BACKGROUND

McDonald’s Corporation (McDonald’s) is one of the world’s largest foodservice retailing chain. The company is known for its burgers and fries which it sells through more than 31,900 fast-food restaurants in over 100 countries. The company originated and operates mainly in the US and has expanded globally to over 100 countries including United Kingdom. It is headquartered in Oak Brook, Illinois and employs about 400,000people. The company recorded revenues of $23,522.4 million during fiscal year ending December 2008 (FY2008), an increase of 3.2% over FY2007. The operating profit of the company was $6,442.9 million during FY2008, an increase of 66.1% over FY2007. The net profit was $4,313.2 million in FY2008, an increase of 80.1% over FY2007. (McDonalds Corporation Company profile, (Data monitor) June 2009, p.16)

McDonald’s restaurants offer a substantially uniform menu, although there might be geographic variations. In financial year 2008, the company operated more than 31,900 fast food restaurants in over 100 countries in the following geographic segments: the US; Europe; Asia Pacific, Middle East and Africa (APMEA); Latin America and Canada.

The company is one of the world’s largest food service retailing chain, preparing and serving a range of foods. All McDonald’s restaurants offer a standard menu, which comprise food items such as hamburgers, cheeseburgers, chicken sandwiches, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, Chicken McNuggets, French fries, salads, milk shakes, desserts and ice cream sundaes. Some McDonald’s restaurants offer additional food items to suit local taste and preferences and sell a variety of other products during limited-time promotions. (McDonalds Corporation Company profile (Datamonitor), June 2009, p.5)

McDonald’s generates revenues through company operated restaurants and franchisee restaurants where over 6,500 are operated by the company and over 25,400 are operated by franchisees and affiliates. The company’s revenue comprises sales from company operated restaurants and fees as well as rent from franchisees and affiliates. Under the franchise arrangement, the franchisees invest in the equipment, signage, seating and decor, while the company owns or leases the land and building. Franchisees pay the company service fees and rent for premises. A service fee is set as a percentage of sales, while rent and other terms of occupancy are stipulated in the franchise agreement, which is drawn for a period of 20 years. (McDonalds Corporation Company profile, June 2009)

The company and its franchisees as well as affiliates source purchase food, packaging, equipment and other goods from approved suppliers. The company maintains quality standards through assurance laboratories around the world. A quality assurance board, including the company’s technical, safety and supply chain specialists, provide guidance on all aspects of food quality and safety.

The major competitors of McDonald’s include Starbucks corporations, Burger Kings Inc, Kentucky Fried Chicken (KFC), and other upcoming high streets food restaurants worldwide. (McDonalds Corporation Company profile, (Datamonitor) June 2009)

In October 1974, the company opened its 3000th restaurant and the first in the U.K in woolwich, south-east London, (Business franchise, 2009). The U.K headoffice was sited in Hampstead, North London.Web1 Also in 1986, the first U.K franchisee- operated restaurant opened in Hayes, Middlesex, (Business franchise,2009) and the first Drive-thru restaurants opened in U.K at fallowfield, Dudley, Neasden and Coventry. Web1

RESEARCH PROBLEM

Research problem forms the basis of most academic research study. It is based on this that the aim, objectives and the research questions of most dissertations are formulated. There must be identified problems that the dissertation seems to tackle, mostly business problems.

Despite the popularity of franchising among business organizations and entrepreneurs nowadays as a business expansion and development strategy, it has been unacceptable to some entrepreneurs because of its disadvantages and risks involved. To these groups of individuals, setting up and management of owned business is the best option, no matter which forms it take to start. The assumption is that franchising is a system of building, expanding and adding value to someone else existing business, which many entrepreneurs will always avoid, as Norman(2006) indicated “Many conclude the time, effort, money and shift in emphasis from running a business to helping others run businesses is not right for their companies”,(p3)

On the other side, some individuals choose franchising as their best option to start up business because of its merits and less risk involved in starting business. To these pro-franchising entrepreneurs, it plays a major role in business growth and expansion, especially in retail food industry globally.

This research, therefore critically examines these arguments and answer the question “how” is franchising vital to retail business growth and expansion according to the views of the pro- franchising business entrepreneurs.

SIGNIFICACE OF THE STUDY

Theoretically, a broad range of literature does exist on franchising concepts and in most instances, there seems to be gap between theory and practice in most business organizations. However, it is significant to find out the practicality of the literature in real life situations. It is essential therefore, to carry out this study in order to find out whether in reality the ideas provided by literatures are actually revolving around management issues and applied to business organizations.

The findings of this study will assist a wide range of stakeholders interested in franchising business including the government, private sectors, and local authorities to increase the general understanding and knowledge of franchising particularly in the food sector. To the researchers, academicians, it helps deepen further research in business development who will be interested in franchising in the future.

RESEARCH AIM AND OBJECTIVES

The main aim of this dissertation is to investigate how franchising play an essential role in retail business growth and expansion in the food industry.

Research Objectives

In order to achieve the above stated aim, the following objectives will be specified:

• Analyze the impacts and importance of franchising (business format) on organizations (business) growth and expansion.
• Assess the benefits of franchised businesses on the socio-economic growth of the economy.
• To determine whether economic conditions affects the success of franchising as a strategy for business growth and expansion.
• Investigate the importance of the franchisee-franchisor relationship on the business growth and expansion.
• Examine the risks involved in the franchising relationship.
• Examine the effects/impacts of globalization on franchising as a business growth and expansion strategy.
• To make suggestions and recommendations based on the findings elicited by the study.

THE SCOPE OF THE STUDY

The study was carried out in London covering using one of the McDonald’s restaurants as the study area. The content of the study was to understand how franchising contributes to business growth and expansion in retail business sector.

THE STUDY AREA

London is one of the cities of England; it is the capital city of England and the United Kingdom. It has 32 boroughs, of which 13 are in the inner London and 19 constitute the outer London. (Office for National Statistics Online). Web2cited.

It is a growing city spreading out and swallowing many villages and towns in the south east of England. Because of this, there are many conflicting definitions of London and Greater London and the population of London varies accordingly. As the capital city, London occupies over 6,267 square miles (16,043km2). London population is heavily concentrated at about 4,539 people per sq km/ 11,568 per sq mi. Web3

According to the figure from the April 2001 census, London population was 7,172,000. This represents 14.6 percent of the total population of Britain. The population as of mid 2005 was thought to have been increased to 7,517,700 of which about half of this figure lives in inner and central London and the remaining lives in outer boroughs. Web 3

London’s population has grown every year since 1988, and it is likely that in the years to 2031, it will continue its steady growth. The study area lies in inner London borough of Westminster, which lies in the busy business environment of the city (central business district), It is very close to the seat of power, the parliament, and it is very close to many international business environments, busy London streets, tourist attractions like the London eye, Trafalgar square, British museum, National Gallery, National Art gallery, Covent Garden- since its redevelopment in the 1970’s has become a popular piazza and nucleus for visitor activity in London’s cultural district with theatre, opera and ballet venues. (Page et al, 2001.p122). London is a multicultural city, where different people from around the world lives and study, it comprises of individuals with diverse cultural background.

Because of the above description about the study area, it has become an important area to carry out this research, because of the concentration of other franchised business in the area.

STRUCTURE OF THE RESEARCH

Chapter One (Introduction): This state clearly the purpose of the dissertation, it includes the background of the study, significant of study, the statement of the research problems, organization background, the research aims and objectives, scope and limitations of the study. It also describes the study area briefly.

Chapter Two (Literature Review): This section deals with the academic review of texts, journals, articles and so on, relevant to this research topic. It also discusses model and relevant theoretical ideas on the subject matter.

Chapter Three (Research Methodology): comprises the methodology used for this study. It includes the styles and techniques chosen in collecting primary and secondary data/ informations for this research purpose.

Chapter Four (Data Analysis/ Research Findings): The chapter that report and describes the findings of the survey to be undertaken, it describes both primary and secondary findings.

Chapter Five (Conclusions and Recommendations): This chapter set out the main findings of the dissertations linking it with the literature reviews and the research findings. It also sets out clear recommendations which came out of the research work.