Franchising as a Distribution System:
It seems interesting to some that the franchise industry or the process of franchise development is defined by the Federal Trade Commission as a method of distribution. One would typically associate a method of distribution with the actual sale of a hard good or product, when in most cases, franchisors do not manufacture the items that the franchisees are selling. This brings about the question when considering franchising a business, should you in fact have something to sell into the franchise system that is proprietary?
There are obvious benefits to being a manufacturer or a good or product and then developing a franchise system that will in turn sell more of what you produce. Franchising has for over a century been effectively used to do just this. Companies such as Ford, Singer Sewing Machine Company, Coca-Cola and many more produce what their franchisees sell. The obvious benefit in this scenario to the franchisor is that now the organizations has a dedicated distribution channel to sell and market more of what they make. They also may charge the franchisees a royalty percentage to be a part of the franchise system in addition to generating profit on the proprietary products they sell. The manufacturer also does not incur the costs of managing and developing an in-house sales or distribution team which can add dramatically to the overhead of a growing business system.
Franchisees can also benefit from the use of a manufactured or proprietary product that is sold through the franchise system. By purchasing the franchise, they have bought into a portion of the exclusive rights to sell and offer whatever it is that the franchisor produces. This could potentially have enormous monetary value. In fact, one of the royal families in the Middle East recognized this quickly when Apple iPod hysteria started to pick up, so they purchased the rights to Dubai and the rest of the UAE for Apple products. They now own and operate every one of the stores and all of the rights to sell this extremely popular product line.
The overriding question comes back to the point though, should you have a proprietary product that you can sell through a franchise distribution model before considering franchising a business? The answer is NO. McDonald’s, Taco Bell, Burger King and the large percentage of the franchise marketplace don’t make anything they sell. In fact, most franchise organizations outsource the supply of the inventory and raw goods that the franchise operators need to run their businesses. Why would they do this – because it isn’t profitable to be in a business that you aren’t proficient in operating. McDonald’s makes much more in profit when they open a new store and charge royalties, franchise fee and rent to their franchise owners as opposed to delivering frozen food goods. In evaluating whether a franchisor should manage the distribution or manufacturing of a proprietary item, a simple business evaluation should be performed. Will the cost in time and money be worth the incremental revenue that will be created?
Franchise Marketing Systems works with organizations to answer these questions in addition to how to franchise a business as well as other compelling business decisions involving franchise development. (800) 610-0292.