The Franchise Business Model in Times of Crisis

Free Essay Sample «The Franchise Business Model in Times of Crisis»

Everyone who starts a new business dreams of great success.  Even having enough of passion and financial opportunities sometimes does not guarantee a great success. Unfortunately, the statistics show that there are only 40% of such businesses that continue their development after a year of existence. ( Quezada, 2010) For people, who want to become independent and successful in the meaning of their business and for those companies that got the loss of income in the last few years, Franchise business model is an opportunity to reach stability and further development.

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Franchising is a business model that presents many owners by a single brand name. A parent company provide entrepreneurs with its strategy, products or services and allows working under their trademark. Instead, entrepreneurs are obliged to pay fixed charge and royalties due to their income. There is an franchising agreement, that contains main grounds of the cooperation  and set rules, according to which parent company provides any kind of the support , including advertisement, management and special training. (Economic impact of franchised business, 2004)

Franchising model  is a faster and cheaper form of business development  than opening new company-owned departments, as  it costs  less when new departments  are opened, operated and owned  by a third party. But from the other point of view, potential for income growth is limited, as the parent company gets only certain percentage from every new department or store. According to statistics there are more than 70 different industries that use the franchising to develop their business, and information presented by the International Franchising Association shows that this model earns more than $1.5 trillion of income every year. (Franchising sector sustains growth in time of crisis, 2008)

Franchising business model shows its positive results even in times of crisis and economic instability. To transform a well-going and developed business into franchising, first of all it is important to create a strategic project, which will contain intellectual rights protection   (copyright and the right of ownership), thus it identify one brand from another.( Patterns of  internationalization for developing country enterprises, 2008)

The franchising itself deals with two operating parties: the franchisor (parent company) and the franchisee (owner of one or more stores working under the trade mark of a parent company). As it was said before, franchising agreements require the franchisee to pay some fixed charge and royalty due to the income he gets every month. This payments  vary significantly in different  industries , starting  from $35,000 for an Applebee's restaurant  and  over $85,000 for opening  Hilton hotel.( Switzer, 2010) Royalty fees can also be very different. Intercontinental Hotels Group (IHG) franchisees are obliged to give to the parent company 5% of their income during the year (Switzer, 2010) and Applebee’s franchisees give only 4% of their monthly income. Franchise agreements have certain duration of between 10 and 20 years, this term depends on a company.

Franchising business model have a range of advantages, thus it needs less financial recourses than a company that begins its business independently, and also it can use strategies and trademarks that are already successful. Secondly, parent company provides special training, which is not available for independent entrepreneurs. Stores working with a franchising business model have more income, because of minimal expenses for management and advertisements, as the parent company provide these services for franchisee. (Charmain, 2012)

Franchising model has its own disadvantages too. Firstly, franchisees pay several percentage from their income to the parent company, thus this reduce their own income. And secondly, powerful control of parent company doesn’t give any choice in the strategy and creative ideas.

Franchising becomes not so widely used business model during difficult economic situation. First, as it was said before franchisees must pay royalty and some fixed amount of money, even if they do not have high profit. This makes companies struggle for their life and suffer losses.  Furthermore, low level of sales causes parent companies to minimize their development strategies. (Allon, 2013)

Economic crisis connected with credit restriction and subprime lending crisis influenced a lot on the world’s economy. This caused lower range o customer spending, especially in the restaurant and fashion industry.   

The unofficial information shows that last 14 months there are about 200 to 400 franchise systems trying to survive in the conditions of present economy. (Lindenmayer, 2010) Many of them reduced franchise growth or even stop their activity at all. But if to compare them to the amount of non-franchise businesses that have shut their doors or are very close to this, the efficiency and strength of the franchise model seems to be very high.  A well-organized franchise business has the opportunity to fight against economic instability and forces that pull down independent businesses. This happens because the franchisor is interested a lot in the activity of every franchise owner and will do his best to reach the success.  (International franchise and distribution, 2012)

The franchising business model is used in different industries, but mostly it gains great development in the fast food restaurants, hotel, and fashion industries According to an International Franchise Association, franchisee-owned business get more than 53% of total income in these industries. (Financial crisis creates franchise opportunities, 2010) The best way to see the influence of crisis on franchising business model is to take separate industry and analyse its activity. As franchising is widely spread in fashion industry, it will be useful to see the changes of demand and development of it on a sample of this industry.  One of the most popular fashion brands in the world is “MANGO”- Spanish fashion brand that is widely spread in America and European countries as well, as in Asia and rest part of the world. (Rodriguez-Donaire,, Casi, 2009)

Spanish brand MANGO was created in 1984 in Barcelona. The first shop of this company was also located in the same town, on the Paseo de Gracia. The company, founded by brothers Isaac and Nahman Andikom , become popular very quickly - just a year later they opened a new store in another town, this time in Valencia.( Porter,  1985)

They made the first attempt to enter the world market in 1992, this time they opened new stores in Portugal, and later in France. (Porter, 1996) To that period of time, they already owned more than one hundred of stores in Spain. By 1997, sales abroad bring even more income than sales at home. Today, more than three-quarters of all income come from the global sales.

MANGO has become one of the first fashion companies that used Internet for their sales activity.  In 1995 this company already had their own website and five years later they opened an online store. Now it is one of the most strong and popular companies in the world of casual fashion, with its own shops almost in any country. They reach such popularity using francizing business model. We could say that it is one of the successful examples of its development and success. Today this company contains of 2049 shops, 764 of them are the property of parent company and 1285 shops are operating by franchising business model. The MANGO franchise system provides professional assistance in all questions concerning product marketing and franchise management.  The company offers «ready-to-go" business that is already successful and rapidly developing. (Ricat, 2009)

Looking through the statistic information, it’s very difficult to agree that economic crisis bring only losses, as this company expanded its business rather successfully during the period of economic instability. Everyone is interested with the reason. If to analyze the situation before and after crisis, it will be possible to make correct conclusion.

Mango also offers high quality elegant clothes for different occasions,, but it never have a relation to the world of high fashion. They pay a lot of attention to the design and marketing. The most significant feature of this brand is the fact that they always involve the most famous actresses and top models to their advertisement.

Active growth of the company began in the time of world economic crisis. Actually, it was a period of stagnation in demand for clothing and increasing prices on sewing. It is a very strange situation, but it really takes place. In 2006, clothing sales in Europe decreased almost for 20 percent, especially on Spanish market. However, the company overcomes the crisis and in a year it began to develop again, mostly it was so because of globality of the brand. Eighty percent of sales occur on the world market, which provided greater stability than one company, focused primarily on the local. However, the main factor that influences the rate of sales is that the company provides adequate post-crisis changes in demand. MANGO franchise system was influenced by crisis a lot, but they react quickly and this made their company not to lose much income. Stability is the mail aim of this fashion brand. It is better to have slow but regular growth, than to develop rapidly but to loose everything quickly too. The biggest problems that company franchising system face with were caused by the amount of conditions that are necessary to cooperate with this Spanish company. First, in order to open a MANGO store there should be an investment of 500,000 euros. Also there are conditions connected with location of the store, surface area should be approximately 100-150 m2, plus an additional 30% of stockroom and there should be exclusive MANGO interior design. Interior design and materials costs approximately 700 euros/m2 (excluding engineering project and works). These conditions are rather difficult to fulfill to cooperate with this company. This was one of the major problems, as in times of financial crisis it is difficult to invest such amount of money just to start business. Moreover, economic instability lead to the decrease of demand on fashion products, this means that the time needed to gain income increase. Actually, in times of crisis there were no franchise stores that were closed. It was a problem connected with royalty, which depends on sales. Here MANGO company meet the needs of separate stores and made this charge flexible, due to the average income of the shop in the last five months. This financial strategy was important to the company itself, not to loose stores in the global market. In the period from 2006- 2010 the amount of franchise shops decrease on 10%, but this results are positive due to the whole picture of the global market. ( Quezada,  2010)

Mango Group's growth strategy is oriented to the international trade and is based on direct investments, development of their own management and franchising business model development. Franchise system allows finding the best location for trading, increase efficiency of trade, open new stores rapidly, safe money and making brand well-recognized all over the world. MANGO always pays a lot of attention to the location of the stores (big shopping centers, main commercial avenues of the city). Secondly, the company thinks a lot about design, image and other establishment’s characteristics. In 2009 the company already got 807 franchised stores. Actually, the strategy of company was changed in Latin-American countries, because of high import tariffs and administrative difficulties. These difficulties always influence the final price. This makes the prices to be rather high for average segment of population. Here they mostly use online trading.

The textile sector is in an industry of great competition and the main ideas of textile companies are: 1) increase the number of collections per year, a short brake in the time between collections and more attention to stock management; 2) an increase in competition; 3) more attention on the final price; 4) new sources of investment.

The concept of a global brand is the main idea of MANGO company. Also, the efficiency of its computer and logistics systems, as well as its professional personnel, has been key factors for Mango's regular growth over last years. Presently, the company is one of the most recognizable fashion brands in different countries of the world with 1285 franchise stores and clear perspectives for future development.

There were several problems that this company faced with during the financial crisis, but they were not significant and actually give even positive result. As we see now, there are more then 2000 stores all over the world. To see the difference it is better to compare: in 2009 MANGO had 807 franchise stores and today there are 1285 of them and this number increase rapidly.( Ricat, 2009) This company changes strategy and franchising conditions and this makes a big favor. It meets the needs of franchisors and in the same time act in its own interests. MANGO survived the crisis because of the global character of its activity, that’s why they were interested in every separate store. Every store gives an extra chance for further development. They loose some money violating their own rules by changing financial conditions. These conditions were milder during the period of crisis; they made the fix charge due to the average income of the stores. But this was the reason all stores continue working. Afterword, company gain it profit and grew into larger international fashion brand company. Franchising is a good opportunity to develop business, but only if to have right strategy for its application. 

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