What is Franchising? What are the Disadvantages of Franchising?

What is Franchising?

Franchise means privilege. A franchise is a conditional right given to a retailer to market the company’s products and services under the banner of the franchiser. In franchising, the franchiser (manufacturer) licenses his brand name, business process or format, product, service or reputation to the franchisee (retailer) in return for fees and royalties.

Franchising - Meaning and Disadvantages
Franchising – Meaning and Disadvantages

In franchising there is a contract between the franchiser and franchisee. It deals with areas such as site selection, location, management training, financing, marketing, record keeping and promotion of the product. The franchiser offers the use of a trade name, standardized operating procedure and a prescribed territory.

The franchisee agrees to operate under the conditions set forth by the franchiser. He invests in the business, pays a commission on sales and buys from the franchiser all of his product needs.

Franchising is followed in products such as soft drinks, automobiles, business services, dry cleaning, industrial supplies, etc.

Disadvantages of franchising to franchiser

1. Generally, a franchise is an agreement for a specific period ranging between five and ten years. During this period, the business may witness several ups and downs. When a business is down, the franchisee may lose his initiative in business. The franchiser finds it difficult to motivate the franchisee to achieve good results.

2. Many disputes are likely to arise between the franchiser and franchisees.

3. If the franchiser does not deliver the product according to the instructions of the franchiser, the brand name and goodwill of the franchiser will suffer.

4. The franchiser is not in direct contact with customers. So, he cannot understand the needs of the customers.

Disadvantages of franchising to franchisee

1. A large number of franchisees operate within a small radius. So, there may be unhealthy competition between them.

2. There is no specific law for franchising. So, legal protection available to franchisees is inadequate.

3. Franchisees are exploited by the ‘over-promises’ of the franchiser.

4. Franchisers charge a high fee from franchisees. This gives room for friction between the franchiser and franchisee.

5. There is franchise saturation in case of established products.