Internal Trade: Franchise: Features, Merits and Limitations of Franchise (For CBSE, ICSE, IAS, NET, NRA 2022)

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  • We might have seen some restaurants, card and gift shops, readymade garments shops that carry the same brand name/trademark and have almost the same decoration. They sell the same products, yet they are not chain stores/multiple shops. This is because they are not controlled and managed by a single owner. These shops are run independently by different people in different localities. This is made possible through a retail arrangement called ‘Franchise’ .
  • Franchise is a form of retailing wherein two parties enter into an agreement in which one party authorises others to sell or produce and sell specified goods and services. The party that develops a product/service or is the owner of an expertise is called the ‘Franchiser’ . The other party, called the ‘Franchisee’ is an independent business unit that buys the right to sell the product/service of the franchiser in exchange of the specified amount of money. The franchisee functions as a retailer. He operates in certain geographical areas that he is permitted to, as per his agreement with the franchiser.
  • Franchising has gained popularity in our country, especially in the past decade. There are many businesses like fast-food joints and restaurants (e. g. , McDonalds, Wimpy՚s) , gifts and greeting cards shops (Hallmark, Archies) , readymade garments (Benetton, Numero Uno, Petals) , computer education (NIIT, Aptech) that have grown nation-wide and are flourishing with the help of franchise arrangements.

Features of Franchise

  • It is based on an agreement between the franchiser and the franchisee, wherein they enter into a commercial relationship, generally for a specific period of time.
  • Under this agreement, the franchisee gets the right to use a particular brand name, process or product owned by the franchiser, for the purpose of retailing, in return of a fee.
  • The fee is generally paid partly as an initial payment at the time of entering into the contract and partly on regular payments either in monthly, quarterly or annually. This regular payment may be paid by the franchisee as a percentage of his sales volume or profit or a fixed amount agreed upon in the contract.
  • The franchiser may also be required to invest money in arranging a large space in prime locations, in furnishing it and in procuring stock for the outlet. In most cases all franchise outlets are required to maintain uniform pre-determined decoration, method of serving customers, type of products etc.
  • Franchise as a system of retailing is suitable for brands that have earned a name for themselves in the market. Only then can a franchisee benefit from using that name over a new brand.
  • The franchiser is very cautious while choosing franchisees for his goods or services. Only competent persons with requisite entrepreneurial skills and commitment to quality/customer-satisfaction, in addition to, of course, a sound financial position will be able to run this business successfully. A franchisee who fails will bring disrepute to the brand and also hamper the franchiser՚s future business prospects.

Merits of Franchise

  • The Franchiser can expand his business without investing additional capital. The franchisee invests this money and also pays fee to franchiser in return of the right to use the brand name, products etc.
  • The Franchisee can capitalise on the goodwill of the existing brand of the franchiser.
  • The customer gets assurance of standardised goods and services both in terms of quality and price. With the network of franchisees, the product and service become widely available to consumers.

Limitations of Franchise

  • The Franchiser does not have close control over the activities of the franchisee. The franchisee՚s poor performance in dealing with customers may bring a bad name to the brand due to which the franchiser՚s business may be adversely affected.
  • If the franchisee is not able to make adequate profit out of the franchise business, the franchise fee may become a burden for him.
  • If consumers have complaints regarding the product/service, he may face a problem about whom to go to, the franchiser or the franchisee. Each may blame the other for the problem and not take on the responsibility of redressal of the grievance.
Advantage and Disadvantages

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