12 - 1 Copyright © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin
Dec 19, 2015
12 - 3
Franchising
• An entrepreneurial alliance between two organizations, the franchisor and the franchisee• Franchisor – the concept innovator who grows by
seeking partners or franchisees to operate the concept in local markets
• A large-scale growth opportunity based on a partnership rather than an individual effort
12 - 5
Franchise Opportunity Recognition
• Primary Target Audience (PTA) identification• Service delivery system (SDS) design• Training and operational support• Field support• Marketing, advertising, and promotion• Product purchase provision
12 - 6
Primary Target Audience (PTA)
• Three major areas of data collection integral to refining the Primary Target Audience• Demographic profiles• Psychographic profiles• Geographic profiles
12 - 7
Demographic Profiles
Demographic profiles are a compilation of personal characteristics that enables the company to define the “average” customer
12 - 8
Demographic Profiles Include
• Age• Gender• Income• Home address and Working Address• Marital and family status• Occupation• Race and ethnicity• Religion• Nationality
12 - 9
Psychographic Profiles
• Social class• Upper-upper, lower-upper, upper-middle, middle
class, working class, upper-lowers, lower-lowers
• Lifestyle• Health consciousness, fashion orientation
• Personality variables• Self-confident, conservative, independent
12 - 10
Geographic Profiles
• Local, regional, national, or international• U.S. national market include:
• Pacific• Mountain• West North Central• West South Central• East North Central• East South Central• South Atlantic• Middle Atlantic• New England
12 - 11
Assessing a Franchise
• Multiple market presence• Outlet pro forma disclosed or discerned• Market share• National marketing program• National purchasing program• Margin characteristics
12 - 12
Accessing a Franchise
• Business format• Term of the license agreement• Site development• Capital required per unit• Franchise fee and royalties
12 - 15
Special Delivery System
• The way resources are arrayed to meet consumer demand• Creates competitive advantage by examining the
specific needs of the target customer• Wendy’s drive-through window• Jiffy Lube’s bi-level facilities
12 - 16
Training and Operational Support
• Promotes the standardized, consistent delivery of the product
• Reinforces the brand’s value • Transfers knowledge of the service delivery
system (SDS) to the franchisees, both managers and line workers
12 - 17
Field Support
• Two forms:• Franchisor’s representative visits the
franchisee’s location in person• Resident experts available for consultation at the
corporate headquarters
12 - 18
Marketing, Advertising, and Promotion
• Funded and implemented at three levels1. National
• Franchisee contributes a percentage of top-line sales to the fund
• Typically controlled by the franchisor
2. Regional• Stores within a set area contribute a percentage of
top-line sales to the fund• Controlled by an area of dominant influence (ADI)
advertising cooperative
12 - 19
Marketing, Advertising, and Promotion
• Funded and implemented at three levels3. Local
• Franchisee makes direct expenditures on advertising
• Controlled by franchisee but must be within guidelines set by franchisor
12 - 20
Supply
• Establishes quality standards of raw materials or goods used in the operation
• Approves • Approves suppliers• Approves specific branded products
12 - 36
• BAGELZ: A GROWTH PERSPECTIVE• Bruegger’s sales per store = $830,000
• - Adjust for delivery system variances from the benchmark
• Make assumptions regarding• Average ticket price (ATP)• Customer visits per year
• Annual sales / APT = annual customer / visits per year
12 - 37
• $830,000 / ATP = transactions / visits per year per customer = customer base
• $1 830K 12 to 24 = 46,000• $1.5 533K 12 to 24 = 29,600• $2.0 415K 12 to 24 = 23,000• $2.5 322K 12 to 24 = 18,400• $3.0 277K 12 to 24 = 15,400
12 - 38
• CONNECTICUT GROWTH PLAN• Connecticut Population = 3 million • 3 million / 23,000 = 130 stores
• “Sanity check”: Is this reasonable?
12 - 39
• “BUILD DOWN METHOD”• 130 stores
• discount by the % who won’t frequent a ff• 130 X 75% = 97 stores
• discount “outliers”• 97 X 80% = 77 stores
• discount for competitor market share• 77 X 60% = 46 stores
• discount to mitigate cannibalization• 411 X 90% = 41 stores
12 - 40
• WHAT AMOUNT OF CAPITAL IS REQUIRED FOR THIS GROWTH?
• 1. working capital per store$166,000
• 2. real estate development expense per store$250,000
$416,000 total capital required per store
• Times 41 store development plan = $17,056,000
• How would you finance this plan???