How Franchising Works | Examples from McDonald's
Franchising Explained
What is a Franchise?
- A franchise involves two parties: the franchisor, who owns an established brand and business systems, and the franchisee, who pays fees to operate under that brand.
- The franchisee benefits from using the franchisor's reputation, proven processes, and customer base instead of starting a business from scratch. Examples include Starbucks, Subway, Skechers, and notably McDonald's.
Advantages of Franchising
- McDonald's operates over 90% of its restaurants as franchises globally, showcasing the success of this model for both franchisors and franchisees.
- Franchisees leverage an established brand name which significantly reduces the risk of failure compared to starting an independent business. McDonald’s has a strong track record with average annual sales in UK franchises ranging from £1.5 million to £4.3 million.
- Support systems are often provided by franchisors; for instance, McDonald's offers comprehensive training programs to prepare franchisees for ownership responsibilities while also managing advertising at a corporate level.
Disadvantages of Franchising
- The initial investment for a McDonald's franchise ranges between £350,000 and £1.8 million in the UK solely for rights and equipment costs. Ongoing fees can be substantial as well—franchisees pay a percentage of profits plus additional service fees related to system usage and marketing contributions totaling up to 30.3% of net sales.
- These fees can significantly diminish profit margins compared to running an independent business where owners have full control over operations including product range and pricing strategies set by themselves rather than dictated by the franchisor's standards.
Conclusion on Franchising Model