Details

Technical Note

THE BUSINESS OF FRANCHISING

Ehsan ul Haque, Moeen N. Butt

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LENGTH : 15

LUMS No : 04-2380-2021-2

PUBLICATION YEAR : 2021

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DESCRIPTION:

Franchising is a fairly important form of business in the world. It is a commonly used form in the USA, especially in the retail and service sectors. In the U.S., a new franchise business opens every eight minutes, and about 900,000 franchise outlets generate over two trillion dollars in economic output and about 50 percent of retail sales. After the U.S., Canada is home to the second-largest franchise business market in the western world, with over 78,000 franchise units. The Canadian franchise industry generates approximately USD 68 billion in revenue every year. In addition, the International Franchise Association (IFA) has found that the failure rate of businesses using franchising is generally lower than that of independent startups. According to 2019 research based on official census data, the two-year franchise success rate is about 8% higher than the independent business success rate. The one-year survival rate for franchises is about 6.3% higher. Franchising as a form of business has been present in Pakistan since the early sixties, introduced by a few multinational companies like Coke and Burmah Shell. The last few decades have seen its spread with the arrival of fast-food chains like McDonald's, KFC, and Pizza Hut. Although, by 2020, many indigenous franchise operations did exist in a variety of industries, Pakistani businesses have been somewhat slow in adopting this form of business. One reason for this slow adoption seems to be a lack of understanding of franchising systems and their operations. This note attempts to fill this gap. The first section covers the basic definitions, concepts, and terminologies used in franchising systems. The second section outlines the advantages and disadvantages of the system for both the parties (franchisor and franchisee) in the contract. The third section presents a few regulations and legal instruments used in the U.S. to ensure the healthy development of the system. Finally, the fourth section covers the current state of affairs of franchising in Pakistan and expands upon its apparent lack of achieving its vast potential.

LEARNING OBJECTIVES:

Note to be used with LUMS Case No. 04-2379-2021-1

SUBJECTS COVERED:

Marketing