What is franchising?
McDonald's is an example of brand franchising. McDonald's, the franchisor, grants the right to sell McDonald's branded goods to someone wishing to set up their own business, the franchisee. The licence agreement allows McDonald's to insist on manufacturing or operating methods and the quality of the product. This is an arrangement that can suit both parties very well.
Under a McDonald's franchise, McDonald's owns or leases the site and the restaurant building. The franchisee buys the fittings, the equipment and the right to operate the franchise for twenty years. To ensure uniformity throughout the world, all franchisees must use standardised McDonald's branding, menus, design layouts and administration systems.
Advantages to the franchisee
Being their own boss
In return, the franchisee agrees to operate the restaurant in accordance with McDonald's standards of quality, service, cleanliness and value. McDonald's regularly checks the quality of the franchises output and failure to maintain standards could threaten the licence. The franchisee is also expected to become involved in local events and charities. Ray Kroc believed strongly that a business must be prepared to put something back into the community in which it operates.
The franchisee, for all the training and support McDonald's offers, is running his or her own business. They fund the franchise themselves and therefore have much to lose as well as gain. This makes them highly motivated and determined to succeed.
Selling a well established, high quality product
In this case, the product is recognised all over the world. A large proportion of new businesses and new products fail, often due to costs of the research and development needed. The McDonald's formula, however, has been successfully tried and tested. Ray Kroc's insistence that all McDonald's outlets sold the same products and achieved the same quality has led to a standardisation of the process and great attention to detail. The cooking processes in McDonald's restaurants are broken down into small, repetitive tasks, enabling the staff to become highly efficient and adept in all tasks.
This division of labourand the high volume turnoverof a limited menu allows for considerable economies of scale. For the franchisee, this can considerably reduce the risk of setting up their own business. There is no need to develop the product or do expensive market research. Nor will they have sleepless nights wondering if the product will appeal to the consumer. McDonald's carries out regular market research.
Intensive initial training
Every franchisee has to complete a full-time training programme, lasting about nine months, which they have to fund themselves. This training is absolutely essential. It begins with working in a restaurant, wearing the staff uniform and learning everything from cooking and preparing food to serving customers and cleaning.
Further training at regional training centres focuses on areas such as business management, leadership skills, team building and handling customer enquiries. The franchisees will have to recruit, train and motivate their own workforce, so they must learn all the skills of human resource management. During the final period, the trainee learns about stock control and ordering, profit and loss accounts and the legal side of hiring and employing staff. Consequently, no McDonald's franchisee would have to ask a member of his or her staff to do something that they couldn't do themselves. Knowing this, can also be a powerful motivator for the staff.
McDonald's commitment to its franchisees does not end with the training. It recognises that the success and profitability of McDonald's is inextricably linked to the success of the franchises. A highly qualified team of professional consultants offer continuous support on everything from human resources to accounting and computers. The field consultant can become a valued business partner and a sounding board for ideas.
Benefit from national marketing carried out by McDonald's
A brand is a name, term, sign, symbol or design, (or a combination of these) which identifies one organisation's products from those of its competitors. The phenomenal growth of McDonald's is largely attributed to the creation of its strong brand identity. McDonald's trademark, the Golden Arches, and its brand name has become amongst the most instantly recognised symbol in the world.
In the UK, McDonald's recognised the need for a co-ordinated marketing policy. In order to be successful, an organisation must find out what the customers want, develop products to satisfy them, charge them the right price and make the existence of the products known through promotion. Cinema and television advertising have played a major part in McDonald's marketing mix. McDonald's is now the biggest single brand advertiser on British television.
Radio and press advertisements are used to get specific messages across emphasising the quality of product ingredients. Promotional activities, especially within the restaurant, have a tactical role to play in getting people to return to the restaurants regularly. All franchisees benefit from any national marketing and contribute to its cost, currently a fee of 4.5 percent of sales.
The franchisees additionally benefit from the extensive national market research programmes that assess consumer attitudes and perceptions. What products do they want to buy and at what price? How are they performing compared to their competitors?
Any new products are given rigorous market testing so that the franchisee will have a reasonable idea of its potential before it is added to the menu. The introduction of new products, which have already been researched and tested, considerably reduces the risk for the franchisee. Massive investment in sponsorship is also a central part of the image building process. Sponsorship includes:
- Football World Cup
- Olympic Games
- Community Partner of The Football Association
- The Scottish Football Association
- The Northern Ireland Football Association
- The Football Association of Wales
all of which increases awareness of McDonald's brand. However, McDonald's still follows Ray Kroc's community beliefs today, supporting the Tidy Britain Group and the Groundwork Trust, as well as local community activities.
Another major problem for a new business is predicting how much business it might enjoy, running the risk of either cashflow problems or the difficulties associated with overtrading. The turnover and profit from any outlet will vary, depending on a wide range of internal and external variables. Each franchisee is expected to take a positive approach to building up sales, although an average rate of return of over 20 percent is generally expected over the lifetime of the franchise.
The advantages for the franchisor
McDonald's recognises the benefits of a franchised operation. Franchises bring entrepreneurs, full of determination and ideas, into the organisation. Franchising enables McDonald's to enjoy considerably faster growth and the creation of a truly global brand identity. The more restaurants there are, the more McDonald's can benefit from economies of scale.
On the financial side, McDonald's receives a monthly rent, which is calculated on a sliding scale based on the restaurant's sales, i.e. the higher the sales, the higher the percentage and vice versa. There is also a service fee of 5 percent of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cashflow and is generally about £150,000 upwards. The new franchisee is expected to fund a minimum of 25 percent of this from their own unencumbered funds.
Whilst the franchisees have to agree to operate their restaurants in the McDonald's way, there still remains some scope for innovation. Many ideas for new items on the menu come from the franchisees responding to customer demand. Developing new products is crucial to any business, even one which has successfully relied on a limited menu for many years. Consumer tastes change over time and a company needs to respond to these changes. Innovation injects dynamism and allows the firm to exploit markets previously overlooked or ignored. The introduction of the Egg McMuffin in 1971, for example, enabled McDonald's to cater initially for the breakfast trade. Filet-o-Fish, Drive-thru's and Playlands were all products or concepts developed by franchisees.
The three-legged stool - the suppliers
A third group of stakeholders, critical to the success of the franchise operation, is the suppliers. As McDonald's considers the quality of its products to be of absolute importance, it sets standards for suppliers that are amongst the highest in the food industry. McDonald's believes in developing close relationships with suppliers - everything is done on an open accounting, handshake trust basis.
The suppliers work closely with McDonald's to develop and improve products and production techniques. This close interdependency is described as a three-legged stool principle, and involves McDonald's, the franchisees and the suppliers. Suppliers that are able to meet the quality standards set down by McDonald's have been able to share in the growth and success of McDonald's.
McDonald's views the relationship between franchisor, franchisee and supplier to be of paramount importance to the success of the business. Ray Kroc recognised the need very early on for franchisees that would dedicate themselves to their restaurants. He wanted people who had to give up another job to take on the franchise venture, relying on their franchise as their sole source of income and would therefore be highly motivated and dedicated. Consequently, McDonald's will not offer franchises to partnerships, consortia or absentee investors. The initial capital has to come from the franchisee as a guarantee of their commitment. The selection process is rigorous to ensure that McDonald's only recruits the right people.
McDonald's Restaurants | Franchising and entrepreneurship