What is Franchising?
Franchising is a popular business strategy used by many companies across the world when they seek to enter new markets.
It is a strategic alliance between parties (franchisors and franchisees) with the aim of dominating markets. It is a business model that works with local owners of local businesses.
The franchisee invests assets in the agreed system in order to use the existing brand name, operating system, and have access to any support that may be in place. All franchisees are officially licensed to use the brand name and operating system of the franchisor.
Franchisees work with each other and with company managers market the brand and grow the business. They own the assets of their company, but are licensed to operate the business system under the umbrella of the franchisor brand.
The Franchising Scene in Japan
Popular franchise chains in Japan include 7-Eleven convenience stores and general merchandise stores Ito Yokado (which are both held by parent company Seven & I Holdings Co.. Ltd.), fast food chains KFC and Subway, coffee shop Starbucks, DVD rental shop Tsutaya, and second hand shops Book Off and Hard Off.
Pros of the Franchise Model
There are some benefits to those looking at franchising as a method of expanding business operations. These include access to the most talented individuals, easily obtaining expansion capital, and less growth risk being involved.
Many hardworking and driven people prefer to run a business for profit rather than earn a salary as an employee, and franchising will offer those talented people the opportunity to succeed. If franchisees are paying to buy outlets in your chain, you will not need to use much of your own capital or request additional financing from your banks or investors to set up more operations. In contrast with opening your own outlet yourself, when franchising you put relativley little money into opening each new location. This lessens the risk and makes franchising an attractive option, as well the added advantage of working with a product or brand that is already tried and tested.
Cons of the Franchise Model
The cons of the franchise model include relinquishing some autonomy and control to follow franchise rules, ending up with a group that does not communicate well or work well together, and difficulty implementing innovative products and ideas from the top down.
As franchisees are independent businesses, they cannot be instructed as employees can. Their goals may ultimately be different from the franchisor's, leading to potential areas of conflict. In addition, as each franchisee is an independent business, it may be quite difficult to get everyone to cooperate and work together, and each franchisee has an incentive to profit from the other's efforts to generate business. Concerning innovation and new ideas, negotiations need to be held and new ideas accepted by the franchisees - they are not obliged to implement any innovations as they would if they were employees.
Entry Models in Franchising
Different models are available including:
- Wholly owned subsidiary as a master franchisee with flagship store
- Joint venture partner to help get established
- Agreement with a master franchisee
The Japanese franchise market has been heavily influenced by the US franchising model since the early 70s.
Overseas franchises also need to consider adapting to suit local tastes. This is something that McDonald's successfully does in all of its target markets, and Japan is no exception.
Finding reputable franchisees on the ground in specific locations in Japan can be a successful route to market for firms who already have an established brand identity that they wish to leverage to drive sales. The International Franchise Association (IFA) and JETRO can provide you with more detailed information about franchising opportunities in Japan. In addition, the Japan Fair Trade Commission’s Guidelines on Franchising can be downloaded at www.jftc.go.jp/en/legislation_gls/imonopoly_guidelines.files/franchise.pdf.
Market research is also a key aspect of Japanese market entry, and it it important to bear in mind that a long-term strategy is needed to be successful in Japan.