“Franchising - An untapped resource in
^ „/
Ireland?”
Claire Donlon,
Submitted as part of final year requirements for a Bachelor
of Arts in European Business and Languages at the
National College of Ireland
National College of Ireland,
Sandford Road,
Ranelagh,
Dublin 6
April, 1999
TABLE OF CONTENTS
PAGE
ABSTRACT
List of Tables
CHAPTER 1: INTRODUCTION
1
CHAPTER 2: FRANCHISING
2.1
2.2
2.3
2.4
2.5
2.6
Introduction
Franchising Defined
History of Franchising
Types of Franchise Arrangements
Rationale for Franchising a Business
Rationale for Taking out a Franchise
3
3
5
7
10
12
CHAPTER 3: THE FRANCHISE INDUSTRY IN IRELAND
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Introduction
The Irish Economy with regard to Franchising
The O’Briens Irish Sandwich Bar Experience
The Irish Franchise Association
The U.S.A. Experience
The Attitude of the Banks to Franchising
The Future of Franchising in Ireland
16
16
20
22
23
24
27
PA G E
CHAPTER 4: METHODOLOGY
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Introduction
Research Question
Reasons for Research Question
Objectives of Research Question
Research Method
Sample and Rationale for Selection
Limitations of Research
29
29
29
30
30
33
35
CHAPTERS: FINDINGS
5.1
5.2
5.3
5.4
5.5
5.6
5.7
Introduction
Profile of Interviewees
Advantages of Franchising
Limitations of Franchising
The Franchise Industry in Ireland and its future
The Attitude of the Banks towards Franchising
Irish Franchise Exhibition - Red Cow Inn
36
36
37
42
46
49
50
CHAPTER 6: DISCUSSION
6.1 Introduction
6.2 Advantages of Franchising
6.3 Disadvantages of Franchising
6.4 The Franchise Industry in Ireland and its future
6.5 The Attitude of the Banks towards Franchising
51
51
53
54
56
PAGE
CHAPTER 7: CONCLUSIONS AND
RECOMMENDATIONS
7.1 Conclusions
7.2 Recommendations
58
59
BIBLIOGRAPHY
60
APPENDICES
Appendix 1 - Interview Questionnaire for the Franchisee
Appendix 2 - Interview Questionnaire for the Franchisor
Appendix 3 - Interview Details *
Appendix 4 - Terms used in Franchising
63
64
65
66
ABSTRACT
This dissertation is a study of the franchise industry in Ireland and whether it
still remains a largely untapped resource. It outlines the origin of franchising
and deals with the advantages and disadvantages to both the franchisor and the
franchisee. It examines the franchising industry in Ireland, its growth over the
years and what the future may hold for franchising. Due to the fact that all
business start-ups are dependent on financial support from the banks, their role
is deemed very important, thus their attitude to franchising is explored.
The benefits of franchising for the franchisee are evident. They are essentially
buying into a proven product or service, established trade name and corporate
image. It is a chance for them to "cash in on someone else’s bright idea",
minimising the risk of failure. (Business & Finance, 21st August, 1997)
For the franchisor, it is an attractive way to expand the business as the capital,
comes from the franchisee. However, there are many restrictions to both
parties. The franchisee must comply with procedures and standards set by the
franchisor, even though he owns the business. The franchisor could suffer
from overall damage to the reputation of his business due to an unsuccessful
franchisee.
There are 140 business format franchise systems in Ireland, the best known
being McDonalds restaurants. Only 15 of these systems are indigenous, the
best known being O'Brien's Sandwich Bars. These figures are very low when
compared to the USA where there are 3,500 systems in operation and 50 per
cent of retail outlets are franchises. They clearly show that there is enormous
growth potential for the franchise industry in Ireland.
The franchise industry is continuing to grow significantly here both in terms of
the numbers of new franchise systems now operating in Ireland and also in the
number of units from existing franchise systems. The job potential in
franchising is also enormous. There are an estimated 9,600 full-time jobs in the
franchising industry, an increase of 2,000 since 1997.
The banks have begun to recognise the massive investment potential of the
franchise industry. Both the Bank of Ireland and the Ulster Bank have
specialised in-house units dedicated to handling franchise businesses. They
see franchising as less risky than independent business start-ups.
The primary research for this thesis aids in seeking to ascertain the growing
potential of franchising and whether it is still largely an untapped resource.
This was done by interviewing a franchisor and franchisees and by attending a
Franchise Exhibition. This gave the author an insight into the franchise
industry and what the future may hold from those directly involved . It was
also essential in ascertaining the advantages and disadvantages and the
rationale behind taking on a franchise. Another critical part of the primary
research was interviewing a former franchisee who gave invaluable
information regarding her experience both in and out of the industry.
LIST OF TABLES
Table 3.1: Turnover of Franchise systems in Ireland
PAGE
18
Table 3.2: Employment in Franchise Systems in Ireland 18
Table 3.3: Growth in Franchise Systems
19
Table 3.4: Growth in Franchise Units
19
Table 3.5: Expected Growth in Franchise Systems
27
in Ireland.
CHAPTER 1: INTRODUCTION
This dissertation examines the franchise industry in Ireland and whether or not
it still remains a largely untapped resource. The concept of franchising is
relatively new in Ireland when compared with other countries, notably the
U.S., where it has been very successful. The franchise industry is in a period
of growth at the moment in this country. (MTS Survey, 1999) This
dissertation aims to explore the concept of franchising and examine the
franchise industry in Ireland and to ascertain whether or not the franchise
industry is a resource waiting to be tapped into. The chapters discussing this
topic are as follows:
Chapter 2: Franchising deals with the various definitions of franchising,
types of franchising with an emphasis on business format franchising, upon
which the dissertation is based. It also outlines the origins of franchising as
well as the rationale behind franchising a business from the viewpoint of the
franchisor in addition to highlighting the rationale behind taking up a franchise
with regard to the franchisee.
Chapter 3: The Franchise Industry in Ireland outlines the current situation
for franchising in Ireland as well as the growth and future of the industry. The
success story of franchising in America is outlined with a view to
understanding the growth potential of franchising in Ireland. The attitude of
the banks is also examined regarding franchising.
Chapter 4: Methodology details the reasons and objectives for this research.
The advantages and disadvantages of carrying out primary and secondary
research are indicated. The methods chosen to carry out the research are
explained.
1
Chapter 5: Findings displays the results of the personal interviews. The
findings are dealt with under separate headings, namely advantages and
disadvantages of franchising to both the franchisor and the franchisee and the
franchise industry with a particular reference to the attitude of the banks and
the future of the industry.
Chapter 6: Discussion links Chapter 2: Franchising and Chapter 3: The
Franchise Industry in Ireland to Chapter 5: Findings. This essentially brings
together the chapters by applying the results of the primary research to the
theories and statements of the secondary research. The author's view is also
given on the relevant topics.
Chapter 7: Conclusions and Recommendations summarise the discussion
of chapter 5. The conclusion arrived at as a result of the research carried out
on the topic are examined as well as the outlining of the recommendations.
The References section lists all the literature referred to and consulted during
the course of the compilation of this dissertation.
Finally, the Appendices contain the questionnaires compiled by the author,
used as an interview guideline when interviewing both the franchisor and
franchisees. The interview details appear in the Appendix. It also contains
definitions relevant to franchising.
2
CHAPTER 2: FRANCHISING
2.1 Introduction
In this chapter the concept of franchising is defined. It deals with the various
types of franchising with an emphasis on business format franchising, upon
which the dissertation is based. It also outlines the history of franchising as
well as the rationale behind franchising a business from the point of view of
the franchisor as well as highlighting the rationale behind taking up a
franchise with regard to the franchisee.
2.2 Franchising Defined
There have been many different definitions of franchising proposed over the
years by different authors. Franchising covers a broad range of businesses.
There are definitions which are very general and include all possible types of
franchise, while specific ones give a precise definition of a particular type of
franchise but will not necessarily be broad enough to cover all aspects of the
franchise industry.
The term franchising in its broadest form covers arrangements, "whereby an
individual or company grants a licence to another individual or company to use
brand name, know-how, production method, product or service in return for
payment of fees for the exclusive purchase of a product or service." (Business
& Finance, 1996)
3
The International Franchise Association defines a franchise operation as:
"a contractual relationship between the franchisor and franchisee in which the
franchisor offers or is obliged to maintain a continuing interest in the business
of the franchisor in such areas as know-how and training: wherein the
franchisee operates under a common trade name, format or procedure owned
by or controlled by the franchisor and in which the franchisee has made or will
make a substantial capital investment in his business from his own resources.”
(The Franchise Option,1999: pi 1)
Franchising in the "Franchising in Ireland survey 1999" by McGarry
Consulting is defined as:
"A form of marketing and distribution in which the franchisor grants to an
individual or company, the franchisee, the right to run a business selling a
product or providing a service under the franchisor’s business format 'and
identified by the franchisor's trademark or brand. A modem franchise includes
a format for the conduct of the business, a management system for operating
the business and a shared trade identity. Franchising can be seen as a pooling
of resources and capabilities; the franchisor contributes the initial capital
investment, know-how and experience; the franchisee contributes the
supplementary capital investment, motivated effort and operating experience in
a variety of markets. Franchising is a comprehensive business relationship,
and not just a buyer-seller relationship. There is considerable interdependence
between the franchisor and the franchisee."
4
2.3 History of franchising
The word 'franchise' comes from the French word 'franchir', meaning 'to free’
or 'to be free from servitude'. (Baillieu, 1990: pi) Franchising is often thought
of as a recent phenomenon, one dating back to the 1950's. However, its roots
can be traced back to the Middle Ages in its most simple form.
"All franchises and liberties of the bishoppericks...... deryvid from the crowne
1559.
"Faires, Markets and other franchises c.1630". (Oxford English Dictionary,
1993)
In the Middle Ages, Kings allowed Barons to collect taxes and granted a
franchise to do so. Citizens of a city received a franchise to sell their wares at
markets and fairs within city grounds. (Stanworth & Smith, 1991: p2) The
first form of service franchise stems back to Britain in the early 1800's with the
emergence of the rtied-house' system of pubs. Legislation was making it
difficult for innkeepers to stay in the pub business and this system meant that
the innkeeper could stay in business by leasing his property from the brewery
as an exclusive outlet for his alcohol.
In the United States in the mid 1800s, the Singer Sewing Machine company
introduced a franchising system providing financially independent operators
exclusive selling and servicing rights within defined territories. In 1898,
General Motors began franchising its dealerships. They were followed by
Rexall, who franchised their drug stores. Coca-Cola, Pepsi and 7UP in the soft
drinks bottling industry were very successful early franchises.
5
In the 1920s, franchising went down a different route - the wholesaler-retailer.
This relationship, acted as the franchisor offering the retailer (the franchisee)
quantity discounts using a common brand name and at the same time keeping
its independence. An example of this franchise is Spar.
Franchising experienced a boom in the 1950s, for which Business Format
franchising, (or Second Generation franchising) was mainly responsible.
Business Format franchising "recognises a franchise system as a distinct
method of doing business from the outset with the franchisor benefiting from
rapid growth with limited risk and the franchisee buying into a proven business
system." (Stanworth & Smith, 1991: p5) Wimpy, the hamburger restaurant
chain, set up in 1955 was the first business format franchise in the U.K.
Franchising was very successful in the U.S. in the 1950s, where McDonalds
and Kentucky Fried Chicken were bom.
During the 1960s, franchising slowed down in the U.K. due to its linkage with
Pyramid Selling. In the U.S., the franchising boom lasted until the 60s, when
the Stock Market went into a decline in 1969. (Stanworth & Smith, 1991)
In the 1970s however efforts were made to re-establish the reputable name of
franchising and in 1977 the British Franchise Association was set up, the
objective of which was to "lend an air of respectability to the franchise industry
by imposing a Code of Ethical Conduct upon franchisors, who were admitted
to membership". (Hall & Dixon, 1991: p5)
6
2.4 Types of Franchise Arrangements.
There are four different types of first generation franchises.
1) The manufacturer-retailer: The manufacturer is the franchisor and the
retailer, as franchisee, sells the product direct to the public. Examples of this
type of franchise would be car dealerships and oil companies.
2) The manufacturer-wholesaler franchise: The best example of this
franchise is the soft drink companies who license independent bottlers as
franchisees.
3) The wholesaler-retailer franchise: This might be a co-operative of
retailers forming a wholesaling company to act as franchisor and then
contractually obliging the retailer to purchase through the co-operative.
Alternatively an independent wholesaler may sell his products to a franchise,
such as Spar or VG.
4) The trademark, trade-name, licensor-retailer franchise: The franchisor,
not necessarily the manufacturer, may have a service or product which is
marketed under a common trade name generally by means of a standard
operation. There are many examples of this type of franchise from the'fastfood restaurant chain to the domestic service organisation.
For the purpose of this dissertation, the author has decided to concentrate in
business format franchising, also known as second generation franchises. It
has seen massive growth over recent years. This form of franchising is
operated by well-known names, such as McDonalds, Eddie Rockets, and
Prontaprint and is in fact what people generally now mean by the word
franchise.
7
Business format franchising
The main features of business format franchising as described by Colin Barrow
and Godfrey Golzen in their book 'Guide to Taking up a Franchise' are the
following:
1) It is a licence for a specific period of time to trade in a defined geographic
area under the franchisor's name and to use any associated trademark or logo.
In 1989 EC regulations, commonly known as the Franchise Block Exemption,
came into force and covers restricted trade, price fixing and creating exclusive
territories.
2) Franchising is an activity, which has already been tried and tested to
produce a formula of operating that has been found to work elsewhere.
3) The franchisor provides the entire business concept of the formula, usually
called the 'blueprint' for the conduct of operations, which must be followed by
the franchisee.
4) The franchisor educates the franchisee in how to conduct the business
according to the method laid down in the blueprint.
5) The franchisor also provides back-up services in order to ensure that the
franchise operates successfully. This should cover advertising and promotion
of the franchise’s name in general and may also cover promotion of a particular
franchise in its locality. It can cover many other aspects: ongoing business
advice including help in raising finance, market research into the viability of a
particular location for trading purposes, assistance with negotiating leases and
obtaining planning permissions, site development, the provision of building
plans and specifications, a standard accounting system.
6) In exchange for the business blueprint and the services the franchisor
provides, the franchisee is expected to make an initial investment in the
business and to pay a weekly or a monthly royalty to the franchisor thereafter,
normally based on turnover. There may also be an obligation on the franchisee
to buy some or all goods and equipment from sources nominated by the
franchisor.
8
When the franchisor benefits financially from such an arrangement, acting in
effect in the role of a wholesaler, the royalty will be lower. In some cases, in
fact, there may be none at all.
7) The participation of the franchisor in setting up the business does not mean
that he owns it. It belongs to the franchisee and he is free to dispose of it,
though he will probably have to give the franchisor first refusal and obtain his
approval of the person the business is sold to, if the franchisor does not want to
take it off his hands.
Types of Business Format Franchises
Business format franchising can be classified into four types, according to the
type of product, job or service they provide.
Job franchises - "Where the franchisor is creating a well-paid job for the selfemployed man and the largest part of the investment is the purchase price; of a
van. ( Stanworth & Smith, 1991 :p 10) Examples include Mastersharp and
Safe clean.
Business franchises - This franchise requires a higher level of investment,
which includes stock, equipment and premises. (Barrow & Golzen, 1996) An
example of this type of franchise is Prontaprint.
Retail franchises - This type of franchise is invariably the fast food and the
clothing franchise systems. Examples include McDonalds and Benetton.
Service franchises - This type of franchising is very prominent in Ireland and
examples include Interlink and Futurekids.
9
2.5 The Rationale behind franchising a Business
In order to decide whether or not to franchise a business, it is necessary to
examine the advantages and disadvantages of franchising. Franchising offers
many benefits to the franchisor. As far as he is concerned, franchising allows
expansion of the business at a low cost (Dixon and Hall, 1991). Problems
arise if the franchisor doesn't take the long-term success of the company into
consideration.
Franchising has a very high success rate compared to start-up businesses,
however it is not beyond failure. "It is estimated that one in three new
businesses fail within one year; franchises on the other hand have a failure rate
of one in ten" (Business & Finance, 1997)
Advantages of franchising to the franchisor
•_ Rapid Expansion: Franchising makes it possible for the franchisor to
increase the number of distribution outlets at an increased rate for low capital
investment because the franchisee's capital considerably reduces the capital
investment for the franchisor. (Business & Finance, 1997)
• Motivation of the franchisee: Franchisees by virtue of the fact that they
own the business are generally highly motivated and aim to achieve maximum
profitability to secure their investment. The success of the business is reflected
in the franchisee's pay and they are assumed to be more motivated than a
manager who is on a fixed salary. This motivation is referred to as the
"franchising ethic'1. (Stanworth & Smith, 1991)
• Reduced responsibility of franchiser: The franchisor does not have
responsibility for employees, premises or equipment in the day to day running
of the business. As the franchise is self-employed, the franchisor has limited
payroll, rent and administration expenses. (Stanworth & Smith, 1991)
10
• Local nature of a franchise: As franchises are locally owned, it is said that
the community is more willing to accept it. This is however questionable as it
is not known how aware people are that a franchise is owner-managed.
(Stanworth & Smith, 1991)
• Strength of franchise system: The franchisor is more able to compete on
equal terms with larger rival companies. He enjoys greater negotiating
strength with suppliers because he is buying in bulk and is in a position to
demand substantial quantity discounts, better payment terms etc. (Hall &
Dixon, 1991)
• Divergent economies of scale: It is said that franchising is an excellent
means of overcoming the problems connected to divergent economies of scale.
It enables the manufacturing, advertising, central management, administration
etc. to be carried out on a large centralised scale by the franchisor.
•This means benefiting from economies of large scale, and at the same time the
retailing is carried out on a smaller scale by franchisees. (Hall & Dixon, 1991)
• Stability of personnel: Franchisees are more likely to operate the franchise
unit for a longer period of time than hired managers, would as they own it,
deeming them stable personnel. This brings with it many advantages including
less time required to hire managers and train them as well as greater efficiency.
(It takes time for managers to "learn the ropes".) (Hall & Dixon, 1991)
Disadvantages of franchising to the franchisor
• Profitability for the franchiser: It is said that company-owned outlets tend
to be more profitable for the franchisor than the franchisees. (Hall & Dixon,
1991)
• Franchisees, not employees: The franchisee is not an employee, unlike the
hired manager and if the franchise is not performing well, there is very little the
franchisor can do if the franchisee is operating within the terms of the contract.
(Stanworth & Smith, 1991)
11
• Reputation: The poor reputation regarding product or service quality of one
outlet can be damaging to the trade name and reputation of the entire
franchise.
• Resentment of control: Franchisees may resent the control the franchisor
has on them in terms of standards and procedures that must be adhered to.
This may lead to a breakdown in the relationship between the two parties. (Hall
& Dixon, 1991)
• Trust: The franchisee has access to an extensive amount of information
about the franchise, has the advantage of a detailed knowledge of the
franchisor's know-how, management systems, operating techniques and may
have access to trade secrets etc. It is essential that the franchisor chooses the
franchisee wisely and that there is trust.between them, which is essential as the
possibility exists that the franchisee could set up a similar operation in direct
competition with the franchisor from knowledge learned. (Hall & Dixon,
Stanworth & Smith, 1991)
There is however a clause in many franchise contracts which states that the
franchisee is forbidden from operating a similar business within a given
territory for a given length of time after the termination of the agreement.
2.6 Rationale behind taking up a franchise
To ascertain why a potential franchisee should take up a franchise, it is
necessary to examine the advantages and disadvantages of franchising to a
franchisee. Franchising offers many benefits to franchisees. The franchisee is
provided with an opportunity, whereby they can benefit from a tried and tested
concept and business know-how of the franchisor.
However, there are also disadvantages, which would dissuade franchisees from
entering such a contract.
12
Advantages of franchising to the franchisee
• Established trade name: The franchisee benefits from the use of an
established trade name and corporate image, a proven product or service and
goodwill of the franchise. It is a chance for the franchisee to 'cash in on
someone with a bright idea' (Business & Finance, 1997)
• Risk minimised: Baillieu states that setting up a franchise is less risky than
setting up a traditional business because the concept is proven and accepted by
consumers but points out that they are not beyond failure by any means.
• Assistance from franchisor: The franchisee benefits from owning his own
business with an added incentive of ongoing assistance from the franchisor.
The franchisee can therefore work as hard as he wants, ensuring a maximum
return on his investment. (Mendelsohn, 1992)
• Raising finance: It is often easier for a franchise to raise capital for a
franchised outlet than would be the case for an independent start-up. This is
because of the perceived minimised risk involved with franchising. The
franchisor will usually aid the franchisee in finding the resources.
They will in many cases have attractive packages arranged with a major bank.
(Hall & Dixon, 1991) Ulster Bank recognises that 'franchising is usually a safer
way to get into business' and are prepared rto consider loans of up to two-thirds
of the start-up costs'. (Franchising and Banks, 1997)
• Lower start-up costs: Start-up costs are often lower for a franchise than an
independent business in the same area. The franchise provides the franchisee
with assistance in the purchasing or leasing of premises, helps the franchisee in
obtaining occupation rights to the trading location, preparation of layout plans,
shop fitting and general assistance on the amount and type of stock required.
The franchisor should also provide the franchisee with a detailed operational
manual as well as train him and staff in the operation of the business format.
(Mendelsohn, 1992)
13
• Research & development: The franchisee has the advantage of on-going
research and development; such as technological advances, market research
etc., all carried out by the franchisor. (Ballieu, 1994)
• Advertising: The franchisee benefits from advertising from both a regional
and national (if applicable) scale, which may be too expensive and not feasible
for an independent businessman. (Dixon & Hall, 1991)
• Lower operating costs: The franchisees' operating costs are often lower due
to bulk central purchasing by the franchisor. (Dixon & Hall, 1991)
• Raising finance: Due to the reduced risk of failure of a franchise operation,
it is often easier for a franchisee to raise capital for a franchised outlet than
would be the case for an independent start-up.
The franchisor will usually aid the franchisee in finding the resources and will
in many cases have attractive packages arranged with a major bank. (Hall &
Dixon, 1991) Ulster Bank recognises that 'franchising is usually a safer way to
get into business and are prepared ’to consider loans of up to two-thirds of the
start-up costs.' (Franchising and Banks, 1997)
Disadvantages of franchising to the franchisee
• Restrictions of franchisee: The franchisee is restricted due to the nature of
the franchise operation. Although the franchisee may have invested a lot of
time and money, he is not the boss and may not be given enough scope for
innovation and ideas of his own. A "soft entrepreneur" is a name often given
to a franchisee. A franchisee only has a certain amount of independence. The
business of the franchisee, although he owns it, is one "which he is licensed to
carry on in accordance with the terms of his contract”. (Mendelsohn, 1992:
p34)
• Franchisee control: Many franchisees find the control which the franchisor
exerts over the operation frustrating and may resent the restrictions and
continuing resistance of the franchisor. This control is however necessary in
the maintaining of the uniformity and standardisation of the franchisee.
14
Lack of control may result in the suffering of the business. The franchisee may
be prevented from making changes, which could in fact benefit the franchise.
(Dixon & Hall, 1991)
* Collective bad publicity: The franchise may suffer from bad publicity of
either franchisees or the franchisor. Being associated with a large network of
franchises could have a detrimental effect on the franchisee if the reputation of
the franchise is poor. (Ballieu, 1994)
• Management Service Fee: The franchisee must pay a management service
fee to the franchisor, which may be based on profits. The fee can be a subject
of dispute if the franchisee resents the amount or wishes to withhold part of it
due to the non-performance of the franchisor.
15
CHAPTER THREE: THE FRANCHISE INDUSTRY IN
IRELAND
3.1 Introduction
Franchising is a major factor in daily commercial life in Ireland and its
importance is increasing annually. Many famous names like McDonalds and
Benetton have found a profitable market opportunity in Ireland. Likewise
indigenous franchises such as O’Briens and Eddie Rockets are experiencing
good growth in their coverage and. profits. In this chapter the franchise
industry is examined, the future of franchising in Ireland and the banks attitude
to the industry.
3.2 The Irish Economy with regard to Franchising
The growing Irish economy plays a vital part in the success of the franchising
industry. The latest global competitiveness report on 53 global economies
confirmed that Ireland has been one of the fastest expanding economies in the
European Union during the 1990s. It has been one of the best performing
economies in the EU enjoying high growth rates, low inflation and being
financially stable. The economic growth in Ireland has been more than twice
the EU average and inflation one of its lowest.
Disposable income in Ireland has grown phenomenally in recent years (12
per cent in 1998) and consumer-spending pattern has changed resulting in a
growth in sales of over 20 per cent per annum. (MTS Survey, 1999) The
Department of Finance forecast that economic growth will continue.
16
It also forecasts that and income tax levels should decline even further. This
will lead to further growth of disposable income and an increased demand for
goods and services which is good news for the franchise industry. Due to the
fact that Ireland's domestic population is only 3.5 million people, the economy
is hugely dependent on trade and export of goods and services which is 90 per
cent of GNP. (Irish Franchise Magazine, 1999) Franchises are also benefiting
from the so-called "time crunch". Irish people are working longer hours, with
less time or willingness to devote to household chores. As the majority of
franchises operate in either the food or service industry, there is a market to be
exploited. (Business & Finance, September 25th, 1997)
Ireland enjoys a well-educated workforce and there is a growth in the number
of students undertaking third level education. Enterpreneurship is
encouraged in Ireland and there is a sizeable section of the population
interested in running their own businesses. (Irish Franchise Magazine, 1999)
There are many financial incentives for foreign investors wishing to enter
Ireland.
• Reduced corporation tax rate of 10 per cent on profits from manufacturing
and international services.
• Generous capital allowances for tax purposes.
• Cash grant towards fixed assets up to 60 per cent and
• Staff training grants up to 100 per cent for workers in new industries. (Irish
Franchise Magazine, 1999)
Legislation
There is a distinct lack of legislation governing franchising in Ireland. "The
major portion of legislation affecting franchise agreements comprises
restrictive pricing orders and these are of little significance for prospective
franchisors/ franchisees.
17
The only intervention by legislation into the franchise area came in 1980 with
the Pyramid Selling Act. Pyramid selling schemes, although not specifically
prohibited under Irish law, are regulated by this Act". (Mendelsohn, 1991):
Turnover of Franchising
The turnover of the franchise systems operating in Ireland was an estimated
£450 million in 1998, a figure which has tripled since 1992.
Table 3.1: Turnover of Franchise Systems in Ireland (IR£ M)
1992-1999
Survey
1992
1995
1997
1999
Turnover
Change on
previous survey
125
202
313
450
+70% +68% +55% +43%
(MTS Survey, 1999: pl3)
The predicted turnover for the year 2000 is £600 million, which represents a
growth of 33% in the franchising industry.
Employment in Franchising
The franchising industry provides an estimated 6,000 full-time and 7,200 parttime jobs. These jobs are directly attributable to franchisees , but there are
many additional jobs, which are dependent on the franchise industry .
Table 3.2: Employment in Franchise Systems in Ireland
1992-1999
Survey
1992
1995
1997
1999
Employment 3,300
% Change +72%
4,900
+47%
7,400
+52%
9,600
+30%
(MTS Survey, 1999: p i4)
18
Growth in Franchising
Franchising in Ireland, when compared to other countries, is a relatively new
business concept. However, it is a concept that is on the increase. The Irish
Franchise Association (IFA) was set up in 1984, whereas the British Franchise
Association (BFA) was set up in 1977. The Irish Franchise Association, like
its British counterpart, favours self-regulation. There is no government
intervention in franchising in Ireland, nor is it predicted. (Mendelsohn, 1991)
Indigenous franchises as well as ones from the U.S., U.K. and other countries
are being set up on a continuous basis.
Table 3.3: Growth in Franchise Systems (1992 - 1999)
1997
Survey
1992
Systems
% Change
60
90
113
1
+36% +50% +25% +30%
1995
1999
(MTS Survey, 1999: p i5)
Table 3.4: Growth in Franchise Units (1992-1999)
Survey
1992
Units
Change
390
1997
1995
1999
590 860 1,100
100% +50% +46% +28%
(MTS Survey 1999: p i6)
There are currently 140 business format franchises in Ireland. There was an
increase of 37 systems between 1997 and 1999. It is however important to
note that some of the franchise systems included in the 1999 figure already
existed but were too small to be identified in 1997. There have also been
certain failures over the past two years, which have reduced the number to 140.
These include Pierre Victoria and Nectar.
19
At present most of the franchises in Ireland originate from the U.K. and U.S.A.
Only 12% of franchises are indigenous. There is distinctive growth in the
number of Irish home- grown franchises as the performance level of
indigenous systems continues to rise. Irish Franchises showing significant
growth since 1995 include O'Briens sandwich bars, Abrakebabra and
Supermacs.
3.3 The O'Brien Irish Sandwich Bar Experience
"We're doing for the sandwich bar what McDonalds did for the burger bar."
(Brody Sweeney founder and director of O'Brien's Irish Sandwich Bar)
Proof of the potential of indigenous franchises can be gained from the
success story of O'Brien's Irish Sandwich Bar. The first O’Brien’s Irish
Sandwich Bar was established in 1988 in Dublin and the first franchise
operation was set up in 1994. (Sunday Business Post, February 21st, 1999) It
now has 16 units in Ireland. Although the concept is Irish, the bars have
proved to be equally as popular across the U.K. where O'Briens is now the
largest of the franchised sandwich bar business in Britain with 15 units across
the country from Glasgow to Plymouth.
(Business Franchise,
December/January, 1999) New stores are currently being operated in the
U.S.A. and Germany and the group plan to open 40 new stores in 1999 at a rate
of almost one a week. (Business Franchise,December/ January 1999)
Expansion
O'Briens has expanded further afield than the U.K. and has set their sights on
the huge German and U.S. markets. One O'Brien franchise operator in
Chicago plans to set up 30 other franchised outlets in Michigan and Indiana
over the next five years. (Sunday Business Post, Feb 21st, 1999)
20
Mr. Sweeney says he gets about 30 enquiries a week from places such as
Indonesia and Malaysia as a result of the company's website. (Business &
Finance, Aug 21st, 1997)
Costs of setting up
The start-up franchise fee is £2,500 and an investment of £70,000 secures a
standard 800 sq. ft 30-seat O’Briens Sandwich Bar in a prime location such as a
modem shopping centre. There is an on-going royalty fee of 6 per cent of
turnover with an additional 2 per cent for marketing costs. (Business
Franchise, December/January 1999) The projected profit of a typical outlet is
20 per cent of turnover. (Sunday Business Post, February 21st, 1999)
♦
Why O'Briens is successful
Brody Sweeny attributes the phenomenal success of O'Briens to careful
marketing and prudent selection of franchisees. (Business Franchise,
December/January 1999) Research showed that the majority of workers only
took half an hour for lunch. O'Briens was not only offering a wide variety
sandwiches, but also a quick and efficient service. The recruitment of
franchisees is very important for Mr. Sweeney. He believes that "owning and
running an O’Briens sandwich bar is strictly a people business”. He insists on
franchisees, who can relate well with their customers.
He doesn’t require expertise in the area, in fact seeks people with a non­
catering background. The training programme includes two orientation days in
an O’Brien's Sandwich Bar follow and a three-week course. There are regular
training sessions, which update franchisees and staff on the latest
developments. (Business Franchise, December/January 1999)
21
3.4 The Irish Franchise Association
The Irish Franchise Association was founded in 1984. It is made up of a
number of categories of members having equal standing. These are:
1. Franchisor members
2. Franchisee members
3. Affiliates such as bankers, lawyers, accountants etc. and others having an
interest in franchising.
The motto of the Irish Franchise Association is linking enterprise with
o p p o rtu n ity The role of Association is to promote, protect and to further the
interests of properly established and constructed franchise systems and to play
an educational role in presenting and promoting ethical franchising as a bona
fide business technique. It also aims to counteract the sometimes quite :
damaging inference that franchising and pyramid selling have something in
common and further to distinguishbusiness formatfranchising inparticular
from other so called franchise systems. TheAssociation seeks to promote and
establish and maintain a clear definition of ethical franchising standards in
order to assist members of the public, press, potential investors, government
etc, differentiating between sound business opportunities and any suspect
investment.
The educational role of the Irish Franchise Association involves holding
franchise seminars on a regular basis. There is also a series of 'mini-seminars’
or workshops are being organised around the country, at numerous venues.
This has further helped to publicise the role of the Association and heighten
public awareness. (IFA booklet, 1998)
22
3.5 The U.S.A. Experience
In order to understand the growth potential of franchising in Ireland, it is
necessary to examine franchising in another country. The country chosen in
the U.S. as it is not only nthe cradle of modem franchise development, but also
it is the largest marketplace for franchising systems and also provides the best
statistics." (Mendelsohn 1992, p.5)
According to Business Horizons (May/June 1996 edition) franchise systems
account for more than one-third of all U.S. retail sales. It is forecast that by
the year 2005, they will account for nearly half of U.S. retail sales. There are
3,500 franchises systems in the U.S. as compared to only 140 in Ireland. (Irish
Times, March 16th 1999) In 1991, over 500,000 franchise outlets in the U.S.
generated more than $750 Billion in combined retail sales. (Statistical Abstract
of the United States, 1992; Bond and Bond, 1994) Franchising employs over ,
8 million workers in the US today. (Stem and El-Ansary, 1992) According to t
Franchising Recruiters Ltd., franchising is expected to grow by 15 per cent
across most industries. (The Franchise Option - Enterprise Ireland, 1999, p. 21)
"Several social and economic trends were identified in America such as an
ageing and growing population, an increase in the number of small and homebased businesses, a great health consciousness among the population and
growing consumer demand for more convenience services. The majority of
these trends are also occurring in Ireland, the UK and Europe. Businesses
responding to them in the United States should therefore have the potential to
transfer the associated products or services to similarly growing markets
elsewhere.'1 (The Franchise Option - Enterprise Ireland, 1999, p.21)
23
An indication of the sheer scale of franchising in the U.S. compared to
Ireland or the UK can be gleaned from the following: "It is perhaps a sobering
thought for us in the UK to appreciate that McDonalds and Kentucky Fried
Chicken, the two largest franchise operations world-wide, have between them
more outlets than the entire franchise community in the UK." (Mendelsohn,
1992, p. 23) This gives a clear indication of the enormous growth potential in
the franchising industry in Ireland. A further indication is provided by the
following forecast for franchising in the US into the 21st century. "By 2010,
US sales of franchised organisations are expected to account for 50 per cent of
retail sales and to reach $2.5 trillion, more than four times the $592 billion
generated in 1992." (Business Horizons, Nov-Dee 1993)
3.6 The Banks1Attitude to franchising
The banks in Ireland now recognise that franchising is an important element
of industrial growth. Both the Bank of Ireland and the Ulster Bank have set
up special in-house units dealing specifically with franchising. The A.I.B. and
other banks have special schemes recognising the "comfort factor" that
franchises bring with them. (Irish Times, March 16th, 1999)
The Bank of Ireland
Peter Dunne is the Marketing Manager of Business Banking in the Bank of
Ireland. He is of the opinion that franchising is booming and is particularly
well paced to exploit the buoyant economy. "Many franchise operations
provide a service that addresses the ’time crunch' issue which has developed
because people lead busier lives. Lots of people don't have the time they used
to have and are willing to pay others to provide services. The busier people get
the less time they have, but they will have more money to pay for services they
previously did themselves", which is good news for franchising.
24
%
According to Mr Dunne of Bank of Ireland, international statistics show that
franchisees are less likely to fail than other start-up businesses. This makes
franchising more attractive with a lessened risk factor for bankers. Mr
Dunne said the fact that franchisees are buying into well-known brands using
proven operating systems and have the support of a central pool of training and
advice means that the higher success rates with this type of business venture is
not surprising. "The key to successful franchising is finding the right
franchisor, one who will provide the right level of support and be committed to
continually developing and improving the franchise," he said.
The Bank of Ireland provides advice and information as well as finance to
franchisees. It has been involved with franchising since it started in Ireland and
has sponsored the McGarry Industry Survey of Franchising for the past ten
years. The Bank of Ireland has just published a 'Guide to Franchising in
Ireland,' which examines all aspects of the business from the perspective of the
franchisor and the franchisee. It deals with such important issues as how to
assess different franchises, what the franchise agreement should look like as
well as a detailed analysis of typical costs involved. Mr. Dunne said: "In
assessing a proposition the key areas we look at include the franchise, its track
record and suitability plus the level of support the franchisor will provide, and
most importantly the franchisee themselves, their skills and commitment."
In a foreword to the Franchising in Ireland Survey, by McGarry Consultancy
sponsored by the Bank of Ireland, Mr Dunne writes on the growth of
.franchising in Ireland: "It is an area of the business sector that has continued to
grow significantly in the last two years, both in terms of the number of new
franchise systems now operating in Ireland and also in the number of units
from existing franchise systems". He believes that the most encouraging
statistic of the 1999 survey is the level of full time jobs now being sustained
through franchising.
25
This year an estimated 9,600 full-time jobs in franchising, which represents
an increase of 2,000 jobs on the last survey carried out in 1997. "As the
findings of this report point, there is an ever increasing interest in the area of
franchising in Ireland."
The Ulster Bank
Ulster Bank is a part of the National Westminster Bank Group which were the
first to recognise the potential of franchising in Britain. Ulster Bank was the
first bank in Ireland to establish a dedicated Franchise Unit.
The Ulster Bank, like the Bank of Ireland also acknowledges the investment
potential of franchising. In a booklet on franchising published by the bank,
entitled 'Franchising and Banks' it states: "If you are thinking of going into
business on your own account for the first time, or are already in business but
would like to do something new, it could pay to look at franchising." The
Ulster Bank recognises that "franchising is usually a safer way to get into
business and we are prepared to consider loans of up to two-thirds of the start­
up costs, including working capital, for the right applicants, who would like to
join a proven franchise system."
The Ulster Bank makes the point that statistical information on franchising in
Ireland is limited but they state that recent surveys in the United States and the
UK have consistently shown that the failure rate of franchisees, who lose their
businesses for financial reasons is as low as five per cent. However the Ulster
Bank stresses that all this assumes that the franchise has been properly
constructed and proven, and that it is being run by an efficient, caring
franchisor with sound business practices.
26
Allied Irish Bank
David Roberts, the Franchising Manager with AIB bank recognises franchises
as a good concept, especially in the retail sector. "Franchises are certainly
raising standards and there are a lot of strong brands out there that we are more
than happy to support." However he sounds a warning about pyramid selling,
which gives franchising a bad name. (Business & Finance, 21 st August, 1997)
3.7 The Future of Franchising in Ireland
Ireland’s rapidly growing franchise industry was worth an estimated
£450million in 1999 and it is predicted that this figure will reach £600million
by the year 2000. (MTS Survey, 1998) This growth of £150 million in two
years represents the enormous potential of the franchise industry. With the
healthy economy and plenty of optimism for future growth, the Irish have
now reached a stage where they have in place the kind of business
infrastructure which provides a solid basis for franchised expansion. (Irish
Franchise Magazine, New year, 1999) Previous Irish franchise exhibitions
have demonstrated the high level of interest in penetrating the Irish market.
(Irish Franchise Magazine, New Year 1999)
Table 3.5: Expected Growth in Franchise Systems in Ireland
1998-2000
1988
2000
Turnover £m.. 450
% Change +43%
Employment 9,600
% Change 30%
600
+33%
12,800
30%
Year
(MTS Survey, 1999)
27
As aforementioned, the banks are warming towards franchising, with all the
major banks setting up special units to promote franchising. Michael Bradley
, Franchising Manager of the Ulster Bank said: "Because of the lower risk
involved in setting up an established franchise unit, banks would lend up to 70
per cent of the start-up capital compared to the 50 per cent cap on loans for
stand-alone small businesses." (Business & Finance, 21st August 1997) This
trend is likely to continue into the foreseeable future, according to Mr Bradley.
Industry experts all agree that the Irish franchising market will continue to be
dominated by U.K. and U.S. brands, there are a number of homegrown
operations making their mark abroad. (Business & Finance, 21st August, 1997)
Franchising is seen as a route into new business ventures for those seeking a
way out of working for someone else, or putting accumulated wealth to good
use after early retirement or the sale of a former business. The signs are that the
trend will continue, as more franchisors are lured here by our strong economy,
and as consumer purchasing patterns depend evermore on brand recognition
and loyalty. (The Irish Times, March 16th 1999)
Even in the context of the current economic boom, few sectors can match the
20 per cent annual sales growth being achieved by the franchise sector.
Moreover, this rate of growth will be maintained in the coming years, so that
by the year 2000 sales will be running in excess of £600 million a year and
employment will have risen by a further 33 per cent. (The Irish Times, 1999)
28
CHAPTER 4 : METHODOLOGY
4.1 Introduction
In this chapter, the methods of studying the research question and its
hypotheses are outlined. The research methods undertaken are explained.
4.2 Research Question
The question for research is whether franchising is an untapped resource in
Ireland.
This research question is a study of the franchise industry in this country.
Franchising is a huge topic, so the research is broken into three hypotheses:
A. Benefits and drawbacks of franchising to both the franchisor and the
franchisee.
B. The franchising industry in Ireland at present.
C. what the future may hold for franchising.
4.3 Reasons for Research Question
"In the past, franchising has been a much neglected element of business
related study." (MTS Survey 1999, p. 4) There are 140 Business Format
franchise systems in Ireland, the best known being McDonalds restaurants.
Only 15 of these systems are indigenous, the best known being O'Brien's
Sandwich Bars. These figures are very low when compared to the USA where
there are 3,500 systems in operation and 50 per cent of retail outlets are
franchises.
29
It was not until January of this year that the first magazine specialising in the
area of franchising in Ireland was published. Roy Seaman, the publisher of
the magazine wrote in the issue: "There is an ever growing number of
perspective franchisors and franchisees, hence the need for the launch of The
Irish Franchise Magazine." It is necessary to examine to what extent there is
a growth potential for the franchise industry in Ireland. The job potential in
franchising is also enormous. There are an estimated 9,600 full-time jobs in the
franchising industry, an increase of 2,000 since 1997. (MTS Survey 1999) It is
important to examine the role of the banks with regard to franchising as they
provide the necessary financial support to most business start-ups.
The issue of franchising is both an interesting and important area for
research in the field of Irish business today.
4.4 Objectives of Research Question
The aim of this dissertation is to discover more about the franchising industry
in Ireland. Through the three hypotheses previously cited, the objective of this
research is to discover whether or not franchising in Ireland is an untapped
resource.
4.5 Research Method
The information needed to research this thesis is obtained through both
primary and secondary research methods.
30
Secondary Research
Secondary data is "Information that already exists somewhere having been
collectedfor another purpose" (Kotler 1986,: p97)
The secondary data on the topic of franchising was collected by analysing
• Published books
• Journals
• Newspapers and magazines
• Published surveys
There is a list of all the literature used in the Literature Review (Chapter Two)
in the References section of this thesis.
Advantages of Secondary Research
The advantages of secondary research are:
• It is a reliable source of information as it is in permanent form.
• It is easy to gain access to and is an unobtrusive method of information.
(Robson, 1995)
• Secondary research is less expensive and quicker than primary research.
(Bronnick, and Roch, 1997)
• It may shed light on or compliment the primary data collected. (Blaxter et al,
1996)
Disadvantages o f Secondary Research
However there are also disadvantages to secondary research
• The documents may be biased or distorted
• Information may be out of date. This may lead to inaccuracies.
• The documents may be limited or partial. (Robson, 1995)
31
Primary Research
Primary research "is observed and recorded or collected directly from
respondents. This type of data must be gathered by observing phenomena or
surveying resp o n d en ts(Dibb, Simpkin, Pride, Ferrell, 1994, p i65)
The primary research for this thesis seeks to ascertain the growing potential of
franchising and whether it is still largely an untapped resource.
The method chosen for research were personal interviews. It was also
decided to attend a Franchise Exhibition organised by the Irish Franchise
Association.
Semi-structured interview
It was decided to choose the method of personal interviews, more specifically a
semi-structured interview was conducted. It is a form of qualitative
research and is carried out in order to conduct exploratory discussions to
reveal and understand not only the what and the how but also the why.
(Robson, 1993)
The researcher had a list of themes and questions to be covered which varied
from interview to interview. This meant omitting some questions in particular
interviews given the specific organisational context, which is encountered in
relation to the research topic. It provided the researcher with the opportunity
to probe answers where the interviewee was required to explain or build on
their responses. It was felt necessary to conduct personal interviews to gain an
in-depth knowledge at first hand from experts and people involved in the
industry. This was felt more relevant than conducting other forms of primary
research.
32
The initial contact with the interviewees was made on the phone or while
attending the Irish Franchise Association exhibition. Details of date, location
and duration are contained in the Appendix.
The interviews were conducted on a face to face basis, usually at the offices
of the interviewee. The researcher used a tape recorder for each interview.
One of the interviewees did not want her opinions on tape. In this case details
were written down. The interviews were then transcribed and analysed.
4.6 Sample and Rationale for Selection
Interviewees:
The following people were selected for interview:
1) Franchisee of McDonalds
2) Franchisee of Benetton
3) Former franchisee of Prontaprint
4) Franchisor of Chemical Express and
5) Solicitor and Advisor to the Irish Franchise Association
Franchisees were selected for interview as they are a key component of the
franchise industry: Without franchisees it would be impossible for franchisors
to exist. It was felt that an insight into how franchisees operated was deemed
necessary to critically examine and evaluate the industry with regard to its
advantages and disadvantages. Two franchisees were chosen , one from the
fast food industry and one from the retail industry. These were McDonalds
and Benetton.
A franchisee of McDonalds was chosen because McDonalds it is the most
recognised franchise brand in Ireland and the best known. (MTS Survey,
1999). It now has 47 outlets in Ireland. (Irish Times, February 23rd, 1999) As
33
McDonalds is in the fast food industry, where franchising is a popular method
of entering the business, it was necessary to ascertain why it was so successful.
A franchisee of Benetton was chosen because Benetton is the most recognised
clothing franchise brand in Ireland. (MTS Survey 1999) It was felt necessary
to include the clothing sector to provide a broad view of opportunities in the
franchise industry.
The third interviewee was a former franchisee of Prontaprint. Unlike
McDonalds and Benetton, Prontaprint is a business franchise, which provided
an another dimension into the industry. In addition, the interviewee was in a
position to provide a unique insight into the franchise industry, having left it
after seven years to set up her own business. Her views would illustrate where
and why franchising goes wrong.
A franchisor for Chemical Express was interviewed. Not only is he a
franchisor but he is also a former franchisee and an expert in the field, having
written extensively on the subject. He is at present the vice President of the
Irish Franchise Association.
A solicitor and advisor to the Irish Franchise Association was also
interviewed. He is a regular speaker at franchise exhibitions in Ireland. He
advises potential franchisees on the industry and examines contracts they may
be about to sign.
The Irish Franchise Association Exhibition
Further research was carried on by attending a franchising exhibition
organised by the Irish Franchise Association in the Red Cow Inn, Dublin. This
was invaluable in acquiring information on the subject and in developing a
strategy with regard to the compilation of the dissertation.
34
It also provided a unique opportunity to make essential contacts with those
involved in franchising and helped secure interviews.
4.7 Limitations of Research
The author also endeavoured to interview the following indigenous franchisors
- Eddie Rockets, O'Brien's Irish Sandwich Bar and Abrakebabra - but the
principals in the aforementioned firms would not submit to an interview.
While this was considered a limitation at first, it later became apparent that the
expertise of the franchisor for Chemical Express and the breadth of experience
of the legal advisor for the Irish Franchise Association adequately
compensated.
Another limitation was that the franchisor was unlikely to denigrate the
franchise industry. Again, this was compensated for by the interviews with
the franchisees.
A further limitation was the lack of permission given to the researcher to
tape the interview of one the interviewees. This meant that the researcher had
to concentrate on writing the findings of the interview as well as asking the
questions. It was more difficult to ask follow on questions but fortunately the
researcher had a list of questions, which helped the flow of the interview.
35
CHAPTERS: FINDINGS
5.1 Introduction
In this chapter, the findings from the interviews are presented. The findings
are presented under separate headings, namely advantages, limitations. The
franchise industry is also outlined under the headings of the future of
franchising in Ireland and the attitude of the banks with regard to franchising.
There is also a brief profile on each of the people interviewed. In addition
there is a report on an Irish Franchise Association Exhibition, attended by the
author in the Red Cow Inn, Dublin.
5.2 Profile of Interviewees
Those interviewed were:
1) JOHN GALLAGHER- franchisee of McDonalds.
Mr Gallagher has the McDonald’s franchise for 20 months in Ranelagh, a
South Dublin suburb. Prior to this he was the "right hand man" for Michael
Megihan, then owner of 12 McDonalds franchises in Ireland. At different
times during his 16 years with McDonalds, Mr Gallagher managed the
Rathmines and Grafton Street restaurants and was Human Resource Manager
for the 12 franchises.
2) VINCENT KENNEDY, franchisee for Benetton clothing.
Mr Kennedy, a Chartered Accountant has been operating the franchise from
Amotts of Henry Street, Dublin for 18 months. Prior to that he owned a steel
business in partnership for 15 years.
36
3) CONNIE FAHY, former franchisee for Prontaprint.
Ms. Fahy had previous experience in the printing trade and was a print buyer
for a major company before she became a franchisee with Prontaprint 12 years
ago, in 1987 in Baggot Street, Dublin. Prontaprint is a British-based franchise,
specialising in express printing. After a legal battle she terminated her
franchise with Prontaprint five years ago, but continued in the print business
and now trades under the name of Baggot Print and Design.
4) COLM CLARKE, franchisor for Chemical Express.
Chemical Express is located in Willsborough Industrial Estate, Dublin 17. In
July 1995 Mr. Clarke took on the Master Franchise for Ireland. He is also a
franchisee holding an Interlink franchise. He is also Vice Chairman/ Vice
President of the Irish Franchise Association.
5) BILL HOLOHAN - solicitor and legal advisor to The Irish Franchise
Association.
Bill Holohan is the principal of Bill Holohan & Associates, Solicitors of Cork
and Dublin who has acted on behalf of many franchisors and franchisees in
evaluating franchises. He also handles queries from the public in relation to
franchising.
5.3 Advantages of Franchising
JOHN GALLAGHER said that the great advantage with a McDonalds
franchise is the instantly recognisable brand and that it is now ahead of
Coca-Cola as the world's leading brand. "You never hear of a McDonalds
closing down," he said.
"When you open the door you’re already ahead of the posse with a strong brand
like McDonalds."
37
He relates that the first McDonalds to open in the U.K. was in Woolwich,
London in 1974. There was one customer the first day. Three years later when
Michael Megihan opened the Grafton Street franchise, the place was swamped.
This was because the brand had grown all over Europe and was instantly
recognisable to the Irish public.
He believes that going it alone in business is a massive risk but that the risk is
lessened with franchising. "McDonalds is not the cheapest route but appeared
to be the best route," he said.
Another advantage he listed was the invaluable back up from the franchisor
and franchisees. McDonalds provide a six to nine-month unpaid training
programme to new franchisees, though Mr Gallagher did not need this because
of his experience. "When you ask for help from McDonalds, you will get it,"
he said. Included in the price for the McDonalds franchise is expertise with
shop layout and design and the provision of furniture, fixtures and fittings. Mr
Gallagher also said he believed that other McDonalds franchisees offered great
support to each other as they would encounter similar problems from time to
time.
He also pointed out the advantages of global advertising in maintaining
McDonalds as the world brand leader and extensive market research which
ensured that McDonalds was meeting all the changing customer demands. "I
would never be able to afford the extensive television advertising provided by
McDonalds if I were a small private operator. Nor would I have the resources
to carry out continuous market research to cope with changing tastes. For
instance McDonalds has introduced the McB.L.T. and McRib in recent years
rather than relying solely on the Big Mac."
38
VINCENT KENNEDY of Benetton also agrees that there are many
advantages to franchising. Before obtaining the Benetton Franchise, he
considered many options, from setting up his own business to buying an
existing one. "I wanted a business that would generate an income of more than
£50,000 a year. I believe that the fast food and the retail sector are the ones
with the most potential to produce a high margin of 45% to 50%. I considered
many options including McDonalds, but the unsociable hours didn't suit me.
Benetton, on the other hand offered me a high margin as well as sociable
hours."
Included in the initial fee paid to Benetton was the whole shop fit-out.
Benetton have the same shop lay-out, suspended ceiling, lighting etc. They *
give advice about the suitable size of the shop.
Vincent Kennedy is of the opinion that in every business a certain amount of
discipline is needed. He believes that people who aren't cut out for business
have a better chance of success within a franchise environment, rather than a
business environment. "There are guidelines, a certain amount of help in
getting started and a strong brand like Benetton, which is instantly
recognisable to most people and is a huge help to a business."
Like Mr. Gallagher, Vincent Kennedy is of the opinion that he benefits greatly
from global advertising. "Benetton is basically a marketing company. It
gives the franchisee marketing exposure for its product range, through a ready­
made image. The Benetton brand is a valuable asset and the advertising
campaigns help to keep it that way, thus maintaining the value of the
franchisee's initial investment”.
39
CONNIE FAHY, although no longer a franchisee, recognises that franchising
has many advantages. The main advantage from Ms. Fahy's point of view was
the invaluable help provided by the franchisor in setting up the business.
Ms. Fahy She believes a major problem for people starting their own business
is finding the right location, securing reputable suppliers and obtaining the
right equipment, all of which were provided to her by Prontaprint. "They
provide the business know-how. They open your doors. They tell you where
to buy the equipment for the initial start-up," she said.
Another advantage was that there was no technical expertise required in
being a Prontaprint franchisee, as they provided the franchisee with one
month's training course in London and organised shop placement as well.
She shared the view of Mr. Gallagher that franchisee support was highly
beneficial. "When there was a breakdown in equipment, or the job workload
was too heavy, contracts could be passed to fellow franchisees," she said. Ms. ^
Fahy was also in agreement that risk is minimised in franchising in
comparison with setting up your own business.
COLM CLARKE, franchisor of Chemical Express said he had every
confidence in the ethos of franchising. "It offers unparalleled potential to
develop a long-term and recession-proof business," he said. He is of the
opinion that franchising allows expansion at a lower cost. The recruitment of
a local guy means that he will have local knowledge of the area, people etc."
He said franchising was a different way to approach the same market. "At the
end of the day, the objective is to sell an excellent product. Managers don’t
have the same vested interest as franchisees, who are essentially provided
with a bigger piece of the cake, given a vested interest."
40
Mr Clarke believes that expertise in the field is not necessary. "I believe that
a fresh approach is a good one," he said. "Chemical Express lends itself to
franchising. The business itself it attractive because unlike other franchises,
you don't need to be experienced in the industry. Still more importantly you
receive 100 per cent back up from the franchisor. There's no question of
your being on your own once the initial bedding-in period is over". He
believes that help is essential, not just initially but on a continuous basis. MWe
put our franchisees on the road and help them develop their business and make
it a success. On day one we put our men in a rubber tyre, provide them with a
life jacket, armbands, throw them in the deep end but we don't let them sink.
We keep an eye on them to make sure they don't drown."
BILL HOLOHAN acknowledges the many advantages to business format
franchising. He believes the main benefit of franchising is the fact that
someone else (franchisor) has developed a method or scheme of doing
business in a particular way using certain trade secrets and trademarks in
association with the goods and services and that this developed methodology
of doing business eliminates a lot of problems and elements of time wasting.
"Buying into this type of package is benefiting from someone’s learning curve
and avoiding the cost of mistakes they made."
The franchisee is getting the benefit of the franchisor’s experience,
something which they would never get if they were trying to reinvent the
wheel or do it themselves and also getting the benefit of the name. "It's very
clear what you are buying into with a company like McDonalds, an
established brand and an established name. With some of the other
franchises, particularly if they're the first in Ireland, there isn't that same
advantage, in terms of brand recognition. You are however getting the benefit
of someone else's experience or their business know-how."
41
5.4 Limitations of Franchising
JOHN GALLAGHER admits that although there are many advantages to
franchising, there are also drawbacks. The high cost of the franchise is
probably the main disadvantage. "It's a huge investment and I still owe the
bank a lot of money. The franchisees pay a massive amount for advertising
and market research into a central fund. McDonalds also charge a substantial
amount for rent and take a percentage of sales, which makes profit harder to
make."
McDonalds doesn't allow their franchisees invent their own shop layout, they
are provided with a choice of five packages, out of which they must pick one.
The franchisees cannot change the type of produce or the menu board. "I think
for some franchisees this could be a problem, but I feel that McDonalds have it
sussed. They know what sells, how to get people in and out as fast as possible.
Our seats are uncomfortable for a reason," he said. According to Mr. '
Gallagher, McDonalds have a field consultant, which they send around to
inspect the restaurants, thus ensuring uniformity in all their restaurants. "While
this can be an advantage, it is difficult for some franchisees to except orders
from the franchisor as to how they should change their own restaurant," he
said.
Mr. Gallagher acknowledges that part of the McDonalds success is the strong
brand, that people know what to expect when they see the "M" for McDonalds
in any four comers of the world, but he sees this as a problem. "Customers
expect my McDonalds here in Ranelagh to run like every other McDonalds.
Initially my staff was very slow due to the fact that they were only new and
had limited experience. Customers had to wait longer than they would have to
wait in Grafton Street for a Big Mac.”
42
John Gallagher admits that even now “it may take up to three minutes to feed a
customer because I like to keep a minimum amount of food cooked at off-peak
times. He feels this to be a limitation and doesn’t think that he always meets
customers' expectations of McDonalds”.
VINCENT KENNEDY like Mr. Gallagher agrees that the initial start-up
costs of setting up his franchise were very high. "In my first year of running
the Benetton franchise, the bank saw an exposure of more than a quarter of a
million pounds". Unlike most franchises, he isn't required to pay a royalty to
Benetton, however must buy all the stock from the company.
Benetton changes their stock every season, notably the colours. This means
that Mr. Kennedy is forced to buy in new stock every season and sell off the
old stock at a reduced rate. "Customers' expectations of Benetton are very
high. These must be satisfied by giving to them the latest in the fashion world,
otherwise the Benetton name would suffer."
CONNIE FAHY, formerly a franchisee with Prontaprint, agreed that there are
limitations to franchising. She explained why she is no longer involved with
the company. The lease for the franchise was seven years, and on Christmas
week 1994 Connie Fahy was sent documents to sign for the renewal of the
lease. She felt the new agreement was very "onerous". Prontaprint wanted
rights to the premises, which was owned by her. Her solicitor advised her not
to sign the new agreement and to ask Prontaprint for more time to ponder the
new deal. The franchisor, however wasn't willing to let any time lapse and took
an injunction out against her. This forceful approach didn’t appeal to Ms Fahy.
She learned from Prontaprint franchisees in England that this was typical
behaviour of this British Company. "They’re the big players and can afford
massive legal bills unlike most franchisees, who usually give into them".
43
Connie Fahy believes that Prontaprint's approach may work with English
people, but she really didn't appreciate it and decided if she had to go to court,
she would. It was at that point that she began thinking about her business and
whether she really wanted to be connected with Prontaprint. She was paying
them a huge royalty fee - 10% of her turnover, a figure that she thought
"ridiculously high".
She was the "top shop" in Dublin at the time and was training new franchisees
in her store in Baggot Street. Prontaprint, unlike a lot of franchises had no
global advertising campaign and were conducting no market research. She
felt that all that was left was the name, a name she had helped build up in
Dublin. While this name was very valuable to her, it wasn't worth all the
money she had to pay out to Prontaprint and putting up with the bad treatment
from them. She wanted to get out of the Prontaprint franchise, but the
franchisor wasn't going to give in very easily and Ms. Fahy was faced with a
legal battle. The case never went to court however. Prontaprint, only a day
before the Court Hearing approached her with a view to settling the case out of
court. Ms Fahy had to pay a settlement fee, which was less than the 10% of
turnover fee paid annually to the franchisor. She believes that they settled
because they couldn't afford to take the chance that she might win and that the
case could be used as a precedent.
Ms. Fahy admits that she was lucky. She owned her own premises and her
own equipment. She had built up a string of clients over the seven years, who
"weren't going anywhere in the morning". She had the technical expertise
necessary and the experience of running her own business. She no longer
required assistance from the franchisor.
44
Additional disadvantages mentioned by Ms Fahy were the following:
She felt that being part of a group of stores brought with it some problems.
Everyone presumes that the service and quality received in one store will be
the same as the next store. "If one store is giving bad service, they are all
tarred with the same brush". Prontaprint had a price list, which franchisees
were supposed to go by. "Not all franchisees adhered to the price list, which
led to customer complaints about prices". Ms. Fahy believes that a successful
franchise should have standards, which must be met by all franchisees.
"Prontaprint came occasionally to check up on the franchise, but they cared
more about the filing being done than they did about the quality of our
product".
COLM CLARKE saw few limitations to franchising. However, he pointed
out the importance of recruiting the right franchisee and how complications
can stem from choosing the wrong person. "I place a lot of emphasis on the
selection process. Is the franchisee suited to self-employment? Does he know
that he isn't going to be suddenly a millionaire? Is he the type of person who
will always wear a PAYE stamp on his forehead? Does he fit the job?"
He gave an example of a former franchisee of Chemical Express who came
from an office background and had worn a suit during his working career. He
could not get used to the way of life at Chemical Express, being on the road
and wearing overalls, so he quickly opted out of the franchise contract. "My
salary depends on the success of each franchisee," Mr Clarke said.
BILL HOLOHAN points out the limitations or disadvantages to franchising
from the point of view of an advisor to potential franchisees and someone who
lectures in the field. He has come across failed franchises and is aware of the
pitfalls. From his experience, he believes the main problem arises concerning
the paying of the royalty fee.
45
Bill Holohan advises franchisees to work out figures carefully. "Sometimes a
franchisor may want 10 per cent of gross turnover, which might be a sum equal
to or more than the profit, meaning the franchisee may be contracting to give
away the profit element of the business. The margin of a comer shop is very
low in comparison to fast food outlets, where margins are 16% or 17%. This
means that if the franchisee is paying 10% of turnover, there is a sufficient
margin to make profit.” In his experience franchisees sometimes resent
paying out a large sum of money to the franchisor on an ongoing basis.
According to Mr. Holohan, there is a perception that there is a lack of ongoing
continuing benefit in many franchise packages. "The franchisee in the initial
stages may think that the product is fantastic, the training is brilliant and that
they couldn't have done it alone."
He believes that this changes when the franchisee is completely at ease with
the business and doesn't require assistance from the franchisor. "They begin to
question the ongoing benefit and think they have got all that they can get out of
the franchise deal, but are still required to pay a royalty fee. He believes that
the controls imposed by the franchisor can be a disadvantage as franchisees
sometimes resent them and he is of the opinion that the relationship between
the franchisor and the franchisee is vital.
5.5 The Franchise Industry in Ireland and its Future
BILL HOLOHAN makes it clear that it is only since the whole Celtic Tiger
phenomenon, in the last five or ten years that Ireland has moved into the wide
area of business growth. "A lot of franchises in Ireland are service based,
which rely on discretionary income.
46
Bill Holohan said. “It is only with the growth of discretionary income that a
lot of these franchises have grown and will continue to grow.”
Bill Holohan believes that there will certainly be a growth in franchising in
Ireland but not to the same extent as the huge growth experienced in America.
He attributes this to Ireland's population structure. "Our demographics are
very different. A market is necessary. He gives the example of a specialised
franchise, which may have a market in New York and other American cities
but wouldn't work in Dublin due to a smaller population. " The range of
franchises in America is staggering. This is largely due to the high
population, which offers more opportunities to franchising."
However, Mr. Holohan is of the opinion that there is potential for growth but
"it is tied in with an economic buoyancy" to a certain extent. He stated that
there is a demand in America for the "do it for me" market, from dry-cleaning
to food delivery. "In Ireland, this culture has not arrived yet, but is beginning
to develop and people are starting to rely on the service industry much more."
He believes that as long as the boom lasts and people have a high
discretionary income that franchising will continue to be successful and' will
continue to grow.
Bill Holohan believes that the long-term success of franchising depends
largely on the franchisor. "If the franchisor doesn't charge an ongoing
royalty, then it is time to get suspicious. A franchisor should be content to
make money out of a franchisee in the long term. If they are charging an up
front only fee, the agreement should be questioned." He advises franchisees to
trust their gut instinct. It should be like a partnership in one sense of the word,
with a certain amount of give and take, co-operation and understanding.
47
COLM CLARKE believes that franchising is the way forward for Irish
business. "Statistics show that it has been growing for many years and that
future growth in the area is also predicted."
Mr. Clarke mirrors the view of Bill Holohan that the franchisor should look to
the long-term success of the business. He predicts that the steady growth being
enjoyed by Chemical Express will continue.
JOHN GALLAGHER did not know what the future held for the franchise
industry in Ireland in general, but he was in the position to speak for
McDonalds. He believes that the success of McDonalds will continue because
of its strong and well-established brand name, its advertising, promotion and
extensive market research. However Mr Gallagher sounded a warning with
regard to the initial cost and the royalty fee charged by the American food
giant. "I think that if McDonalds makes it too hard for franchisees, by
demanding too much financial investment, the golden goose will die."
He advised future franchisees: "Read the small print! "His primary concern
would be if McDonalds came in themselves and opened a restaurant beside
him.
VINCENT KENNEDY acknowledged the success of franchising in Ireland
and predicted growth. He saw franchisees making "a decent living" as
opposed to becoming millionaires overnight. He cautioned about greedy
franchisors trying to recoup their investment rather than looking to the long­
term success of the company.
CONNIE FAHY echoed the opinion that some franchisors think short term
rather than long term. Some wanted to open several franchises simply for the
initial fee without taking other factors such as demand for the product or
population into account. In her experience in Prontaprint she felt that ongoing
support from the franchisor and research and development was lacking.
48
She believes that in order to ensure the success of franchising in Ireland,
franchisors would have to be more innovative and invest more in developing
new products as well as provide on-going assistance to the franchisee.
i5.6 The Attitude of the Banks towards franchising
JOHN GALLAGHER had nothing but praise for the banks. With regard to
the support from the banks and a McDonalds franchise, he said: MThey were
a piece of cake." He believes that if he were to start his own business that it
would be more difficult to obtain a loan as banks would require information on
background etc., none of which mattered when the "famous M is behind you.”
VINCENT KENNEDY, Benetton franchisee, said that if you were setting up
an established franchise with a high success rate it was probably slightly easier
to get finance from the banks but it depended on the person seeking the
franchise and his track record. According to Mr. Kennedy, "Banks treat any
new business venture whether an existing successful franchise or a start-up
business with caution. They look at the individual setting it up, and measure up
whether the individual has the ability to make it work. I wouldn't think it helps
you a lot having Benetton behind you but I think it should." He said he had a
financial background and a good business record "but at the end of the day I
was going into a new business venture and the banks were nervous whether I
would make a go of it."
CONNIE FAHY was critical of the attitude of the banks to franchising when
she went seeking finance from them. Her experience was that 12 years ago
when she started with Prontaprint, a "high up" bank official in the Bank of
Ireland asked her what franchising was. Ulster Bank, on the other hand, were
"more clued in" back then. She believes that all the main banks nowadays are
warming to the idea of franchising and understand it better.
49
BILL HOLOHAN believed banks were cautious about lending money for
any business unless they had some form or security. However he felt they
favoured franchising over other start-up businesses. He claims that "Banks are
in the business of lending money and when giving a loan, they usually ask for
it in the form of security." He added that the banks draw comfort from the
fact that franchises succeed more often than non-franchised businesses.
Therefore they have a greater chance of getting their money back. This is why
they are more readily willing to lend money to potential franchisees and lend
them more than in a non-franchise situation. "In my experience banks are
more amenable, but it’s always difficult to get money out of banks.f'
5.7 Irish Franchise Exhibition- Morans Red Cow Inn
On the 25th of February 1999, the author attended a franchise seminar in
Morans Red Cow Inn, Dublin. The seminar consisted of a number of
franchisors and franchisees speaking about their perceived benefit of doing
business through franchising.
A presentation was made by the marketing manager for business banking in
Bank of Ireland, giving a banks' point of view on franchising. Bill Holohan,
the legal Advisor to the Irish Franchise Association dealt with the legal,
commercial and practical considerations to be borne in mind when considering
entering a franchising agreement. Mr. Sean McGarry of McGarry Consulting
also made a presentation in relation to the industry and its growth over the
years as well as profiles of those involved. Other speakers included Michael
Bennett of Enterprise Ireland, John Greene, the chairman of the Irish
Franchising Association and franchisor of Chem Dry as well as Colm Clarke,
Vice Chairman of the Irish Franchise Association to Master Franchise holder
for Chemical Express.
50
CHAPTER 6: DISCUSSION
6.1 Introduction
In this chapter, the secondary research discussed in Chapter 2 and Chapter 3 is
applied to the results of the primary research in Chapter 5: Findings. Included
in this chapter are the views of the author in areas being discussed.
This discussion is divided into the following headings:
> Advantages of franchising
>
Disadvantages of franchising
> The franchise industry in Ireland, with particular reference to the attitude of
the banks and the future of the industry.
Each section of the discussion applies the findings of the secondary research to
the findings of the primary research.
6.2 Advantages of Franchising
The secondary research dealt with the advantages of franchising to both the
franchisee and franchisor. The main advantage to the franchisor was the
possibility of "increasing the number of distribution outlets for minimal
capital investment". (Stanworth and Smith, 1991: p29) This was echoed by
Colm Clarke, franchisor of Chemical Express.
In the secondary research the main advantages emerging for the franchisee
were essentially buying into a proven product or service with a recognised
brand name and availing of the business know-how.
51
This was bome out in the primary research by both Benetton and McDonalds
franchisees and former Prontaprint franchisee. "Franchising opens your doors,
gets you started" said Connie Fahy, formerly with Prontaprint.
The author was convinced after interviewing two franchisees and a former
franchisee that franchisees were attracted by the strong brand name, the
invaluable start-up assistance and the lack of expertise required in the
area. Franchising offered a clear advantage over independent start-ups in that
the franchisee was not alone in the harsh world of business but had the comfort
of a proven business behind them.
The author had not realised just how important the assistance of other
franchisees in the same company was to the franchisee. In some cases it was
even more important to the franchisee when the business was up and running
than the assistance offered by the franchisor. Connie Fahy admitted missing
this support when she terminated her contract with Prontaprint and went out on
her own.
The development of the Irish Franchise Association since its inception in 1984
offers invaluable information to those contemplating entering the franchise
business. It also provides legal advice on contracts. According to Bill
Holohan, legal advisor to the Association, the information pack offered by
them to potential franchisees provides almost all the details on franchising that
they seek. "Feedback has shown that the information has been able to answer
99 per cent of all queries," he said.
One of the Association’s roles is to educate those wishing to get involved in
business to consider franchising as an option. They conduct seminars every
four to six months and publish literature detailing the range of franchises
available and providing general information and advice on the subject.
52
6.3 Disadvantages of Franchising
It was not always the case that what was beneficial to the franchisor was
beneficial to the franchisee, or vice versa. Many franchisees find the control
which the franchisor exerts over the operation frustrating (Dixon and Hall,
1991), clearly showing that what was demanded by the franchisor was not
always appreciated by the franchisee. In the primary research, it was shown
that in the case of McDonalds (John Gallagher interview) the franchisor also
exerted a high level of control e.g., layout, menu board and products, yet this
was not resented by the franchisee. It was in fact appreciated by him as he
understood that McDonalds had the long-term success of the business in mind
and knew how important it was to control standards.
However the author felt this limitation to be a major disadvantage in that it
restricted franchisees from stamping their own entrepreneurial mark on
the business. At the end of the day you were not really your own boss.
Although in the case of Connie Fahy, she was not required to buy certain
equipment from Prontaprint and was unrestricted in comparison with most
franchisees, she still felt she was not her own boss and welcomed the
opportunity to terminate the contract.
In the secondary research the main disadvantage to the franchisee was the
exertion of control by the franchisor and the fact that the franchisee may have
been given no scope for innovation and ideas of his own. (Stanworth and
Smith, 1991)
In the primary research the author found out that apart from the initial start-up
fee, the franchisees resented paying the annua] royalty fee. They felt they
were doing all the hard work, yet the franchisor was creaming off handsome
profits on a yearly basis
53
Connie Fahy was paying 10 per cent of turnover to Prontaprint and did not feel
that the support provided warranted this huge yearly pay-off to the
franchisor. This was echoed by John Gallagher, franchisee with McDonalds.
He was hugely in debt because of the massive start-up cost of £350,000 and
was finding it difficult to pay off this money because the McDonalds
franchisor was demanding a substantial yearly royalty fee. "If McDonalds
make it too hard for franchisees, the golden goose will die," he said.
Many people are ignorant towards franchising. They see it as an investment.
However Colm Clarke, franchisor of Chemical Express pointed out that
franchising is buying into a business opportunity, "a way of life rather than an
investment." Bill Holohan, advisor to the Irish Franchise Association mirrored
this view, stressing how important it was that the franchisee "fit the job.'! He
said that the Association "advises, cautions and warns" about the pitfalls of
franchising but doesn't tell the potential franchisee what franchise they should
go into." It was very important that the individual picked the franchise for
himself, because it would be his way of life, according to Mr. Holohan.
6.4 The Franchise Industry and its Future
McGarry Consultants are the primary authors and researchers of the franchise
industry in Ireland. They conduct a survey every two years into the franchising
industry. Their research (MTS Survey, 1999) predicts an expected growth of
33 per cent in the year 2000 with franchise turnover growing from £450
million to £600 million. "Some of the major players are already planning a 50
per cent increase in units throughout the country over the next two years."
(MTS Survey, 1999: p i4) The Survey also shows that employment in the
54
franchising industry has gone from 3,300 in 1992 to 9,600 in 1988 with a
prediction of 12,800 by 2000.
In the primary research the author found plenty of evidence to support the
findings of the MTS Survey. Bill Holohan predicted a bright future for
franchising but felt there would be a steady growth rather than a massive
leap. He linked this growth to the Celtic Tiger economy, which has made
Ireland the fastest growing economy in the EU. He is of the opinion that as
long as this boom lasts and there is an abundance of discretionary income,
on which franchising in heavily reliant, the franchise industry will continue to
grow. Colm Clarke also believes franchising is the way forward for Irish
business, offering potential entrepreneurs a safer way to get started in
business.
The author attended an Irish Franchise Exhibition organised by the Irish
Franchise Association and McGarry Consulting. From the large attendance
there, it was clear that there was a huge interest in the field. The author was
surprised to find that the attendance was predominantly male "men in suits"
with an obvious lack of women and young people. All the speakers at the
exhibition were very optimistic about the future, though the author felt that
this was to be expected given that the event had been organised by the
franchise industry and was therefore unlikely to be critical. However the Irish
Franchise Association claims to hold these seminars to educate people in
franchising and is not used to extol the virtues of franchising. It must be
pointed out in fairness to the organisers that franchisees also spoke at the
exhibition and were forthright in their views. It was also felt that they would
have nothing to gain from communicating a biased view of franchising.
The secondary research showed the phenomenal growth of franchising in the
U.S. in recent years. In Business Horizons, 1996, franchise systems account for
more than one-third of all U.S. retail sales. There are 3,500 franchise systems
55
in the U.S. compared to only 140 in Ireland (Irish Times, March 16th 1999)
With our booming Tiger economy giving us an American-style discretionary
income, the author feels we will follow the U.S. experience.
The author is of the opinion that there are massive opportunities, ready to be
tapped into in Ireland, for both franchisors of indigenous companies going
abroad as well as potential franchisees. The O'Brien Irish Sandwich Bar
Experience is one of the huge success stories for Irish franchisees, which are
not only thriving in Ireland, but also abroad. The company is planning to open
40 additional units in the UK, Europe and the US, bringing its total operation
to 80 shops. (The Sunday Business Post, February 21st, 1999) It is now the
largest sandwich franchisor in the UK.
According to John Lattimore, Business Journalist with the Irish Times the
strength of franchising looks unlikely to diminish in the future. "As
spending power and customer sophistication both increase, there will be more
demand for products that are not mass-produced yet at the same time offer the
assurance of an established brand and wide availability." (The Irish Times,
March 16th 1999)
6.5 The Attitude of the Banks towards Franchising
It was found in the secondary research that all the major banks in Ireland
now take franchising very seriously and recognise it as an important
industry. Peter Dunne, Marketing Manager of Business Banking with Bank of
Ireland, writing in the MTS 1999 Survey said: "It is an area of the business
sector that has continued to grow significantly in the last two years, both in
terms of the number of new franchise systems operating in Ireland and also in
the number of units from existing franchise systems."
56
The author noted that Mr. Dunne was a speaker at the Irish Franchise
Association Exhibition in February. He highlighted the fact the Bank of
Ireland continues to recognize the growth potential of the industry.
The fact that Bank of Ireland also sponsors the Franchising in Ireland survey
and provide an information pack on franchising demonstrates its recognition
for the growth in the industry and its anxiety to comer the market.
However, when conducting primary research, the author met with a mixed
reception for the banks. John Gallagher felt that the banks were very
supportive, "a piece of cake" but this was hardly surprising given that he was a
franchisee for the very successful McDonalds empire and had years of
experience with that company before embarking on the franchise agreement.
Vincent Kennedy, the Benetton franchisee, felt that the banks favored
franchising only slightly over independent start-up businesses and felt that
there was room for improvement with regard to the banks. Colm Clarke,
franchisor, was of the opinion that the banks "pay lip service" to franchising
and in his experience did not favor franchising.
The author was more swayed towards the opinion of Bill Holohan, legal
advisor to the Irish Franchise Association who recognised that the banks are in
the business of lending to clients who have security to offer and will make the
repayments. "They want to see the money before they give it to you," he said.
It seemed to the author that the banks were likely to favor franchisees going
into business with recognised international firms like McDonalds or The
Body Shop with proven records but even in those cases, they would assess the
franchisee on his/her own merits. However, regarding the smaller, lessestablished franchises it is understandable why the banks might be more wary.
They would not throw away money to franchisees just because the concept of
franchising was gaining momentum.
57
CHAPTER 7: CONCLUSIONS AND
RECOMMENDATIONS
7.1 Conclusions
Ten years ago franchising was hardly heard of in Ireland. From its infancy
stage it has now grown to a £450 million turnover, employing 9,600 people.
(MTS Survey, 1999) Even in the context of the current economic boom few
sectors can match the 20 per cent annual sales growth being achieved by the
franchise sector. (Irish Times, 16th March 1999) This trend is set to continue
into the foreseeable future.
From extensive research, both primary and secondary, the author concludes
that:
1) The advantages of franchising to both the franchisor and the franchisee far
outweigh the disadvantages. (Chapter 2 - 2.4, 2.5) For the franchisor, it offers
expansion at a lower cost and for the franchisee they are essentially buying into
a proven business concept and business know-how. However, all franchisors
are not equal and the franchisee has to balance the cost of buying into a
franchise with the scale of financial return it may provide.
2) The role of the banks in franchising is very important. (Chapter 3 - 3.6)
They supply the necessary capital for both franchisor and franchisee and are
vital to the success of the industry. The banks are finally beginning to
recognize the potential of franchising and because they realise that fewer
franchises fail than independent business start-ups, their support for franchising
will boost the industry.
58
3) Franchising is still an untapped resource in Ireland, compared to other
countries notably the U.S. (Chapter 3 - 3.5) The industry also offers the
opportunity for indigenous Irish firms to expand into the world franchise
market, particularly the U.S.
4) Franchising in the main will provide a franchisee with an adequate income,
rather than make him an overnight millionaire.
7.2 Recommendations
To address the above conclusions, the following action is recommended:
1) That successful Irish firms should look at the opportunity of becoming
franchisors as a means to expand their business at a lower cost, both in Ireland
and abroad.
2) That with the Celtic Tiger economy booming, the Government should set
up a Task Force comprising principals in the franchise industry, the business
associations, the trade unions, the banks, Forbairt and representatives from
other interested parties to examine the growth potential for the franchise
industry, both from identifying new Irish franchisors and developing
employment among potential franchisees.
3) That indigenous Irish franchisors should consider expanding
international markets, notably the US.
59
into
4) That potential franchisees study in depth their contractual obligations regarding the
franchise agreement, bearing in mind that all franchises do not guarantee immediate
financial success.
60
BIBLIOGRAPHY
Bank of Ireland (1999) The complete guide to franchising, Bank of Ireland,
Business Banking: Dublin.
Barrow, C. and Golzen, G. (1996) The Daily Telegraph: Guide to Taking up a
Franchise, Kogan Page Limited: London
Ballieu, D. (1990) Franchising: Fact Fraud & Fallacy, Streetwise
Publications: London.
Ballieu, D. (1994) Streetwise Franchising: How to take up a successful
franchise, Century Limited: London.
Bond, R.E., and Bond, J. M. (1994) The Source Book of Franchise
Opportunities, Homewood.
Bums, P. and Dewhurst, J. (1993) Small Business and Enterpreneurship,
The Macmillan Press Limited: London.
Dant, R.P. (1995) 'Motivation for franchising: rhetoric versus reality.'
International Small Business Journal, Vol. 14, October- December.
Dibb, Simpkin, Pride, Ferrell, (1994) Marketing Concepts and Strategies,
Second European Edition, Houghton Mifflin Company: U.S.A.
Doherty, F. (1999) 'Franchising opportunities: Food dominates the franchising
boom', The Sunday Business Post, February 21, pp.26, Sunday Business Post:
Dublin.
61
Enterprise Ireland (1988) The Franchise Option - Summary of a report by
McGarry Consulting, Forbairt: Dublin.
Francis, Z. (1999) The Irish Tiger', The Irish Franchise Magazine, Vol.l,
New Year
Hall, P. and Dixon, R. (1991) Franchising, Pitman Publishing: London
Lattimore, J. (1999) 'Branching into franchising', The Irish Times, March 16,
pp.26, Irish Times: Dublin.
McGarry, S. and Kay, A. (1999) Franchising in Ireland 1999 Survey - A
report on business format franchising in Ireland, McGarry Consulting:
Dublin
McNeill, P. (1990) Research Methods, Routledge: London.
Mendelsohn, M. (1992) The Guide to Franchising, Pergamon Press: London
Robson, C. (1995) Real World Research, Blackwell Publishing: London.
Rust, H, (1991) Owning your own Franchise,
Stanworth, J. and Smith, B. (1991) The Barclays Guide to Franchising for the
Small Business, Basil Blackwell Limited: Oxford
Stem, L.W., and El-Ansary, A. I. (1992) Marketing Channels, Prentice Hall
Inc.: New Jersey.
62
Taylor, C. (1999) 'McDonalds planning 37 more outlets’, The Irish Times,
February 23, pp. 16, Irish Times: Dublin.
The Official Business Franchise Association Journal, (1999) 'Franchise in
Focus - Green for go', December/January.
Thesing, G. (1998). ’Untapped Potential', Business and Finance, July 2.
Thesing, G. (1997) 'Royalties Rule’, Business and Finance, August 21.
Thesing, G. (1997) 'The Future for Franchising', Business and Finance,
August 21.
U.S. Government (1992) Statistical Abstract o f the United States, U.S.
Department of Commerce: Washington DC.
63
APPENDIX 1: Questionnaire for the franchisee
1) For how long have you been in this franchise?
2) Did you consider other options? Which ones?
3) Why did you decide to go into franchising (as opposed to
starting up your own business)?
4) Did you have any expertise in the area before entering the
agreement?
5) What qualities, in your opinion are necessary in a franchisee?
6) Were you provided with assistance from the franchisor?
If so, was it necessary?
7) What are the benefits of franchising, in your opinion?
8) Do you experience limitations from time to time?
If so, what are they?
9) What can go wrong for a franchisee?
10) Did you experience any difficulties in obtaining finance from
the banks?
11) Would you from your experience recommend setting up a
franchise?
12) Do you think that franchising in Ireland is an untapped
resource?
64
APPENDIX 2: Questionnaire for the franchisor
1) Why did you consider franchising your business?
2) Did you find it difficult to recruit franchisees?
3) How did you go about it?
4) Why do you think some business people are reluctant to get
involved in franchising?
5) What type of person do you look for?
Age?
Sex?
Experience?
6) What qualities do you look for in a franchisee?
7) With what assistance do you provide your franchisees?
8) What are the benefits of franchising to your company?
9) How important is it that each franchise succeeds for your
company?
10) What guarantee is there that the standard is kept to its highest
level?
11) What can go wrong?
12) In your opinion, is franchising in Ireland an untapped
resource?
65
APPENDIX 3: Details of personal interviews
1) Date of Interview: 19/2/99
Name of Interviewee: Mr. Vincent Kennedy
Interview Location: Amotts Cafe, Henry St. Dublin.
Duration of Interview: 55 Minutes.
2) Date of Interview: 26/2/99
Name of Interviewee: Mr. John Gallagher
Interview Location: McDonalds, Ranelagh, Dublin 6.
Duration of Interview: 70 Minutes.
3) Date of Interview: 8/3/99
Name of Interviewee: Mr. Colm Clarke
Interview Location: Willsbourough Industrial Estate, Dublin 17. Duration of
Interview: 30 Minutes.
4) Date of Interview: 9/4/99
Name of Interviewee: Ms. Connie Fahy
Interview Location: Baggot Print & Design, Baggot St., Dublin Duration of
Interview: 60 Minutes.
5) Date of Interview: 12/4/99
Name of Interviewee: Mr. Bill Holohan
Interview Location: 88 Ranelagh Road, Ranelagh, Dublin 6. Duration of
Interview: 45 Minutes.
66
APPENDIX 4: Terms used in franchising
In order to have an in-depth knowledge of franchising it is necessary to
understand the following definitions:
A franchisor is a person or business with a developed business method
(product or service) wishing to expand by offering investors the right to trade
under the business name, operational method, organisational systems and
trademarks. The franchisor aids in the establishment of the business and will
advise, train and assist in the overall development of the business.
A franchisee is the investor (individual or company) who purchases the right
to trade under the franchisor's business name using their operational methods,
organisational systems and trademarks.
A master franchisee is the individual or company who has been given the right
to recruit other franchisees by the franchisor. It is usually in terms of territory,
i.e. a country. The master franchisee holds the right to appoint, train and
collect fees from their franchisees.
A franchisee agreement is a legally binding contract that outlines the
obligations of the franchisor and franchisee for the duration of the operation.
The agreement covers the duration of the contract, territory, fees and
obligations of both parties.
The operating manual is a 'blueprint' for the franchise, with specifications,
procedures and instructions necessary for the successful running of the
franchisee.
67