Why do fast food companies usually franchise their restaurants instead of operating the locations themselves?
In: 101
Franchising is a way to address two big growth-related problems:
Capital and Risk.
If you open a new restaurant yourself, you have to come up with the money up front to buy/rent the space, buy equipment, hire and train staff, advertise, the list goes on and on. If the location goes south, you’re still on the hook for that money. On the other hand, if you simply vet franchisees, you let them put up the money and take the risks, and all you provide is the brand name, supplies, and high-level marketing.
Now granted, you’ll earn far less profits of the whole amount of sales, typically between 4 and 6 percent of gross sales, but considering you’ve really put nothing up other than your brand name, that’s actually a pretty solid deal.
And it’s not a terrible deal for the franchisee, either. You’ve got a known profitable businss, free marketing, and hopefully a supply chain which is incentivized to help you maintain the brand’s value. Of course, that’s not always true. Subway is the cheapest and worst franchise in the business, or it would be second-worst if Quiznos hadn’t finally forced itself out of business through sheer greed and incompetence.
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