Franchises and chains are two types of business models that retail companies use to expand their business. Many people have the wrong notion that franchises and chains mean the same. However, there are many distinctions between the two of them.
A franchise is a setting in which a company grants a license to another business to sell its products or services in return for payment. A chain, on the other hand, is the selling of products in multiple retail locations.
Likewise, many features make franchises and chain stores different from each other. Let us understand their differences further through this article.
Franchise vs Chain
Franchise and chain are two different types of strategies followed by companies to expand their business.
A franchise gives other individuals or groups the right to sell their products or services. Hence, in a franchise the owner of a company does not have overall control to operate business decisions. In contrast, the parent company runs the chain stores. Hence, the owner of the company has overall control over business operations.
In a franchise, most of the financing has to come from the franchisee for using the brand of the franchisor company. On the other hand, in a chain store strategy, financing is managed by the company itself.
Differences Between Franchise and Chain in Tabular form
|Definition||A franchise is a kind of business model that involves a company allowing or providing a license to another group or individual to sell its products or services in return for a fee.||A chain is a business model used to expand a business by opening various stores in different locations by the same company.|
|Ownership||Every location of a franchise has a different owner.||The parent company is the owner of all the chain stores.|
|Financing||The franchisee manages most of the finances.||The parent company manages all the finances.|
|Profit||The franchisee enjoys the profit, however, they have to share a portion of it with the franchisor.||The parent company enjoys the profit.|
|Risks||Both the franchisor and the franchisee face the risks.||The parent company faces the risks as they run all their chain stores.|
|Consistency||Although in a franchise the franchisee and the employees try their best to provide good customer service, it still struggles to be consistent in it.||A chain is consistent in providing good customer service as each chain is run by the same parent company.|
|Employees||The franchisee hires the employees of a franchise.||The parent company hires employees for its chains.|
What is a Franchise?
A franchise is a business arrangement where a business corporation grants permission to an individual or a group to sell the business's goods and services using its brand name. It is an agreement between –
- The franchisor – The franchisor is the business corporation that grants permission to sell its products and services.
- The franchisee – The franchisee is the individual or group of individuals who receive the license to sell the business's products and services after paying a fee.
The franchisee acquires several rights from the franchisor in the agreement. It includes the right to –
- To use the brand name
- To the know-how
- To use the business procedures
- To use intellectual property like software and trademark
- To the marketing materials
- To the system of doing business with the franchisee.
After the franchise opens, the franchisee has to pay a percentage of revenue to the franchisor. Franchise is used primarily to expand a business without having to spend an excessive amount of money. Since much of the expenditure in marketing and selling is taken up by the franchisee; the franchisor may not have to spend much on them.
Characteristics of Franchise
A franchise has the following characteristics:
- License – The franchisor grants a license to the franchisee to use the company's trademark for business.
- Policies – The franchisee must follow the policies prepared by the franchisor in matters of operating the business.
- Marketing support and technology – The franchisee gets the support of the franchisor in matters of market support and technology as stated in the agreement.
- Royalty – The franchisee has to pay a royalty to the franchisor for being allowed to use the latter's brand name and business procedures.
- Limited period – The franchise exists for the specified time mentioned in the agreement. However, if both parties agree, the agreement can be renewed as well.
Types of Franchise
There are about five main types of franchise agreements. They are:
- Job-Franchise – This type of franchise is typically a low-investment franchise run by an individual who wants to start a small franchise. These franchises are operated singlehandedly by a person selling products or providing services. Depending on the type of franchise, the franchisee can either work from home or can operate from a moderate office. The franchisee can also work in a mobile setting, however, one has to have or buy a vehicle to operate such a franchise. The franchisee has to make the arrangements and buy the equipment by oneself to start with the franchise.
- Product or Distribution Franchise – From the name itself we can understand that distribution franchises deals with distribution of the products. These franchises are based on supplier-dealer relationships. In this type of franchise, the franchisee has to distribute the franchisor's products and services. The franchisee only gets the license to distribute the products and does not gain access to other activities or operations of the company. It has been studied that product franchise offers the highest percentage of total retail sales.
- Business Format Franchise – In a business format franchise, the franchisor grants the license to the franchisee to operate the business and sell their goods and services. The franchisor offers a detailed agreement to the franchisees and also provides them training and support. It is the most common type of franchise used by franchisors to expand their business. Fast food, business services, restaurants, retail, etc., mostly fall under this type of franchise.
- Investment Franchise – Investment franchises are large-scale franchises that need a lot of capital investment to run them. These franchises run big hotels, large restaurant businesses, and other big businesses. The franchisees invest money and hire their employees themselves or work with the employees hired by the franchisor to operate the business.
- Conversion Franchise – It is a type of franchise that is converted from a regular existing business to a franchise. When an independent business is converted to a franchise, it has to convert its operating procedures, brand, and business models to best suit the new franchise system. A business usually takes this step for its growth and profit. Once a business can use a recognized brand name it would pull in more consumers towards it. Franchises like real estate and travel agencies, commonly use conversion franchises.
What is a Chain?
A chain is a business model that involves a corporation opening up several branches in different locations with the same central management. It is a strategy used to expand a business however, it does not include a second party. Each retail location bears the same name and sells the same products and services as the parent company. The parent company has to manage everything involved in running and expanding a business. It assumes the profits as well as the losses. To be considered a chain, a company must have at least two branches in different locations. Chains can be located in different cities of a region, different regions in a country, or even in multiple countries.
Characteristics of Chain
Chains have the following unique characteristics:
- Accessibility – These stores are easily reachable by the customers as they are located in many areas instead of just one or two locations.
- Cost Reduction – The head office takes care of the merchandise and manufacturing of products for all the retail units. Goods are dispatched from the main office to the chain stores according to their requirements. Hence, the retail units do not have to do half of the job, and it reduces operating costs.
- Centralized Control – The parent company controls the stores and no other party is involved. The branch manager of each unit looks after the daily process and sends a report to the head office about the sales, cash deposits, and stock requirements.
- Supervision – The head office monitors all the operations and performance in the chain stores. They look at it that everything goes according to plan. They ensure that everyone involved in the chain stores follows the guidelines and policies of the company.
- Transparency – The managers keep records of all the transactions made in each store. The cash flow from the sale of products is deposited daily on behalf of the head office. They prepare and send reports every day to keep the head office informed about the daily cash flow.
- Regular Inspection – The head office appoints inspectors to inspect the operations regularly. They check that the customers are given fair services and are provided with good quality experience in the store. It is also checked that the chains follow the principles and policies of the company.
- Prices – The prices of the products are fixed and are the same in all the chain stores of the particular company.
- Display – Usually, each of the chains of a company has the same kind of look and setting.
Types of Chain
Chain stores are of two broad types depending on the kind of products or services provided by the company. They are:
- Business Chains – It includes many industries like music, clothing stores, and electronics. Chains of a company are opened in various locations, and they all follow the same guidelines and rules provided by the parent company. They sell the same products and provide the same services as every other chain of the same company. Here the individual store owners gain the license for the use of a shared brand, training, and operations.
- Restaurant Chains – It is a chain of restaurants located in different locations using the same brand name. Restaurant chains have standardized menus and are known for their consistency in maintaining the standards and operations of the chain. These restaurant chains are mainly located in areas with high traffic, including tourist spots, shopping malls, airports, hotels, etc. This provides them the advantage of attracting a large consumer base which leads to the profit of the company.
Main Differences Between Franchise and Chain in Points
- Franchises are not fully owned by the parent company, whereas chains are fully owned by the parent company.
- In a franchise, the franchisees pay initial investment fees and royalties that help in sustaining the business. In contrast, chain stores are fully financed by the parent company and they could only get help through lenders or reinvested profits.
- In a franchise, the expenditure is lower as the franchisee takes care of most of the costs of operations. On the other hand, the overall cost of a chain store is managed by the owner of the company hence; it costs more to maintain chain stores.
- Profits and losses are shared in a franchise between the franchisor and the franchisee. On the other hand, profits and losses are both assumed by the parent company in a chain.
- In a franchise, the employees are recruited by the franchisee according to the guidelines given by the franchisor. In contrast, the employees in a chain are recruited and trained by the parent company.
Franchises and chains are great business strategies used to expand a business. We get confused between the two and sometimes think that they are synonymous because of a few similar features. Both of these business models are associated with opening several branches of stores in different locations. Both share the feature of selling the same products in various branches.
However, they still have their unique features. They are different business strategies and suit different companies. Due to the low investment required in a franchise system, most companies across the world are choosing franchises as their strategy to expand their business. Nevertheless, businesses that can afford to invest more capital do not mind sticking with chain stores.
Therefore, we can conclude that franchises and chains are distinctive and are chosen by a company according to what it requires and how it wants to expand its business.