Updated: Oct 3, 2019
Production franchise occurs when the franchisee produces products based on patents, technical know-how and the trademark of the franchisor. In the case of a production franchise, the franchisor may act as a producer of raw materials and ready producers of goods, and be the owner of patent rights and know-how, not directly involved in production.
Production franchises are designed to:
Division of labor and specialization of production.
Increasing production and expanding the product range.
Ensuring profitability and an adequate level of production costs.
Increased production and sales flexibility commensurate with market needs.
Quick and effective introduction of new ideas.
Implementing the production of new products in line with the changing market demand.
Performing these tasks allows you to gain a competitive advantage and an appropriate position on the market. The most famous production franchisor is Coca-Cola. The recipe of the drink is a secret - it was bought in the nineteenth century from a pharmacist. At the beginning of the 20th century, two American businessmen bought bottling rights from Coca-Cola. Because they didn't have enough capital to start their business on a large scale, they started selling the franchise. The lack of sufficient capital to open their own business on an appropriate scale decided that they started selling a franchise for opening the bottling plant.
This type of franchise is directly related to sales and two types can be distinguished. The first type is the sale of the franchisor's products under his logo, while it is targeted at retailers. Franchisors may deliver goods to the franchisee through a third party whose task is to distribute the goods (agent, distributor, sales representative, etc.). This not only allows you to increase sales, but also allows you to distribute products in remote areas and facilitates logistics. The most important advantages for this type of franchise will be the manufacturer's brand, product brand and uniformity of the network enabling the identification of the producer. The franchisor may be a producer of petroleum products, clothing, footwear, toys, alcoholic beverages etc.
The second type of commercial franchise is the sale of goods from franchisees who are not directly involved in production, but have business contacts and long-term contracts with suppliers of attractive products. In this case, the franchisor buys products from various suppliers and sells them to franchisees.
A special model of a commercial franchise is a deposit franchise. In her case, the franchisee does not buy products from the franchisor, but gets them in deposit. The product is the property of the franchisor until it is bought by the customer. The franchisee is a kind of transaction broker, and his earnings depend on the value and quantity of the goods sold.
The main task of the service franchise is to provide the franchisee with the right to take action (offer services) using trademarks, brands and logos, access to recipes, technical software and methods of performing a specific service, as well as support in arranging the service point and staff training in customer service. In this way, networks of hotels, SPA centers, fitness salons, restaurants etc. are created.
In practice, service franchising is applicable in all types of service activities - from tourist offices to banking services
Product distribution franchise
This is a type of franchise that involves cooperation between companies on a supplier-seller basis. In this franchise model, the supplier is the franchisor and the seller is the franchisee.
By setting up a company in a distribution franchise model, you will receive from your franchisor the right to use its brand and the goods with which you will trade or knowledge in the field of performing specific services. However, you won't get extensive support, marketing or operational plans.
This type of franchise works well when selling products, for example, selling cars or clothing. In addition, it is used when the franchisor is interested in the rapid development of his franchise network and often evolves gradually to the model we discuss below, i.e. to the franchise business concept.
Franchise - a breakdown by system organization
This franchise system involves the conclusion of a contract directly between the franchisor and the franchisee. The franchisor himself grants the license and controls the performance of the contract by the franchisee himself, and also directly helps his franchisee in conducting business.
Under this system, a franchisee may operate more than one franchise unit, usually in a specific territory. Typically, the franchisee undertakes to create a certain number of network points within a specified time. This form of franchise was created to minimize the number of franchisees by the franchisor, but not at the expense of the number of franchise points.
Simply put, in a multiple franchise, the franchisee operates more than one franchise point.
Master franchise (sub franchise)
Master franchise consists in the fact that the franchisee has the exclusive right to use the franchise package in conducting operations in a given territory.
How is a master franchise different from a multiple franchise?
First of all, in this model, the franchisee assumes many obligations of the franchisor and has much more freedom of action. Sam may recommend certain changes in the operation of the franchise network and in the franchise agreement, and may introduce them after the franchisor's consent.
This type of franchise system is widely used in international franchises, in which the main franchisor is not able to control all franchisees alone. In addition, legal norms and economic conditions in different countries differ from each other, so it is worth focusing on the master franchise system.
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