Learning Objectives

1. List the relative advantages and disadvantages of chains and independents in the following areas: marketing and brand recognition, site selection, access to capital, purchasing economies, control and information systems, new product development, and human resources.
2. Identify the independent's imperative for success; provide an example of this imperative; and identify the independent's unique market advantage.
3. Explain the difference between product franchising and business format franchising, and identify which is most commonly used in the hospitality industry.
4. List the services the franchisor offers the new franchisee and those offered the established franchise.
5. List the advantages and disadvantages of franchising for the franchisor and for the franchisee.

Chapter Overview

This chapter discusses the three major ways of organizing ownership in food service: independents, chains, and franchises. The text shows that both independents and chain operations have strengths-but, for the most part, strengths in different parts of the marketplace.

The discussion of franchise organizations that makes up the last half of the chapter is a section you may want to draw on again when you discuss hotel franchising.

Key Concepts

1. Discuss various forms of restaurant ownership.
• Forms of ownership include chain ownership, independent ownership, and franchise ownership.
• Most chains include both chain-owned and franchised units.
2. Identify the seven areas in which chains have strength.
• Marketing and brand recognition
• Site selection expertise
• Access to capital
• Purchasing economies
• Centrally administered control and information systems
• Financial support and expertise for new product development
• Employee and management training programs
3. Define and discuss economies of scale.
• Economies of scale are savings that come from spreading a centralized activity over a large number of units.
4. Explore restaurant chain marketing and brand recognition, site selection expertise, and access to capital.
• Chains can afford national or regional advertising campaigns that promote their brands because they are able to spread the cost over many units.
• Chains can also afford real estate departments with the expertise to analyze factors that affect location potential.
• A bank's willingness to lend increases with the size of the company seeking the loan.
• Publicly traded companies can attract capital from individual investors, mutual funds, insurance companies, and pension funds. They can also sell bonds through public markets.
5. Discuss restaurant chain purchasing economies, control and information systems, new product development and human resource program development.
• Chains can centralize their purchasing and negotiate the best prices and terms because they buy in great quantity.
• Chains have centrally managed inspection and quality control staffs that regularly review the efficiency and quality of the units.
• With adequate financial support and expertise, chain companies are able to test and launch new products.
• Some chains have sophisticated training programs for hourly employees.
• Large chains usually provide thorough entry-level management training.
6. Examine the market share of chains.
• The top chains controlled over half (51.3 percent) of restaurant sales.
• Their growth in market share is slowing down.
• Since chains have adequate financial reserves, they can ride out recessions.
• Few chains will dominate the market except on a local or temporary basis because of fierce competition and shifting customer preferences.
7. Review the factors that can impact the success of the independent restaurant.
• The independent's flexibility, the motivation of its owner, and the owner's presence in the operation all affect its success.
• To prosper, the independent must achieve differentiation.
8. Discuss the independent's marketing and brand recognition.
• A successful restaurant proprietor is often well known in the community.
• A high-quality operation enjoys a good reputation that may spread beyond the community through word-of-mouth.
• The independent begins with a local identity.
9. Review site selection, access to capital, and purchasing economies with respect to independents. )
• Established operators move infrequently, although successful independents sometimes expand by adding locations.
• If an operator has a well-established banking relationship and a carefully worked out business plan covering a proposed expansion, the local bank may be happy to make the loan.
• Banks are more willing to give loans to independents if they can gain support from the U.S. Small Business Administration (SBA).
• The independent often places more importance on consistently finding top-quality products than on purchasing economies.
• Long-standing relationships with local purveyors can help the independent maintain quality.
10. Discuss the independent's use of cost control and information systems.
• An independent can buy systems and software that have standardized but highly complex programs, such as POS systems.
• An owner who keeps an eye on everything can achieve effective cost control even if a computerized system is not available or when the cost of such a system is prohibitive.
11. Examine human resource, flexibility, and differentiation with respect to independents.
• The independent often has low turnover because of such factors as employees' personal ties with the proprietor and employees' wish to remain in their home community.
• The independent's cost of training tends to be higher because of the operation's complexity and the lack of a centralized training program.
• An independent has the advantage of flexibility and fast decision-making because there is only one boss or a small partnership.
• One element of the independent's differentiation is the owner's personal identity.
• The other element of differentiation is the reputation as a local firm with a concept, such as unique foods, outstanding service, a pleasing ambience, and an enjoyable atmosphere.
12. Review the market share of franchised restaurants and the two basic kinds of franchising.
• Franchised units make up about half of the restaurant sales in the U.S.
• Product or trade name franchising confers the right to use a brand name and sell a particular product.
• Business format franchising includes the use of the product, the service, and the other systems and standards associated with the business.
13. Describe the franchisee's role in a franchise.
• The franchisee makes a substantial investment, owns the franchise, and usually owns or leases the land, building, furniture, and fixtures.
• The franchisee has full day-to-day operating control and responsibility.
• Many franchisees have considerable freedom in advertising, choice of some suppliers, and changes in the physical plant.
• Most franchisees have considerable budgetary discretion.
14. Explore the most common characteristics of a franchise agreement.
• A franchise agreement states the rights and responsibilities of both the franchisee and the franchisor.
• Use of trademarks
• Location of the franchise
• Term of the franchise
• Franchisee's fees and other payments
• Obligations and duties of the franchisor
• Obligations and duties of the franchisee
• Restrictions on goods and services offered
• Renewal, termination and transfer of franchise agreement
15. Discuss the services received by the new franchisee.
• In addition to the overall concept, the franchisor provides the newcomer with franchisee screening, site selection and planning, pre-opening training, and operations manuals.
16. Review the services offered to the franchisee on a continuing basis.
• On an ongoing basis, the franchisor provides operating and control procedures, information management, quality control, training, field support, purchasing, marketing, advertising, new products, and sometimes new concepts.
17. Examine possible drawbacks for the franchisee.
• Possible drawbacks include loss of independence, substantial advertising assessments and franchise fees, and inadequate field support.
18. Discuss advantages to the franchisor.
• The franchisee makes most, or all, of the investment in the unit, allowing the franchisor to expand rapidly without extensive use of its own capital.
• The more units the franchisor has in a market, the more advertising media it can buy.
• Good geographic coverage makes it easy for people to visit often.
• The franchisor gains highly motivated owner-managers who require less field supervision than do managers of company-owned units.
• Franchisees can contribute know-how and practical ideas.
19. Describe disadvantages to franchisors.
• Many franchisors find their owned stores have higher sales and profit margins.
• About 2 percent of sales must be used to service the franchise system.
• Because of start-up costs, it may be three years before the royalties from a unit contribute to the franchisor's profit.
• Each new unit requires the franchisor to make a large investment in time and money.

Study Questions

1. What does economy of scale mean?
2. What are the advantages of brand recognition?
3. What are the advantages for chain specialty restaurants in the mass media?
4. What is the difference between chain, independent and franchises in terms of access to capital?
5. What is a franchise and how does it operate? How does it differ from an independent operation?
6. What are the strengths of independent ownership?
7. What are the competitive advantages of independents over chain operations?
8. What is the difference between product or trade name franchising and business format franchising? Which is predominant in the hospitality industry?
9. What is a franchise agreement?
10. What is the role of a franchisor?
11. Basically know the advantages and disadvantages of independent, franchise and chain operations?
12. What characterizes competition in the restaurant industry?
13. Who competes for market share in the food service market today?
14. How do training programs differ between chains and independent operations?
15. How do independent operators survive in the competitive market of today?
16. How does cost control differ between a chain and an independent restaurant?
17. How does access to capital differ between a chain and an independent restaurant?
18. Which type of franchising includes use of the product and service, systems, and standards associated with the business?
19. Which kind of restaurant has the most financial support and expertise to develop new product?
20. What is the role of the franchisor's marketing department?