What is franchising and how does it work?

FAQs: February 11, 2020

What is franchising and how does it work

Franchising is a growing sector in Australia worth over $182 billion. According to The Franchise Council of Australia, there are over 80,000 franchised business. 

The first franchise businesses in Australia back in the 1970s were mostly US-based Quick Service Restaurants (QSRs). However now most are Australian owned. In fact, there are growing numbers of Australian franchisors taking their brands overseas. 

But what is franchising and how does it work?

Franchising definition

Franchising is a way of doing business where the franchisor (the owner of the product or service) gives the right to a franchisee to sell that product or service using the franchisor’s brand for a specified period of time. 

The franchisor provides services such as training and marketing, and in return, the franchisee pays a fee for the privilege of using the brand.

Franchising models

What is franchising and how does it work

There are four models of franchising used in Australia. 

  • Manufacturer-Retailer

This model is where the franchisee sells the franchisor’s product straight to the public. This type is common in new motor vehicle dealerships.

  • Manufacturer-Wholesaler

This model lets the franchisee manufacture and distribute the franchisor’s product under license. You see this in examples like soft drink bottling arrangements.

  • Wholesaler-Retailer

In this model, the retailer (franchisee) buys products from a franchisor wholesaler in order to offer them for sale. Often the agreement means they are contractually obliged to buy from that wholesaling company. This is commonly seen in hardware product stores.

  • Retailer-Retailer

This model lets the franchisor market its products or services through a network of franchisees. As part of the deal, each franchisee must use a common name and a standard set of systems and processes.

Business Format Franchising Model

The first two models, Manufacturer-Retailer and Manufacturer-Wholesaler are often referred to as product and trademark franchises. 

The one you generally think of when you think of a franchise is a Retailer-Retailer or ‘Business Format Franchising Model’. It’s the most common type and is used across all types of sectors and industries. 

The Business Format Franchising Model differs from the product and trademark franchises due to the requirement that the franchisee must operate their business in a particular way. This can include restrictions on areas such as:

  • where the franchise can be located
  • the image of the business
  • the quality of the goods and services
  • how the business is operated.

Oporto: a great example of the Retailer-Retailer and Business Format Franchising Model

Like many other QSRs, Oporto uses the Business Format Franchise, or Retailer-Retailer model. This means that franchisees can operate their own business under the Oporto brand name and must follow the guidelines set down by the franchisor. 

They are required to offer the same products at the same price and quality as other Oporto franchises. This quality standard is achieved by following the same best-practice systems and processes developed by Oporto and used across their franchises.

In return, each Oporto franchise partner has access to a Shared Services team to assist with marketing, IT, HR, legal and business management support, and to negotiate better supplier rates and leases. 

The strength of the Retailer-Retailer format is that the same customer experience is guaranteed across all stores. This grows the overall brand image and boosts all franchise stores.

Why consider franchising?

There are many advantages to buying a franchise compared with starting your own independent business. Just briefly, these include:

  • Brand recognition

You don’t need to spend time, effort and money to establish your brand. You can take advantage of the brand image and popularity that already exists. 

  • Higher success rate

When you follow already established products, systems and services, you have a higher chance of success. There’s no need to take the trial-and-error approach to pricing and marketing – the work has already been done to create a successful formula. You simply need to follow it.

  • Easier finance

You may find it easier to raise finance to get started as investors know that franchise businesses have a higher success rate.

  • Collective buying power

You can take advantage of lower costs due to economies of scale. Your franchisor will usually negotiate the best deals with suppliers and distributors for their entire business, which gives you the savings.

  • Support from franchisor

Professional franchisors have an extensive training program before you start your business, and ongoing support while you’re operating your franchise. You’re supported to run a successful business, even if it’s your first time.

Do your research

While there are advantages to buying a franchise, it’s still a significant monetary investment. So, it’s important to do your research.

You should talk to other franchise operators about their experience to see if it’s the right opportunity for you. Is their day-to-day life something you can see yourself doing? Does it fit with your lifestyle and business goals?

You should also seek independent financial, legal and business advice. Franchising is regulated by the Franchising Code of Conduct, which means you will need to comply with various laws, such as the Fair Work Act, tax legislation and licensing schemes.

Want to see if Oporto is the right franchising opportunity for you?

Our Franchising Team is here to help you with any query you might have. 

Get in touch today!