Wednesday, April 26, 2017

Is Franchising good or bad?

Among the readings assigned for this week, the Ben and Jerry’s case has a lot of data that is relevant to those of us studying strategy development. Starting as an ice-cream vendor at a gas station in Burlington, Vermont, Ben and Jerry’s grew to become the second largest in terms of market share for super premium ice-cream in the United States by 1994. The lessons worth noting here include a broad spectrum of strategies such as product differentiation, dealing with healthy competition, manufacturing, distribution, human resources and the social mission. However, what really drew my interest was when the author mentioned franchising.
Growing up in a business family, I was only exposed to the merits of franchising. In 2001, my father and his cousins started a hotel in the central business area of our hometown in India- a city called Hyderabad. It was a successful business operation which prompted them to open a couple more hotels in close distance. As all three hotels began to bring healthy profits, we decided to expand by franchising our hotel brand known as “Swagath Group of Hotels.” Today, there are about 40 outlets in Hyderabad and business has been stable. The model is simple- Retain a large stake in each branch of the hotel while giving a stake to a partner who has the time to be responsible for the respective branch because we cannot be in all places at once. The brand value of “Swagath” brought us more customers and as a group, we were able to leverage our resources and knowledge that are required to effectively run the myriad of day-to-day operations of a hotel.
However, after reading the Ben and Jerry’s case, I realized that franchising does not necessarily have to be a boon for any business. Ben and Jerry’s franchised retail stores, known as “scoop shops” during its early years. These franchises failed to add substantial value since they only accounted 3% of the total company sales in 1994.  Another concern was that the scoop shops was causing damage to Ben and Jerry’s unique image. This struck me to think about more risks that come with franchising, such as losing control over quality; dilution of core values and consequential reputational risks. Ben and Jerry’s eventually suspended their franchising operations in the 1990s.
Although, franchising can still be a great channel for expansion, if done carefully, like I saw my family do with Swagath hotels in Hyderabad. They always controlled a majority stake and hence had the say in all big decisions. As a group, this helped to make sure that the core values were guarded and the quality remained consistent across all branches. Ben and Jerry’s too, eventually, started a new, more closely controlled franchise program which was more real-estate and retail-traffic focused.

To conclude, organizations that are looking to expand must surely consider franchising, but should tread with caution. It’s important to make sure that the quality of the product as well as the core values do not get affected.

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