Co-franchising

Co-franchising

We are all familiar with business chains. They are nowadays the norm and not the exception. They are almost everywhere. Fast food restaurants, restaurants, hotels, car rentals, coffee shops, apparel, footwear, bookstores, electronics, supermarket, mini-market, furniture are some examples. There is a standard formula, a successful business model that is applied to different locations in one or several countries.

The alternative to a chain is a single store. Some people consider 2 stores a chain. There are chain definitions that argue that. Probably 2-3 stores do not make a chain. Others put the number to 10. New York city puts the number to 14, for restaurants. There are clearly benefits in a chain like name recognition, economies of scale, customer loyalty, common advertising, supply discounts through volume. In some chains all stores are owned by the company, in others by franchisee’s and in many both forms of ownership exist.

USA’s largest franchisors are Subway, Mc Donald’s and 7-Eleven. In order for someone to become a franchisee he will have to pay to the franchisor; (a) one-time royalty for the trademark, (b) fee for training and advising (c) an ongoing percentage of sales volume d) disclosure fee. The franchisor gives the know-how, the business model, the brand name and supply discounts. As it was explained, lack of capital is the main reason people can’t start a business. The required capital in the case of franchising is larger and a part of the profit, if it exists, is given to the franchisor.

The Co-operative Group, is a British consumer co-operative with 3,600 locations and 4.6 million members. Consumer cooperative is an interesting proposal. Retailer cooperatives is something different. Independent retailers join forces for buying and promotion discounts. ACE Hardware was a company owned chain. When the president died, the company was sold to the retailers and it is now a retailers’ cooperative. Best Western was using the cooperative name but it changed to franchisor after a court order. There are examples of retailers’ cooperatives that date back to the beginning of 20th century.

They are usually governed in a democratic way where each member has one vote. A franchising structure is probably better. Co-franchising is a retailer cooperative that is run like a franchise.  A central location exists like in the case of the franchising company. This central location does not get any royalties, advising and training fees, percentages on sales and disclosure fee.

Members of co-franchising only have to pay the salaries for those working at the central location who are their employees. Co-franchising is between franchising and retailer cooperatives. It will help existing small stores but it will also make a lot of people start their own business. Franchising considerably increases the initial capital required. The additional capital to get into a co-franchise will be zero or very small.

Three different alternatives were examined, co-entrepreneurship, remote work nets and co-franchising. What they have in common is that more employees become business owners and have a share of profits. This will probably decrease income inequality. Supply for employees will decrease because they will be working in their own businesses. This will bring salaries up for all, including those who are still employed and will further decrease income inequality. It will also decrease unemployment rate because some workers will find work in this way. The state should have a role in assisting these three alternatives spread.

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