To a layman, food chain and franchise may sound one and the same thing but in reality there is a huge difference between the two. These can be classified as 2 different models of business. Here are some key difference between food chain and franchise, the 2 forms of restaurant business:
Chain model has been initiated by a company named The Great Atlantic & Pacific Tea Company (A&P), which used this model to open numerous retain, tea and coffee stores starting from U.S. around the year 1860. A&P has given an inspiration to many companies in various fields. In restaurant fields various companies following chain models are Courtyard by Marriot, Taj Hotels, Fortune Landmark Group, etc. Franchising has evolved over time as an efficient way to do business. The origin of the word franchise goes back to Anglo-French meaning freedom or liberty. History traces back the credits of franchising to Isaac M. Singer (1811-1875) of U.S. who wanted to find a wider distribution for his product (sewing machine) but lacked the money to increase manufacturing. (source)
In the chain concept, the parent company is the owner of all the business locations, or all the chains as we call it whereas in the franchisee business concept independent owners operate individual stores. In case of a chain, all the management of all restaurants across all the locations is handled by the central owner company. Each franchised unit must adhere to the basic requirements set up by the parent company. Requirements normally include the menu items they can serve, level of quality to be maintained, operating procedures as well as prices are many a times controlled by parent company.
One of the major differences between the 2 is about the risks involved. When a restaurant is expanding with a chain model, the entire risk lies on their shoulders. It will have to capitalize the whole project at its own risk. But when a restaurant is expanding with the franchisee model it passes on some of the risk onto other investors. In franchise model, from parent restaurant point of view the level of risk decreases, but it increases significantly on the franchisee owner as franchisees buy licenses for restaurant operation from the parent restaurant and derives its income from revenue/royalty. These days franchise fees have also increased significantly for this model.
- The ownership will always be in the hands of one sole individual/company by whom everything will be taken care of.
- The profit margins of the owner increases significantly while opening newer successful chains of the restaurant.
- It is owned by a franchisee owner paying the franchise fees in the beginning and supplying only a percentage of profit to the parent company later on.
- The owner of the parent company need not worry about the restaurant operations at all its franchise.
- For the owner of the parent company, various risks are transferred to the franchise owner.
Some on the various restaurants following chain model are: Barbeque Nation, Pizza Corner, Vasudev Adiga, Marriot Hotels, The Leela Palace.
Some of the restaurants following franchise model are: KFC, Pizza Hut, Subway, Taco Bell, Quiznos.
Following are some insights on deciding what is more suitable and perfect for you:
Financing is a key factor in deciding which way can be better in expansion. Opening a new restaurant has its own high capital requirements. Thus considering the finances you can choose to go by either chain or franchise model. Chain Model will require higher capital with all start up costs and operational capital for new locations on your shoulders. Franchising will reduce finances as franchisers would bear the investment cost.
Responsibilites in a chain restaurant falls entirely in the owners hands, whereas in the case of franchise, most of the responsibilities of daily operations, staffing, generating payroll, maintaining utilites, etc will fall on franchiser. Having a chain increases the responsibilities hugely for handling operations at all the branches whereas for a franchiser to maintain his own franchise is easier compared to multiple branches. Thus depending on the bandwidth available, decisions can be made on which model to follow for your restaurant.
Impression on customers is a key factor in generating profit in any business. While you expand your restaurant with the chain model, it is easier to maintain same level of food quality standards and serving styles across all your restaurants. Inspite of owner trying to normalize operations at each location with franchise agreements, franchisees might lack the consistency of food and service to the customers. One bad experience by a customer at a franchise location, can harm the reputation of the entire brand and eventually affect all the locations under that brand name. This phenomena is termed as COATTAIL Effect.
Knowing the above difference between food chain and franchise will help you to decide the suitable option for you. In either case for gaining success, understanding customer is very important.
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