F RANCHISE S YSTEM

2.1.1 Definition of franchise system

The word “Franchise” was originally from French, meaning freedom from slavery. Thereafter in English franchise means “special right”, and now we can interpret it as “license”, which is the binding contract between franchisor and franchisee, it provides an opportunity for people to have their own career. Franchising offers opportunities for individuals and business firms who wish to expand their business and is an important market strategy in world market for economic development, job creation and business growth (Hoffman & Preble, 1991).

Japan Franchise Association (JFA) thinks franchise is the cooperation and franchisors conclude a legal, written contract that authorize other to use its logo, slogan, and selling techniques to sell its products in similar cooperate image. Relatively, franchisees pay an equitable fee to the cooperation. Running a franchise business is a coexist relationship between cooperation and franchisees. International Franchise Association (IFA) defined “Franchise is the agreement or license between two legally parties which gives a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor).”

The franchise system is treated as a distribution channel, using the dimensions traditionally used in the literature on distribution channels - conflict, power, and

relationship (Stern & El-Ansary, 1988).Kotlor (1988) proposed that franchise system is a combination of principal (manufacturing wholesaler, services industry organization) and agent (franchisee, independent entrepreneur) by signing contract. Su (2002) defined franchise system as two or more stores that shared the same name, logo, cooperate identity to sell products. Headquarter gives the authority to operate the store, and help the store from training, purchasing and managing. As Mendelsohn (1999) states, franchising is a method of distribution and marketing goods and services in almost every business segment.

To be brief, this study defines franchise system as a long-term business relationship with headquarter, to sell the products by sharing the same name, logo, cooperation identity, and technology of operations.

2.1.2 Types of franchise system

1. The U.S. system

First launched “Products and franchising”, the store gets only the products and the icon. The relationship of franchisor and franchisee in this system is not close, so most of the research does not take this type of franchising into account. New type of franchising in the U.S. is called “Business format franchising”. Business format franchising provides not only the tangible icon but also the intangible managerial assistance, accounting assistance, such as McDonald as example.

2. The Japanese system

Japan has very complex distribution system, so they develop a special way of

classification. The classification is based on the rights and obligations on the contract to formulate the categories. It can be categorize in four category: Regular Chain (RC), Voluntary Chain (VC), Franchise Chain (FC ＆ FC2). At the moment, Taiwan has various types of franchise system, which is closer to Japanese style of franchising system. Based on Japanese franchise system, there are four categories that Taiwanese corporation are more familiar with:

(1) Corporate Chain (RC)

In a narrow sense, the company itself owns the store.

(2) Voluntary Chain (VC)

Franchise Association defined VC is a “ Joint system of a scattered retail stores that seeking to modernize its retail business. They want to have the advantages that chain system provided, which is sustainability, but not to effect its own independence.” Usually franchisor only requires the unified image of the store, and some help on managing the store. Therefore franchisor has low control ability to VC franchisor. Unified purchase to lower down the costs is the most important part of VC, and it is the main reason why traditional grocery store cannot compete with convenient store nowadays. Many grocery stores have chosen to join the higher autonomy of VC system, also it is the major factor that franchise system grow rapidly in the early times.

(3) Franchise Chain (FC)

Lai (1999) called “Franchise Chain” is the authentic franchise system, because

“Franchise Chain” is the only word for franchise system in the United States, there

is no “Regular Chain”, or “Voluntary Chain”. JFA defined franchise chain is a

“contractual behavior between Corporation (franchisor) and stores (franchisee), the corporation provide their own trademark for stores to use, and also provide business know-how, same business design and merchandise to sell. The stores that obtaining these rights need to pay a certain amount relatively. Under the guidance and assistance of the franchisor, the relationship is coexisting and will be continue until the end of the contract.”

(4) Franchise Chain II (FC II)

FC II is a new term in franchise system, the term usually goes with regular franchise chain. FC II is a changed form of regular FC: Instead of finding place by franchisee, the company (franchisor) find a place for the store, and hire a manager, which is also the franchisee to run the store. The autonomy of FC II is low, because the shop owner is franchisor, not franchisee. Some corporation even required the franchisees to be a couple, so they can put in 100% of effort to run the store. The corporation has great control in FC II, so accordance with the traditional literature review, FC II cannot be counted in franchise system.

In summary, the various forms can be explained in Figure 1 that the corporation has higher control power in RC, then FC, FC II, and the last is VC, while franchisee’s autonomy is the opposite way.

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Figure 1 Different type of franchise system ebb and flow of corporation's control power and branch's autonomy

Reference: Su (2002).

To show more details, Table 1 explained more details about which part is different.

It is a comparison of four categories of Japanese classified franchise system.

Table 1 Comparison of franchised system

Corporate Chain Franchise Chain Franchise Chain II Voluntary Chain Capital Corporation Corporation Corporation or

Mutual Franchisee Decisions Corporation Mainly by

Corporation

Ownership Corporation Corporation Mainly by

Franchisee Franchisee Capital

Operation Corporation Franchisee Franchisee Franchisee

CIS Unified Unified Unified Basically Unified

Purchase Unified Unified Unified Basically Unified

Net profit Corporation Shared Franchisee Franchisee Price Uniform Pricing Uniform Pricing Uniform Pricing Elasticity Pricing Education &

Training By Corporation By Corporation By Corporation By Franchisee

Promotions Unified Unified Unified Free to access

Reference: Wu (2001).

Corporate Chain (RC) and VC is clearly in an opposite way, the only two similarities are the CIS and the Purchase, which means the store may use same logo and sell the similar products, but maybe in different prices. The main concern about Table 1 is to compare FC and FC II. In regular FC, the corporation gives the capital and owns the capital. This means franchisee do not get the net profit, but you will get paid by the company. In FC II, both of franchisor and franchisee share the capital. This means in the net profit part, both of them can share the net profit by percentage of capital given out.