ANALYSIS ARTICLE Indian Journal of Arts · new challenges every day, such as: legal issues, marketing campaigns, franchisee- franchisor relationship, use of high tech systems, etc

Fagboun Lawrence IGE,Impact of franchising on retail business,Indian Journal of Arts, 2017, 7(22), 113-120,www.discoveryjournals.com © 2017 Discovery Publication. All Rights Reserved

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Fagboun Lawrence IGE

Department of Marketing, Federal Polytechnic, EDE; Email: [email protected]

Publication HistoryReceived: 03 February 2017Accepted: 10 March 2017Published: April-June 2017

CitationFagboun Lawrence IGE. Impact of franchising on retail business. Indian journal of arts, 2017, 7(22), 113-120

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ABSTRACTThis paper examined impact of franchising on retail business. It further examined the pattern of franchising being employed byretailers compared with other retail strategies. Also the paper evaluated the impact of franchising on volume of sales. The studyemployed survey research with descriptive analysis. The population for the study is 100 respondents out of which 50 sample size wasselected with the aid of Yammane Model. Structured questionnaires and interviews were used to elicit information fromrespondents. The study used both descriptive and inferential statistics such as Pearson’s Correlation Coefficient statistical techniquesto carry out the empirical analysis at 0.05 significant level. The result revealed that franchising is crucial to volume increase andexpansion of retail trade at 5% level of significance. From the objective, it was concluded that franchising is vital to expand retailbusinesses and stimulate higher sales volume. It was recommended that for effective sale growth and retail business opportunities,retailers should opt for franchising as the best option to expand retail opportunities and increase volume of sales.

Indian Journal of Arts, Vol. 7, No. 22, April-June, 2017 ANALYSIS

Impact of franchising on retail business

Indian Journal of ArtsAn International Journal

ISSN2320–6659

EISSN2320–687X


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Publication License


General Note






ISSN2320–6659

EISSN2320–687X


Page113

ANALYSIS ARTICLE





Publication License


General Note






ISSN2320–6659

EISSN2320–687X


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1. BACKGROUND OF THE STUDY

From a marketing standpoint, a franchise offers the benefit of brand recognition. It is a strong marketing strategy to expand

delivery of effective service concept without a high level of monetary investment. Franchisees are motivated to ensure goodcustomer service and high quality service operations.

As the result of globalization, today’s business environment is undergoing a fundamental transformation (Kotler & Armstrong,2004). According to Alon (2001) this movement is so widespread that investment and patterns of trade are being shaped bycompanies that operate on a global level. To be able to compete in this business environment, companies have to start looking attheir businesses from an international point of view. In this constantly changing environment, it is vital for companies to understandthe role of culture differences and develop a business that is capable of working across cultures hence they need to have a flexibleorganizational culture. According to Anand (1987), Franchising is a well working theory that helps companies adapt to differentcultures and business regulations Cited by Anand and Stem (1985). According to Ford (2002) franchising has become thecornerstone of international expansion of companies. The author argues that there are many advantages with franchising as an entrymode such as ability to expand the company rapidly and lowering the risk by spreading it across the networks. Bracker and Pearson(1986) have suggested that franchising is the appropriate market entry strategy in countries that are culturally distant to the homemarket and those that have relatively few barriers (such as stiff competition, high costs, and legal restrictions) to overcome.

According to Williams (2007) Successful franchising relationships consist of three dimensions:i. The business relationship (day- to-day activities that help provide acceptable products and services to customers);ii. The non-business relationship (the cooperative association that exists between the franchisor and the franchisee); andiii. The legal relationship (the contract that exists between the franchisor and the franchisee, and that prescribes the

responsibilities and obligations of both parties).

In a foreign market environment, maintenance of the first two relationships depends on the cultural distance from the homemarket, while the maintenance of the third relationship depends on the extent of legal barriers that have to be encountered in thelocal market. The terms "cultural distance" or "legal barriers" are relative, however, and any given country market would liesomewhere along a continuum with regard to cultural distance or the extent of legal barriers.Franchising as a business concept is fully established in the USA dates back to at least the 1850s when Isaac Singer wanted toincrease the distribution of his sewing machines. But franchising gained acceptance as a type of business at the beginning of the20th century.

The automobile industry and the soft drink industry were the first to adopt the so-called product and trademark franchising.Later, in the 1930s, the petroleum industry franchised the gasoline service stations. Since then many European countries found to beadapting franchising. Even developing countries are benefiting from franchising.

Williams (1993) stated that researchers have examined such topics as control and power in international franchising cited byKolensnikov (2008); Fredericks (2005); Haynes and Williams (1974) control techniques used by franchisors to monitor franchisees indistant markets cited by Williams (1998) the inability of franchise chains to coordinate price, quality and advertising (Kotler &Armstrong, 2004) and resource scarcity and agency theory explanations for franchise growth cited by Alon (2001).

The past decade has witnessed international retail academics examining a limited range of franchising issues such as in-depthcompany experiences cited by Anand (2001); Anand and Stem (1995) power and control in international retail franchising cited byHanes and Williams (1974); Kolensnikov (2008) and the theoretical development of the area cited by Ford (2002); Danta,Grumhergenb and Windspergerc (2011); Bracker and Pearson (1986). According to Alon (2001) researches on franchising have beendominated by the studies on how companies, that have domestic franchising business, bring their tested franchising into the globalmarket.

2. LITERATURE REVIEW AND THEORETICAL FRAMEWORK2.1 Conceptual FrameworkFranchising is one of the most popular and successful strategies for businesses to enter new markets and expand operations.Franchising enables the franchisor to enter a new market with very low risks and initial investment. Franchising systems are facing


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new challenges every day, such as: legal issues, marketing campaigns, franchisee- franchisor relationship, use of high tech systems,etc. (Fredericks, 2005).

According to Williams (1998) franchising is considered to be a relatively low cost, low control entry mode. Franchisors sell theright to market goods and services to franchisees that use the franchisor's brands and business methods (Danta et al., 2011).

Franchising is a successful method of national retail expansion. Continued relationship in the franchisor provides licensedprivilege to do business while rendering assistance in organizing, training, merchandising and management in return for aconsideration from the franchisee.

In practical term, most franchisors are foreign based. In the managing a franchise, franchisor a franchisor will be responsible forsite selection in the foreign market but the franchisee will choose approval.

Franchisors set out both product and structural design and expect the franchisee to incur maintenance costs. In order to ensureproductivity growth, the franchisor will provide employees training and development programmes while the franchisees hire,supervise and pay remunerations and allowances.

The decision of which products to be sold can be taken by the franchisor. However, the franchisee can change product policy ifprior approval is sought. Pricing of products is the sole responsibility of the franchisors, they can set or recommend prices structureand expect the franchisees to strictly adhere. Most advertising and promotional programmes are determined by the franchisors o anational basis, however, the franchisees may suggest local needs as situation requires

In a franchising arrangement, a supplier (the franchisor) grants a dealer (the franchisee) the right to market its products inexchange for some type of consideration, such as a financial commitment and an agreement to conduct business in accordance withthe standards specified by the franchisor (Bracker & Pearson, 1986). According to Alon (2001) franchising can be defined as a “typeof business arrangement in which one party (the franchisor) grants a license to another individual, partnership or company (thefranchisee) which gives the right to trade under the trade mark and business name of the franchisor”Nijmeijer, Fabbricotti and Huijsman (2013) define franchising as “a long-term, continuing business relationship wherein for aconsideration, the franchisor grants to the franchisee a licensed right, subject to agreed requirements and restrictions, to conductbusiness utilizing the trade and/or service marks of the franchisor and also provides to the franchisee advice and assistance inorganizing, merchandising, and managing the business conducted to the licensee”. Franchising has also been seen as an alternativeto individual self-employment decisions to start an independent small business (Williams, 2007; Williams, 1998).As said by Anand (1987) franchising is a key tool in the entrepreneur’s toolbox. In a franchising relationship, a franchisor sells theright to use its trade name, operating systems, and product specifications to a franchisee. The franchisee is permitted to offer thefranchisor’s product/service under the franchisor’s name within a specified region and time period. Ford (2002) describes franchisingas a business relationship whereby a franchisor permits a franchisee to use its brand name, product, or system of business in aspecified and ongoing manner in return for a fee. In terms of market entry mode strategies available to international retailcompanies‟, franchising has proved an increasingly popular mode of operation in recent times (Nijmeijer et al., 2013).

Retailers also appear to have found franchising to be a valuable means by which to develop their businesses. The strategy offranchising has been traditionally associated with the service sector, and in particular the fast food restaurant business (Haynes andWilliams, 1974).However, in more recent times, franchising has been increasingly adopted across a range of other retail sectors. Franchising isconsidered as a market entry strategy for international retail companies. Franchising is increasingly used as a means of enteringforeign markets. For niche retailers such as Body Shop, Yves Rocher, Sock Shop and Benetton, it has become the cornerstone ofinternational expansion activity, providing them with the opportunity to rapidly build a global operation, without exertingconsiderable financial pressure on domestic retail operations.

Franchising has also found favor among more traditional retailers, those companies without a strong global appeal, where it hasbeen employed as part of a balanced portfolio of entry strategies, rather than as the sole means of international expansion. Suchcompanies have included the supermarket and hypermarket operators Casino (France) and GIB (Belgium) and UK variety storesMarks and Spencer and BhS. In such cases it has often been used as a low cost/low risk alternative for expansion to internationallydiverse economies.

2.1.1. Benefits of Franchising in Retail Business DevelopmentFredericks (2005) established the following benefits of franchising to retail business.


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Proven Method: A franchise provides you with a proven business format to follow. The entity from which you purchase thefranchise, known as the franchisor, provides you with operational procedures and marketing strategies that have been successful forother units. This eliminates much of the trial and error associated with starting a business from scratch, as well as much of the risk.

Brand Recognition: From a marketing standpoint, a franchise offers the benefit of brand recognition. Because you're starting anoperation that features an established brand name, you'll likely need to spend less money and effort on establishing the name topotential customers. In many cases, the customer will have already purchased your products or services from another unit in thechain.

Training and Support: The franchisor will provide initial training for you and your employees regarding franchise operations. Thiscan be especially beneficial if you're a first-time business owner or new to the particular type of business. You will also receiveassistance in selecting your site location and in obtaining financing, although the franchisor will probably not provide the financingfor you.

Corporate Advertising: If you purchase a franchise from a nationally established company, you can benefit from the corporation'sown advertising campaigns. For example, noted franchisors such as McDonald's and Burger King advertise continuously on anational scale, which can help direct business to your unit. You may also be able to supplement this with your own local marketingcampaigns.

Protected Territories: When you purchase a franchise unit, you will often enjoy exclusivity in a specific geographic region such as acounty. This ensures that you won't lose business to a franchise owned by another entity. This is also an advantage if you goal is toopen several

2.2 Theoretical FrameworkThe study’s objective was informed by a few theoretical premises.

Resource Scarcity Theory: Franchising is a cheap and fast way to grow because the franchisee supplies the franchisor with one ofthe basic resources to develop a business - money. The franchisor faces a need for growth to achieve economies of scale and marketshare, particularly in the early stages of the operation when they usually face a scarcity of financial resources to fund the growth. Thefranchisee not only contributes to the franchisor with fees and royalties, but also finances the investment to start the operation andprovides the ongoing capital required to continue the operation. So, franchising appears to be the best solution when there is aneed to grow fast and when the franchisor needs to gain access to financial and human resources at a low cost. Kotler andArmstrong (2004) stated that the franchisee is the most inexpensive source of resources that a franchisor might find to fund growthand that there is no economically efficient substitute for the financial resources supplied by the franchisee. This is the theorydeveloped by Bracker and Pearson (1986) known as the Resource Scarcity Theory, which explains that the reason for the franchisorto use the franchising system originates in having access to a resource possessed by the franchisee and basic for the growth of anybusiness - the financial resource. Revising the Resource Scarcity Theory into a financial theory framework, Alon (2001) found that thefranchisor would find more optimal financial sources than the franchisee. Even when franchising would not be the most optimalsource of capital for the franchisee, Danta et al. (2011) emphasise that, added to the argument that the franchisee brings togethermoney and management, franchising has another advantage over selling company shares - keeping control. Indeed, sellingcompany shares to external investors implies losing strategic control; usually the investors will be partners of the company with theright to influence the company’s strategic decisions. Alternatively, using franchising implies that the partners are individualfranchisees who are financing the growth, but do not hold shares in the company; so the franchisor keeps full strategic control of hiscompany.

Agency Theory: It seems that Resource Scarcity Theory explains part of the reason to franchise, but not all of it. The main reason todoubt Resource Scarcity Theory is that the empirical evidence shows many franchising chains continue to franchise even thoughthey have plenty of resources.


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When these companies are using franchising, it is not because they face financial resource scarcity, but because franchising givesadditional advantages to the franchisor, which are not explained under the Resource Scarcity Theory.

Contrary to Resource Scarcity Theory, some researchers have highlighted the idea that the franchising system has indeed a moreimportant aspect than financial resources - the motivation of the franchisee.

The idea is that the franchisees are risking their own money in the franchised business; they are the owners of the business, sothey have all the incentives to work hard and make it a profitable operation. The motivation of the franchisees is superior to themotivation of the company managers, even when the company managers may have a variable salary dependent upon theirperformance - the motivation of risking their own money is higher than any variable compensation we might think about.

Nijmeijer et al. (2013) developed the idea that the franchising system is an effective response to the classic principal-agentproblem studied in Agency Theory. Agency Theory explains that when there is a separation between the property (the principal) andthe manager (the agent), there is an agency problem; that is, the principal is always uncertain about the behaviour of the agent.

Plural Organization Theory: The empirical evidence reported supports the idea that neither the Resource Scarcity Theory nor theAgency Theory is able to explain the whole franchising decision. Despite the controversy between the two theories, it seems thatboth are more complementary than contradictory. Resource Scarcity explains one part of the problem and Agency Theory explainsanother part of the problem, but the predictions of both theories shows that Resource Scarcity, predicting an evolution to fullycompany-owned chains and Agency Theory, forecasting an evolution to fully franchised chains that have not been fulfilled. What wefind in reality is that most of the franchising chains maintain a mix of company-owned and franchising structures.

Kolensnikov (2008) formulated his Plural Organization Theory, which explains that the mix of company owned and franchisedproperties under the same brand; namely, the Plural Form, is what gives the organization a competitive advantage over systems thatare fully franchised or fully company owned. Kolensnikov found that most of the franchising chains have a mix of company-ownedand franchised establishments. One of the reasons he gave for this is that some establishments are more suited to one form ofownership than others.

The other reason is that the existence of one kind of outlets has positive impacts on the other kind of outlets, and vice versa.Under this theory, the reason to franchise is to have simultaneous access to the most important advantage of the company ownedstructure uniformity and the most important advantage of the franchised structure adaptation.

2.3 Empirical FrameworkThis study reviewed some of the extant related empirical works below. Ward, Gurry and Denis (1995) examined businessperformance, operations strategy and performance of retail firms in Singapore. The aim of their work was to determine the linkagebetween franchising and the growth of retail business. Their study found that there are significant paths linking environmentaldynamism, competitive choices, flexibility of delivery, quality and performance with increased sales volume through retailing.

Badri, Quin, and Ferell (2000) examined performance of retail business strategy in the United Arab Emirates (UAE). The purposeof their study was to ascertain the degree of franchise contribution to the growth of retail business. It was found that competitivestrategy acts as a spring board towards the choice of franchise options as this is the fastest means of competitive strategy in a highlydynamic retail environment. Ford (2002) examined the relationship between business franchise performances and increased retaildevelopment. The objective of his paper was to determine if the sales in franchise retails exceed that of other non franchise retailtrades in the emerging economy in Ghana. This study found that in an emerging economy, concern about competitive retailing isthe factor expansion and spread of retail opportunity, which franchising duly provided.

Anand (1987) conducted a study on competition and franchising in organizations performance in the Jordanian. The study aimedat determining if there is relationship between franchising and retail competition. It was observed that the intensity of market retailcompetition has strong correlation with the extent of franchising. The world practice shows that the franchising method of businessorganization and development is widely used in many countries all over the world. This is due to the fact that franchisingsignificantly reduces the risks associated with the creation of new business. The franchisor does not invest his funds in thedevelopment of network, while having the opportunity to receive income from its work, in its turn, the franchisee uses theexperience and support of his/her partner, by buying elaborate and proven business scheme.

Each state has its own system of franchising relationships regulation; however, we can identify a number of common features infranchising and its defining concepts in almost all foreign systems. Thus, the franchising is primarily a way of organizing business


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relations fixed in the contract that defines conditions for the establishment and running of a joint business in which one party (thefranchisee) has the right to charge for the use of the trademark and technologies of his/her partner (the franchisor).

3. METHODOLOGY3.1 Methodology and Model SpecificationThe study employed a survey research design, thus made use of primary data collected from randomly selected staff of thesefranchise organizations. The population for the study comprises all available franchise staff in Osun State and other indigenousretailers. A sample of forty franchise staff and forty non franchise staff was drawn using simple random sampling technique.Questionnaire was used to collect data from the respondents. All the items in the questionnaire were measured on a five pointLikert’s scale ranging from Strongly Disagreed =1, Disagreed =2, Undecided =3, Agreed = 4, to Strongly Disagreed =5.

Ninety (90) questionnaire s were set out, of which only 80 were correctly filled and used for the analysis. Pearson correlationcoefficient was used to test the hypotheses. A pilot study was conducted to know the Cronbach alpha reliability of the questionnaire.According to Cronbach alpha reliability, the R value was 0.81The variables in this investigation were completely and accuratelyidentified before determining their functional relationships. Both the reliability and validity measures are in line with Amaoko-Gyampah (2003) which examined the relationship between business franchise performances and increased retail development.

3.2 Statement of ProblemThe problem of retail business development has been of age in Nigeria. Retailers face a lot of problems in the business sector. Theproblem of retail business development has been of age in Nigeria. Retailers face a lot of problems in the business sector. Toalleviate most of these problems, franchising has been embraced as the fastest and standardized means of extending retail outletsand widening the scope of retail trading for increased sales volume and profitability.

The paper therefore aimed at evaluating franchising to ascertain the relationship between franchising and retail business and todetermine the extent to which franchising contributes to retail business growth. The operational model for this research workrequires that the following key variables were established. These are the independent variable and the dependent variable. Thispaper considers franchising as the independent variables (x) and increased sales volume as the dependent variable. For the purposeof this paper, the model specification for testing formulated hypotheses is expressed below.

The Pearson correlation coefficient is a very helpful statistical formula that measures the strength between variables andrelationships. The coefficient value can range between -1.00 and +1.00. If the coefficient value is in the negative range, it means therelationship between the variables is negatively correlated, or as one value increases the other decreases. If the value is in thepositive range, then that means the relationship between variables is positively correlated or both values increases or decreasestogether. The Pearson correlation coefficient formula is denoted by;

r = N∑XY – (∑X) (∑Y)

√ [N∑X2 – (∑X)2 ] [N∑Y2 – (∑Y)2 ]

Where;

N = Number of pairs of squares: ∑XY = Sum of the products of paired scores: ∑X = Sum of X scores: ∑Y = Sum of Y scores: ∑X2 =Sum of squared X scores: ∑Y2 = Sum of squared Y scores.

3.3. Research QuestionFor the purpose of this paper, the following research questions were raised.

i. What is the relationship between franchising and growth of retail business?ii. To what extent has franchising contributed to sales increase of retail business?

3.4 Objective of the Studyi. examine the relationship between franchising and growth of retail businessii. investigate the extent to which franchising contribute to sales increase in retail business


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r = N∑XY – (∑X) (∑Y)

√ [N∑X2 – (∑X)2 ] [N∑Y2 – (∑Y)2 ]

Where;






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r = N∑XY – (∑X) (∑Y)

√ [N∑X2 – (∑X)2 ] [N∑Y2 – (∑Y)2 ]

Where;






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3.5 HypothesesHo 1: Growth of retail business does not depend on franchise strategyHo 2: franchising does not contribute to sales increase in retail business

4. DATA ANALYSIS AND PRESENTATIONObjective 1: This examines the relationship between franchising and growth of retail businessHypothesis 1:H01: Growth of retail business does not depend on franchise strategyHa1: Growth of retail business depends on franchise strategy

Table 3.1 Correlations Table for Hypothesis 1Franchising Growth

Franchising Pearson Correlation 1 1.000**

Sig. (2-tailed) .000N 20 20

Growth Pearson Correlation 1.000** 1Sig. (2-tailed) .000N 20 20

**. Correlation is significant at the 0.015 level (2-tailed).

From table 3.1, it can be seen that correlation is also significant at the 0.015 level of significance (2. tailed). Since our probabilityvalue (0.015) is less than alpha level (0.05), the null hypothesis should be rejected. It can then be concluded that growth of retailbusiness depends on franchise strategy.

Objective Two: This investigates the extent to which franchising contributes to sales increase in retail businessHypothesis 2:Ho2: Franchising does not contribute to sales increase in retail businessHa2: Franchising contributes to sales increase in retail business

Table 3.2 Correlations Table for Hypothesis 2FranchisePerformance

Sales Trend

FranchisePerformance

Pearson Correlation 1 .771**

Sig. (2-tailed) .000N 20 20

Sales Trend Pearson Correlation .771** 1Sig. (2-tailed) .000N 20 20


From the table 3.2, it can be seen that correlation is significant at the 0.014 level of significance (2. tailed). Since our probabilityvalue (0.014) is less than alpha level (0.05), the null hypothesis should be rejected. It can then be concluded that franchisingcontributes to sales increase in retail business

5. DISCUSSION OF FINDINGSThe study investigated the impact of franchise activities on retail trade performance. Findings from correlation analysis revealed thatit is significant at the 0.015 level of significance. This is in agreement with the study of Badri et al. (2000) who examined


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Sig. (2-tailed) .000N 20 20






Sales Trend



Sig. (2-tailed) .000N 20 20






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Sig. (2-tailed) .000N 20 20






Sales Trend



Sig. (2-tailed) .000N 20 20






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performance of retail business strategy in the United Arab Emirates (UAE) and the degree of franchise contribution to the growth ofretail business. The study also examined the extent to which franchising contributes to level of sales increase in retail business.Findings revealed that correlation is significant at the 0.014 level of significance. This finding is supported with the study of Ward etal. (1995) whose study found that there are significant paths linking environmental dynamism, competitive choices, and flexibility ofdelivery, quality and performance with increased sales volume through franchise retailing.

6. CONCLUSIONAs a result of globalisation, today’s business environment is undergoing a fundamental transformation. In order to compete in thisbusiness environment, companies have to start looking at their businesses from an international retail point of view. Franchising hasbecome an accepted strategy for business growth, job creation and economic development. It is now a recognised and reputableway of doing retail business. Franchising provides fast growth of retail business and also generate higher sales volume than otherretail means.

RECOMMENDATIONSIf a franchise has been well selected, the franchisor will be able to help to avoid many of the mistakes new and independent start-upbusinesses make. Here are some recommendations for franchisee success: Franchise training should be continuous. Stay incommunication with the franchisor through, letters, newsletters, emails, phone calls, faxes, training classes, regional meetings,conferences and conventions. Franchise organizations must improve on provision of resource and equipments to upgrade franchiseperformances at various levels.

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ANALYSIS ARTICLE Indian Journal of Arts · new challenges every day, such as: legal issues, marketing campaigns, franchisee- franchisor relationship, use of high tech systems, etc