The benefits of all these measures are not always obvious or measurable by franchisees. For example, the average franchisee won't appreciate the research and development costs incurred by a company store for a new training program or product. Franchisees only see the final result.
Tensions between franchisees and franchisers
There can be a legitimate tension between franchised and company-owned stores.
For instance, company-owned stores may have greater access to resources such as local area advertising and staff training, preferential pricing and access to stock, and even favourable trading terms.
This can be unsettling for franchisees who feel they are not only competing against other brands but also their own. This is called "encroachment" and can damage the brand in the long run.
In a case between McDonald's and a franchisee, the Australian Victorian Supreme Court found that McDonald's could open new stores even if they potentially impact the existing franchisee. Opening new stores creates a barrier to entry for competitors, increases sales, and thereby lowers the costs of products for both franchisees and company-owned stores.
This shows that even an action that may appear harmful can have wider benefits.
The huge difference in business models between franchisers and franchisees can also be a source of tension.
Franchisees are retailers. They need to buy the products they are selling as cheaply as possible while incurring the least amount of cost. In doing so they will maximise their retail profit. On the other hand, franchisers are like a wholesaler. They rely on the profit they make from selling products to franchisees. So franchisers can afford to lose money in company-owned stores, making up the difference by selling products wholesale to franchisees.
A happy medium
But as the research clearly shows, for franchisees the benefit from company-owned stores - from marketing, research and development, and training - outweighs the negatives.
Nevertheless, some things should change to keep the peace.
For starters, every company-owned store should operate like a franchise.
Franchisees have been found to perform better than company-owned stores. Franchisees have skin in the game and are motivated by the bottom line of their stores.
What this means in practice is that all stores should make the same contributions to a marketing fund, buy products at the same price, and observe the same retail pricing structure. Company stores should have the same relative local advertising budget as franchisees, have the same stock-holding requirement (quantity and range), and company store managers should face the same performance criteria as franchisees.
Company stores might not perform as well at the bottom line, but overall they add value to both franchisers and franchisees.
Mitre 10 Australia and Mitre 10 New Zealand are owned by different people.
• This article was originally published on The Conversation.
Lorelle Frazer, Professor and Director, Franchising Centre, Griffith University and Maurice Roussety, Lecturer- Franchising and Marketing, Griffith University
