Know About Different Types of Franchise Business Model
Starting a franchise can be a thrilling introduction to entrepreneurship, but before moving forward, it is important to understand the models you will have to choose from. Each franchise model operates differently in ownership and operational management, and how profits are shared with the brand. Choosing the right model can help in making sure your goals align with the franchise's expectations.
In essence, franchising allows you to run a business in the name of the brand, using the brand's products or services, and following the supporting systems put in place by the brand, in exchange for a payment or royalty to the franchisor. The franchisor owns the brand and the system, and the franchisee engages with the brand, pays a royalty, and runs their outlet using the brand and system.
Let’s talk about the four most common franchise business models in India.
1. Company Owned Company Operated (COCO)
A company-owned, company-operated model means the company will own the outlet, and all of the management will be the responsibility of the company, owned by the company. The COCO format is often referred to as the “flagship” store model, as it can be used to test a new market or to show the full capability of the brand.
Benefits:
The company has complete control.
All investment, location, and operational decisions are made directly by the franchisor.
Easier to maintain brand consistency.
Cons:
Requires significant capital and resources on the part of the company.
Examples: Reliance Jio Mart, Big Bazaar.
2. Company Owned Franchise Operated (COFO)
In this arrangement, the company invests in the real estate and establishes the outlet, while the franchisee is responsible for the daily operational functions such as hiring, maintenance and rent. The franchisor keeps the lion's share of profits.
Pros:
A franchise doesn't have the burden of a high initial investment.
The company can develop regions where it is difficult to recruit franchise investors.
Franchisor isn't responsible for the day-to-day operations.
Cons:
Franchisee makes a relatively small profit share.
If the franchisee leaves, there may be adverse operational consequences.
3. Franchise Owned Company Operated (FOCO)
In this scenario, the franchisee is responsible for investing in the outlet and infrastructure, while the company is responsible for operations. This guarantees a greater level of brand control, quality, and customer experience. The FOCO structure is prevalent with most international food brands.
Pros:
The company manages the business, ensuring an acceptable level of consistency.
The company can assure good customer service and brand quality.
The franchisee can invest in the business without worrying about operational management.
Cons:
Franchise owners have little control over the business.
Higher capital investment with lower potential returns.
Unsuitable for those seeking hands-on involvement.
4. Franchise Owned Franchise Operated (FOFO)
The franchise model represents the most commonly used model by far at almost 85% of franchises in India. The franchisee pays a fee to operate under the brand name; however, he is completely responsible for investing, operating and managing the business.
Pros:
Maximum profit potential.
Total operational and staffing control.
Attractive to activity-seeking independence.
Cons:
Full risk is absorbed by the franchisee.
Higher pressure to succeed.
Greater opportunity for failure with weak management.
Examples: Café franchises, like Bistro 57.
Conclusion
All models of franchising have their advantages and disadvantages. COCO offers the brand complete control, COFO models limit franchisee capital risk, FOCO models are consistent with branding, and FOFO offer maximum independence and maximum risk.
Before any investment, assess your financial stability, risk tolerance, and long-term objectives. Finding the right model of franchise is critical in building a sustainable business. If you are not comfortable with your final decision, working with a franchise advisor will help steer you to make the appropriate choice for your unique business concept.