Types of franchises

Here is the most important classifications you should know.

Type of activity:

1. Distribution franchise
2. Service franchise
    

Type of know-how transferred to the franchisee:

1. Product distribution franchise
2. Franchise business concept
    

Organisation of the system:

1. Direct franchise
2. Multiple franchise
3. Master franchise
4. Regional representation
    

Distribution (commercial) franchise

A type of franchise where the franchisor provides the franchisee with its know-how providing a range of goods with the knowledge of how to sell them. The franchisee distinguishes the store with the franchisor’s trademark. They also use the franchisor’s support in the retail outlet visualisation, assortment selection, staff training, customer service, merchandising and marketing.

The following distribution industries are covered in our franchise catalogue:

• Food and industrial products
• Pharmacies and health products
• Clothing and footwear
• Children’s products
• Cosmetics, jewellery and gifts
• Home and garden products
• Household appliances / RTV, IT and telecommunications
• Petrol stations
• Sports products

Development of the distribution franchise systems began before the franchise service systems.  This progress was observed in Western Europe and the USA after World War II, and in Eastern Europe after the Berlin wall came down in 1989. This is due to the simple fact that a distribution system is easier to develop than a service system. Standardising a point-of-sale operation is simpler than a point-of-sale where the tasks and procedures required to perform the service need time to develop.

For example: Poland in the early 1990s had high trade margins which ensured a quick return on investment in retail outlets. In mature markets, the distribution franchise continues to grow due to good brand value and applied know-how.

Source: PROFIT system, Reports on franchise in Poland

Don’t mistake distribution franchising (above), for franchise distribution. Franchise distribution is the transfer of know-how relating only to the distribution of products (e.g. regarding the selection of a product range).

Service franchise

A type of franchise where the franchisor provides the franchisee with its know-how in the form of practical methods and service performance procedures. The franchisee represents the service point with the trademark of the franchisor and has use of in-field support of service point visualisation, selection and implementation of services, staff training, customer service, promotion and marketing.

The following service industries are covered in our franchise catalogue:

• Gastronomy
• Education
• Beauty and fitness
• Tourism and hotels
• Real estate
• Business and internet services
• Services for individual clients
• Finance and banking
• Legal and economic consultancy

The development of service franchise systems took place later than in the case of distribution systems. This trend can be observed in Eastern Europe partially after 1990. This service system is more difficult to develop than a distribution franchise. It’s also generally more difficult to manage the standardisation of the operation of a service point, as it requires the development of a precise methodology or procedural system, to perform this service.

It’s worth adding that the degree of development of service franchising also depends on social behaviours for specific types of services. For example, for gastronomic franchise systems to better develop, consumers in that region need to enjoy eating out. Furthermore, Eastern Europeans use services to a lesser extent than in Western Europe. They dry clean in laundries less frequently, overall caring less about vanity. The demand for services such as dog grooming or garden maintenance is again very small. Therefore, the differences in the number of systems present in places such as Poland or in mature markets result from specific needs and expectations of customers. However, there has been a dynamic increase annually in the number of systems operating according to the principles of service franchising.

Source: PROFIT system, Reports on franchise in Poland

Don’t mistake service franchising (above), for franchising company formula (or, business format franchises). Service franchising indicates a type of service business. Franchising the enterprise formula means transferring know-how regarding the overall business model (in the form of procedures facilitating the solution of all issues related to running a given business, training the franchisee and its staff as well as ongoing care and support).

Product distribution franchising

A type of franchise where the franchisor (distributor or manufacturer) makes its know-how available to the franchisee via a range of products or services. The franchisee has the right to sell a designated range of goods or services under this model.

Sometimes franchise systems evolve. In the early periods of development, the franchisor focuses on the quantitative growth of its network, providing franchisees with know-how though a range of goods or services. We call this system a product distribution franchise. In the later system developmental stages, the franchisor will focus on improving the quality of the system's operation and develops additional know-how. 

Product distribution (above) shouldn’t be equated with the concept of franchise distribution (or, distribution franchises). Product distribution franchise means the transfer of know-how relating only to the distribution of products (selection of the product range). Whereas distribution franchising indicates the commercial type of activity. Some simple commercial and service systems can both be called a product distribution franchise (e.g. chains with cheap clothing or simple catering stands).

Business format franchising

A type of franchise where the franchisor transfers all their know-how to the franchisee as a complete business concept. Not only does the franchisee receive the knowledge of selling particular products or services, but also about running the entire enterprise. Everything from guidelines relating to site visualisation, uniforms worn by staff, through methods of service delivery, customer service, to promotion and marketing tips.

Don’t confuse franchise formula company with the concept of franchise services (or, service franchises). Service franchise means a service type of business. Whereas the franchise of the enterprise formula means the transfer of know-how in the form of procedures facilitating the solution of all issues related to running a given business, training the franchisee and its staff, as well as ongoing care and support.

Direct franchise

Direct franchising is the easiest and most common way to develop a franchise system. The franchise agreement is made directly between the franchisor and the franchisee. The franchisor provides the license recipient with the services described in the franchise agreement and carries out all the activities that enables the enterprise to operate effectively. It also provides assistance and ongoing advice, trains employees, conducts marketing, advertising, accounting and financial activities.

When a franchisor sets up a franchise system far away from the head office (e.g. abroad or in another geographic region), it can be difficult to control the franchisee and provide the ongoing services. It is wise to consider transferring some of their powers to an intermediary. For example, by using a multiple franchise, master franchise or regional representative office.

Multiple franchise

Multiple-unit franchising is the exclusive right to create a franchise system in a specific area, generally as a part of a new geo-development. Under a multiple franchising agreement, the franchisee will have signed on to establish a certain number of system units within a specific period of time.

This is usually done as a framework agreement - the basis of which the franchisee usually does not obtain the right to use the franchisor's trademark and know-how. That right is granted to a franchisee on individual contracts for individual units of the system. This type of franchising is most often used by franchisors who want to retain the full control of direct franchising, but at the same time, avoid the need to recruit and train large numbers of individual franchisees.

Master franchise (sub-franchising)

In creating a sub-franchising agreement, the franchisor grants the franchisee (in this case the master franchisee) exclusivity to use his franchise package in conducting business in a specific region.

Unlike with a multiple franchise, the franchisee in this agreement assumes many of the franchisor's obligations contained within the franchise package. Moreover, the franchisee obtains the right to recommend changes to the franchise agreement and the franchise package. However, the franchisor still retains full control of the system, thanks to a ‘final right to approve changes’ clause. Sub-franchising is mainly used to create franchise systems in countries where the conditions for doing business differ significantly from those in the country where the franchisor is based.

Regional representation

A regional representative is a person (or company) that aims to discover new opportunities in another region or territory. They also provide business services to existing franchisees. All agreements are made directly between the franchisor and the franchisees; all royalties are paid to the franchisor directly. The responsibilities of the regional representative can include local advertising, training and supervision of franchisees.