Franchise Dual Systems

"Business Franchise Management regulations" which brought into effect on May 1, 2007 defines the franchise as follows: Business franchise is that the business enterprise which possesses a registered trademark, enterprise mark, patent and know-how resources permits other operators to use its resources in the form of the contract, at the same time, the franchisees operate under the unified business model in accordance with the contract, and pay the franchise fee to the franchisor.Nowadays, more than ninety countries own the franchise systems which exist in various forms, furthermore, more and more countries will use the franchise systems to distribute products or services. Although it is later to introduce the franchise system in our country, the development of franchise system is rapid in a short period of time for more than a decade, and the market potentialities will be great. Currently, the number of franchise system of our country is most, and the speed of development is amazing.The surveys for franchising businesses indicate that some franchise systems only own franchisee-owned units, and the others have both franchisee-owned and franchisor-owned units. Furthermore, the vast majority of franchise enterprises use the form of the latter. In other words, most franchise systems not only own franchisee-owned units but also franchisor-owned units. In this paper, the main target is the franchise dual system. In the dual system, there are not only franchisor-owned units but also franchisee-owned units. The franchisor-owned unit is controlled by the manager whose wage is fixed, but thefranchisee-owned unit is operated by the independent franchisee.The article does not discuss the operation process of the franchise system clearly, but puts the franchise dual system into the framework of economics, and analyses the dual system based on the risk investment between franchisor and franchisee.The article first briefly introduces the research background as well as the ideas, then overviews the knowledge of franchising and then followed by the main part of the article: this paper uses an analysis framework of neo-classical economics. First the paper constructs a model under the uncertain conditions, and then the paper draws respectively the franchisor's ranges of franchisor-owned units and franchisee-owned units, at the same time, the paper also draws the franchisee's ranges of franchisee-owned units and units of the independent brands. Franchisor based on cost-benefit comparison will own franchisee-owned units when his benefits from the franchisee-owned units are better than the benefits from the franchisor-owned units. As long as franchisor is willing to provide the franchise contract and the franchisee's benefits from franchisee-owned units are better than the benefits from the units of the independent brands, the franchisee is willing to join the franchise system. Therefor, the franchise dual system is a form from which both the franchisor and the franchisee can get the most profits.Because the analysis is built on the assumption that the franchise contract has been signed, that is, it is that only in the franchise system the franchisee will be able to maximize his profits. Therefore, in this case, the numbers of franchisee-owned units are decided by the franchisor. The paper draws the optimal proportion of the franchisee-owned units based on the maximizing profits of franchisor through the cost-benefit analysis of the franchisor. When the marginal cost of a franchisee-owned unit equals to the marginal revenue of a franchisee-owned unit, the proportion is optimal. There are many factors affect the proportion such as the fixed fee, the royalty, the expected income of franchisor from the franchisor-owned units, the franchisee's degree of risk aversion, the franchisor's degree of risk aversion, the investment cost of a franchisor-owned unit, the certainty equivalent of franchisee who join the franchise system and so on. The paper draw some following conclusions: the correlation between the fixed fee and the optimal proportion is positive; the correlation between the royalty and the optimal proportion is positive; the correlation between the investment cost of a franchisor-owned unit and the optimal proportion is positive; the correlation between the franchisor's degree of risk aversion and the optimal proportion is positive; the correlation between the certainty equivalent of franchisee who join the franchise system and the optimal proportion is positive; the correlation between the franchisee's degree of risk aversion and the optimal proportion is negative; the correlation between the expected income of franchisor from the franchisor-owned units and the optimal proportion is negative.Lastly, the article uses the data from the world's top 500 franchise systems and tests the model. The paper uses the data of food industry, children's products & services industry, home industry and service industry. The paper also tests the correlation between the factors which affect the optimal proportion and the optimal proportion; furthermore, the paper draws a conclusion that the fixed fee, the position and the franchise development time affect the optimal proportion significantly.