Disadvantages of franchising to franchisor and franchisee

Franchising offers various benefits to both franchisee and franchisor in many ways. The following are some of the disadvantages of franchising to franchisee and franchisor..

Disadvantages of franchising to Franchisor

Franchising is not without its challenges. Most franchisors encounter the following disadvantages.

1. Difficult in motivating franchisees: Generally, a franchise is an agreement for a specific period ranging between five and ten years. During this period, the business may witness several ups and downs. When the business is down, the franchisee may lose his initiative in business. The franchisor in such situations, finds it difficult to motivate the employees. Moreover, he experiences problems in motivating independent operators to price, deliver, promote and hire according to the standards of the business.

2. Highly publicized disputes between franchisees and franchisors: Many disputes are likely to arise between the franchisor and the franchisees. The well organized franchisees constantly seek legal advice to gain economic clout. They hire lobbyists to protect themselves against any possible adversities in the market.

3. Problems of inconsistent quality: Franchisees deliver unique service concept. They are service outlets licensed by a principal. The franchisees should distribute the services according to the specifications of the franchisor. If the franchisee does not deliver the service properly, the brand name of the franchisor will suffer. Low performing franchisees will always undermine the name and reputation of the franchisor.

4. Lack of direct contact with customers: The franchisor is not in direct contact with customers which means that he cannot understand the needs of the customer. As franchisees directly deal with customers, they maintain a good customer relationship. The relationship formed between the customers and franchisees is strong. Franchisees are able to collect all customer-related information relating to demography, purchase-pattern and preferences. Customer relationships are effectively maintained by the franchisees rather than by the franchisor.

Disadvantages of franchising to franchisees

1. Encroachment of franchisee: A large number of franchisees operate within a small radius. Encroachment of franchisees may occur by opening new units near existing ones. This reduces the profitability of franchisees. When encroachment occurs, potential revenues diminish and competition increases.

2. Absence of adequate protection: In India, franchisees do not get adequate statutory protection. There is no specific law for franchising. So, franchisors do not disclose adequate information about their franchise. Consequently, there is no transparency in the operation of the franchisor. But in some countries like USA, specific laws have been enacted giving protection to the franchisees.

3. Franchise saturation: In case of established services, franchisees compete with one another to grab a franchise from the service provider. The terms dictated by the principal service provider are not often favorable to the franchisees. Franchisees are sometimes sour that most markets are crowded and expenses are rising. Over promising by the franchisor and unrealistic assumptions about high return may cause dissatisfaction among franchisees.

4. Competition from franchisor-owned distribution points: Of late, service firms avoid the role of middlemen by establishing self-contained kiosks. Customers can place orders directly with the service firms when kiosks are operated at important centres. The recent shift towards franchisor-owned distribution points has increased the resentment of franchisees as the kiosks encroach the market of the franchisees,

5. Lack of perceived control: A franchisor charges a high fee from the franchisees. At every stage, the franchisor interferes in the functioning of franchisees. This gives room for friction between the franchisor and the franchisee.

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