Franchising

From Phinvestopedia

Franchising is a business model where an individual (the Franchisee) pays a fee to use the brand, operational systems, and products of an established company (the Franchisor). In the Philippines, franchising is often seen as a shortcut to entrepreneurship, allowing beginners to skip the "trial and error" phase of product development.

The Philippines is often called the "Franchise Hub of Asia," with a market dominated by food carts, water refilling stations, and quick-service restaurants.

Historical Context

  • The Jollibee Phenomenon: Modern franchising in the Philippines was cemented by the success of Jollibee. Its rapid expansion through franchising in the 1980s proved that local brands could compete with global giants like McDonald's using this model.
  • The Food Cart Boom (2000s): The proliferation of malls (SM, Robinsons) created a massive demand for small-footprint concepts. Brands like Potato Corner, Master Siomai, and Zagu became household names, democratizing franchising with entry fees as low as ₱250,000.
  • The Service Shift (2010s-Present): Recent trends have shifted toward service franchises, such as self-service laundromats, express courier services (LBC, J&T), and generic pharmacies (The Generics Pharmacy).

How to Franchise (The Process)

Acquiring a franchise is more complex than simply paying a fee. Legitimate franchisors are selective.

  1. Discovery Day: You attend a briefing (often at the HQ) where the franchisor explains the business model, ROI, and requirements.
  2. Letter of Intent (LOI): You submit a formal letter stating your interest and proposed location.
  3. Site Inspection: The franchisor visits your proposed location. Crucial: If the foot traffic is too low, a good franchisor will reject the site to protect their brand (and your money).
  4. Contract Signing: You sign the Franchise Agreement. This legal document binds you for 3 to 10 years.
  5. Payment: You pay the Franchise Fee (upfront) and prepare capital for the Investment Package (construction, equipment, initial stocks).
  6. Training: You and your crew undergo mandatory training on operations, inventory, and customer service.
  7. Grand Opening: The business launches with marketing support from the HQ.

Pros and Cons

Feature Pros (The "System") Cons (The "Handcuffs")
Brand Instant recognition. You don't need to convince people to try "Potato Corner"; they already know it. You have zero control. You cannot change the logo, the menu, or the prices even if customers complain.
Operations Plug-and-play. You get an Operations Manual that tells you exactly how to cook the fries or clean the floor. Royalty Fees. You must pay a percentage of your gross sales (usually 3-5%) to the franchisor every month, profit or no profit.
Supply Chain Stocks are delivered to you. No need to wake up at 4 AM to go to the wet market. Marked-up Supplies. You are forced to buy supplies only from the franchisor, often at prices higher than the supermarket.
Marketing National TV ads and social media campaigns are handled by the HQ. Marketing Fund fees are deducted from your sales, even if the ads don't target your specific barangay.

Pitfalls and "Gotchas"

The Philippine market is flooded with "Scam Franchises" targeting OFWs.

The "Turnkey" Trap
Scammers offer "No Royalty, No Hidden Fees" packages for ₱50,000. These are often just equipment sellers in disguise. Once they sell you the cart, they disappear. Real franchising is a relationship, not a one-time sale.
The Site Selection Lie
Unethical franchisors will approve any location just to collect your Franchise Fee. If a franchisor doesn't care where you put the store, run away.
The Renewal Fee
Many franchisees forget that the contract expires. After 3 or 5 years, you often have to pay a Renewal Fee (sometimes 50% of the original franchise fee) to keep the business.
Territory Encroachment
Check the contract for "Territorial Protection." Without it, the franchisor can open another branch just two blocks away from you, cannibalizing your sales.

How a Franchise Works

Once the ribbon is cut, the "honeymoon phase" ends, and the daily reality begins. Being a franchisee is essentially a middle-management role where you manage the store while reporting to a Head Office.

  • The Supply Loop: You are generally strictly prohibited from buying supplies elsewhere. Even if onions are cheaper at the local palengke, you must buy them from the franchisor's commissary to ensure consistent taste (and to pay their markup).
  • The Audit: Field Officers from the franchisor will visit your store unannounced. They check everything—from the crispiness of the chicken to the cleanliness of the grease trap. Failing these audits can lead to penalties or contract termination.
  • The Remittance: Every month, you submit a sales report. Based on this, you pay the Royalty Fee (usually 3-5% of gross sales) and Marketing Fee (1-2%). This happens before you take out your own profit.
  • The marketing Push: When HQ launches a promo (e.g., "Piso Sale"), you must participate. While this drives traffic, it can sometimes squeeze your margins if not subsidized by the franchisor.

How to Choose the Right Franchise

Don't just buy what is trendy. "Trends fade, staples remain."

1. The "Commissary Test"
Ask to visit their commissary (warehouse/kitchen). A legitimate franchisor will be proud to show it. If they are just mixing powders in a dirty garage, run away.
2. The "Call a Franchisee" Tactic
Don't rely on the list of "Happy Franchisees" the sales agent gives you. Go to a random branch of the franchise, buy a product, and ask the staff: "Kamusta si Boss? Masaya naman ba siya sa HQ?" (How is your boss? Are they happy with HQ?). Staff gossip reveals the truth about delayed deliveries or lack of support.
3. Check the COGS (Cost of Goods Sold)
Ask the franchisor for the food cost percentage. In the Philippines, a healthy food franchise should have a food cost of 35% to 45%. If it's 60%+, you will work like a carabao for very little profit.
4. Corporate-Owned vs. Franchised Ratio
A healthy franchise usually owns at least 10-20% of its own branches. If they have 100 branches and own zero, they might be a "Franchise Mill"—earning from franchise fees rather than selling the actual product.

Tips to Increase Chances of Success

  • Location, Location, Negotiation: The difference between profit and loss is often the rent. Negotiate for a lower rate or a "percentage of sales" lease with the landlord. A rent that exceeds 10-15% of your gross sales is a danger zone.
  • The "Ate/Kuya" Factor: In the Philippines, customers are loyal to the staff, not just the brand. If your *tindera* (staff) is grumpy, customers will walk to the next stall. Treat your staff well, pay SSS/PhilHealth, and they will stop theft and upsell your products.
  • Be "Hands-On" Initially: The most successful franchisees are those who scrubbed the floors and manned the cashier during the first 3 months. You cannot guard against theft if you don't know how the POS system works.
  • Local Store Marketing (LSM): Don't rely solely on the franchisor's national TV ads. Do your own LSM. Give flyers to the tricycle drivers nearby; offer a "Free Upsize" to the local call center agents. Win your specific barangay.

Success Stories (Watch on YouTube)

YouTube is a valuable resource for learning from both the founders of major brands and the franchisees who operate them. Here are key interviews and case studies:

  • The Potato Corner Blueprint
    Video: From Vision to Venture: The Franchise Formula (ANC)
    The Story: An interview with the CEO of Potato Corner, explaining how a small popcorn-flavored fries cart became a global empire.
    Key Lesson: Scalability is key. A franchise succeeds not just because the food is tasty, but because the operations are simple enough for a teenager to run.
  • Modernizing Franchising
    Video: There's a 90% Success Rate in Franchising in PH (ANC)
    The Story: RJ Ledesma discusses the shift towards "service" franchises (car wash, laundry) and how technology is allowing OFWs to manage franchises remotely.
    Key Lesson: Franchising has a statistically higher success rate (90%) compared to starting a business from scratch (20%), provided you stick to the system.
  • Filipino Brands Going Global
    Video: PH Franchise Association on Filipino Brands (ANC)
    The Story: Insights from the Philippine Franchise Association on how local brands like Jollibee and Bench compete internationally.
    Key Lesson: For aspiring "Master Franchisees" (those who want to bring a brand to a whole region or country), understanding global standards is crucial.
  • Real-World Franchise Operations
    Video: Franchoice: Turning Dreams into Franchise Success (Business Beat)
    The Story: A deep dive into the operational realities of running a franchise in the current Philippine economy.
    Key Lesson: Success requires active management. Buying a franchise is not buying "passive income"—it is buying a business model that requires supervision.

Comparison with Other Ventures

vs. Starting Your Own Business

  • Choose Franchise if: You have capital but no experience. You want a lower risk of failure (90% of franchises survive vs. 20% of independent startups).
  • Choose Own Business if: You are creative and want total control. You want to keep 100% of the profit and avoid royalty fees.

vs. Passive Investing (Stocks/REITs)

  • Franchising is ACTIVE. Even with a manager, you must audit inventory, handle staff absences (the #1 headache in PH), and deal with permits. It is a job you buy.
  • Stocks/REITs are PASSIVE. You buy the asset and do nothing.
  • Reality Check: A franchise can yield 20-30% ROI per year (high effort), while REITs yield 6-8% (zero effort).

When to Franchise (Decision Guide)

  • YES, if: You are willing to follow rules strictly. You have a prime location (owned or leased). You have a buffer fund for 6 months of losses.
  • NO, if: You think it runs itself. You want to modify the recipe. You are borrowing 100% of the capital (interest rates will eat your margin).

Sources

See also

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