While the terms “chain store” and “franchise” are usually used interchangeably, there’s a whole lot of difference between the two. In fact, if you don’t know the difference when investing, it can cost you dearly. Let’s take a look at the differences between a franchise and a chain store, shall we?
What’s a Chain Store?
In the business world, a chain means a group of stores (typically two or more). They possess the same name (brand), and adhere to similar corporate store policies, sell the same products, and often owned by the same parent company. Here, think of Wal-Mart as a chain of mass-retail supermarkets. They can be local, regional, nationwide or global depending on the reach of the brand.
Chain stores are corporate owned, meaning that the parent company owns and operates all of the units. Moreover, all the profits or losses made by the units/chain stores are assumed by the parent corporation. In fact, they run daily operations, hire employees, and do everything from planning to tax.
What’s a Franchise?
Most successful businesses and corporations can offer franchising opportunities to willing and qualified investors. When a company sells franchises it’s called a franchise chain. In that case, a franchise location is owned and operated by an outside owner (franchisee). Franchisees must pay a small royalty fee (usually monthly or annually) and ongoing fees to the franchisor, as well as follow the business protocol and corporate policies set by the franchise company.
The guidelines that the franchisees must adhere to are clearly spelled out in a franchise agreement document called FDD. Each and every franchise location must stick to these guidelines unless indicated otherwise by the franchisor. These guidelines include operating procedures, opening hours, products allowed to be sold, and how & when pricing can be changed.
A franchise business structure is a win-win for both parties: the franchisor and the franchisee (unit owner). On the one hand, franchising offer corporations a chance to expand their reach. It also allows others to emulate their successful, time-tested business model, brand, and marketing reach.
On the other hand, franchisees don’t have to start the business from scratch. It’s been already done by the franchisor and test by time and the end users. In essence, the franchisee will get a business that has been proven, and the advantage of the marketing and branding power of the franchisor.
A chain store and a franchise are fundamentally different:
Chain stores are fully owned and managed by the parent corporation on behalf of the shareholders. A franchise unit, on its side, is owned by a franchisee (an outside investor). That doesn’t mean that a corporation cannot have franchises and corporate-owned chains. In fact, franchise companies like McDonald’s have franchise-owned stores and corporate-owned restaurants within their network. At the end of the day, both franchises and company-owned chain stores must follow similar guidelines and corporate policies.
One of the fundamental disparities between a chain store and a franchise is the level of risk involved. A company that goes down the franchising road will pass on some of the risks onto the franchisees.
Getting funds to finance growth is the biggest incentive that drives companies to sell franchises. Companies that go with a chain store model will have to find financing elsewhere perhaps from the top-tier lenders or reinvesting profits.
Franchises, however, go to franchisees to help raise funds to defray costs of running both the corporation expenses and franchises. With running a business location being capital-intensive, franchises are more likely to experience faster growth than chain stores. This is solely because of financing.
Costs of Operations (Overheads)
A franchise-owned store typically has fewer overheads and fewer costs of operations than a similar chain store. For one, the franchisee can act as the manager and take care of costly expenses like serving, cleaning, etc. Most chain stores, on the flip-side, have larger payrolls.
A chain store has a potential to return more profits to the parent company in the long run because ownership. Specifically, profits (and losses), and operations stay with the corporation. When it comes to franchises, the franchisor has to share the spoils with the franchisee.