Franchising

From an economic perspective, franchising is a marketing method— a system for promoting products or services to the final consumer. It consists of a commercial collaboration between independent businesses, usually operating at different levels of the market (for example, manufacturer and distributor, or wholesaler and retailer). Accordingly, the cooperating parties are typically a large enterprise and a smaller one.

The aim of the first is to expand its distribution network by increasing the number of retail outlets or service points, while the aim of the second is to increase profitability by leveraging the commercial reputation, organizational structure, and expertise (know-how) of the former.

From a legal perspective, franchising is a cooperation agreement between two independent businesses, under which one party—the franchisor—grants the other—the franchisee—in exchange for direct or indirect financial consideration, the right to exploit the so-called franchise “package” or system for the purpose of marketing specific types of products or services.

The franchise package comprises the totality of industrial and intellectual property rights, including trademarks and trade names, shop signs, operating standards, designs, patents, and technical and commercial know-how.

This franchising relationship is characterized by strict centralization, which is directed and controlled exclusively by the franchisor.

The franchisor determines the overall strategy and organizes sales, drawing on the knowledge and experience it has acquired in the production and distribution of specific products or services.

Franchisees merely adopt the existing organizational structure, becoming members of a unified distribution system that expands in a radial manner. However, franchisees are not contractually bound to one another, nor are they connected by any other form of legal or contractual obligation.

This centralization is externally reflected in a high degree of uniformity in the organization and sales methods of businesses operating within the same franchising system—such as uniform product appearance and packaging, store layout and design, staff appearance and customer conduct—along with the establishment of standardized retail prices for identical products.

Form of Franchising: Distribution Franchising

Franchising agreements may be classified into different types, depending on the criteria applied. In particular:

Based on the subject matter of the franchising relationship, four main forms may be distinguished: distribution franchising, service franchising, production or industrial franchising, and mixed franchising.

In distribution franchising, the franchisee exploits the franchise “package” solely for the purpose of selling products to final consumers. The franchisee operates a retail outlet bearing the franchisor’s distinctive trade name or brand and sells specific products on a retail basis (for example, cosmetic or clothing stores).

This form of franchising is the most common. In Greece, well-known examples of distribution franchising include businesses such as Goody’s, Pizza Hut, McDonald’s, Neoset (furniture), Alouette (children’s clothing), Yves Rocher (cosmetics), Dodoni Ice Cream, among others.

Form of Franchising: Service Franchising

In service franchising, the franchisee provides services to final users under the distinctive sign, trade name, or even the trademark of the franchisor, in accordance with the instructions and operational standards set by the franchisor.

The main sectors in which this form of franchising is encountered include high-end hotel chains (such as Hilton, Holiday Inn, Sheraton, etc.), car rental and repair businesses (Budget, Avis, Hertz, etc.), dry-cleaning services, travel agencies(e.g. Travel Plan), and foreign language training centers.

Service franchising also includes mobile franchising, which is characterized by the provision of services outside the company’s business premises. In such cases, the company’s employees travel to the customer’s location (either a business site or a private residence) in order to deliver the services.

EEC Regulation 4087/1988 contains specific provisions regarding the means of transport used in mobile franchising and the technical specifications they must meet.

Form of Franchising: Production or Industrial Franchising

In production or industrial franchising, the franchisor grants the franchisee a license to manufacture or process specific products and subsequently sell or resell them, affixing the franchisor’s trademark to those products.

The manufacturing or processing of such products is carried out in accordance with the methods, specifications, and appearance predetermined by the franchisor, and generally in compliance with the instructions provided by it. In essence, this form of franchising is more akin to a license agreement for the exploitation of proprietary know-how or patents.

A characteristic example of this type of franchising is found in agreements where the franchisor is a beverage bottling and distribution company, such as Coca-Cola, Fanta, Pepsi-Cola, and similar brands.

This form of franchising is typically chosen by the franchisor when it seeks to avoid transporting its products, either for economic reasons (to reduce transportation costs) or due to factors related to the nature of the products themselves(such as the risk of spoilage or deterioration).

Form of Franchising: Mixed Franchising

Mixed franchising refers to arrangements in which elements of more than one of the previously described franchising models coexist.

Most commonly, the term mixed franchising is used to describe agreements that combine features of both distribution franchising and service franchising.

Typical examples include car dealerships that also provide maintenance and repair services, or cosmetics retailersthat additionally offer beauty and aesthetic services.

However, it is also possible for a mixed franchising model to incorporate elements from all three of the aforementioned forms, resulting in a more complex and hybrid franchising structure.

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