Franchise vs Chain. What’s The Difference?
Learn about the difference between franchise and chain. Help yourself start one of them today and earn higher revenue!
In discussions about growth or brand expansion in the area of business, the terms of “franchise” and “chain” are often given immense consideration. In both the approaches, scaling of business is involved, only in different ways. Still, there has been a consistent debate on the “franchise vs chain” topic. Although there are some key differences between them, understanding them clearly is imperative. This is because both of them play a crucial role in creating jobs and bringing economic growth. For instance, franchise cover about 40% of the total retail sales, just in United States. Also, the differences between franchise and chain are crucial for major stakeholders to be aware of. They require this knowledge for important decision making in their businesses.
In this blog, we bring you a comprehensive review of franchise vs chain, exploring their effective operational frameworks, financial implications and strategic advantages in the industry. Go through this guide, to get in-depth insights on these business models and understand in the simplest terms about franchise and chain.
What is a Franchise?
Franchising is all about getting the license to run the operations of an already established business completely by oneself. It allows the franchisee to use the name of the business and some of its resources under certain agreements. Franchise offers many benefits. The franchisee operates the franchise of a recognized business and enjoys the benefits of reputation and the profits earned, as per the contract of the franchise.
Franchises tend to be a good investment. Franchise ownership helps the investors or franchisees in many aspects. The franchisees get to enjoy the goodwill of the company’s brand, the already set up value proposition and business framework, and details on a variety of suppliers. Also, the franchisor provides assistance in educating the strategy and approach of the business The franchisor cannot risk bearing bad reputation to the brand. There are various types of franchises that exist in the business world and all of those have some notable characteristics.
Key Characteristics of Franchises
- Ownership of the Brand: Under the trademark of the franchisor’s established brand the franchisee operates a franchise. Hence, leveraging the brand’s recognition and market reputation.
- Initial Franchise Fee: The franchisor is usually paid an initial franchise fee. The franchisee is required to pay this fee in order to get the rights of operating the franchise and access to its business model.
- Standard Business Model: The franchisees are provided the standardized business model to operate the franchises. This is done to make sure there is consistency in all franchise locations as the model includes standard procedures and operational systems.
What is a Chain in Business?
A chain is a network of many outlets with the same brand name that are operated by a single company that owns them. In a chain business model there are standardized systems, processes and practices across all locations. In the simplest terms, a single company that opens multiple outlets under its own jurisdiction and runs and manages all the operations is known as a chain. The company is usually a parent company that runs the operations.
All the outlets in a chain business conform to the standard procedures of the brand along with the product and service offerings. A manager is assigned in each outlet of the chain by the parent company to run the operations. In a chain business model, there is no third-party involvement and the manager holds no shares in any location either hence, all the profit from all locations goes to the parent company.
Key Characteristics of a Chain
- Ownership of the Brand: In this business model, the parent company owns all the outlets entirely. This means that there is no ownership of any other party in any of the outlets of the company.
- Control and Management: All aspects of each outlet of the brand are managed by the parent company. The parent company is responsible to employ the staff and assign one manager for each of the locations.
- Profits/Earnings: As there are no shares of a third party in any of the outlets, this means that all the profits from each location goes directly to the parent company. It keeps all the earnings to itself.
Franchise vs Chain Examples
While exploring the business world, understanding the difference between franchise and chain is crucial. Both franchises and chains are business models used for business growth and expansion. But both of them have their own specific characteristics.
To have a clearer understanding of both the franchise and chain, one must look at the examples of each in the business world. There are various examples of both franchises and chains that exist in many industries across the world. Here are a few of them:
Franchise Examples:
Multiple industries consist of well-known and top franchises. First, the best running franchise industry is the fast-food industry and one of the top fast food franchises is McDonalds. It is one of the most famous franchise models globally and the franchisee need to invest a hefty amount as well as follow strict guidelines to run the franchise as per the parent company’s standards.
Another top industry is the coffee industry and one of the best coffee franchises is Dunkin’. It is really famous for coffee and baked food items. The franchisees receive comprehensive training and immense marketing support as the franchise policy of Dunkin’. Furthermore, we can definitely include the pizza industry in this category and one of the top pizza franchises is Papa John’s. It is a very well-known pizza franchise where the franchisees receive extra support from the parent company in terms of marketing, training and established/proven standard operating procedures.
Chain Examples:
Some of the well-known and top performing chains exist across various industries in the world. One of the top industries that uses this business model is the coffee industry and the top performing coffee chain is Starbucks. It operates as a corporate chain in the industry and the company itself owns and manages all the locations.
All locations have somewhat same product offerings and adapt the same branding and service style. Another thriving industry for chain systems is the clothing industry and one of the top clothing chains is Gap Inc. There is streamlined decision-making across all outlets for consistent experience, same marketing strategies and product lines.
Furthermore, another food chain has earned its way to be considered in the top food chains around the globe. This one is known as IHOP (International House of Pancakes). They basically operate with both the franchise and the chain model. But majority of the IHOP outlets are company-owned making them a long chain of outlets. Hence, they have a greater control over menu offerings, operational standards and managing customer experiences.
Chain vs Franchise Similarities
Chain and Franchise, both, are somewhat common business frameworks. Both of these models are used across various industries with similar product and service offerings and experiences.
They have several significant similarities that make it difficult to differentiate between them. Understanding these similarities can certainly help businesses in decision making for expansion opportunities.
Brand Presence
Both the franchises and chains have a network of multiple outlets that operate under the same parent company. On all locations, the customers may find similar products and services.
This creates a strong brand presence for both the models similarly. Hence, this fosters a sense of trust among the customers.
Standard Operating Procedures
Both the franchise and chain often implement similar standard operating procedures at all their outlets. This is to make sure that there is no compromise on efficiency and quality of the brand. This may include the staff training, inventory management etc. This streamlines operations and reduces the risks.
Marketing Strategy
Both the business models utilize similar strategic market expansion techniques to reach a larger audience. Also, in both models, all the outlets benefit from centralized marketing efforts, promoting the brand and attracting potential customer base. The goal of both the models is the same, that is to capture the market share and increase brand visibility.
Difference Between Chain and Franchise
Even though both the business models have same goals and many similarities like sharing the same industries or provision of similar services yet they have some crucial differences that separates them on the broader perspective.
From operating frameworks to major characteristics including the financial aspects of starting each one, they do hold some differentiating elements. The most common differences are:
Ownership
In the concept of chains, the parent company owns all the locations. It has the ownership of the whole network of outlets. The parent company employs managers for each of its outlets and all the operations are continued under that manager. There is no autonomy nor flexibility given to supervisors. This means that they cannot contribute to major decision-making that revolve around prices, standard operating procedures and other key decisions.
On the other hand, in the concept of franchises, each location from the whole network of outlets present is owned by individual people. These people may be entrepreneurs, business owners, investors or from other walks of life.
These individuals are obliged to pay some amount to use the name of the brand and operate the store on a separate location. They may enjoy some margin of autonomy in the decision making as per the franchise agreement.
Financing
When businesses are looking for financing options to invest in a chain model, it is mostly the owners of the company or loan companies who pool in capital to start the outlet. Sometimes the residual profits are also utilized as a reinvestment purpose.
On the other hand, in a franchise model it is the franchisees who have to take care of all the finances of the particular outlet they own under the brand name. They bear all the startup costs as well as the operational costs.
Only some cost is covered by the parent brand for example the training costs or some part of marketing expenses. The funding may be completely from bootstrap or may be taken as a loan from various financial institutions such as bank loans.
Risks
In both the models, there is always some risk involved to a certain degree. Within the chain model, the parent company is responsible for all the risks pertaining to the whole network of outlets.
Hence, if any location of all the outlets is not performing well enough then it is the responsibility of the parent company to uplift it. The whole burden is on the parent company.
On the contrary, in the franchising system the risk is supposed to be shared between the franchisor and the franchisee. Basically, the responsibility of the risk is shared between them.
So, if a franchise outlet is not performing well enough, then the franchisor all takes some burden in lifting the franchise off the ground with the franchisee. The most burden of the risk is borne by the franchisee.
Why You Can’t Franchise with Chain?
Franchising with a chain is rather uncommon in the business landscape. The common element in this aspect is a hybrid model where the outlet operates in a mix model of franchise and chain.
Franchising with a Chain is not applicable directly because of the agreement regarding the rights of the brand. The chain businesses do not sell the rights to us the brand name and access the established business framework.
In the hybrid system, the parent company has a network of multiple outlets of which some are owned and managed by the parent brand itself, while some are operated by franchisees.
Finding the Right Franchise with NFA
The pre-requisites of owning and starting your own franchise are too many, making it a very frustrating task overall. But you need not to worry as NFA (National Franchise Association) has got you covered. NFA is one of the finest institutions available that offer all such services and takes all your worries.
NFA is one of the most sought-after firms for franchising. NFA takes care of all the necessary regulations and legal proceedings as well as the small yet relevant technicalities that are needed to be taken care of before owning and starting a franchise. It also does not leave you while the franchise is running as there are some regulatory measures that arise constantly in franchising.
NFA has a team of experienced and passionate individuals who are expert in business and franchise law. They hold expertise that can guide you on each step of the process.
FAQs
What is the difference between a food chain and a franchise?
A food chain refers to a network of multiple restaurant outlets owned and managed by a single company i.e. the parent company. A food franchise refers to the food outlet of an established brand that is operated and managed by an investor or entrepreneur other than the parent company.
Is McDonald's a chain or franchise?
McDonald’s operates in a hybrid model, so it considered both a food chain and a food franchise. Some outlets are owned and managed by the parent company, making it a food chain, while others are owned and operated by different business owners, investors etc. making it a food franchise.
What is the difference between chain and franchise?
A chain is a network of outlets owned and managed by a single/parent company that makes sure that everything is consistent across all outlets. A franchise is a particular outlet of the brand that is owned and operated by an independent business owner or investor under the same brand name.
Conclusion
About The Author
