Other forms or Private Sector Organisation

Franchises

These businesses use the name and logo of an existing company. Franchising is a major growth area in the UK economy: by the end of 1999 there were nearly 600 business format franchises in the UK, comprising almost 30,000 franchisees who employed nearly a quarter of a million people.

Examples include The Body Shop, which opened its first franchise in 1977, Thornton’s Confectionery, Prontaprint Ltd and ANC package delivery service.

Some 70% of McDonald’s 26,500 outlets worldwide are franchised (1999).

Franchisees need the use of a car, a telephone, a reasonable size room at home (or use of the garage), plus plenty of energy and determination. Card Connection will provide everything else needed to make the business a success.

Source: Card Connection, 1999

Our commitment to franchising derives from sound business reasons. Fundamental to our long term success story has been the innovative ideas and contribution of our franchisees. Without them, McDonald’s would not be what it is today.

Source: McDonald’s, 1999

The franchisee buys the franchise, entering into a contract with and paying a fee to the franchisor (the company).

Typically:

The franchisee:

• agrees to follow set rules, e.g. layout of premises and product standards
• buys only from the franchisor or other named supplier

The franchisor:

• supplies the decor and assists with layout
• allows the franchisee to use the product and the logo

The franchisor can expand without making a large capital investment, since the franchisee provides the capital. The company knows that its franchisees, who are not on a salary, will be highly motivated by the direct financial incentive to make their franchise a financial success.

The franchisee gains a recognised product or service backed by successful marketing and business methods, and receives expert business support: success is therefore more likely than for an ‘independent’ entrepreneur.

Types of franchise agreements include:

• manufacturer–retailer (some petrol stations and car dealers)
• wholesaler–retailer (Spar and other voluntary groups)
• trademark–retailer (‘fast food’ outlets).

The British Franchise Association (BFA) regulates franchising in the UK. The BFA is a non-profitmaking body, promoting ethical franchising through its member franchisor companies.

The franchisee agreement grants the right and authorisation to operate a specific McDonald’s restaurant, usually for a period of 20 years. These rights include the use of McDonald’s trademarks, restaurant decor designs, signage and equipment layout, the formula and specifications for menu items, use of McDonald’s method of operation, inventory control, book-keeping, accounting and marketing and the right to occupy the restaurant premises. In return, the franchisee agrees to operate the business in accordance with McDonald’s standards of quality, service, cleanliness and value. The franchisee is expected to become involved in their community’s civic and charitable activities. Training is a top priority to ensure the uniformity of the operation and the consistent quality of staff. Each franchisee has constant support through their own McDonald’s consultant who is always available for help and advice, visiting the restaurant on a regular basis. Training facilities are free and available to the franchisee and their management team.

Extract from franchise agreement, McDonald’s.

This extract is a clear indication of how a franchisor–franchisee relationship can operate.

Co-operatives

Although the larger UK co-operatives operate as limited companies, owning capital is not the dominating factor in the co-operative movement. Most cooperative societies exist to provide a service for their member-owners and for the public. Control is shared democratically, with each member having a single vote: trading surpluses (‘profits’) are often distributed to the members in proportion to their trade with the society.

Consumer co-operatives, where customers collectively own the business, are found in Europe and Japan: types of these in the UK include housing co-operatives and credit unions (formed to allow people to benefit from collective saving and borrowing). There are over 4,000 local co-operative retail societies (CRS) – the ‘Co-ops’ – in the UK. Many of their products come from the Co-operative Wholesale Society Ltd (CWS): its role is to buy in bulk and to supply the retail coops with its own (about 3,000 own-brand) goods. The CWS is also the UK’s largest farmer. Other co-operative activities include banking and insurance. The Co-operative Retail Trading Group (CRTG) links individual retail cooperatives. By 1999 the CRTG accounted for over 90% of co-operative food buying power.

Producer (worker) co-operatives also exist. There are over 1,000 worker cooperatives, many of them having existed previously in a different ownership form: printing/publishing, fashion/textiles and agriculture are popular areas. ICOM, the federation of worker co-operatives, was formed in 1971 and supports its members by providing training and business advice: local Co-operative Development Agencies also support these worker co-operatives.

Mutuality

Some building societies and life assurance firms are non-profitmaking organisations, existing for the benefit of their members (customers). In the 1990s, many changed status (e.g. the Halifax converted from a building society to a bank, becoming a limited company), producing cash ‘windfalls’ for the existing members, many of whom became shareholders.

KEY POINT: Many commentators argue that the new profit-focused companies now operate in the interests of their new owners (shareholders), having to meet new priorities such as profitability and dividend payment: this can be at the expense of the old priorities based on satisfying the old owners (customers).