Table of Contents essay


    1. Term of franchising and its differentiation from other business types.

    2. Types of franchising.

    3. Advantages and Disadvantages of franchising as a business model.

    4. Influence of political and legal system on the franchising


    1. Franchising experience in USA and EU countries

    2. History of franchising and Poland and Ukraine and its comparison

    3. Importance of Franchising In the System of Polish-Ukrainian Economy


3.1.Polish companies on the Ukrainian Market (example of PKO Bank Polski)

3.2.Ukrainian companies on the Polish Market (example of Haircut expressand other companies)

Polandand Ukraine have different economies such the economy of the formeris less developed. The economy of Ukraine can be improved through abold and urgent change, and one of the propositions is that Ukrainerequires franchising its systems of the economy with Poland1.Ukraine as a country is facing a lot of challenges, which are notonly political but also economic. The country’s currency is weakagainst the dollar such that it trades at around 23:1. The importanceof Ukraine entering into franchising with Poland is to help Ukraine’seconomy grow and reform like that of Poland, and have a positiveimpact on both economies. It is very unbelievable to imagine that in1991, both Poland and Ukraine had the same GDP per head but when thecomparison is made now, the Polish GDP is more than three times thatof Ukraine.2Transformationsin the economy of Poland required political will and rationaldecisions and the effective cooperation between the politicalparties, parliament, and the government. The process took the countrya lot of commitment in terms of required technical capacity and thepersonnel to work over a sustained period to ensure that it was asuccess. The process required a lot of support all over the society.We understand that two economies cannot be compared in the same waydue to the different historical background and current politicalsituation.3Thetwo countries are required to form a franchising to ensure that theboth economy expands and grow. The aim of the work is find out howfranchising can be carried out in the system of Polish-Ukrainianeconomic relations and propose the ways that can lead to itsdevelopment.4

Thepurposeof this master thesis is:

– to determine term and type of franchising

– to analyze franchising experience in EU and USA

-to compare franchising in the system of Polish-Ukrainian economy

Thefollowing methods were used in the paper as analysis and synthesis,grouping, induction and deduction and summarizing.

Thefirst chapter is dedicated to definition of term franchising and itsdifferentiation from other existing business types. Biggest part isdevoted to analyses of franchising types. The chapter ends withreflection on the advantages and disadvantages of franchising as abusiness model.

Thesecond chapter describes franchising practice in USA and EUcountries. The main part is devoted to analyses of franchising inUkraine and Poland where its comparison is made and future ways ofmutual development are shown.

1.1.Termof franchising and its types.

Franchisingas a business model gained outstandingpopularityinthe world.InEurope franchising first occurred in France in 1911 where the word“franchise”itself goes back to the 13th and 14th centuries. The term“franchise” comes from French language where the word “franc”stands for “free” and “franchir” for “liberate”. The wordwas used to identify the general exemption from customs duties andtaxes and even today in France people refer firstly to this meaning.In 17thand 18thcenturies, in France, United Kingdom and later in USA the term changeits meaning and people start to see it as a grant of privileges tothe 3d party…………………5

Inthe first part of 19thcentury the concept approaches to our current understanding offranchise. It stood for the granting of a permit to commercial useof third party rights. The pioneer of modern franchising was AlbertSinger and his sewing machines. He used franchising in order todistribute his machines all over the United States and was the firstto launch franchise contract.

However,despite such a long history of franchising there is no commondefinition in literature. Due to this fact, franchising associationin almost in each country developed its own interpretation.

InternationalFranchise Association defines franchising as &quotMethod ofdistributing products or services. At least two levels of people areinvolved in a franchise system: 1) the franchisor, who lends histrademark or trade name and a business system and 2) the franchisee,who pays a royalty and often an initial fee for the right to dobusiness under the franchisor`s name and system.&quot

Accordingto polish franchise origination franchising is a “system ofmarketing goods and/or services and/or technology, which is basedupon a close and ongoing collaboration between legally andfinancially separate and independent undertakings, the Franchisor andits individual Franchisees, whereby the Franchisor grants itsindividual Franchisee the right, and imposes the obligation, toconduct a business in accordance with the Franchisor’s concept.”6

Afranchise is basically a temporary lease of an opportunity. This isbecause the franchisee buys the opportunity to use an alreadydeveloped model, trademark and brand, making it easy to market. Thereis usually a ready market for the products offered by the franchisebecause most of the franchises are well-known brands7.This is opposed to the idea of buying a whole business where anenterprise owner is supposed to start from scratch in order to buildthe brand.

Franchisinghas been used by many multinational firms as a way of enteringforeign markets. The US, the global leader of franchising since the1930s has used this mode as a way of expanding their fast foodrestaurants, coffee joints, motels and food inns to the foreignmarket. In the United States, franchising contributes to the economyof the country8.Franchising became very popular during the Great Depression whereinvestors ad enterprises had to look for means to increase theirturnover due to the inability of the state of the economy to supporttheir growth. Therefore, they resolved to sell their alreadydeveloped brands and models for a fee in order to access more market.As at 2010, there were more than 909,000 firms that had franchisedoutside America, with a combined turnover of about $880 billion,which accounted for more than 8% of private ad non-farm jobs9.

Weconsider it as necessary, to define also another types of businesseswith which in many cases confusion occur.

Firstto mention, is distributionsystem. Adistributor purchases products from one company and re-sell them.Agreement that exist between this two organizations is legallybinding and define their rights. In this form of business,distributor has no ownership in the company where he buys products.The main similarity, between franchising and distribution, is thatboth have responsibility to supply goods to the end consumer.Franchiseeas well as a distributor buys a large quantity of goods to sell atretail and both know the specifics and the needs of the local market.

Thedifference between franchising and the different types of businessesis that other business models can change their products at any time.Franchises, on the other hand, have to follow what the parent companydecides on the product line and other specifications. Franchiseeshave the benefit of having their businesses tested in comparison toother business models that have to start from scratch. Franchiseesenjoy the security that comes with knowing that markets have alreadybeen tested, and success was proven. Other business types are mostlikely to incur enormous investment costs that come with establishinga business. The only costs that a franchise will incur are theagreement fees and royalty fees paid regularly. The franchise candetermine the timing of projects and manage large scopes of businessin comparison to other business models who at times have to delayprojects due to reduced funding. Franchises have better brandrecognition as compared to other business models. The success offranchises is great because of the support is given by the franchisorregarding funding and marketing.

    1. Types of franchising.

Thereare two main types of franchising, which are product distributionfranchising and business format franchising. However, there is anadditional franchising type called manufacturing franchising thatoperates almost the same way as product distribution franchising.

RegionalMaster Franchise

Thistype of franchising favors a particular geographical location. Thistype of franchising gives permission to one franchisor to open anestablishment in one geographical location and the franchisor, inturn, gives license to other franchisees to open businesses withinthat same geographic location. The income acquired from thesub-franchisees is shared between the master franchisor and thefranchisee.


Themaster franchisee seeks contacts between foreigners so as toestablish businesses and work as the native franchisor. The masterfranchisor tests the market, supports and familiarizes himself withthe local environment and initializes the business as the localfranchisor.

ProductDistribution Franchising

Inthis kind of franchising, the franchisor supplies manufacturedproducts to the franchisee. In this scenario, the franchisor leavesout some of the processes required to make the commodity into an endproduct that is readily consumed. This type of franchising isrelatively unpopular in the US market. Most of the firms that usethis type of franchising include firms that manufacture drinks,automobile firm and firms that provide automobile accessories.

Asindicated earlier, the franchisor manufactures the product andsupplies it to the franchisee with some processes left out for thefranchisee to finish up. It operates on a supplier and dealer basis,only that the franchisee gets more benefits in terms of services andtraining from the franchisor.

Inthe automobile industry, the franchisor might leave out the part ofthe assembling of the parts for the franchisor. Other services leftout include maintenance services. This is where training comes in.For the franchisor to ensure that the services are received by thecustomers from the franchisee, the employees of the franchisee haveto be trained to the standard level of the franchisor so that thereis insignificant difference in terms of rendering of services fromone franchisee to the other. Additionally, assembly of the partsshould be uniform so that all customers globally enjoy a standardlysimilar product. The same also applies to automobile parts.Automobile firms have used outlets such as DT Dobie to increase theoperations in various countries in the world. Petroleum fillingstations have also mastered this type of franchising by allowingenterprises to use their trademarks and brand name to sell petroleumproduct. Examples include Total, British Petroleum and Shell.

BusinessFormat Franchising

Inthis kind of franchising, the franchisee uses the franchisorsbusiness brand and trademarks. Nevertheless, the franchisee isrequired to use the firm’s business operating system of thefranchisor 10.They are given a detailed plan consisting every information necessaryfor the operation of the franchise to look almost exactly like theparent firm11.This is a more advantageous form of franchising because it allows foruniformity and consistency therefore, most American firms preferthis type of franchising that allow for sustained success.

Servicesoffered by the franchisor includes training on advertising andmarketing, recruiting and training of staff, management of thefranchises, customer relation regarding new and old customers andevery detail regarding the running of the enterprise12.Fast food restaurants are a good example of this type of franchising.Companies that have mastered this type of business agreement includeBurger King, McDonalds and Pizza Hut.


Throughthis type of business agreement, the franchisor allows another firmto manufacture its products using it brand names and trademark. Foodand beverage companies have been greatly associated with this type offranchising.

Inthe drinks industry, the franchisor will give the franchisee thepermission to use the logo, trademark, business model and operationsof the franchisor. However, things like bottling are left for thefranchisee to do. Although such processes are left for thefranchisee, they are required to adhere to the model and operationsof the mother firm in order to give a uniform image 13. Therefore, bottling and handling of the products has to be done in aspecific way as instructed by the franchisor. This type offranchising had been widely used by Coca-Cola. The firm allowsdifferent franchisees to establish bottling companies. The companyonly produces a syrup concentration that is sold to the differentbottling companies that have franchised with them. The bottles finishthe process by adding water to the syrup concentration beforedistributing it to the retail stores, food service distributors andrestaurants. The company does not dictate to their franchisees todistribute the product to the retail outlets14.This has helped the Coca-Cola brand to be one of the most respectedbrands globally, making Coca-Cola one of the most consumed productsworldwide.

There are also exist two main typesof franchise arrangements.The first one – single-unitor the other words direct-unit franchise is where the franchisorgrants the right to a franchisee to open only one unit. This is thesimplest and the most wide spread type. In the same time, franchiseecan buy additional single-unit when the first one will be profitable.In this case, it will be regarded as a multiple, single-unitrelation15.

Anothertype is multi-unitfranchiseis agreement where the franchisee has a right to run more than oneunit. It includes areadevelopment andmasterfranchise (sub-franching).We will firstly define the area development franchise, where thefranchise has an exclusive right to open more than one unit, however,with specified area and time. Master franchise agreement give morerights than the first mentioned above: open a certain number ofunites within the specific area as well as master franchisee can sellall this to other people under sub-franchises. Moreover, the masterof franchisee provides support and training, and plus receives feesand royalties. There exist another mixed type of multi-unit franchisecalled area representative franchise. Under this type, arearepresentative purchase aterritorial franchise to sell and service unit franchisees in theterritory.

1.3Advantages and disadvantages of franchises

Advantagesof Franchises

Thebenefits of franchising are that the complexity and intimidation offranchising are reduced. The concept has already been tested by thefranchisor and the outcome known. Well established businesses aid inthe marketing sector as they are well established and have a brandname that a majority of people are familiar with. This makes gettingcustomers a minor task. Product and services quickly reach thetargeted consumer as marketing and distribution are made easier. Mostsuccessful franchises give training in business and how to run thebusinesses and minimize mistakes that could be encountered as theyhave been initially tried. The training provided involves marketing,merchandising, advertising and management. Franchising helps toincrease and operate a business with minimum capital as the buyersprovide a firm an enormous amount of capital that enhances expansion.Franchises can also get great market quickly without having to spendlots of money, but the owner is paid for investing.

Thebusiness acquires the right to use the franchisor’s system afterpaying a certain fee and paying regular royalties gotten from sales.The franchisor gives an overview of the current market status, itsrates of demand and supply and its potential competitors. They alsooffer advice on how to differentiate oneself from competitors.Franchisees also benefit due to the tyranny numbers. They cannegotiate well for lease terms and locations without having to worryabout the amount available. Franchises don’t have a problemsecuring funding for their business, and when purchasing in bulk,they get better discounts. Since a franchise is a better part of alarger organization, customers are confident of getting quality goodsand services making profitability increase. When the businessmatures, it can be sold for a higher amount making the businessvaluable. Advertising in a franchise covers a large geographical areamaking all franchises beneficiaries of the advertising program thusenabling franchises to be successful.

Disadvantagesof Franchises

Thebiggest problem of franchises is that one does not own the businessbut runs the business. The shareholders are the owners of thebusiness or the franchise. The owner monitors the way the business isrun and is in control of each aspect of the business. This is becausethe investment is someone else’s plan and what the franchise ownsare the assets associated with the franchised company. The royaltiesand fees paid are only for the licenses and privileges. Businessowners impose a certain amount of money to a franchise to start itsoperations, and they demand a share of the annual turnover. Theroyalty fees paid to the owners increase operating expenses. Thefranchisee is also required to operate under the strict guidelines ofthe franchisor. The guidelines could be inappropriate and tamper withthe franchisors way of running the business. The rigid uniformity ofthe franchises gives franchisees less

1.4Influence of political and legal system on the franchising

Productdistribution franchising in Poland is, however, higher than businessformat franchising. Establishing systems in Poland is an importantchallenge as the number of potential franchisors is minimal.Expertise and knowledge on franchising and franchisees who candevelop businesses with lots of finances to start franchises arelimited in number. Foreign investors who want to launch franchises inPoland face a challenge as they cannot entrust their businesses topeople with limited knowledge on how to run their businesses. Therelationship between franchisors and franchisors is hampered as thestate does not sponsor or organize any business franchise relatedcourses. Polish law does not have proper legislation that supportsfranchising. The specifications of the franchise contract are vague,and most definitions are excluded from the contract. The Polishjudiciary has not made interpretations regarding the principles ofbusiness franchises.

Foreignershave a problem interpreting the principles of social existence as thelaws were created after the Second World War. In the event of adispute, the language in which the contract was written in is legallybinding. The contract does not have to be drafted in Polish and theevent of a dispute, a sworn translator has to be used to interpretthe terms and conditions specified in the contract. A sworntranslator could be proficient in a particular language but notnecessarily be familiar with legal jargon. This could pose a majorchallenge in the outcomes of a franchising trial. The Polish lawstipulates that a certain amount should be reserved for marketing,but since the law does not interpret these phrases well, the moneyusually ends up being pocketed by the franchisor. In Poland has to bein written form otherwise the contract is considered null and void.The license has to be recorded in the registrar of trademarks, and itexpires when the due date of expiry is over. A licensor is allowed toconsent to the granting of licenses to a sub-licensor. Foreign firmsin Poland are cautious and are taking good care of their trademarksand patents to minimize intellectual property infringement.

Ukrainehas a weak economy in comparison to Poland. For Ukraine’s economyto improve, it has to partner with Poland in franchising businesses.Poland’s GDP compared to Ukraine’s a few years back, was the samebut as compared to Poland’s GDP currently which is more than threetimes that of Ukraine. Rational decisions have to be adopted so as tomake Ukraine reach Poland’s status, and the legislature should makelaws that favor franchising. For Ukraine to reach the standards ofPoland, they should adopt the franchising business format thatprovides uninhibited business opportunities for the citizens of thetwo countries. The franchising system will make the locals access abroad range of business opportunities as Ukraine is full ofunexplored resources. Both countries will benefit from the job willincrease due to an increased number of industries that will develop.The living standards of the Ukrainian people will also increase.

2.1.History of franchising in Poland and Ukraine

Startingfrom 1990s there were economic and political changes in Poland. Theliberalization of economy allowed fast development both private andindustrial. With almost 40 million people, Poland was the largestcountry that joined EU in 2004 and become one of the most dynamicemerging markets among with increase in GDP above EU average. Set ofreforms in Poland, put the begging of franchising development. Thefirst foreign franchise that enetered polish market was Yves Rocherin 1989. In next four years Polishfranchising was represented by such international brands as Adidas,Jean Lois David salons and Kodak photo shops. There were fast foodchains that expensed the market – McDonalds, KFC, Taco Bell, BurgerKing, Pizza Hut. However, not of them managed to succeed, where TacoBell left and Burger King come back only in 15 years.

Thepractice of mentioned companies and their achievements as businessmodel caused a great interest and showed opportunity to run a companythat belonged to recognized brand. As a result since 1995 thefranchise idea starts to develop greatly and on the polish arenacomes first domestic franchise companies– chain “Pozegnanie zAfryka” and confectionary shop of A. Bikle.

Theworth mentioning also such significant franchiser as Salad Story,that was established by two polish women. Another typical examplesare GrubyBenek&nbsp(meaning “Fat Benny”) pizza franchise or theMinisterstwoŚledzia i Wódki (literally – the Ministry of Herring andVodka) which is a bar serving. Successful polish franchisers were notonly in gastronomy sector but such as language schools (Abrakadabra),electrical energy sales (CRM Holding), ecological car wash facility(EcoMynia) and many others.

Inthe year 2011 theaverage size ofinvestmentin thebusinessfranchisewas morethan241thousandszlotyh. In 2012 the numberoffranchise outletsisup 50thousands,wherethe most intensedevelopmenthasfoodindustry-alreadymorethan20thousandstores that operate infranchising.

In2014 on the market were introduced 113 new franchises. The highestscore got catering with its 24 new systems. At end of 2014, a totalnumber of franchising was 1058.

Reportabout franchising in Poland for the year 2015 indicates that amongnewly represented 63 companies 16 belong to clothing16.Intotal for the end of the year, 2014 Polish market contained 63.5thousands franchise units.

Today30% of market share belongs to foreign companies, where the rest goesto domestic ones. Origin of foreign representatives is basically fromthe US, Germany, France and UK.

Source:Polish Franchising Organization

Accordingto official data average investment in the franchise in 2014 was to200.8 thousand zlotych in trade and 195.3 thousand. zł in services.17

Aswe may see, Poland is a mature franchise market and the number offranchising as a business model that operates on its market israpidly going up. We see how much importante franchise is, especiallyits good visible in retail, where despite the fact of decline instores in polish market the number of franchising is grown.

Dynamicof franchising development in Ukraine for the period 2001 – June2014

Source:Franchise Group

Comparisonof franchising in Ukraine and Poland



Franchising in Ukraine

  • Immature franchise market

Dynamic development

Franchising in Poland

  • Mature franchise market

  • Growth of the franchise sector in next several years is forecasted as 15-20% annually

The number of franchising increase year to year

2.2.Importance of Franchising In the System of Polish-Ukrainian Economy

Franchising provides unhindered business opportunities for all thePolish and the Ukrainian citizen, and it is relevant to the people’seconomic and political well-being18.For Poland to retain its leadership in bringing new goods andservices in the international and local market, franchise systemscontinue to offer the widest business opportunities for every citizenof the country. Ukraine has many resources that are untapped and,therefore, Poland should use in order to grow its economy further.Though Poland will be benefiting a lot from the franchise, theUkrainian economy will also be accelerated by the move.

Asglobalization increases with time, Ukraine should seek help byexpanding its business operations with the other economies like thatwith Poland, which will help it expand its business in theinternational, landscaped19.The number of jobs will be increased in both countries becausefranchised businesses assist in adding jobs to many industries thatdevelop in the process.

Polandstarted franchising with other countries from as early as 1989. Thisis to say that the country has enough experience to help Ukrainedevelop its economy through entering into a franchising system.


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PolandInvestment and Business Guide: Strategic and Practical Information

Polishfranchising – simple yet innovative business ideas

Franczyzaw Polsce. Rozwój rok po roku

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2 Asbill, R. &amp Goldman, S. (2001). Fundamentals of international franchising. Chicago, IL: American Bar Association.

3 Hendrikse, G., Tuunanen, M., Windsperger, J., &amp Cliquet, G. (Eds.). (2008). Strategy and governance of networks: cooperatives, franchising, and strategic alliances. Springer Science &amp Business Media.

4 Doherty, A. M., &amp Alexander, N. (2004). Relationship development in international retail franchising: case study evidence from the UK fashion sector. European journal of marketing, 38(9/10), 1215-1235.

5 Rupp T., Handbuch für den Franchisebetrieb 17-20.

6 Polish franchise organization [28.02.2016]

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8 Altinay, L., &amp Miles, S. (2006). International franchising decision-making: An application of stakeholder theory. The Service Industries Journal, 26(4), 421-436.

9 Altinay, L. (2004). Implementing international franchising: the role of entrepreneurship. International Journal of Service Industry Management, 15(5), 426-443.

10 Whitehead, M. (1991). International franchising-Marks &amp Spencer: a case study. International Journal of Retail &amp Distribution Management, 19(2).

11 Alon, I. (2012). Global franchising operations management: cases in international and emerging markets operations. Upper Saddle River, N.J: FT Press/Pearson.

12 Konigsberg, A. (2008). International franchising. Huntington, NY: Juris Pub.

13 Quinn, B., &amp Alexander, N. (2002). International retail franchising: a conceptual framework. International journal of retail &amp distribution management, 30(5), 264-276.

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16 PFO [01.02.2016]

17 [28.02.2016]

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19 Quinn, B., &amp Doherty, A. M. (2000). Power and control in international retail franchising- Evidence from theory and practice. International marketing review, 17(4/5), 354-372.