Franchise business VS non-franchise small business - Term Paper Example

 Franchise business vs. non-franchise small business Introduction This report focuses on the differences between a franchised and a non franchised small business in the same industry. Mrs. Kai’s dry cleaning service in Korea is a franchised laundry pick up store by the franchise ‘Cleantopia’. Mr. Choi’s Burnham Cleaners is a dry cleaning shop in Burnham Apartments, Chicago. Both businesses are sole proprietorships and have only a few employees. They are successful dry cleaning stores that have been operating for less than five years. Franchisee: Cleantopia Deachi, Korea Cleantopia is the leading laundry service in Korea. It introduced the concept of franchised cleaning stores in Korea and as of October 2010 they had 85 factories and 1400 laundry pickup stores in the country. They train there franchisees intensively and are actively involved in the business process and activities. Mrs. Kai was an ordinary housewife in Korea with a full time working husband. After his retirement they needed to support themselves and their college going sons. The Kai’s lacked a business background and their initial capital consisted of severance pay and savings. As she was unwilling to take major risks with their meager capital, Mrs. Kai analyzed the market to identify which businesses would require lower investment and would be less risky. She found that a new trend in Korea was the emergence of dual-income households. Due to the economic downturn and rising expenses both parents had to work. This resulted in them not having enough time to do their household chores such as laundry. She also researched and found out that Cleantopia, the leading laundry franchiser provided one month training to new franchisees with lack of business expertise. Cleantopia franchisees are not required to purchase all the cleaning equipment as there are centralized cleaning services available. Thus she decided to start a Cleantopia franchise in Deachi, the richest village in South Korea. The startup costs required to open a new cleaning store were around $400,000. Mrs. Kai saved around $90,000 as she did not need to buy dry cleaning equipment such as washers, dryers and steam irons. As a franchisee of Cleantopia, she got a bank loan of $100,000 relatively easily. As a result she started her laundry pickup franchise store for an initial investment of $340,000. Although there were no hidden costs due to guidance and assistance from the franchisor at every step; 70% of the startup cost was spent in acquiring the store and the rest for purchasing the franchise. She chose the Deachi area as the Kai’s have lived there for seven years and it is a booming shopping district with more than 10,000 people. After commencing business, she earned profits of up to $6,000 in the second month which surpassed even the franchisors expected calculations. She recovered her initial investment within two years and the shop is currently earning high profits. The lack of business expertise did pose a few problems in the early years of the business. Mrs. Kai was new to management and customer service even though she was trained by Cleantopia. She hired two female employees but was unable to motivate them. Recently, she hired a woman with experience to help her run the business. Customer service was an issue as in the beginning she did not know how to respond and communicate with customers but that improved with experience. As a franchisee, Mrs. Kai was greatly assisted by Cleantopia’s advisor. He helped her predict potential problems and their solutions; he keeps financial records and advises her on business issues. Mrs. Kai has only two other cleaning stores in the shopping district to compete with and she has a competitive advantage over them. Since Cleantopia is responsible for advertising and promotion, her shop gets more exposure at no extra cost. Cleantopia’s central and automated cleaning services enable her shop to provide faster service at lower costs. She did not develop a business plan and claimed that the franchisor was responsible for all such plans; however she does keep financial records and statements which are discussed with her advisor regularly. She does not have a separate marketing plan as the franchisor handles the marketing. She does implement promotional schemes that Cleantopia introduces and provides services such as free pickup and delivery and express cleaning. The promotions are to attract new customers and retain old ones. Customer records are kept in the computer system; if the customers spend a certain amount of money they receive a discount. Memberships are also available for customers, which entitles them to lower prices and other promotions, but they are required to pay an annual fee. Mrs. Kai has no succession plans for her business. She is focusing on housewives as her target market and thus is only keeping female employees. The major issue that can be gleaned from the interview is that of the business plan. Mrs. Kai has no business plan of her own; this means that she has no short term or long term goals or strategies. Although the franchisor is maintaining a business plan, Mrs. Kai needs to develop her own business plan which incorporates her goals, strategies, performance and reviews. This will help her focus on the future and business needs. As franchise fees are high and there may be potential problems in the future, the business plan will help Mrs. Kai keep a record for herself. Mrs. Kai’s shop and her record keeping are too dependent on the franchise advisor. Although it is necessary to keep the franchisor informed of the performance, Mrs. Kai can hire an accountant to keep and analyze financial records. This franchise differs from other franchises such as retail stores and fast food outlets due to its centralized dry cleaning services and although the franchisee owns the store and the franchise; she is more like a shop keeper that provides customer service, keeps records and manages employees as she is not involved in the dry cleaning part of the business. Small business: Burnham Cleaners 720 S. Clark Street, Chicago, IL 60605 Mr. Choi was an employee of LG electronics in South Korea. In 2007, he decided to immigrate to the USA due to personal issues. In Chicago, he rented an apartment in Burnham Apartments and joined the Korean American Association of Chicago. According to Mr. Choi, 30% of South Koreans residing in Chicago operate profitable dry cleaning businesses thus, he decided to become one of them. He did not have any other specific reason for opening up a dry cleaning store as he first tried to run a beauty shop for skin and nail care which failed. Mr.Choi did not have enough funds to start his business, so he applied for a Small Business Express loan from Foster bank which is a Korean bank in Chicago. He preferred the Foster bank due to the ease of communication. He required a small loan and this sort of loan entailed less documentation than SBA. The initial investment required was about $200,000 and Mr.Choi got a loan of $50,000. Around 50% of the startup investment was spent on acquiring the store. Even though the apartment building was new with few residents, the rental store premium was high as it was specifically designed for a dry cleaning store for apartment residents. As the apartment building was new and Burnham cleaners opened before many tenants had moved in; the store did not have many customers in the beginning. It took the store two months of operation before it started making a profit. However, the store recovered its initial investment within 2 years. Mr. Choi’s biggest problems in the beginning were his lack of knowledge regarding fabrics. This resulted in unknowingly damaging fabrics through improper methods and the cost had to be borne by the store. Mr. Choi did not need to hire any employees for his business; however six months into the business he hired a woman to start a mending and alteration service at his store. This service now yields 20% of his profits. When Mr. Choi was starting his business, The Korean American Association provided him assistance in the form of advice and knowledge on the processes. The Association consists of more than 30 dry cleaning store owners who have been in the business for 20 years, thus their knowledge and input was invaluable for Mr. Choi. Burnham Cleaners caters to the apartment’s residents and as it is the only cleaners located nearby, it does not face strong competition. The closest dry cleaner store is three blocks away, which makes Burnham’s location convenient for the residents even though its prices are higher. According to Mr. Choi, he does not have a business plan nor did he make one when starting the business. In the beginning he kept financial statements for the bank, but he continues to do so as it helps him assess the financial capabilities of the business. Mr. Choi chose Burnham Apartments for his store location due to it being newly constructed with a specialized place for a dry cleaning store. There are 450 units with more than a thousand people living there. A major favorable point about the location was the fact that as Mr. Choi took over the apartment management’s responsibility of delivering packages to the residents, his rent is relatively low. This decreased his costs and helped him come in direct contact with prospective clients. Mr. Choi does not have any marketing strategy or promotions. He does not employ any strategy to attract new customers or retain his regular ones. He states that as his shop is the most convenient for the residents and he provides speedy service, the customers prefer his store. He also admits that his prices are higher and he could improve on quality. He is considering advertising in nearby apartments to attract new customers. Mr. Choi does not have a succession plan and he does not have any friends or family working with him as he does not require any other employees to run his small business. Burnham Cleaners is doing well due to its prime location. Mr. Choi has anticipated the customers’ needs by locating his shop at the most convenient place and offering mending and alteration services. This differentiates this dry cleaner shop from the rest. It is common that clothes rip, or a button is lost or measurements need altering, by anticipating this customer need Burnham cleaners is providing two services at one place. The major weakness of the business is that there is no focus on quality of the service. Burnham needs to focus on better quality cleaning if it wants to attract other customers. Mr. Choi has not developed a business plan, even though it is a small business there should be a vision and goals guiding the business so that performance improves. The vision can be something as simple as ‘to provide good service and earn profits’. If the store attracts new customers, Mr. Choi will have to hire employees, and it would be advisable that he hires experienced cleaners or undergoes some training himself. Although he claims that the dry cleaning business does not require any skills, there is a need to know about fabrics and cleaning processes and products. Comparison: A comparison of the franchised dry cleaner with the un-franchised dry cleaner shows: To buy a franchise more money was needed due to higher costs, whereas for Burnham Cleaners the start up cost was much lower. Cleantopia provided assistance, research, and guidance for the shop whereas Burnham Cleaners had to conduct research. Mrs. Kai had to get a bigger bank loan even though she was not required to buy dry cleaning equipment. This was due to higher franchising costs. Mrs. Kai did not incur any marketing costs yet received the benefits due to the advertising by the franchisor. Whereas Burnham Cleaners did no marketing as it was not required. Mrs. Kai received financial and other advice from Cleanotopia including business plans and record keeping system. Mr. Choi did not develop any business plans and keeps the bare minimum financial records. Through Cleanotopia’s franchise, Mrs. Kai can provide faster and higher quality service. Her shop gets enough customers to require two more employees. Whereas Mr. Choi has no streamlined processes or standards. Mrs. Kai is not responsible for all the services, the Cleanotopia vans pick up and deliver laundry whereas Burnham Cleaners’ Mr. Choi is responsible for the cleaning. Mrs. Kai provided other services and promotions through Cleantopia whereas Mr. Choi provides the basic service. Mrs. Kai is answerable to the franchise and is monitored by the advisor. Mr. Choi owns the Burnham cleaners and as it is not franchised he is free to make decisions on his own without review from the franchisor. Mrs. Kai needs to maintain standards and pay franchising fee as well as rent and salaries. Mr. Choi pays salaries to only one employee and does not incur franchising fee. As Mr. Choi does not have to follow franchising standards he has differentiated his business by offering mending and alteration services at his store which are very profitable. He also delivers packages which has made him familiar to residents and thus indirectly promote his shop. Whereas Mrs. Kai is not at liberty to diversify her services. Mrs. Kai invested $340,000 and recovered it within 2 years as well as started making profit within a month. Whereas Mr. Choi invested $200,000 and did not make profit for 2 months. He recovered his investment in 2 years as well, even though his investment was substantially lower than Mrs. Kai’s. Conclusion There are many benefits of both; franchise and non-franchise small businesses. Starting a franchise business entails greater costs and stricter standards; however it also provides guidance, brand name and business strategy. For Mrs. Kai, the franchise was a differentiation from competitors and it enabled her shop to provide more efficient and higher quality service as well as promotions, discounts and lower prices that she wouldn’t have been able to otherwise. Although she cannot diversify and is dependent on the franchise, she is making high profits and running a successful small business. Mr. Choi has been successful in running his non franchised small business. He took advice from other Korean dry cleaners and chose a prime location. His store faces no close competition enabling him to sustain his high prices. Customers find his shop the most convenient, which is the reason he is making a profit without marketing, increasing quality or service. One major advantage that Mr. Choi has is his brilliant scheme of combining alteration and mending service with the cleaning. He has also decreased his rents by helping out in apartment management activities. However, he has no marketing or business goals. Both businesses need to develop business plans to establish goals, financial records, marketing plans and so on. Business plans establish the viability of the business and help in improving and expanding. Although they are aware of their market segment, no steps are being taken actively to maintain or increase customers. The businesses lack vision and mission. In order for the businesses to maintain their profitability they need to develop strategies and innovate and improve constantly. Bibliography Cleantopia. 10 2010. 15 11 2010 . Cooper, Joe. "Top four problems of owning a franchise." Ezine. 14 11 2010 . Kai, Mrs. Cleantopia Deachi 5 11 2010. Mr.Choi. Burnham Cleaners 10 11 2010. Read More