Problems encountered in selected food cart franchising business in the University belt: an assessment

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  • 1.  
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  • 4. B ackground of the study Franchising is often defined as being in business for yourself but not by yourself. It is route to expansion where there is a franchisor and a franchisee that enters into a franchisee agreement, although both parties have a contractual relationship, one that enhances and sustains the success of franchising. It gives the business a distinct ability to expand and grow through the commitment and resources of entrepreneurs who have a stake in the business. Their commitment to the business is more than any manager or employee who gets paid their salaries regardless of sales and costs. The franchisee is precisely concerned with these because his profit and returns depend on them.  
  • 5. Franchising is the fastest growing way of doing business. It has become the most important and popular method of creating business. It has now become a phenomenon worldwide. According to the Philippines franchise association, franchising is duplicating the success of your own business through the proven franchising formula. Most of the people who have no experience in business wanted to get into franchising in the Philippines, mainly because it gives freedom and opportunity to invest money without much effort of researching of target market of the business.
  • 6. In 1995, the Philippines retailers association, through the initiative and vision of its president Samie Lim, broke new grounds and made history when they organized the first Philippine franchise convention. The conventions objectives were two pronged one, introduced and explain the concept of franchising to as many people as possible in order to spread the benefits that many Americans who have become entrepreneurs and business man in their own right thou franchising have experienced and to introduce new Americans franchises to the local market. Food cart franchising business in the Philippines is one of the most popular businesses today.
  • 7. A lot of entrepreneurs today go into the food cart business despite of the possible problem they might encounter, first, because it's cheaper compare to the other type of business, and second it’s easier to put up than restaurants. In fact, even big fast-food chains are using food carts for their events or promotions. Another reason is that depending on the target market and marketing strategy, you can make a food cart either mobile or stationary. We can see that there are a lot of food cart businesses today grow rapidly in metro manila, especially at those area that is near in Schools, malls, MRT/LRT stations etc.
  • 8. Like in the University belt most of the businesses are more into food and there are almost 400,000 plus of students population from different campuses.., it gives an opportunity to a lot of entrepreneurs to put up a food cart businesses in this area. This thesis focuses also the role of the franchisor and franchisee. ( These two persons represent the two levels of people involved in franchising) We have on the first level the franchisor who lends his trademark or a trade name and a business system. (IFA 2009a).
  • 9. And on the second level the franchisee who pays a royalty and often an initial fee for the right to do the business under the franchisor’s name and system. (IFA 2009a). More particularly, we want to examine what are those problems they most often encountered in a food cart franchising business, and reason why a lot of entrepreneurs are growing despite of the risk in franchising.
  • 10. S tatement of the problem The study aimed to get an idea and get broad and fully documented information from the respondents in the area of the University belt, based on the questions provided by the researcher regarding in food cart franchising business This study looks also into the profile of the franchisee. , and what is the main problem encountered mostly by the franchisee.
  • 11. General problem The main purpose of the study is to assess the problems encountered in food cart franchising business in the area of the University belt. Specific problem Specifically it sought to answer the following sub - problems;
    • What is the demographic profile of the respondents in terms of the following variables;
      • 1.1 Gender
      • 1.2 Age
      • 1.3 Civil status
      • 1.4 Educational attainment
  • 12.
      • 1.5 Capitalization
      • 1.6 Average profit (monthly)
      • 1.7 Employment status
    • II. How the respondents rate the problems encountered in the food cart franchising business in University belt.
      • 2.1 Internal environment
    • Franchising / royalty fee
    • Return of Income
    • Profitability
    • Suitability of the area to the target market
    • Product spoilage
    • Ways of communication
  • 13. 2.2 External environment
    • Government support/promotion
    • Threats on informal/unregistered and small scale food cart businesses.
    • Customer satisfaction in the product and service
    • Increasing of competitors
    • Continuity of product demand
    • Product trend (seasonal product)
    III. Is there any significant difference on how the respondent rate the questions provided by the researcher regarding the problem encountered in food cart franchising business.
  • 14. IV. What alternatives course of action is necessary to address the problems encountered as perceived by the respondents? a. Study first the location before putting up the business b. Implement alternative ways to promote the product c. Controlling the product to avoid spoilage d. Attend franchising seminar (s) Please rate the following according to the scale: 4 VERY HIGH 3 HIGH 2 LOW 1 VERY LOW
  • 15. This research study discussed primarily the problem encountered in selected food cart franchising business in the area of The University belt”. How the entrepreneurs operates this type of business and how they become successful despite of the risk in franchising. Furthermore, this study will also discuss the role and advantages and disadvantages of food cart franchising business. S cope and Limitation
  • 16. Lastly, this research study was limited only to those who are engaged in food cart franchising business and to those who are willing to acquire food cart franchising as their own business.
  • 17. The study aimed to give an idea and broad information about the food cart franchising business and Problems encountered in selected food cart Franchising Business in University belt” , how and where you will start if you want to enter this type of business., what are those famous food cart and the most “CLICK” food cart in University belt that most student know in this generation. Identify why and how entrepreneurs succeed in this field of business despite of the problem they encountered in a business like this and defining the important role of franchising.
  • 18. This study aims to provide a detailed, fully documented and valid theoretical foundation of food cart franchisor that operates in University belt and to study what are those problems they encountered despite of their success and why they are continuing operate this business. In relation to this study, this will add to the existing knowledge on local franchising. The results of this study will therefore contribute towards;
    • Providing updated information on the food cart franchising business that could contribute to the success of local food cart franchisors.
  • 19.
    • Helping potential franchisees decide as to which product they would need to acquire for their food cart franchising business.
    • Giving new studies for some who are interested in venturing food cart franchising business.
    • This study could serve as a useful for other franchisors desiring to expand their food cart franchising business.
  • 20. A franchise is an agency arrangement in which the seller (or the franchisor ) grants the buyer ( Franchisee ) exclusive rights to market the seller’s product; in return, the buyers agrees to follow policies desired by the seller and not to seller and not to sell competing product. (Business policy in Asian context) Franchising is the practice of using another firm's successful business model. The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. Definition of terms
  • 21. Franchisor The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.
  • 22. Franchisee The party in a franchising agreement that is purchasing the right to use a business's trademarks, associated brands and other proprietary knowledge in order to open a branch. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor. Food cart A food cart is a mobile kitchen that is set up on the street to facilitate the sale and marketing of street food to people from the local pedestrian traffic. Food carts are often found in large cities throughout the world and can be found selling food of just about any variety.
  • 23. Food carts come in two basic styles. One allows the vendor to sit or stand inside and serve food through a window. Another uses all of the room inside the cart for storage and to house the cooking machinery, usually some type of grilling surface. The cart style is determined principally by the type of food served at the cart. Entrepreneurship Is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity.
  • 24. The most obvious form of entrepreneurship is that of starting new businesses (referred as Startup Company); however, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. When entrepreneurship is describing activities within a firm or large organization it is referred to as intra-preneurship and may include corporate venturing, when large entities spin-off organizations. Place An area with definite or indefinite boundaries; a portion of space. Room or space, especially adequate space: There is place for everyone at the back of the room. The particular portion of space occupied by or allocated to a person or thing.
  • 25. . Price Is the quantity of payment or compensation given by one party to another in return for goods or services .Price can sometimes alternatively refer to the quantity of payment requested by a seller of goods or services, rather than the eventual payment amount.
  • 26.  
  • 27. R eview of Related Literature L ocal literature According to Samie Lim, from the article of Business Today (Feb.18, 2008) Franchising is considered a powerful tool for economic development . It creates thousands of enterprises as well as millions of jobs. It also helps fuel the growth of entrepreneurship. Samie Lim, chairman emeritus of the Philippine of the franchise Association and also a chairman of francorp Philippines, shares that ere are three major reasons why franchising works.
  • 28. Franchising he says, uses three of the most limited resources to expand one’s business. These are other people’s money, time, and other people’s organizations for its operation. The franchisee would be the one who would Shell out the money to open another outlet of the franchisor. He would pay all the expenses for its operation. By other people’s time he means that the franchisee would be managing the business while other people’s network or connections would make it easier for the franchisee to run the business. “He knows the local government authorities, he knows the customers. Knowing the people in the community creates lots of advantages,”
  • 29. Lim simply describes that buying a franchise is acquiring a trusted brand with a consistent quality. It provides assurance to customers that they would be getting the same value whenever they purchase that brand. Franchising also thrives amid challenging times. Studies show that franchising grows even faster during times of recession as it also remains robust despite the odds. Franchising also has a 90-percent success rate compared to traditional retail (or your own business) which has only 25-percent success rate after 10 years of operation. So for non- franchises businesses, 75-percent are not expected to succeed after a decade of operation.
  • 30. From the article of Philippine daily Inquirer (June 25, 2010) Magapayo states that, “ the safest way for first time entrepreneur is to go franchising” . Say’s Voltaire Magpayo owner of the food cart business Sweet Corner. In recent years, there has been a significant increase in franchise business in the Philippines notably in the food and cart industry. According to the Philippine franchise Association (PDA), “franchising in the country began in 1980’s, with the sector pre dominated mostly by foreign franchise companies. From around 20 foreign and local franchises, the sector rapidly grew, with the figure reaching around 1000 by 20008.
  • 31. Looking around malls and other commercial centers, home-grown concepts are dominating the local franchises with food and cart businesses leading the pack. Initially, the cart businesses was ruled by food and beverages, this day’s even photo printing is offered in carts- carts getting a new meaning. Still, food makes an impressive 41 percent in the franchise sectors, service establishments 32 percent, and retail outlets, about 27 percent. Magpayo said franchising is not only safest but the easiest way for start up entrepreneur for one a prospective franchise only needs a couple of hundred thousand pesos to start a business he explained, for sweet corner we only require P185, 000 inclusive of the cart, business name, its not labor intensive as one cart needs only two person to main the stall, because its ambulant you can change location and its everyday cash.”
  • 32. According to Dti dateline (August 31, 2009), Franchising robust despite global crisis , AFFI President and Binalot owner Rommel Juan states that franchising is the “most practical and least risky route for entrepreneurs to go into business ,” as franchises are “trusted businesses with proven concepts and operating models.” Those who do not have any experience with business are thus spared of the difficulties of having to start up their own, which is more risky and difficult route. Franchises are like plug-and-play Businesses that enable entrepreneurs to start their business right from the first day of operations.“
  • 33. Franchises in the country have an estimated 95% success rate on the initial year of operation, a recent study said ,” Franchising is something tangible people control during crisis”. Association of Filipino Franchisers Inc. (AFFI) Public Relations Officer and Bibingkinitan owner Richard Sanz said. Juan said applications for franchises have also increased this year despite the economic downtown.
  • 34. According to Philippine Franchise Association chair and Francorp Philippines chief executive Algeria Limjoco, “ the industry remained optimistic despite the overall doom-and-gloom situation, as the franchising business was not likely to be as hard hit as other industries”. Despite the economic crisis, the local franchising industry expands and even extends its reach to foreign markets. The franchising industry, in fact, could provide returning overseas Filipino workers and even retrenched workers the opportunity to remain productive and generate much needed-income. “Franchising does well in good times, and even bettering challenging times.” She said. With our young and large population whose need are fully matched by the products and services of the highly creative members of the PFA, market demand will remain up and the economy can post decent growth,” she added.
  • 35. According to Robert Trota, president of the Philippine franchisers association says the key to this first world vision was “a large armada of entrepreneurs rather than any army of our labor force staying as employees for life.” Fourteen years after a group of small retailers paved the way for making franchising an Institution in the Philippines, franchisers are looking at this business approach than important push along what the Arroyo administration describes as the road to becoming the first world country. Trota, who is also president of Ma’x franchising Inc. that owns the Ma’x chicke, said franchising provides the way for people to put up a business with capital us low as P300,000 or even P150,000.
  • 36. “ Not only has that, franchising allowed (neophyte) entrepreneurs access to business models that have proven track records,” he said. “ That is why they observed a 90- percent success rate among out of franchises in the country.” From Entrepreneur Philippines Magazine, (May 2009) According to dela Costa, there's no industry standard for cart size, material requirements, and design, although food carts must use certain basic food-service safety materials. Some malls will require your cart to be 2 meters x 1 meter; others may want it 1 square meter. It all depends on the location and your agreement with the lesson.
  • 37. Here, dela Costa shares his insights and tips on starting a food cart business:
    • In putting up a food cart business, the first thing to consider is the product you will be Selling. It could be an exceptional product, maybe a family recipe not known to many, perhaps an innovation or variation of an existing product, or simply a very affordable product.
    • Your choice of product will also determine the equipment you need. Let's say you want to sell flavored French fries; it will mean getting frying equipment and a strainer.
  • 38. Your product, of course, will also determine the concept design for your cart. You can buy ready-made food carts or customized ones. The food cart maker will ask you for the specifications, such as the size of the food cart, the size of the selling area, the type of materials you want for the countertop and for the signage, and the equipment your cart will need. These are just the basic specifications. Custom-made designs will require you to give more information to the cart maker. Some cart makers would be happy to help you design or conceptualize your cart and its signage.  
  • 39.
    • Once you’ve decided on your product and cart design, you can choose your location. Many food carts are located in malls and MRT stations; others are in office buildings, school canteens, terminals--in fact, in any area with high foot traffic. Aside from the foot traffic, you also need to consider the lease contract and rent. Choose a lease contract that gives you a lot of leeway in promoting your business; as to the rent, it should be affordable and within your budget.
    • You'll only need one or two persons to run each of your food carts, but you have to carefully choose your staff. They should be trustworthy, conversant, pleasing in personality, meticulous, and able to do basic arithmetic.
    •  
    •  
  • 40.
    • Make it a point to thoroughly train your crew on the product as well as on hygiene and sanitation. As important, you must be a hands-on owner. Visit your store frequently and do the inventory yourself. This way, you can effectively monitor the cash flow of your business and continuously improve your product .
  • 41. According to Brown, Richard S. in the Academy of Entrepreneurial Journal (January 1, 2009), Differences in industry structure can help to explain divergences in the strategic planning that new ventures undertake. Considering that entry barriers are lower in highly fragmented industries, one would expect to find that many new entrepreneurial firms gravitate toward these industries. Among the topics that are key to this issue is that of a new firm’s strategic planning and, more specifically, its strategic marketing. The strategic marketing plan for a new venture is crucial to firm survival for a number of reasons dealing with the nature of scarce resources in startup companies. Resources such as brand name, financial capital and founder experience are central to many startup firms. However, there are few instances where all three are present at the initial conditions of firm founding. F oreign Literature
  • 42. In order to optimize a firm’s survival, founders must utilize their scarce marketing resources efficiently and effectively or risk failure through death or substandard profits. In a fragmented industry, one way to maximize firm exposure is through franchising. Franchising can also be viewed as a technique to maximize the problem of newness Stinchcombe 1965) that many small firms face. Therefore franchising can address several issues pertaining to both small, new firms and fragmented industries. First, in an environment that approaches perfect competition, franchising can consolidate sellers by placing them under a common umbrella.
  • 43. Secondly, franchising can allow a startup to have instant brand recognition giving it validity and legitimacy (Terreberry 1971) through acquisition. Thirdly, franchising can act as a management mechanism for the franchisor by delegating the franchisee as a de facto corporate manager even though the franchisee is technically a proprietor.
  • 44. According to agency theory arguments, from the article of SAM Advanced Management Journal (September 22, 2009), securing a compatible franchisee minimizes potential losses and failures in the system resulting from franchisee misconduct. Olm et al. (1988) postulated that for a franchisor to succeed, the first critical task is to develop the right team. Xiao et al. (2008) state that education of the franchisee is also an important criterion. The strategic alliance literature also reveals that resources alone can not bring competitive advantage, but complementary also reveals that resources alone can not bring competitive advantage, but complementary resources can contribute to the strategic fit of partners in the franchise alliance (Chathoth and Olsen 2003 and Alitany (2006).
  • 45. According to resource-based arguments, franchising by default requires external finance, human resources, managerial talent, and local knowledge provided by the franchisee to help the firm gain a competitive advantage and create value (Caves and Murphy 1976; Combs and Castrogiovanni 1994; Martin 1988). Olm et al.(1988) suggest that franchisor adopt a combination of the agency and scarce considerations when awarding a franchisee to ensure cooperation, curb optimism, secure commitment, and enhance the likelihood of franchisee satisfaction. Xiao et al. (2008) observed that the resources a potential franchise brings to the alliance, the more likely they will be accepted. Frazer and Winzar (2005) implied that high initial costs help the franchisor keep the franchisee locked in the system.
  • 46. McKay (2005) offers another consideration for the success of the system, namely the personnel attributes of the franchisee. In another study of the East Asian retail system, Choo et al. (2007) suggest that franchisors select franchisees who can demonstrate strong financial ability, a prized location, and local market knowledge. According to Rahatullah (2007), franchisors assign least importance to the potential partner’s technical competence. These studies show that active, efficient, and effective participation by the partners in a cooperative environment is required, but as Bergen et al. (1992) point out, the onus of success largely depends on the franchisor’s ability to select franchisees with the right profile.
  • 47. Therefore franchising should seek franchisee who are cooperative, willing to follow decisions, policies, and instructions, are good performers, responsible, and supportive. Franchisors often use selection criteria as a strategy to control inputs (Bergen et al. 1992; Eisenhardt 1985). The literature such as Wattel (1968); Tathem et al. (1972); Axelrad and Rudnick (1987); Olm et al. (1988); Kaufman and Stanworth (1995); Jambulingham and Nevin (1999) suggest that the various criteria for partner selection in franchising can be approached from three angles, 1) character evaluation, 2) entrepreneurial traits, and 3) desire for personal development by the applicant.
  • 48. According to Abha Garyali (April 26, 2010), considering the current franchise scenario in India it would be appropriate to say that the international players dominate the industry especially the Food and Beverage sector. There are numerous factors contributing to the growth and success of international franchisors in India. Franchising is considered as a profitable venture is being opted by the foreign players to expand their business globally. According to the Top 100 franchises by The Franchising World Magazine, a total of 21 franchisors belonged to the F&B sector. It was interesting to note that out of these   21 brands, 12 players were of would not be incorrect to state that a major chunk of Indian food franchising is still dominated by the international franchisors.
  • 49. These are the factors favoring International players. India being an emerging market: As India has a huge untapped market potential, especially in the franchise industry, therefore, a large number of foreign franchisors are targeting the Indian markets. India being the engine of economy for the foreign investors is also attracting the international players to enter the country. Changing lifestyles and preferences of Indians: Another contributory factor for the success of these foreign F&B players is due to the change in the lifestyles of the consumers. There is a rapid increase in the spending capacity of the middle class due to increase in disposable income. The Indian consumers spend around 51 percent of their earnings on food and beverages.
  • 50. Moreover, the preferences of Indian consumers have also changed. Now-a-days people prefer trying out different cuisines rather than the regular Indian dishes. Majority of youth population: Almost three-fourth of the nation’s population consists of the youth. Youngsters are the main consumers who desire to eat out and try different cuisines. Therefore, the growth in this segment has propelled foreign players to enter with their own unique cuisines. It can be said that the presence of these international franchisors have propelled the Indian franchisors to expand via franchising. The entry of the foreign brands has added to the growth of the food franchising industry in India.
  • 51. F oreign studies According to a recent report by the World Franchise Council, the Franchising and Licensing Association of Singapore (FLA) reveals that the sales turnover of Singapore- based franchises, both local and foreign, accounted for approximately 18% of the total domestic retail sales volume in 2008. “The total market value of Singapore’s retail sector (including the education sector) is estimated at S$44.6 billion (US$34.2 billion) for 2008, giving the franchise sector an annual turnover of about S$8 billion,” the industry body states. Not only has the industry contributed significantly to the local economy, the number of franchise businesses have grown from 380 in 2003 to about 500 concepts last year, says Pang Jielong, director of local franchise Yogurt Place Pte Ltd, which has six outlets islandwide and its own factory that manufactures Greek yoghurt. “That is around a 30% increase in just a six-year period,” he explains. 
  • 52. The F&B sector in Singapore, including restaurants, contributed S$1.91 billion (or 0.74%) to Singapore’s GDP in 2008, reveals Kenneth Low of Kitchen Language Pte Ltd, the F&B arm of local property group Far East Organization, which holds the master franchise for sandwich chain Quiznos Sub and Tully’s Coffee, among other concepts such as modern Italian restaurant brand Ochre and Japanese kaiseki-style restaurant Kumo. “ According to a survey by Euromonitor, more than 50% of Singaporeans eat out at least once a week. And as Singapore enjoys one of the highest per capita income in Asia, the demand for F&B products in Singapore far exceeds the population of four million people,” Low observes.  While the figures remain impressive despite the nascent industry, businesses here are coming around to the fact that aside from introducing new and interesting concepts into the city-state, franchising also provides lower business risks and improved profitability.
  • 53. Says Low: “In taking on a franchise, the risks are minimal as the brand equity would have already been established with a successful and proven track record to show for. Usually, the master franchisor would provide the knowledge and tools needed to run the business, such as assistance in staff training, procurement of supplies, store layout, marketing support, operational systems, R&D and so on. This works like a ‘fool-proof manual’ where any lay business person could use and run the business.”
  • 54. Greetings! We are the students from The University of Manila and we are currently writing a thesis in analyzing of problems encountered in selected food cart franchising business in the University Belt. Your fully participation will help our study to be more efficient. We assured that all responses will be treated with strict confidentiality, for this reason, we may request you to please answer all the questions below. Thank you and God bless! Please check the appropriate box that describes: Gender Male Female SURVEY FORM
  • 55. What age group of yourself ? 18-25 26-50 56-60 Over 65 Civil Status Single Married Widow Educational Attainment Primary Secondary Tertiary Vocational Employment status Employed Self employed Unemployed Underemployed
  • 56. How much is the usual capital needed to franchise a food cart business? Under 50,000 50,000-75,000 75,000-100,000 Over 100,000 How much is the usual average profit of your business monthly? 25 % below 25-50 % 50-75 % 75-100 % Who is your target market? Class A Class B Class C Class D
  • 57.   4 3 2 1   Please rate the following : Very High High Low Very Low Internal environment:                
      • 1 High cost of franchising fee/royalty fee
           
      • 2 Long period of time in the return of income
           
      • 3 Profitability
           
      • 4 Suitability of the area to the target market
           
  • 58.
      • 1.5 Spoilage of the excess product
              1. 6 Alternative ways of promoting the product to the customer                 External environment   1.1 Lack of government support in this type of business         1.2 Threats on informal food cart businesses                  
  • 59.         1.3 Customer satisfaction in the product/service 1.4 Continues increase of competitors         1.5 Constant product demand           1.6 Changes of product trend