Harry was really bored with his job as second chef in a top-of-the-market hotel. He was also tired of being ordered around by the manager and the head chef. He never liked taking orders and had always hoped to use his talents preparing food for customers in his own restaurant. The main problem was his lack of business experience. Harry had just been to a business conference with a friend of his and had been interested in the franchising exhibition there. One of the businesses offering to sell franchises was ‘Pizza Delight’. This firm sold a new type of pizza recipe to franchises and provided all ingredients, marketing support and help with staff training. They had already opened 100 restaurants in other countries and offered to sell new franchises for a one off payment of $100,000.
If Harry signed one of these franchising contracts then he would have to agree to:
Only buying materials from Pizza Delight,
Fitting out the restaurant in exactly the way the franchisor wanted, An annual payment to Pizza Delight of a percentage of total turnover.
In addition, he would still need to obtain suitable premises and recruit and motivate staff. Pizza Delight claimed that their brand and products were so well known that ‘success was guaranteed’, according to their sales staff. As the product had been tested already, there would be none of the initial problems that small firms often experience and Pizza Delight would pay for national advertising campaigns. They assured Harry that no other Pizza Delight restaurant could open within 5 kilometers of one already operating. Harry was almost convinced that this was the business for him. He had inherited money from a relative. Several things still bothered him; for example, would it give him the independence he so much wanted?
Questions and Answers
1.Explain THREE potential benefits to Harry of opening a Pizza Delight restaurant. (6 marks)
ANSWER – 1. Lower chance of business failure than setting up a completely new business.
2. Pizza Delight is providing all ingredients, marketing support and health with staff training.
3. Pizza Delight is paying for National Advertising Campaign.
2.Explain THREE potential drawbacks to Harry of agreeing to the terms of the franchise contract. (6 marks)
ANSWER - 1. Poor quality service or bad publicity from one franchised outlet could damage reputation.
2. He as to pay an Annual payment to Pizza Delight of a percentage of total turnover.
3. He is still not independent because this wasn’t his business idea.
3.If he decided to open his own restaurant but under his own name, why might the risks of failure be greater than for a Pizza Delight franchise? (4 marks)
ANSWER - The risk of failure may be greater because unlike a Pizza Delight Franchise that is well known, opening a new restaurant under his own name that is not familiar to consumers might lead to failure because he might not attract customers like a Pizza Delight Restaurant that is already popular on the market.
4.Using all of the evidence, would you advise Harry to take out a franchise with Pizza Delight? (9 marks)
ANSWER - Harry taking out a franchise with Pizza Delight would be the best way to go because, not only are they well known on the market but their also providing all ingredients, marketing support and health with staff training. Their also paying for the National Advertising Campaign so there’s a low chance of the business failing. Him opening a completely new business under his name MIGHT fail, because he’s unknown and there’s much bigger competition on the market and he might not be able to run the business well enough to make a profit because it’s his first time owning a business.
Case Study 2 – Andrew’s coffee business