Q.) If a franchise, like KFC or McDonald’s, is wholly owned by a local businessperson, how does it impact the parent company and its shareholders when the franchise is targeted for disruption, as we have seen recently in Egypt?
A.) First, you have to understand the nature of the franchising business model. Being wholly owned by a local party does not mean the franchise has no connection to the parent company. Indeed, franchising is itself a business strategy used by multinationals to spread their brand and increase their market share without having to bear the operating costs of the outlet. Franchises are not independent businesses; they must adhere to the policies of the parent company in every respect. Franchise owners must buy supplies from the parent company or from a supplier designated by the parent company, and they must send a percentage of their profits back up to the parent company.
The franchise model exploits the lack of small business support available to local entrepreneurs. People who want to start a business, but do not have the financial resources necessary to do so, instead of opening their own business, plug in to the multinationals This gives the parent company ultimate control, it dictates things like location, wages, prices, and it retains the power to order the franchise closed.
If a wholly owned franchise is targeted for disruption, yes, the local owners will suffer, but the parent company will be seriously impacted as well. Closure of franchise outlets decreases market share, reduces revenues, hurts the company image, and inevitably lowers share values.
The question is simply “would a multinational rather have franchises operating undisturbed in a country or not?” and the answer is obvious. If the parent company, and its shareholders know that they can create conditions in the market which are conducive for their franchise expansion, they will certainly do it. Indeed, that is precisely what they are doing in Egypt now by supporting Sisi, because they believe he can help secure their profitable activities in the country. You simply have to prove to them that he can’t.
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