Case Scenario:
Liz Strong thought she'd been a librarian long enough, and when the opportunity to open a small organic convenient store in the newly renovated downtown business district arose, she was ready to act. Foods of Reality is a franchisor of organic food shops, and was founded five years ago by a noted certified nutrient specialist in New York City. The concept for the shops is simple, yet sophisticated. It is simple in the sense that the shops sell only organic-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company's founder. The franchisor finances the shop's initial inventory. The franchisee is expected to create a decor within predetermined standards that Foods of Reality establishes. Each franchisee must attend a three-day workshop, outlining the fundamentals of organic food, the merchandising of the different types of organic foods, and the techniques of successful business operation.
The franchise contract requires the franchisee to contribute 1.5% of gross revenue to a national advertising campaign. According to the contract, Foods of Reality will finance the required fixtures for the store for ten years. Also, the franchisor supplies all inventory at very favorable prices because it purchases in large quantities.
Liz knows she can buy organic products from a variety of wholesalers. She also has some ideas on what would make an organic shop successful in this town. Liz knows that Foods of Reality franchisees have had a high success rate in the past.
Help Liz make a decision by outlining the advantages and disadvantages of a franchise agreement. Assuming that Liz has adequate capital, would you recommend that she invest in the franchise or open her own organic foods shop? Why?