‘Chain’ and ‘franchise’ are two terms often melded together in business conversation. We know McDonald’s, Starbucks, Subway, Wal-Mart, KFC, Pizza Hut, and all the other big chains. But are they franchises too?
Labeling many of these businesses as both a chain and a franchise is incorrect—but not all! So what’s the difference? In this article, we’ll define both terms, take a closer look at some notable chains and franchises, and break down the difference between chain vs. franchise.
What is a Chain?
A chain business is a business with two or more locations under the same name and business model. Also, all locations are under the same business structure. Chains can operate in the same city or region, nationally or internationally, or exist as a private or public company. As long as all locations remain in ownership of a parent company, it’s a chain.
Let’s examine this definition and see how it plays out with some notable chains.
Walmart: The Ultimate Chain Store for Retail
With over 2 million employees worldwide as of this writing and annual revenue of over $500 billion in 2019, Walmart is the quintessential business when people think of a chain.
Walmart is not a franchisor as every location is owned and managed by the parent company Walmart Inc. When Walmart opens new business locations, financing comes from the parent company, so they also take on all of the financial risks associated with expansion.
In-N-Out: A Burger Chain that Does Not Franchise
Fast-food chains often cause a lot of the misconception between the terms chain and franchise. However, not all fast food chains embrace the franchise system. A prime example is the private family-owned burger chain In-N-Out.
The main reason In-N-Out never turned into a franchise business was quality control. The burger chain has a strict freshness policy, so there are no freezers or microwaves at any location. They also run a tight service model with strict operating procedures, which would be very difficult for franchisees to follow. All-in-all, the business believes that their quality would suffer if they become a franchiser.
What is a Franchise?
A franchise is a business concept where a chain corporation—a franchisor—sells the rights to use their business model and brand name to an independent business owner—a franchisee.
That’s the key difference between a chain and a franchise.
Chains are corporations with multiple locations, whereas franchises are independently owned businesses that pay to use the branding and business model. And so, all franchises are part of a chain, but not all chains are franchises.
Franchise corporations also provide other perks to allow their independent owners to run successful businesses, such as:
- More comprehensive marketing and brand recognition
- Access to cheaper supplies
- Training to ensure the business has a solid opening with continued profitability
- Support to keep the business running smoothly
- Access to proprietary knowledge and intellectual property
Even though franchises are independently owned, most franchisees pay ongoing royalty fees and other marketing fees to help the chain have continued success and open more franchise locations.
When a chain allows franchising, it relinquishes some control to small business owners and enables them to run locations independently of the corporation. In turn, the chain increases profitability and can expand more rapidly.
Let’s look at some notable corporations that franchise their business.
McDonald’s: Franchising at its finest
No other company has more recognition as a franchise than McDonald’s. The burger chain opened its first location in 1955 with a franchise model already in mind. Now it’s known as the top quick-service restaurant all around the globe.
Opening a McDonald’s location isn’t as easy as it once was. It takes at least $500k of liquid assets on hand to even be considered. And that’s beside the costs related to opening a new location or purchasing an existing one and their $45k franchise fee. The final investment can reach anywhere from 750k to over $2.5 million.
Add in the 12.5% in annual royalty fees and the fact that franchisees must be involved in the day-to-day operations of the establishment, and you can see this company takes franchising seriously.
Though they have over 2,000 corporate-owned locations, it’s the franchise model that brought them an additional 35,000 stores. This is the core of their business and is the reason the company grew into an international success.
Ace Hardware: A Franchise that Acts as a Cooperative
Ace Hardware has invariably steered towards a franchise business plan, even though it didn’t start franchising until later on.
In 1924, four hardware store owners pooled their money together to purchase their merchandise in bulk. It allowed them to increase their profitability and compete with larger stores. Nearly a century later, Ace Hardware has over 5,400 franchise locations in seven countries.
The company likes to think of itself as more of a cooperative than a franchise, as they don’t charge any royalty or franchise fees. Instead, franchisees pay anywhere from $650k up to $1 million based on the store size and must have a net worth of $400k and $250k in unencumbered cash to open a location.
This grants franchisees access to their supply cooperative of merchandise that includes many Ace’s exclusive products. Plus, franchisees gain the use of the Ace brand, which is the most recognizable name for home hardware in the US.
Which Chains are Franchises?
With these two definitions and notable examples, you have a good idea of what’s a chain and what’s a franchise. But to be clear, let’s look at a couple of chains that aren’t as widely known as franchises.
- Ikea – When people think of a franchise, they might think of smaller store locations. But that’s not the case with Ikea. Every Ikea except for one store in the Netherlands operates under a franchise agreement.
- UPS – With so many locations around and their business being in parcel delivery, many people think UPS runs as a business like the US Postal Service. However, there are over 5,000 UPS franchises in the US.
To sum up, remember that all franchises are part of a chain, but not all chains have franchising as part of their business model. Some chains are private and family-owned, while others are public companies traded on the stock market. Regardless, to be a franchise, a company must sell the right to use its brand and business blueprint to a franchisee.