Inside Business: Franchise vs. Distributorship
There's no doubt that the coffee business is in a boom. There seems to be a coffee shop on every corner. And the reason is clear: People Love Coffee. And, history tells us that coffee has always been a staple of life all over the world, and there is no end to it's appeal in sight. Not only does coffee wake you up, the health benefits coffee drinkers enjoy are mounting as well.
Starting a coffee business is a smart move, if you do it right.
Being in business on your own can be a daunting proposition. Many entrepreneurs begin businesses that are related to "parent" companies, such as franchises and distributorships. Both franchises and distributorships receive products, instruction, marketing materials and other support from their umbrella companies. But there are important differences to consider when choosing between the two.
One crucial difference between franchises and distributorships is the start-up costs. Launching a franchise generally requires tens of thousands of dollars, or even in excess of $100,000. That includes everything from franchise fees, required equipment purchases, space leasing, signage, training, materials and employees. In contrast, distributorships generally require nothing more than a setup fee (for some) and the purchase of initial products or marketing materials. Many distributorships are launched with expenses of $100 or less.
Franchises and distributorships are also distinguished by their product sources. In most franchises, the franchise owner gathers materials, often from a limited number of corporate-approved vendors, and puts together the product or delivers a service. For distributorships, the distributor does nothing to create the product -- either it is shipped from the parent company and sold by the local distributor, or the distributor takes orders for products, which are filled and shipped directly by the parent company.
Another factor distinguishing franchises from distributorships is the time required to operate the business. Although most distributorships can be pursued either part-time or full-time depending on the goals and desires of the distributor, most franchises must by nature be full-time operations, often with hours of operation dictated by the parent company. The time involved in setting up a franchise can be six months or more, while most distributorships can begin within a few days of signing up.
Perhaps most contrasting is the level of corporate control involved in a franchise operation versus a distributorship. With a distributorship, the parent company supplies a line of products and makes suggestions on how the distributor might market and deliver the products. However, it doesn't dictate to the distributor how he must operate his business; whether he sells only to friends or goes door to door is entirely up to him. Because franchise owners display the parent company's brand and represent it to the community, they face much tighter control over their daily business operations. Issues such as exacting product or service procedures, employee training, hours, pricing, marketing, decor and even type and brand of equipment required might all be dictated by the franchisee's parent company.
Franchise operations also bear substantial corporate fees, which distributorships avoid. Most franchises require that local franchisees pay not only a percentage of their gross sales to the parent company in the form of a franchise royalty or tax, but also a percentage of their gross sales for corporate marketing efforts. Beyond these fees, franchise owners must periodically renew their franchise license with another franchise fee. Distributors simply pay a discounted price for their products, and sell them to customers for a profit along with 6-7 other ways of earning income and bonuses.
A commonality for both franchises and distributorships is that both have usually already been developed into successful business operations, quite often integrated area, regional national and international marketing programs, training to operate the business, and a corporate structure for support. Distributorships in a network marketing system, also offer income on a group volume basis, which does not occur with a single franchise.