Chain vs. Franchise: What Are the Main Differences?
Updated February 3, 2023
Retail companies often expand through chains or franchises. Both are effective ways to spread a brand and gain market share, but there are important distinctions between these two business models. If you're interested in business ownership opportunities or want to help expand a business, you may want to learn about the characteristics of chains and franchises and how they differ.
In this article, we define chains and franchises, explore the major differences between them and discuss the benefits of each.
What is a chain?
A chain is a type of business with multiple retail locations that one company owns and operates. Each location bears the same name and sells the same types of goods as the parent company, which gains the profits from each and takes responsibility for any financial losses.
Chains can come in various sizes, and to qualify as a chain, there must be at least two locations. Smaller chains are usually in a few cities, whereas larger ones typically serve whole regions, the entire nation or multiple countries.
There are various types of chain stores, such as supermarkets and superstores. Supermarket chains often serve regions but also have divisions under different names throughout the country. Superstores sell a large variety of goods, including clothes, food, pharmaceuticals and electronics. Other examples of chain stores include:
Related: 10 Different Types of Stores
What is a franchise?
A franchise is a type of business that allows individuals to open and run locations of a store under the parent company's brand and name, selling the established company's products or services. Each franchise location is the result of the business relationship between the franchisor and the franchisee.
The franchisor is the company that sells the rights to use its brand, and the franchisee is the person who purchases the license and runs a single location. Franchising helps a company expand geographically and commercially while allowing an entrepreneur to own and operate a business associated with an established brand.
Franchise agreements may vary depending on the specific company selling the license, but they generally have some characteristics in common. To start a franchise, the franchisee pays an initial startup fee to purchase the franchisor's trademark.
Additional startup costs usually relate to payments for equipment, training and advisement. When the franchise location opens, the franchisee regularly pays a percentage of revenue to the franchisor.
Chain vs. franchise differences
Both chain stores and franchise locations are part of a larger corporate entity, but there are several important differences between the two business models, including:
Every location in a chain belongs to the parent company. The company hires managers to oversee operations, but the parent company has the power to make major business decisions for its branches and receives the profits from each.
In contrast, every franchise location has a unique owner. The franchisee buys the rights to operate under a brand but retains autonomy over major operating decisions.
Financing is how you get the money to start a chain or franchise location. This money is necessary for obtaining the physical location of the store, equipping it, stocking it and hiring staff. For a company starting a chain store, the financing comes from its own profits or lending institutions.
For franchise stores, the financing mainly comes from the franchisee, who pays several fees to the franchisor, including the startup cost to use the company's brand.
Related: 5 Types of Funding for Businesses
The allocation of profits also differs between these business models. Chain stores are corporate-owned and corporate-operated, so the corporation receives all the profits.
Franchises are individually owned businesses that receive corporate support. This means the franchisee receives the majority of the profits but shares a portion in royalties with the franchisor.
Risk refers to any factor that can hinder a business's success, such as damage to merchandise, human error and ineffective business strategies. In a chain, the parent company assumes all the risk. If a particular location isn't performing well, this directly affects the company's performance.
In a franchise, the franchisor and the franchisee share the risk. The parent company invests some money and resources to get the franchise started, but most of the operational risk belongs to the location owner.
With a chain, the parent company has total control over all locations. This allows the brand to offer nearly identical inventory and consistent customer service across each chain store.
Franchises may offer variable products and services to customers since an individual franchisee owns each location. Many franchise agreements try to establish greater consistency between locations, but there's typically less control from the franchisor.
Benefits of a chain
There are several benefits of operating a chain. These include:
Volume pricing is the practice of offering discounts in proportion to the number of goods purchased. Suppliers of chain stores commonly engage in volume pricing.
The company must stock each chain location, and every location carries the same lines of merchandise, so the company can buy and sell large volumes of goods, allowing them to take advantage of greater discounts. As a result, the price per unit of merchandise acquired is usually significantly lower for a chain.
With chains, shoppers can expect the same environment, merchandise and deals from every location. This can allow the parent company to create a single advertising campaign that applies to all its locations.
For example, if a nationwide chain wishes to promote a holiday sale with specific markdowns, it can run the same commercials and print ads regardless of the region.
Many chains use one or a few locations as test areas, where they can experiment with new merchandise, advertising techniques, layouts and other changes. Experimenting with isolated chain locations can provide information about the profitability of new ideas or tactics without affecting the entire company.
For instance, if a company wants to see how well a new product sells, it might introduce the product to a single location to see how shoppers react. If the product sells well in that location, it may do the same in the others.
Related: 32 Effective Advertising Tactics
Benefits of a franchise
Franchises also offer several benefits to both the franchisor and the franchisee, such as:
For entrepreneurs, starting a franchise location is usually easier than starting their own business. The franchisee has the advantage of using a well-known brand and doesn't need to develop their own brand identity. This might increase the chances of the entrepreneur experiencing success.
Established business model
Buying a franchise license also allows the franchisee to operate under an established business model, meaning they don't have to devise their own system of operations.
As a result, the franchisee doesn't have to make larger decisions, such as when to open and close, what to sell and how to design and arrange the store. Often, the franchisor also has protocols relating to customer relations and operations.
The franchisor has an interest in the well-being of the franchise, so it often provides support and resources to facilitate startup and success.
Many franchisors provide their franchise locations with advanced training to educate the owners on strategies for business and revenue. They may also offer mentoring programs that pair new franchisees with established franchise owners, who can share knowledge and advice.
Franchisors also provide support through supplies. The franchisor can make deals with suppliers that help to reduce prices for both the company and the franchisees. As a result, it's often less expensive for franchisees to stock their business.
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