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THE DEVELOPMENT OF FRANCmSE FAST FOOD RESTAURANT IN MALAYSIA THE VIEWS OF
CONSUMER ON KUCHING MARKET
TX 9113 M27 Z21
ZAKARIA BIN mRAHIM
Kota Samarahan
2004
THE DEVELOPMENT OF FRANCHISE FAST FOOD RESTAURANT IN
MALAYSIA THE VIEWS OF CONSUMER ON
KUCHING MARKET
PKHIDPAAT PAAKLU PAAT AKADEMIK UNIPAAS
11111111111111111111 11111 1000124126
BY
ZAKARIA BIN IBRAHIM 02-02-0700
A Research Paper Submitted in Partial Fulfillment of the Requirement for the degree of
Corporate Master in Business Administration
Faculty of Economics and Business University Malaysia Sarawak
MAY 2004
APPROVAL PAGE
I certify that I have supervised and read this study and that in my opinion it conforms to acceptable standards of scholarly presentation
Nand is fully adequate in scope and quality as a research proposal for Mthe degree of Corporate Master in Business Administration
I
ASSOCIATE PROFESSOR DR RUJHAN BIN MUST APHA
11
a
SUPERVISQR b
bull This research proposal was submittegto the Faculty of Economics and Business UNIMAS and is accepted as partial fulfillment of the requirements for the degree of C~~rae l1(fster in Business Administration
ASSOCIATE PROFESSOR DR SHAZALI ABU MANSOR Dean Faculty of Economics and Business UNIMAS
T 11 9 ~
7 ~I
DECLARATION AND COPYRIGHT
ame Zakaria bin Ibrahim Matric Number 02-02-0700
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and
bibliography is appended
~ Signature middotmiddotmiddotmiddotmiddot ~~ middot Umiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot
Date -
copy Copyright by Zakaria bin Ibrahim and Unversiti Malaysia Sarawak
III
DEDICATION
Fa prl in1
To my beloved wife Dayang Fawzia my two sons Fiqh Al Huzair and Fiqh Zokhairie my daughter father and mother who had given I me patience understanding moral support and encouragement PI throughout the course hi
Sl To my brothers and sisters who have gIven me the words of n encouragement
I To my p~rent in law who have given me the room and utilities to E write up the research
Sbull I t
IV
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
THE DEVELOPMENT OF FRANCHISE FAST FOOD RESTAURANT IN
MALAYSIA THE VIEWS OF CONSUMER ON
KUCHING MARKET
PKHIDPAAT PAAKLU PAAT AKADEMIK UNIPAAS
11111111111111111111 11111 1000124126
BY
ZAKARIA BIN IBRAHIM 02-02-0700
A Research Paper Submitted in Partial Fulfillment of the Requirement for the degree of
Corporate Master in Business Administration
Faculty of Economics and Business University Malaysia Sarawak
MAY 2004
APPROVAL PAGE
I certify that I have supervised and read this study and that in my opinion it conforms to acceptable standards of scholarly presentation
Nand is fully adequate in scope and quality as a research proposal for Mthe degree of Corporate Master in Business Administration
I
ASSOCIATE PROFESSOR DR RUJHAN BIN MUST APHA
11
a
SUPERVISQR b
bull This research proposal was submittegto the Faculty of Economics and Business UNIMAS and is accepted as partial fulfillment of the requirements for the degree of C~~rae l1(fster in Business Administration
ASSOCIATE PROFESSOR DR SHAZALI ABU MANSOR Dean Faculty of Economics and Business UNIMAS
T 11 9 ~
7 ~I
DECLARATION AND COPYRIGHT
ame Zakaria bin Ibrahim Matric Number 02-02-0700
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and
bibliography is appended
~ Signature middotmiddotmiddotmiddotmiddot ~~ middot Umiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot
Date -
copy Copyright by Zakaria bin Ibrahim and Unversiti Malaysia Sarawak
III
DEDICATION
Fa prl in1
To my beloved wife Dayang Fawzia my two sons Fiqh Al Huzair and Fiqh Zokhairie my daughter father and mother who had given I me patience understanding moral support and encouragement PI throughout the course hi
Sl To my brothers and sisters who have gIven me the words of n encouragement
I To my p~rent in law who have given me the room and utilities to E write up the research
Sbull I t
IV
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
APPROVAL PAGE
I certify that I have supervised and read this study and that in my opinion it conforms to acceptable standards of scholarly presentation
Nand is fully adequate in scope and quality as a research proposal for Mthe degree of Corporate Master in Business Administration
I
ASSOCIATE PROFESSOR DR RUJHAN BIN MUST APHA
11
a
SUPERVISQR b
bull This research proposal was submittegto the Faculty of Economics and Business UNIMAS and is accepted as partial fulfillment of the requirements for the degree of C~~rae l1(fster in Business Administration
ASSOCIATE PROFESSOR DR SHAZALI ABU MANSOR Dean Faculty of Economics and Business UNIMAS
T 11 9 ~
7 ~I
DECLARATION AND COPYRIGHT
ame Zakaria bin Ibrahim Matric Number 02-02-0700
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and
bibliography is appended
~ Signature middotmiddotmiddotmiddotmiddot ~~ middot Umiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot
Date -
copy Copyright by Zakaria bin Ibrahim and Unversiti Malaysia Sarawak
III
DEDICATION
Fa prl in1
To my beloved wife Dayang Fawzia my two sons Fiqh Al Huzair and Fiqh Zokhairie my daughter father and mother who had given I me patience understanding moral support and encouragement PI throughout the course hi
Sl To my brothers and sisters who have gIven me the words of n encouragement
I To my p~rent in law who have given me the room and utilities to E write up the research
Sbull I t
IV
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
DECLARATION AND COPYRIGHT
ame Zakaria bin Ibrahim Matric Number 02-02-0700
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and
bibliography is appended
~ Signature middotmiddotmiddotmiddotmiddot ~~ middot Umiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot
Date -
copy Copyright by Zakaria bin Ibrahim and Unversiti Malaysia Sarawak
III
DEDICATION
Fa prl in1
To my beloved wife Dayang Fawzia my two sons Fiqh Al Huzair and Fiqh Zokhairie my daughter father and mother who had given I me patience understanding moral support and encouragement PI throughout the course hi
Sl To my brothers and sisters who have gIven me the words of n encouragement
I To my p~rent in law who have given me the room and utilities to E write up the research
Sbull I t
IV
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
DEDICATION
Fa prl in1
To my beloved wife Dayang Fawzia my two sons Fiqh Al Huzair and Fiqh Zokhairie my daughter father and mother who had given I me patience understanding moral support and encouragement PI throughout the course hi
Sl To my brothers and sisters who have gIven me the words of n encouragement
I To my p~rent in law who have given me the room and utilities to E write up the research
Sbull I t
IV
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
ACKNOWLEDGEMENTS
Foremost I would like to thank all the respondents for giving their precious time and assistance in answering my questionnaire and interviews
I wish to convey my heartfelt gratitude to my supervisor Assoc Professor Dr Rujhan bin Mustapha who had sacrificed so much of his time and energy and his untiring efforts in giving his suggestions
~ support guidance and motivation throughout the duration of this research
I also wish to express my gratitude to all the staff in the Faculty of Economics and Business for their generous assistance advice ~uggestions and moral support
I am also indebted to all my course-mates colleagues and friends for their undivided moral support understanding and generous
~ assistance
Finally I am grateful to all others whom I cannot mention individually here for whatever helps and assistance towards the successful completion of this research proper
v
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
LIST OF TABLES
Table la List of franchise restaurant registered with Iv1FA
Table Ib List of franchise restaurant registered with Iv1FA
Table 2 List ofFFFR in Kuching
Table 3 The breakdown of sample population by FFFR
Table 4 ~ The breakdown of final sample population by FFFR
Table 5 The areas of concentration of franchise system 2003
Table 6a~ The consumers view on FFFR
Table 6b The consumers view on FFFR
bull Table 7 The respondents profile
VI
Ii
11
I
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
Figure I
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
t
Figure 8
Figure 9
Figure 10
LIST OF FIGURES
Malaysia population for 1991 and 2000
Factors influencing the development ofFFFR
The Franchise system by product category
The population estimates - Malaysia (000)
Actual vs Estimated franchise Outlet Growth
The number of franchisee and franchisor developed under FDP as at December 2001
Distribution of employment
The Population Estimates by age and ethnic groupshySarawak 2004 (000)
The Distribution of Employment by Gender -Sarawak
GDP of Sarawak and Restaurant amp Hotel
Vii
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
LIST OF ABBREVIATIONS
BFA CRDF e-mail FDP FDAS FFFR FFS FFP GDP IFA KFC KPUn MEDEC MFA MPPB SB SPSS UiTM UUM WWW
British Franchise Association Commercialization of RampD fund Electronic mail Franchise Development Program Franchise Development Assistance Scheme Franchise Fast Food Restaurant Franchise financial scheme Franchise Financing Package Gross Domestic Products International Franchise Association Kentucky Fried Chicken Ministry of Entrepreneur Development Malaysian Entrepreneurs Development Centre Malaysian Franchise Association Bumiputra Business and Industrial Society Sugar Bun Statistical Package for Social Sciences Universiti Teknologi MARA Universiti Utara Malaysia World Wide Web
VIII
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
ABSTRACT bull
This study would attempt to scrutinize the development of franchise fast food restaurant business in Malaysia after 10 years inception of
the Franchise Development Program in 1992 Since then the development of this industry has been growing steadily The measurement of development would include the numbers of
restaurants available the franchisor the franchisee the support agencies the suppliers the customers the growth of foreign or
homegrown franchise and many more
This study would also attempt to analyze the views of consumers on the franchise fast food restaurant business on Kuching city It would be an interesting to find out the reasons why there are some franchise
restaurant businesses that are popular in other cities and countries through the globe have failed in Kuching
bull
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
TABLE OF CONTENTS Approval Page 11
List of Figures Vll
List of Abbreviations Vlll
Declaration and Copyright Page 111
Dedication IV
Acknowledgement v List of Tables VI
Abstract IX
10 INTRODUCTION 1
11 Background 1
12 Problem statement 6 13 Objective of study 7
1 14 Scope of study 7 815 Significant of study
16 Limitation of study 8
20 THEORETICAL FRAMEWORK 9
2 1 Literature Review 9
22 Conceptual modeL 13
3 0 RESEARCH METHODOLOGY 15
3 1 Primary data 15 311 Population and sample 15
32 Secondary data 17
33 Method of data analysis 17 331 Statistical Package for Social Science
(SPSS) 17
332 Cross-tabulations 17
333 Likert Scale 17
334 Pilot test 18
40 FINDINGS (ANALYSIS AND EVALUATION) 19
41 The development ofFFFR in Malaysia 20
411 Market penetration 20
412 Growth ofFFFR 22
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
413 International Expansion by Local Franchisor 27
414 Employment in the FFFR Sector 27 42 The views of consumers on FFFR in
Kuching 28 421 The variety ofsocial and demographic
changes 31 422 The degree ofeconomic activities 33 423 The consumers profile 33
43 Success factor of existing establishment in Kuching 37 431 Menu development 38
432 Service 39
433 Location 39 44 Failure of some establishment 40
441 Commitment 40
442 Feel ofenjoyment 41bull 443 Diversion from franchise system 41
444 Could not really afford the franchise 41
50 CONCLUSION 43
REFERENCES 44
APPENDIX 1 Research questionnaires 47
APPENDIX 2 Cross-tabulation of gender age employment marital status household personal income and amount spent per meaL 48
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
10 INTRODUCTION
Franchise business arrangement is one of the most dynamic business ventures in developed nations and is increasingly popular in developing nations It has been a popular expansion strategy for companies to market its products and services throughout the globe It has become a dominating force in the distribution of goods and services in the United States According to a research that was conducted in United States in 1994 35 per cent of the total retail sales were secured through franchising Accordingly there are more than 550000 franchise outlets that accounted to annual total sales of more than US$800 billion (Abdul Rahman Husin 2001)
In Malaysia the concept of franchising is not new The franchise business has emerged as early as 1930s with the establishment of Bata shoe outlet before the Second World War Gradually it expanded to other types and goods and services with the existence of Singer Sewing Machine Company petrol stations and car dealers in
bull the late 1950s and fast food restaurants in the early 1970s The franchises mentioned above are mostly of foreign origin Their success in Malaysia has helped to boost Malaysian economy In 1986 the market size of franchise business in Malaysia contributed to about US$154 million (MR38346 million) (Noraini Ibrahim 2002)
11 Background
The term franchise originated from a French word meaning free from servitude (Khan 1991) Strictly from business point of view it is a right or privilege granted to an individual or a group From the point of economics a franchise is a right granted to operate a business under the general regulation of one who grants it In lay man terms a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or privileges (license) to someone else (franchisee) and this person agrees to sell the goods or services under a set of specific conditions This method of doing business is known as franchising
In other words it is a marketing concept by which a business firm that has pioneered a successful method of business operation grants licenses to others to replicate the use of that method of business operation to distribute goods or services
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
in a specific geographic area The idea of franchising is that the franchisor would confer a license to the franchisee to use
its distinctive logo brand name trademarks or tradename or service marks and pass on its business methods and techniques to the franchisee
The general test of whether or not a business opportunity is a franchise you should be able to distinguish if you sell a business opportunity to any person and you allow the buyer to use your company name or logo charge a fee to the buyer (Wlside or outside of product or service) provide any significant assistance or maintain any significant control over any part of the business In short it is the cloning of a business operation and virtually any kind of business that can )e repeated and systemized can be franchised
FrAnchising in Malaysia has expanded from initially food ciominated business to a broader spectrum of products and services such as household needs computer bookstore education cosmetic and many more As at 31 sl December 200 I there were about 723 franchises that were developed under the Franchise Development Program (FDP) involving 86 franchisors and 637 franchisees The fast food and restaurant sectors remain extremely strong in the marketplace when it remains top of the list with 195 franchisors and 83 franchisees (NlF A 2003)
With the recent regional economic downturn franchising now appears more attractive as it hedges the risks for new entrepreneurs Due to the potential and rapid growth of franchise business in Malaysia the Government through its various agencies has encouraged local business to venture into franchising their business As a result local franchise arrangement started to enter into the Malaysian market by end of1997
The Government has identified the franchise business system as a fast and most efficient mechanism to develop local entrepreneurs Under the Ministry of Entrepreneur Development (KPUn) many programs and facilities have been created to facilitate franchising among bumiputra (ethnic Malay and other indigenous groups) middle-class
2
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
entrepreneurs and has made FDP as one of a mean to develop these groups and also the Bumiputra Business and Industrial Society (MPPB) Under the Eight Malaysia Plan the Government has targeted to develop 1000 franchisees by the year 2005
In 1995 its contribution was 121 per cent of Malaysian Gross Domestic Product (GDP) The Government does not have a precise statistic on the number of franchise business in the country However as of 2001 it was estimated that there are about 268 franchises resulting in more than 6500 outlets In recent years the franchise industry has registered an average annual growth rate of around 10 per cent It now comprises approximately 4 per cent of the total number of retail outlets in the country and accounts for approximately 5 per cent of total retail sales (KPU n 2001)
The growth of the industry in Malaysia ranked second middot between countries in the Asia region and twenty-first in the world (Abdul Rahman 2001) American franchises particularly in the fast food and restaurant sectors remain extremely strong in the marketplace This is especially true since the majority of the worlds franchising originates in the United States In Malaysia American franchises account for about 70 per cent of the total foreign franchise sales (Business advisor 2001)
The Franchise Act which came into effect in mid-1999 makes it mandatory for franchisors and franchisees to register with KPUn The objective is to keep track of the growth of the franchise industry in the country The Act also seeks to regulate such matters as predisclosure and registration requirements for franchise businesses
After a decade of development since the inception of FDP in 1992 the subject matter is still under-researched Furthermore the Franchise Act only came in mid-1999 therefore there was no proper record on the franchise system In addition the development of this industry remains focus at certain states and cities in Malaysia being the most concentration is located in the Kelang Valley
3
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
Franchise fast food restaurant (FFFR) is a restaurant business system that has proven track records with systematic methods
of operation readily granting licenses to others to replicate the business model and system It is concerned with the transfer of intellectual property rights (in the form of trademarks and technical know-how) that provides both parties to the transaction with access to valuable benefits
Fast food is defmed as food that is sold in a fast food outlets but the basic concept depends upon the following character
~
bull Cheap but quality food
bull Product that can be cooked quickly and held in the ~
short term without deteriorating
bull Large throughput of consumers bull Demand for takeaways as well as consumption on the
premIses
bull Precise portion control
In Kuching this business arrangement is relatively very young and the entrance into and exit from the industry is considers high Table 1 depicts the fast food restaurants registered with Malaysian Franchise Association (MFA)Table 2 depicts the FFFR in Kuching
TabilLe a 1St 0 ffranehIse res tauran t re~lstered WIth MFA No Name Country
ori2in Membership No
outlet 1 1901 Home Member 36 2 AampW USA Non member nla 3 American Chilis Grill amp Bar USA Non member nla 4 Baguz Bites Home Member 9 5 Balissinie Home
Non member nla 6 Bearertails Foreign Non member nla 7 8
Burger king Foreign Non member nla Carlifornia Pizza Chicken USA Nonmember nla
9 Chicken Kjn~ Home Member 22 lO Coffee beans amp Tea leaf USA Non member nla II Cup Bon Foreign Non member nJa
4
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
Ta ble Ib L1St 0ffranehIse restaurant reglstered wit h MFA
and the
the
bullthe
No Name Country origin
Membership No outlet
12 DTandoor Restaurant Home Member nla 13 Dairy King Home Member nla 14 Daves Deli Home Member nla 15 Delifrance Foreign Non member nla 16 17
Deli Giant Dome Cafe
Home Foreign
Member Non member
nla nla
18 Durian Shoppe Home Non member I nla 19 20
Eha-Fruit amp Vege Bistro Home Non member nla ES Teller Restaurants Foreign Non member nla
21 Hartz Chicken Home Non member nla 22 Hoca Coffee Home Member nla 23 Juice Fusion Home Member nla 24 Kenny Rogers Roasters USA Member 66 25 I Kentucky Fried Chicken USA Non member nla 26 I Kyros Kebab Home Member 39 27 Lascito Coffee Home Non member nla 28 Long John Silver USA Non member I nla 29 Makanan Eksotik Malaysia Home Member 4 30 Marry Brown Family Restau Home Member 102 31 Mc Dota fried Chicken Home Non member nla 32 McDonald USA Member 146 33 Nelson Home Member 78 34 Papa Chop Mama Grill Home Non member nla 35 Pizza Hut USA Non member 134 36 Saint Cinnamon Foreign Non member nla I
37 38
Schlotzskys Deli Foreign Non member nla Secret Recipe Cake amp Cafe Home Non member nla I
39 Segafredo Zanetti Espresso Foreign Non member nla 40 Shakeys Pizza Foreign Non member nla 41 Snappers Fish Foreign Non member 7 42 Strudels Home Non member nla 43 I Subway USA Non member l1a 44 Sugar Bun Home Member 46 45 II Sunny Ostrich Home Member 5 46 The Fish Shop I NZ Member 18 47 The Pier Home Member nla 48 The Tart Shop Home Non member nla
Source MFA 2003
5
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
Table 2 L1St 0 fFFFR10 K uch102middot
No L Name Year operation No outJet 1 Coffee beans amp Tea leaves 2004 1
I 2 Hertz Chicken Buffet 1994 2 3 Kenny Rogers Roaster 2004 1 4 Kentucky Fried Chicken 1984 11 5 Kyros Kebab 2000 1
16 McDonald 1993 2 7 Nelson 1997 2 8 II Pizza Hut 1994 4 9 Sugar Bun 1981 6
Source MEA 2003
12 Problem statement
The FFFR business arrangement has been a very popular topic of discussion among entrepreneurs Government and academia However there are little academic researches to guide or regulate industry practices Nevertheless it is the fastest growing method of doing business (Miranda 1995) ind has become the most important and popular method of creating new businesses (Justis 1995)
In Malaysia the development of FFFR has been moderately steady in the recent years Since the inception of the FDP 10 years ago how far and how much has the industry grow The Government has targeted of achieving 1000 franchises in the year 2005 under the Eight Malaysian Plan Out of this number how many had been achieved and how many more would be achieved especially in the food and restaurant sectors
This study would therefore attempt to scrutmlze the development of these FFFRs after 10 years inception of the FDP Despite the steady growth as reported in the media the situation is reverse in the case of Kuching A product that is very popular and selling very well in one or more areas does not mean that it is accepted elsewhere For example the very popular A amp W Chicken King and The Fish Shop have ceased their operations in the city It is therefore an interest of the researcher to scrutinize the situation
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
of
13 Objective of study
The objectives of this study were to evaluate the development of FFFR business in Malaysia generally and to analyze the views of consumers from the Kuching market standpoint Meanwhile it was also possible to explore the possible reasons behind the success and failure of the FFFRs in Kuching as secondary objectives
FFFR business system in Kuching has started way back in 1981 with the first being the Sugar Bun (SB) The latest establishment was in 2004 with the opening of The Coffee Beans and Tea Leaves in Sarawak Plaza
Since the first establishment and the latest one various FFFRs have entered into the market and exit from the industry These restaurants are not only very established but also have proven to be successful in other cities and countries throughout the globe Apart from these some homegrown franchising also contributes to the growth Nevertheless the trend in Kuching is unpredictable A amp W one of the earliest and oldest fast food restaurants in Malaysia has closed down its operation in Kuching This followed by the Chicken King and the Fish Shop the popular restaurant from New Zealand Currently there are quiet a handful of these fast food restaurant remains in the market
14 Scope of study
The study encompassed the development of FFFR business in Malaysia generally from the date of inception of the FDP in 1992 until present The franchise systems that were looked at comprised from the foreign owned to home grown regardless whether they were member or non member of the WA
From the viewpoints of consumer regarding these FFFRs in Kuching all nine FFFRs were identified Consumers from each of the franchise system were selected and interviewed Their demographic patterns and spending habits at these FFFRs were analyzed to see their views and responses of the FFFR systems in Kuching
7
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
15 Significant of study
This area of research is still under-studied The intent of the study is to fill the vacuum so that it would help creation of new knowledge and expand this area of research Besides it would also highlight the development and trend of fast food restaurant arrangement in Malaysia Since this research area is still under studied it would also provide a guide and overview to the researcher and readers when they decide to venture into the business later
16 Limitation of study
This study was conducted in Kuching The authorities that are entrusted to develop and regulate the franchise industry are located in Kuala Lumpur There were no proper records on lhe franchise industry in Malaysia Only after the enactment
of Franchise Act 1999 which require all franchisors and franchisees have to be registered the data on franchise
becomes available However due to the distance and cost constraints the researcher can only managed to get secondary
data from the MFA of which the data given were franchise system as a whole They could not give the researcher the data on specific sector such as fast food
As mentioned earlier in the chapter this area of research is very much under- studied Even in the US whereby franch ising has started well after the Second World War there were still lack of academic research done on the subject As such the data on development of franchise in Malaysia were based on the recent survey conducted by MFA in 2003 whereas the data on franchise in Kuching were obtained from questionnaires distributed to the franchisees
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
20 THEORETICAL FRAMEWORK
21 Literature Review
In the Food Service Operations (Peter Jones 1990) the startling growth of the sector and diversification into new product areas has been a result of4 factors They are
bull a change in eating habits- people are tending to spend less time eating lunch and there is a modern preshyoccupation with eating less
bull the growth of a teenage market- teenagers represent a significant percentage of the population and they are less conservative in their eating habits and more likely to accept convenience products
bull 34 per cent of the working population are women and these group do not have time to prepare meals and
bull due to the influence of US firms whereby the market has reached a saturating point in the US
In Malaysia the Government had introduced the alternate Saturday off in 2000 for civil servants and most private companies subsequently followed the move This move has shortened the normal lunch break The shortened break may have caused the working populations to eat out for quick and quality foods
In addition to that there was an increased in numbers of female working population due to the changing lifestyle of Malaysian family whereby the demand for earning dual income becomes a trend in the societies This is well supported with a healthy increase in numbers of higher learning institutions This working group tends to have less time to prepare meals As such they would prefer eating out to nearby food outlets
The growth of Malaysian population from 1838 million in 1991 to 23 27 million in 2000 would proportionately contribute to the increase of FFFRs The highest population
9
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
growth state in Malaysia is Selangor which marked an increase of 7355 per cent from 241360 million in 1991 followed by Johor Sabah and Sarawak at 205 per cent increase from 171840 million to 207150 million Figure 1 below depicts the population of Malaysia by states for the year 1991 and 2002
Figure 1 Malaysia population for 1991 and 2000
MALAYS IAN POPULAnON
[-- 00 I
350000 300000
S 250000 f 200100
50000
100000
400000 fiiIII~
50000
000
Source Statistic Department of Malaysia (2003)
In the What is Meant by Franchise Selling (Kanopa 1963) stressed that franchise selling has been flourishing in the recent years and in 1960 franchising companies established their own trade group the International Franchise Association The association estimated in 1962 that over 400 compantes in 80 different fields franchised over 100000 people
In Malaysia the MFA was established in the year 1994 more than 50 years behind the United States Since the establishment there are currently 37 registered FFFRs through out Malaysia This body would become the key enabler together with other Government agencies to achieve the Eight Malaysian Plan by 2005
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
the
In the Independence of the Franchise Entrepreneurs (Knight 1984) and in the Cost of Control The Sources of Economic Rents for McDonalds Franchisees (Kaufmann and Lafontaine 1994) discussed the amazing development of franchising that has expanded rapidly in North America and around the world during the 1970s and 1980s According to them total franchise sales for the United States and Canada in 1981 were estimated to be about US$376 billion about one third of all retail sales
There are nearly 500000 franchise business establishments in North America which accounts for about 5 million jobs and the numbers are growing daily An estimated 7500 franchisors offer franchises in the United States and more than 1000 Canadian franchisors administer over 2500 franchise units in Canada According to sources from the Department of Commerce it was estimated that the number of franchisors increased from 909 in 1972 to 2177 in 1984 Total nominal sales through outlets of franchisors grew by 442 per cent between 1972 and 1986 with the number of
outlets growing by 65 per cent in the same period from 189640 to 312810 (Knight 1984)
It is really true that franchising is one of the most important business phenomenon in the world especially those that originates from United States However franchising is often misunderstood That is why the development of franchising in the developing nation only started quite recently In Malaysia although franchising has footed way back in as early as 1930s the development was very slow This could be due to the fact that the benefits were not properly disseminated The lack of knowledge and exposure to the business concept would be one of the reasons for the slow growth Only after 1992 when the Government started to promote the benefits and potential of franchising the industry started to move The most popular franchising is in the fast food sector
Generally fast food franchising in Malaysia experiences marvelous growth as reported by the media The reports appear to be bias because it only reports the growth of the industry as a whole If we go deep into some places in Malaysia we will observe that there are a number of fast food
11
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy
franchises failures For example A amp W one of the top names in the industry have failed in Kuching Not long after
that the Fish Shop a franchise restaurant originated from New Zealand also failed in Kuching What more to say the home grown franchise such as the Chicken King that can only survive less than a year in Kuching
Franchising has undoubtedly been one of the keys to the success of many fast food chains (Lee 1987 Acheson and Wicking 1992 Khan 1992) although not all chains have ftmnd franchising successful For example Popeyes Famous Fried Chicken Subway and Arbys are all US franchised systems which although they succeeded elsewhere failed in the UK shortly after the initial entry Similarly Lums Minnie ~
Pearls Fried Chicken and General Foods Burger Chef are all examples of chains that expanded so fast through franchising int the US but failed because of the inconsistent quality and too many disparate locations
n the Hotel and Restaurant Business (Donald E Lundberg 1993) it was noted in the Restaurant and Institution magazine that about 20 per cent of new franchise systems fade from the scene each year According to one writer the well known franchised restaurants have a failure rate of under 5 per cent a year (Tom Power 1993)
The common reasons for such failure are franchisee inexperience too many of same system a given territory insufficient capitalization excessive lease or purchase price and successful new competition
In the Franchising- a Profitable Partnership (Stern 1998) pointed out that franchise is not a shortcut to riches but it can be a safer way of establishing your own business With a properly constructed and viable franchise business operation the risk failure can be considerably less than would be for someone setting up similar business own their own (Stern 1998 P 9)
In the Guide to Franchising (Mendelsohn 1982) he pointed out that in the case US the failure rates for franchised businesses are substantially less than the failure rates for nonshy