Franchising in Georgia

While discussing whether franchising is a suitable growth concept for Georgian economy, I think it is better to talk about two parts: (1) franchising foreign brands and concepts in Georgia and (2) franchising within Georgian market meaning franchise is granted from the Georgian company.

As for the first one, franchising foreign brands in Georgia is utilized for a long time and is found to be efficient. We have franchises of famous brands in the world such as McDonalds, Mavi jeans, Mango, Sisley, Kodak, Apple and others. Georgia is developing country and it is limited with its abilities to grow internally as firms are constrained with their managerial capacity to grow internally according to Penrose (1995). At the same time, Georgia lacks an environment favorable for innovations and it is constrained with its financial resources. For that reason, it might be said that franchising is useful concept for expansion of Georgian economy. In addition, Georgian people are open to new brands and favor foreign brands due to their perception of high quality of popular foreign brands. This in turn, puts high demand on franchising famous world brands, mainly apparel and technologies. But, franchising fees are mostly significantly high, that’s why prices at franchises are very high in Georgia. For example, McDonalds in Georgia has triple prices compare to McDonalds in USA. On a macro level, we might question whether franchising contributes to the growth of Georgian economy since high prices paid by customers should be compared with taxes paid to the government by franchises.

Furthermore, I will emphasize more on the franchising concept within Georgian market since I have more theoretical knowledge and practical experience how franchising leads to growth of the firm, thus impacting on the country’s overall economy. Before I came to pursue my degree at JIBS, I worked for the company “Elit Electronics” founded in Batumi, Georgia. The company was started 12 years ago and now has nearly 40 shops in all big cities and almost all regions of Georgia. It is the leader supplier of household appliances and electronics throughout Georgia. After reading the article by Shane (1996), I found out that using franchising concept by Elit Electronics was the right strategy for growth of the company. Most importantly, due to lack of market transparency in Georgia many still do not know that some of Elit Electronics shops are franchised and not owned by the company. Moreover, I did not know that before I started to work in their management team. The process went so:

First, the company developed the concept of shop design, service offered, salespeople outfit, training and development, after-sale service and then put all those in “handbook”, which was then protected by copyright. The company was successful in determining the intellectual property they own and protecting them from copying. Then, when the owner, who was one person, saw that his company was constrained with managerial capacity as the company started to grow at a high rate. According to Penrose (1955), a firm’s growth is constrained by the speed at which it can expand its managerial capacity. This was the case in Elit Electronics; entrepreneur with only 3 or 4 young BBA graduates was managing the firm. Then, as firm sales increased and demand was placed from regions; it was time to expand. But, here comes the problem of adverse selection and moral hazard in addition to increased monitoring costs. Adverse selection happens when an employee misrepresents his/her true abilities and moral hazard is when an entrepreneur can not assess whether his/her employees is performing good or not. It would have happened in case Elit Electronics decided to grow internally, while increasing monitoring costs and taking entrepreneurs time in traveling to the regions to check how shops are designed, salespeople dressed, products displayed, etc. Since the owner of Elit Electronics did not have so much time to monitor employees, he had to hire new managers, thus introducing the probability of adverse selection and moral hazard. To avoid misrepresentation from the employee and underperformance, constant monitoring should be done by entrepreneur. But, the faster the company grows, more selecting and monitoring costs will be incurred.

Most importantly, I am convinced that owner of Elit Electronics did not know about Agency theory but did behave what agency theory suggests, replacement of wage contracts with HOAs (Hybrid Organizational arrangements) like franchising that provide residual claimancy to employees, in turn avoiding the problem of adverse selection and moral hazard. Despite, my practical experience in Elit Electronics supports Shane (1996) stating that qualified individuals tend to see buying a franchise as more valuable. That happened in the case of Elit Electronics: due to many requirements from Elit Electronics in developing the shop and many steps involved in operating under the name of “Elit Electronics”, only experienced and qualified individuals came to ask for franchise and enter into negotiation. At last, franchising concept used by Elit Electronics reduced increasing rate of monitoring cost associated with growth of the firm and allowed the company to grow faster. Now, it has 40 shops all over Georgia, most of them is franchise and the company enjoys the economies of scale by buying household appliances and electronics in bulk from suppliers. Elit Electronics is one of the examples of firms whose probability of survival was increased by focusing on and employing franchising concept in Georgia.

Finally, high survival rate of Elit Electronics in its 12 years of existence contributed to expansion of Georgian economy. As firm grew, more franchises were granted and created thus leading to monetary contribution to Georgian economy. It is worth mentioning, there are other Georgian companies employing franchising growth strategy, leading to more companies formed in Georgia and activities and markets getting wider. In sum, franchising concept might be considered as a suitable growth concept for Georgian economy.


REFERENCES:

Penrose, E. (1955). Limits to the growth and size of firms. The American Economic Review 45(2), 531-543

Shane, S.A. (1996). Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of management Journal, 39(1), 216-234

http://www.elitelectronics.ge/index.php?m=275