Porcinis Prontos Harvard Case Solution & Analysis

Alternative # 2: Franchising

Franchising option was adopted by many successful businesses in the industry. However, company’s quality reputation will be at stake while considering the franchising option. Giant restaurant chains take franchising as their main tool for growth. In franchising, a business gives franchise license to other businesses and the franchise use the name of the franchisor to conduct business according to franchisor’s specifications. The initial investment will be of $1 million only; this will be invested in legal and staff resources to complete a franchising agreement and franchise system supports. As each site is expected to generate $2.4 million annual revenues; hence the franchising fee will be 5 percent of revenues. Among this, 3 percent will be the cost relating to training/advice, menu development and marketing while the rest 2 percent will become Porcinis’ profit.

 Franchised
 Revenues

         2,400,000

 Profit Margin

2%

 Profit Per site

               48,000

The advantages of this alternative can be that Porcinis can shift its attention and limited capital from restaurant chains to marketing and brand image creation. The company will not be required to incur cost of acquiring the land and building the facility. As Porcinis doesn’t have a construction department, franchising will be beneficial if franchisees will buy the land and build the restaurant themselves.

But in this alternative, Porcinis will lose the ownership as franchisee will be responsible for purchasing land, and building restaurant according to the Porcinis specs. Franchisee will also be responsible for financing. Porcinis will lose the operational control as franchisee will operate according to Pronto specifications.

Alternative # 3: Syndication

Syndication is the third alternative that Porcinis can undertake for expansion purposes. Under this alternative, investors will have ownership of property while full operational control will be with Porcinis. Under syndication, the chain selects and buys a number of locations, constructs and furnishes a facility on each, then sells the portfolio of properties to investor group thus re-earning and investing its capital into another syndication deal.

This alternative may introduce a speed of growth that the company is not able to handle as Porcinis is a slow-growing company. The gross profit to the company will be 4% of annual revenues.

 Syndicated
 Revenues

       2,400,000

 Profit Margin

4%

 Profit Per site

             96,000

In the syndication option, the profit to Porcinis will be $96000.

With syndication, Porcinis will be able to acquire more prime locations. Under this option the company will not have ownership over resources and land. But, the company will have complete operational control that will assist in maintaining the desired level of quality.

However, there are substantial transactional costs under syndication. The costs are related to investment banker, lawyers, and closing costs. These transaction costs can equal 6% of the value of the property.

RECOMMENDATIONS AND CONCLUSIONS

All the above three alternatives has its own pros and cons. But with all three alternatives, the number of stores established till 2018 will be 14 for completely owned, 20 for syndication and 28 for franchising.

20112012201320142015201620172018
 Company Owned
 No. of Sites2                      -                          2                          2                          2                          2                          2                          2
 Cumulative Sites22468101214
 Investment (Millions)4.2-4.24.24.24.24.24.2
 Profit (Millions)0.290.290.580.861.151.441.732.02
 Syndicated
 No. of Sites--233444
 Cumulative Sites--258121620
 Investment (Millions)2.50
 Profit (Millions)--0.190.480.771.151.541.92
 Franchised
 No. of Sites--444556
 Cumulative Sites--4812172228
 Investment (Millions)1
 Profit (Millions)--0.190.380.580.821.061.34

It is recommended that alternative one, which is opening of stores directly managed by the company, must be adopted as by using this approach by the end of year 2018 the company will be earning a profit of around $2 million with just 14 outlets. In the rest of the two alternatives, the company will not own the outlets as well as the profits till the end of 2018 will not cross $2 million. The only advantage of both the other alternatives over the year will be that there will be more number of outlets and subsequently more presence. But the company is concerned with maintaining the quality of food and service, which it can successfully and efficiently undertake when they own the outlets and those outlets are more profitable.............................

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