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ASSESSMENT OF FRANCHISING PRACTICES ADOPTED BY OIL AND GAS FIRMS (TOTAL NIGERIA PLC) AS PERCEIVED BY RETAIL MARKETERS

10,000 3,000

Project Description

 CHAPTER ONE

INTRODUCTION

Background of the Study

            Increased globalization has forced firms to seek entry into foreign regions as markets are becoming more dependent on each other for exchange of resources. The more globalization continues to play an increasing role in the world economy, the more businesses will continue to prudently seek to expand their operations through franchising (Osoteku, 2012).

Franchising is a contractual agreement between two legally independent firms in which one firm, the franchisee, pays the other firm, the franchisor, for the right to sell the franchisor’s product and/or the right to use its trademark and business format in a given location for a specified period of time (Blair and Lafontaine in Penard and Perrigot, 2012). According to the Petroleum Marketing Practices Act, franchising is defined as an agreement between an oil supplier and an oil dealer in which the supplier permits the dealer to use the supplier’s trademark in connection with the sale of motor fuel (Corrigan, 1980).

The franchisor-franchisee relationship exists between a franchisor, the owner of the trademark or service mark, an idea, a patent and the goodwill and know-how associated with it and licensing of it to a franchisee in return for a service fee or royalty (Kotler, 2000; FASA, 2002). The franchisee operates within the operating system that is provided by the franchisor. However, the franchisee is an independent owner of the franchised business and not a partner, an agent or representative of the franchisor (Potgieter, 1999).

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The franchising relationship is supposed to be a mutually beneficial partnership between the franchisor and the franchisee for the generation of wealth for both parties. The franchisor provides opportunities by selling franchises to would be entrepreneurs, the franchisees (Mayfield, 1997). They benefit from growth, franchise fees and royalty payments. The franchisees benefit from buying into a brand and a proven marketing and distribution system, the relationship could be long term with contracts running for several years on average.

The franchisee is an important stakeholder in the franchising organization and the franchisee in turn is affected by the franchising organization. The franchisee is a customer of the franchisor and like any customer his satisfaction should be a priority. The franchise and the franchising organization are independent businesses and typical franchisees are entrepreneurs themselves and should not be looked at as hired hands of the franchisor (Kirabira, 2002).

Franchising has proved to be a well working theory that helps companies adapt to different cultures and business regulations (Hoffman and Preble, 2004). Franchiselnfo (2011) agrees that franchising gives individuals the confidence to start a business on their own. Franchising, because of increasing impacts on business studies (compared with globalization) has also been subject of the wide variety of several disciplines includes (Dant and Kaufmann, 2003): economic, strategic marketing, entrepreneurship and law.

Going down in history, franchising as a business concept was fully established in the USA in the 1850s when Isaac Singer wanted to increase the distribution of his sewing machines. But franchising gained acceptance as a type of business at the beginning of the 20th century. Abizadeh (2010) notes that the automobile and soft drink industries were the first to adopt the so-called product franchising. Later, in the 1930s, the petroleum industry franchised the gasoline (petrol) service stations. Similarly in Nigeria, according to Industry Opinion, oil and gas firms among others began franchising in the 1960s. Soft drink distribution alongside automobile dealers are commonly found in product franchising as earlier revealed but filling stations, which is our focus, represents the largest percentage to total sales (Ojo (2010), and as would be later unveiled in the review, Total Nigeria Plc is considered vital for the study.

Petroleum (oil and gas) products are among the most valuable natural resources abundantly available in the country. Nigerians and people everywhere use petroleum products as a fuel in their automobiles, generating sets, industrial plants and for cooking purposes, thus making petroleum products an essential commodity that is needed for the daily operation of individual, industrial and national activities (oildealsng.com, 2012). Petroleum products dominate Nigeria’s energy consumption mix, averaging 77 per cent of the total over the last eight years (Asaolu, Awe and Sholotan, 2010)

The Nigerian petroleum marketing sector which falls under the downstream oil sector, involves the import, export, sale and distribution of petroleum products such as premium motor spirit (PMS), household kerosene (HHK), automotive gas oil (AGO), liquefied petroleum gas (LPG), and lower-pour fuel oil (LPFO). These petroleum products are utilized by almost everybody on daily basis at an average of 60 million litres daily usage (oildealsng.com, 2012). Demand for petroleum products have been driven by economic growth, increase in vehicular traffic and the inadequate supply of energy. Oil and gas firms fall under the Nigerian Petroleum Industry.

Oil and gas firms are streamlined in this study as companies involved in the distribution and retail marketing of oil and gas products and services at local gas stations. Examples of oil and gas firms are Mobil, Total, Texaco, Oando, MRS, etc. This work is only studying Total Nigeria Plc. Total Nigeria Plc started its operation on 1st of June, 1956 and was listed on exchange 20th of April, 1979 (www.nigeriagalleria.com, 2012). The local gas stations earlier referred to are service stations. According to reports there are over a million petroleum filling stations in the world with over ten thousand retail outlets presently located in Nigeria (Wikipedia Encyclopedia, 2007; Nationwide Retail Outlets, 2009). Many of the service stations in Edo State are Total Nigeria Plc. Total Nigeria Plc is seen as a company of considerable influence and size not only in Edo State alone but in Nigeria and globally.

Operationally, service stations are franchised outlets spread across the length and breadth of Edo State which are managed and owned by major oil and gas marketers. Many service stations also combine small convenience stores, and some sell propane or butane and have added shops to their primary business. Conversely some chain stores such as supermarkets, discount superstores, warehouse clubs, or traditional stores, have provided service (filling) stations on their premises.

Different types of franchise ownership opportunities (franchising arrangements) exist. Daszkowski (2011) holds that one may choose to become a multi-unit franchise owner, an area developer or may decide to buy an existing franchise. According to the author, each ownership opportunity has its own unique responsibility. The following is a list of the many different ownership opportunities franchising offers:

Single unit franchising is the most place a brand new entrepreneur would begin. In this type of franchise, the franchisee would only be responsible for running one unit. However, he or she would be extremely involved with all of the daily operations of the business.

Many franchise owners decide to sell their franchise after they have opened. There are several reasons why existing franchises are listed for sale. There are pros (advantages) and cons (disadvantages) to buying an existing franchise.

Multi-unit franchising creates the opportunity for the franchisee to open more than one unit. In this case, multi-units are usually sold at a reduced rate per unit. In this type of operation, the franchisee partakes less in the day-to-day operation of the unit.

Area development is similar to multi-unit franchising. The only difference is that this type of franchising typically involves a greater number of units encompassing a larger territorial area. The area developer is granted the right to open a pre-determined number of outlets in a certain geographic territory.

Master franchising allows people or corporations to purchase the rights to sub-franchise within a certain territory. A master franchisee helps the overall franchise company by recruiting franchisees to open units within a specific territory.

A vital aspect of instrument in franchising is the franchise agreement. This document is vital in that it encompasses all the components in a franchise. Howell (2012) maintains that this is one of the most important components of a franchise. In addition, FreeAdvice staff (2012), states it is the cornerstone document of the franchisee-franchisor relationship. According to the author, it is this document that is legally binding on both parties, laying out the rights and obligations of each. A franchise agreement must be signed, which makes it a secure legal document (Jojo, 2006) and the franchisee is entitled to receive it at least five business days before signature (FreeAdvice staff, 2012). Each major marketer and multinational outfit have their own operating standards which go along with their corporate brands and in setting up fuel station either directly or indirectly, these operational standards become their guiding tool (Edsearchblog, 2008).

The agreement will contain provisions covering, in considerable detail, the training and operational support the franchisor will provide (and at what cost); franchisee’s territory and exclusivity; the initial duration of the franchise and any renewal rights; how much the franchisee must invest; how the franchisee must deal with things such as trademarks, patents and signs (intellectual property); what royalties and service fees the franchisee will pay; advertising policies; franchisee termination issues; settlement of disputes; operating practices; cancellation and attorney fees (FreeAdvice Staff, 2012). The explanation of most of these components will be unraveled later in the study.

Franchising as a business model is a form of intellectual property which  comprised of trademarks, copyrights, patent, brand name and lots more (Franchise Law Solutions, 2012). The researcher agrees with Okongwu (2004) and Jojo (2006) that though there is dearth of legal provisions for franchising in Nigeria the Intellectual Property rights apply. At present franchisor/franchisee relationship in Nigeria is governed by contract, patents, trademarks/service marks, industrial designs, copyrights, NOTAP laws, etc. (Okongwu, 2004; Jojo, 2006).

In franchising, the franchisee pays certain fees (costs) in return of the privileges provided by the franchisor. On a general note, studies have proved that the two vital fees are the initial franchise fees and the ongoing royalty fees. The cost describes the franchise fees (initial fees) and other payments such as royalty fees, advertising fees, training fees, territory fees that will have to be made by the franchisee to assess the elements provided for by the franchisor. Franchise fees are initial fees paid to the franchisor to obtain the rights to the operating system of the franchise. Lederman (2008) affirms that the franchise fee is a major constituent without which the business is not regarded as a franchise.

Royalty fee, according to Franchoice.com (2012), is a fee paid by a franchisee to a franchisor on a routine basis for the duration of the contract agreement. Advertising fees on the other hand, are payments some franchise businesses require their franchisees to pay to an advertising or marketing fund. Training fees are fees which comprise of initial training in the franchise fee and may also include additional training for franchisee or staff. Territory fees, according to Franchoice.com (2012) are payments made when a franchisor allows a franchisee to purchase an additional or non-standard territory.

The territory of the franchise is also an important component in franchising. Territory falls under assigned franchisee’s location where the operation of the franchise business takes place. Franchises are sold within certain defined areas (Howell, 2012). The issue of exclusivity is also necessary here. Ofodile (2013) adds that in product distribution franchising, the franchisee can enjoy exclusive or semi-exclusive rights than in the supplier-dealer relationship. Furthermore, there are site selection, termination and renewal components.

The termination and renewal components go can also be classified alongside the duration of the agreement. Termination by the franchisor owing to the duration of the franchise leaves room for the franchisee for renewal. The franchisee cannot easily terminate the franchise as the franchisor who wields a lot of powers in the relationship. However, termination must be only for “good cause” (Corrigan, 1980; mywebcsuchico.edu, 2012). In addition, the franchise agreement explains in detail what the franchisor expects from the franchisee, in the way he operates every facet of the business. These show the operating practice components in the business.

A vital component of franchising is training and support services. The primary reason for investing in franchising for a franchisee is for the training and assistance (smallbusinessnotes.com 2013). Pipes (2013) reveals that franchisors offer training programs for franchisees and their staff. The franchisor provides a licensed privilege to do business and assistance in organizing training, merchandizing and management. The component of a successful franchising training program exists.

Coase (1937) in Ojo (2010) opines that there is link between the earlier forms of marketing and the latter of which is franchising. According to the author, early forms of marketing are linked to the classic argument that economic organizations follow two general forms, viz: markets and firms. Drawing a relationship, theorists identified franchising as a hybrid manifestation of the two forms because it has both market-like and firm-like qualities (Norton, 1988; Brickley and Dark, 1987 in Ojo, 2010; Matthewson and Winter, 1985). As firms the Oil and gas firms are oil businesses that could be referred to as a subset of the Nigerian Petroleum Industry.

Marketing is the sum total of all business activities which deals with the movement of goods and services from the producer to the ultimate consumer (Lazo, 1977 in Allen, 2010). Marketing activities are involved in getting oil and gas products to the final consumers. These are carried out by marketers, involved in the business of marketing of oil and gas products.

The oil and gas industry is supplied through imports and locally refined products by both the major and the independent marketers. Dependent oil marketers are marketers of service stations who hold the franchise of major companies. On the other hand, independent marketers are also marketers that are owners of service stations run under their own names, buy products directly from NNPC and have a representative at the Petroleum Project s Marketing Company (PPMC) depot by NNPC (Omeh, 2012).

Asaolu, Awe and Sholotan (2010) maintain that the major marketers accounted for 70 per cent of products distributed in 2008, according to data from Nigerian National Petroleum Corporation, NNPC. They include the (Allen, 2010; Asaolu et al., 2010) state owned NNPC-Retail, multinational petroleum marketing companies such as Total, Mobil and Chevron, and the largest indigenous operators, Forte Oil formerly called African Petroleum (AP), Oando and Conoil. The independent marketers comprise a large number of indigenous operators. But the researcher’s focus is on major oil and gas marketing streamlined to mean dependent oil marketers who are retail marketers of Total Nigeria Plc service stations in Edo State with various positions such as dealers (station owners), managers and supervisors. A Total retail marketer could operate the dealer system. The foregoing is compared to some marketers of oil multinationals, where a staff of the company grows from a pump attendant to become a dealer who can run and manage a station (Edsearchblog, 2008).

The dependent oil marketers have possessed some form or had attained certain level of education while a large number of them possess Senior School Certificate Examination and/or Primary School Leaving Certificate (SSCE/PSLC). Also, these retail marketers of Total Nigeria in the State acquired some levels of experience in the course of the job as a handful of them got engaged in service station business as there are cases where the retail marketers had been engaged in similar business may be as independent marketers. These retail marketers are spread across Edo State which is situated in Southern Nigeria, carved out from the defunct Bendel State more than two decades ago.

The adoption or utilization of franchising by Total Nigeria in marketing and distribution of petroleum products in Nigeria has long existed as aforementioned. This substantiates the fact that some form of franchising in petroleum product marketing has been in existence for almost a century owing from the time kerosene was first petroleum product to be marketed in Nigeria, imported under agency agreement concluded by Socony Vacuum Oil (now Mobil) in 1907. This illustration aside, there is no undermining the fact that there is need for some form of assessment.

Assessment, as elook.org (2012) puts it, is the act of judging a person or situation or event. Assessment in this study refers to evaluating from Total (service station) retail  marketers’ perspectives, the franchising practices they had embarked on with their parent bodies (franchisors) through their perception of the cost terms, location or assigned territory, training and assistance, franchise ownership opportunities, termination and renewals laid down by the parent company or franchisor. The outcomes of such agreement most especially by the low-end distribution marketers need some form of assessment due to the fact that they had already been parties to franchising practices and it best suits the research rather than validating choices already made by experts or other groups on them.

Perception, according to Summers (1995), is the way a person regards something and his/her beliefs about what it is like. Therefore the assessment of retail marketers’ perception of franchising practices can certainly play a positive role in narrowing the gaps inherent in the petroleum product marketing sector.

Statement of the Problem

The franchisee referred to as the retail marketer in the study, provides the monetary and time investments necessary to establish the franchise into the new market territory in moving into new markets. As a result, the franchisee is that who bears the primary risk for expanding into the new territories and benefits when he or she earns a decent living (Kotler, 2000). The conflict in the franchisor-franchisee relationship exists because of their independent nature and the seemingly unequal balance of power in favour of the franchisor. However, the three major problems in franchising are: the incidence of abuses by franchisors of the franchisees, either intentionally or accidentally; fears of potential abuses among franchisees; and corporate takeovers of franchised companies leading to increased communication breakdowns with the franchisees.

Franchising in Nigeria had come a long way but due to the turn of events in the country amidst insufficient ethical franchising which is traceable to lack of specific laws on franchising in the country compared to South Africa, USA, Spain, etc. therefore the franchisor or the parent company is at liberty to pen down in the franchise agreement, the way the business would be run in whatever way he chooses. This action leaves little consideration for the franchisees in the agreement as he is meant to abide by them. As a result the franchisor wields enough powers. This also makes the franchisees’ satisfaction drop and there is this perception that the quality of the relationship is deteriorating. Over and again the growth of the sector has been accompanied by an increase in the incidence of unethical practices melted on the franchisees.

We are in the era where those in the business of franchising projected that the franchising market in Nigeria will grow at 10 per cent in Nigeria. The researcher is of the opinion that growth is everything. Being one of the oldest in the distribution (or retail marketing) sector, service stations are expected to have come of age. It is still a wonder to discover that they represent the largest percentage of total sales as far as product franchising is concerned, as studies have established (Ojo, 2010; Ofodile, 2013). The marketers have in most times been relegated to only dispensing of oil and gas products, meeting up with the parent’s demand and nothing else. Little room is allowed them to expand for example, ensuring that single units break into multi units or even an area developer after a time tested relationship long enough to prove to the parent the capability to run the service station as most of them have actually existed long enough to move on. This creates the feeling that their efforts are not appreciated.

In any agreement between individuals say two for instance, there are conditions placed on both parties. Partnership, as a relationship, is supposed to be mutual and beneficial to either party involved, where both are interested in ensuring that they are living up to the stated goals and objectives. There is this notion that the level of awareness on the concepts and best practices on franchising is presently low. The viability of franchising as an organizational platform has been called to question by researchers. On average, there is the belief held by some individuals that franchise organizations are less successful at coordinating marketing strategies, incidence of provision of  minimum support and advertising less than their wholly company competitors.

However, the extent of franchise relationship in terms of the franchising practices among oil marketing companies in Nigeria and their franchisors is yet unknown and thus, formed the trust of this study.

Purpose of the Study

The main purpose of the study was to assess the franchising practices adopted by Total Nigeria Plc as perceived by retail marketers of service stations in Edo State. Specifically, the study attempted to:

  1. identify the type of franchise arrangement/ownership opportunities the retail marketers of Total Nigeria Plc service station run.
  2. determine the extent to which the franchise cost, training and support components are adopted by Total Nigeria Plc.
  3. find out the extent to which the franchise territory components are adopted by Total Nigeria Plc.
  4. determine the extent to which the franchise termination and renewal components are adopted by Total Nigeria Plc.
  5. find out the extent to which franchise operating practice components are adopted by Total Nigeria Plc.

Significance of the Study

The franchising practice is conceived on dyadic benefits: the franchisor achieves rapid expansion with limited capital outlay. The individual franchisee equally benefits by owning and operating a business which utilizes proven methods and procedures because the franchisor makes his expertise available in a multitude of areas (Olotu and Awoseila, 2011).

The finding of this study will be of immense benefits to dependent marketers of Total Nigeria Plc, oil and gas firms, marketing consultants, National Directorate of Employment (NDE), National Office of Technology Acquisition and Promotion (NOTAP), Nigerian International Franchise Association (NIFA) and researchers.

The finding of this study will be of immense benefits to dependent marketers of oil and gas products. Being marketers of service stations who hold the franchise of major oil and gas companies, directly involved in the day-to-day oil and gas products dispensing and strategically positioned at the low-end of the retail marketing and distribution chain, the finding will be a most invaluable resource. These retail operators of Total Nigeria will through the study be presented with the type of ownership opportunities or franchise arrangement that will help assist in increasing in the marketer and other individuals the knowledge in other specialized types other than the common single units and who may not have known this truth about them. The study will also open the dependent marketers to have information sufficient in cost, training and support components sufficient enough in determining their rights so as for them to be abreast of when or where is appropriate to place their demands on the franchisor to be alive to their responsibility.

The finding of the study will be of help to oil and gas firms. Being the franchisors that have drawn out the franchise agreement and had offered the business opportunity to prospective franchisees that have chosen to buy into the business, the study will be a useful pack for them to tackle some of the inherent challenges that could try to impede this relationship. Assessing from the views of franchisees or marketers (also called the retail marketers) at service stations, the franchise cost, training and support, territory, termination and renewal and the operating practices their perspective will help awaken in them whether or not their interests harmonize with the provisions in the agreement and if possible provide a lasting solution to areas yearning for change in the relationship that had been detrimental to the franchisees once and for.

Marketing consultants will not be left out from the finding and benefits of this study. As experts responsible for providing professional services for operators of both start-up and emerging or time-tested businesses, a resource of this nature will be highly significant. The study will offer the information relevant for these marketing consultants to aid them in their lines of duties that would go a long way in assisting their clients who consult them on franchising (in petroleum product marketing or other fields of endeavors) and other business concepts on relating to franchising. They will be assisted from the provisions of this study on areas such as ownership opportunities (franchise arrangement), cost, training and support, territory, termination and renewal and operating practices which are the necessary ingredients required as an instructional pack for the consumption of their clients seeking to increase their knowledge of franchising fundamentals. Franchising as a concept is field whose tentacles spread beyond its root in economics into diverse areas in politics, sociology, culture and education, and an interesting area that marketing consultants could consider worth venturing. So there is need for a proper understanding of the practice of franchising that could help broaden the scope of the marketing consultants in their chosen profession.

The finding of this study will be beneficial to National Office of Technology Acquisition and Promotion (NOTAP) and Nigerian International Franchise Association (NIFA). Being corporate organizations, the finding of this work will be an inestimable tool they can depend on during the organization of seminars or capacity building workshops as measures for training and retraining on areas such as termination and renewals, support and training, costs territory (exclusivity) etc which have been carefully exhausted in the study.

The National Directorate of Employment (NDE) would with the aid of the finding of the study explore the opportunities such as the ownership, their obligation in making the franchise relationship work, training and support fundamentals, etc. in franchising and to create an opportunity which will make them liaise with capable businesses or preferably the downstream petroleum marketing businesses where franchising has gained sufficient ground in recruitment, owing to the employment situation of country. This will bring about economic gain for the common good of the masses and increased government efforts in curbing the unemployment rate in Nigeria.

Researchers interested in the increasing impact of franchising and franchising practices or its rudiments, will find this study useful both as a reference material and a springboard from which they can draw from for improving or making more contributions in the franchising oil and gas marketing sector. The researcher could dare to conduct a study on franchising as the present study could serve as a reliable source where other studies would be anchored judging from its originality.

Research Questions

The following research questions were formulated to guide the study:

  1. What is the type of franchise arrangements/ownership opportunity the retail marketers of Total Nigeria Plc service station run?
  2. To what extent are the franchise cost, training and support components adopted by Total Nigeria Plc?
  3. To what extent are the franchise territory components adopted by Total Nigeria Plc?
  4. To what extent are the franchise termination and renewal components adopted by Total Nigeria Plc?
  5. To what extent are the operating practice components in franchising adopted by Total Nigeria Plc?

Null Hypotheses

            The following null hypotheses based on the research questions were formulated for the study and were tested at 0.05 level of significance:

Ho1     Educational qualification of the dependent marketers is not a significant source of difference on the extent to which franchise cost, training and support components are adopted by Total Nigeria Plc.

Ho2       Location of the service station is not a significant source of difference on the extent to which franchise territory components are adopted by Total Nigeria Plc.

Ho3       Experience acquired in the petroleum business is not a significant source of difference on the extent to which franchise termination and renewal components are adopted by Total Nigeria Plc.

Ho4       Position of the marketer/position of oil and gas marketing company is not a significant source of difference on the extent to which franchise operating practice components are adopted by Total Nigeria Plc.

Delimitation

            The study is delimited to the assessment of the type of arrangement/ownership opportunities; cost and training and support; territory; operating practices; termination and renewal franchise components spelt out by major oil and gas firms (franchisors) for their marketers running service stations (franchisees) under the  parents’ trade names in the franchise relationship.

This study is delimited to only dependent marketers of service stations holding the franchise of Total Nigeria Plc which is a major oil and gas company in Edo State. This is so in that they are into franchising operation as they are already adopting the strategy for their marketing effort.

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