Pay upfront or pay later? Fixed royal payment in sustainable fashion brand franchising

Abstract

In the fashion industry, many brands operate under different kinds of franchising systems. In many cases, there is a fixed royalty charged by the franchisor. We observe that some franchisors insist on charging the fixed royalty as an upfront payment (before starting the franchising operations), whereas some request the franchisees to pay after the franchising operations have started. We name the first scenario as the upfront payment (URP) plan and the later one as the later payment (LRP) plan. In this paper, based on real world observed franchising arrangements for sustainable fashion brands, we build analytical models to compare the URP plan and the LRP plan from the supply chain finance perspective. We find that the social welfare performance (SWP) under the URP scenario depends on the value of royalty payment, while the SWP under the LRP scenario is not affected by the royalty payment. Moreover, the profit risks of the franchisee, the supply chain and the social welfare all increase with the order quantity. In the extended model, we explore the case when both the fixed royalty and the variable royalty co-exist. Finally, we explore the supply chain coordination problems and generate managerial insights. ? 2019 Elsevier B.V.