Restaurant Franchising: Concepts, Regulations and Practices, Third Edition41592

Topics include: • What is franchising • Franchising pros and cons • Selecting the franchise that fits your style and goals • Finding financial backing • Developing healthy franchisor/fra

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Concepts, Regulations, and Practices

This book is the only up-to-date book of its kind that provides a complete and thorough introduction

to franchising, its pros and cons, and other important aspects It is the only guide to franchising

written exclusively for foodservice professionals, and it will be an indispensable resource for anyone

wishing to break into one of today's most dynamic service industries.

Since the late 1800s when the idea was first conceived, the restaurant franchise has become a

worldwide phenomenon Opportunities abound for restaurateurs and foodservice professionals with

the know-how to dive into and stay afloat in the growing, ever-changing sea of franchise operations

With the help of vignettes and case histories, this completely updated new edition explains how to

do it right, from developing a winning franchise concept to demystifying the legal intricacies of

franchise agreements.

Topics include:

• What is franchising

• Franchising pros and cons

• Selecting the franchise that fits your style and goals

• Finding financial backing

• Developing healthy franchisor/franchisee relationships

• International franchising

• Unconventional franchises

This practical first-hand information will be extremely useful to hospitality academicians and students

as well to franchisors and to entrepreneurs considering entering the world of franchising.

“The newly revised 3rd edition is a classic book covering one of the most vibrant and vital

sectors of the US economy The book is an excellent introduction, much more than a

general academic treatment of the topic On behalf of the International Franchise

Association, we are grateful to Dr Khan for revising and bringing out a new edition of this

classic book It is a multi-purpose book, serving as classroom textbook, reference book, and

business guidebook We are delighted to recommend it on the menu for anyone who wants

to learn more about this fascinating, fast-paced, and dynamic industry.”

—Steve Caldeira, CFE, President and CEO, International Franchise Association

ABOUT THE AUTHOR

Mahmood A Khan, PhD, is a Professor in the Department of Hospitality and Tourism

Management, Pamplin College of Business at Virginia Tech’s National Capital Region campus He

has served in teaching, research, and administrative positions for past 35 years, working at major

U.S universities Dr Khan is the author of several books and has traveled extensively for teaching

and consulting on management issues and franchising Dr Khan has received many distinguished

awards for his work, and he has served in many important roles in several professional associations.

9 781926 895697

0 0 0 0 9ISBN: 978-1-926895-69-7

Revised and Updated Third

Edition

RESTAURANT FRANCHISING

Topics include:

ABOUT THE AUTHOR

9 781926 895697

0 0 0 0 9ISBN: 978-1-926895-69-7

Topics include:

ABOUT THE AUTHOR

9 781926 895697

0 0 0 0 9ISBN: 978-1-926895-69-7

Since the late 1800s when the idea was first conceived, the restaurant franchise has become a worldwide phenomenon Opportunities abound for restaurateurs and foodservice professionals with the know-how to dive into and stay afloat in the growing, ever-changing sea of franchise operations

do it right, from developing a winning franchise concept to demystifying the legal intricacies of franchise agreements.

Topics include:

• Unconventional franchises This practical first-hand information will be extremely useful to hospitality academicians and students

“The newly revised 3rd edition is a classic book covering one of the most vibrant and vital sectors of the US economy The book is an excellent introduction, much more than a general academic treatment of the topic On behalf of the International Franchise Association, we are grateful to Dr Khan for revising and bringing out a new edition of this classic book It is a multi-purpose book, serving as classroom textbook, reference book, and business guidebook We are delighted to recommend it on the menu for anyone who wants

—Steve Caldeira, CFE, President and CEO, International Franchise Association ABOUT THE AUTHOR

Mahmood A Khan, PhD, is a Professor in the Department of Hospitality and Tourism Management, Pamplin College of Business at Virginia Tech’s National Capital Region campus He has served in teaching, research, and administrative positions for past 35 years, working at major U.S universities Dr Khan is the author of several books and has traveled extensively for teaching and consulting on management issues and franchising Dr Khan has received many distinguished awards for his work, and he has served in many important roles in several professional associations.

9 781926 895697

0 0 0 0 9ISBN: 978-1-926895-69-7

www.appleacademicpress.com

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CONCEPTS, REGULATIONS, AND PRACTICES

Third Edition, Revised and Updated

Mahmood A Khan, PhD

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Boca Raton, FL 33487-2742 Canada

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Version Date: 20140924

International Standard Book Number-13: 978-1-4822-2349-1 (eBook - PDF)

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Maryam, Samala, Safdar, Zaki, Layth, Feras, and Nufayl

for their affection, patience, and support

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Mahmood A Khan, PhD, RD, FAND, FMP

Professor, Pamplin College of Business

Virginia Tech’s Northern Virginia Center

7054 Haycock Road, Falls Church, VA 22043-0362

Phone (703) 538-8486 Fax (703) 538-8415

E-mail: mahmood@vt.edu

Dr Mahmood A Khan is the Professor in the department of Hospitality and Tourism Management, Pamplin College of Business at Virginia Tech’s

National Capital Region campus He has served in teaching, research, and

administrative positions for past 40 years, working at major U.S

universi-ties Dr Khan is the author of seven books and has traveled extensively for

teaching and consulting on management issues and franchising He has been

invited by national and international corporations to serve as a speaker,

key-note speaker, and seminar presenter on different topics related to franchising

and services management

Dr Khan has received Steven Fletcher Award for his outstanding tribution to hospitality education and research He is also a recipient of the

con-John Wiley & Sons Award for lifetime contribution to outstanding research

and scholarship; the Donald K Tressler Award for scholarship; and the Cesar

Ritz Award for scholarly contribution He received the Outstanding Doctoral

Faculty Award from Pamplin College of Business

He has served on the Board of Governors of the Educational Foundation

of the International Franchise Association, on the Board of Directors of the

Virginia Hospitality and Tourism Association, as a Trustee of the International

College of Hospitality Management, and as a Trustee on the Foundation of

the Hospitality Sales and Marketing Association’s International Association

He is also a member of several professional associations, and is a Fellow of

the Academy of Nutrition and Dietetics (FAND)

vii

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List of Tables xi

Foreword xv

Preface xvii

Acknowledgments xix

Chapter 1 Introduction to Franchising 1

Case Study: McDonald’s: Menu Glocalization 27

Chapter 2 Impact of Hospitality Franchising on the U.S Economy 35

Case Study: Taco Bell: Beef Controversy 62

Chapter 3 Pros and Cons of Franchising 69

Case Study: Panera Bread: Customer Loyalty Programs 90

Chapter 4 Franchising Agreements and Legal Documentation 95

Case Study: Quiznos: Franchisees and Legal Battles 144

Chapter 5 Franchise Application and Franchise Package 151

Case Study: Subway: Franchise Historical and Operational Aspects 176

Chapter 6 Franchisee/Franchisor/Franchise Selection 185

Case Study: Chick fi l A: A Different Type of Franchise 207

Chapter 7 Standard Franchisor Services 213

Case Study: Pizza Hut: Menu and Service Innovations 235

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Chapter 8 Financial Aspects of Franchising 239

Case Study: Sbarro: Financial Adjustments 264

Chapter 9 Franchisor–Franchisee Relationships 269

Case Study: Wendy’s: Logo & Tagline 298

Chapter 10 Franchise Concept Development and Restaurant Design 303

Case Study: Domino’s Pizza: History and Facts 337

Chapter 11 Site Selection and Real Estate 343

Case Study: Jollibee: Going International 365

Chapter 12 Nontraditional Franchises 369

Case Study: Starbucks: Nontraditional Locations 387

Chapter 13 Communications and Public Relations 391

Case Study: Bennigan’s: Rebirth and Growth 416

Chapter 14 International Franchising 421

Case Study: ALBAIK: A Successful International Concept 445

Chapter 15 Going International 451

Case Study: Chili’s: Domestic & International 481

Chapter 16 Marketing and Advertising: Managing Brand Equity 485

Case Study: Restaurant Logos 505

Chapter 17 e-Franchising 509

Case Study: Popeyes: Franchise Development 536

References 541

List of Abbreviations 555

Glossary 557

Index 579

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Table 2.1 Top 10 Chains 1973 42

Table 2.2 Top 10 Chains 2013 42

Table 2.3 Estimated Sales Per Unit for Top 100 Restaurant Chains 50

Table 2.4 Growth in U.S Franchise Units (Top 100) 53

Table 2.5 Total Number of U.S Units Company Owned and Franchised (Top 100) 56

Table 3.1 Advantages of Franchising 70

Table 3.2 Disadvantages of Franchising 71

Table 5.1 Firehouse Subs’ Application Process 160

Table 5.2 KFC’s Franchisee Application Process and Timeline 161

Table 6.1 Warning Signs of Less Credible Franchisors 190

Table 6.2 Franchisee Self-Evaluation Checklist 196

Table 6.3 Franchisor Evaluation Checklist 197

Table 6.4 Franchise Restaurant Evaluation Checklist 198

Table 6.5 Advice from U.S Federal Trade Commission to Prospective Franchisees 202

Table 6.6 Advice from U.S Federal Trade Commission to Prospective Franchisees: Questions to Ask about Initial AND Ongoing Costs Before Selecting a Franchise 203

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Table 6.7 Advice from U.S Federal Trade Commission

to Prospective Franchisees: Questions to Ask about

Training Provided by the Franchisor 204

Table 6.8 Advice from U.S Federal Trade Commission to Prospective Franchisees: Questions to Ask about Advertising Fund 204

Table 6.9 Advice from U.S Federal Trade Commission to Prospective Franchisees: Questions to Ask Current and Former Franchisees Before Selecting a Franchise 205

Table 7.1 Programs and Support Services Provided by Yum! Corporation 229

Table 7.2 Response to a FAQ on Sonic Drive-In Restaurant Website 231

Table 7.3 Summary of Training Programs Provided by Different Franchise Restaurants 231

Table 8.1 Different Types of Fees 242

Table 8.2 Estimated Sales Projection 245

Table 8.3 Financial Projections 245

Table 8.4 Estimated Preopening Costs for a Franchise Restaurant 246

Table 8.5 An Example of Estimated Costs for Real Estate, Site Work, Building, and Equipment 248

Table 8.6 An Example of Franchise Fees and Royalty Payments 248

Table 9.1 Questions to Ask Prospective Franchisees 272

Table 11.1 Checklist for Assessing the Site Qualities for Franchise Restaurants 346

Table 11.2 Optimal Site Criteria for Yum! Restaurants 349

Table 11.3 Market and Site Analysis Form 350

Table 11.4 Optimal Site Criteria for Yum! Restaurants (Pizza Hut) 355

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Table 11.5 Optimal Site Criteria for Yum! Restaurants

Table 14.1 Requirements and Procedures by Wendy’s

Corporation for International Franchisees 441

Table 15.1 Top Five Growth Chains by Percentage Change

in Worldwide System-Wide Foodservice Sales,

2012 vs 2011 454

Table 15.2 Top 5 Chains in ASIA-PACIFIC Region Ranked

by Year-End Regional Units 455

Table 15.3 Top 5 Chains in EASTERN EUROPE Region

Ranked by Year-End Regional Units 455

Table 15.4 Top 5 Chains in LATIN AMERICA Region Ranked

by Year-End Regional Units 456

Table 15.5 Top 5 Chains in MIDDLE EAST-AFRICA Region

Table 15.6 Top 5 Chains in WESTERN EUROPE Region

Table 15.7 Top 5 Chains in UNITED STATES–CANADA

Region Ranked by Year-End Regional Units 458

Table 15.8 Checklist/Score Sheet for Assessing Political

Table 15.11 Quick Checklist Showing Factors That Are

Essential for Franchising in a Country 474

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Table 16.1 7Ps Model with Examples Pertaining

to Restaurants 487Table 16.2 Advantages of Strong Franchise Brands 501Table 17.1 Assessing Technology-Related Readiness

and Use by Franchisor 530Table 17.2 Assessment and Points to Consider in

Developing a Website 532Table 17.3 Examples of Use of Technology by

Restaurant Franchises 533

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The newly revised 3rd edition of Restaurant Franchising is a classic

vol-ume covering one of the most vibrant and vital sectors of the U.S omy Nearly 190,000 franchise restaurants provide more than 4.1 million jobs

econ-and more than $266.4 billion in economic output—amounting to one-quarter

of all establishments, one-half of all jobs, and one-third of the total economic

output of the franchising industry The franchising sector of the restaurant

industry accounts for nearly 40 percent of total restaurant industry sales of

$660 billion, 30 percent of the more than 13 million restaurant industry jobs,

and nearly 20 percent of all restaurant establishments Hundreds of

well-known, iconic brands, and new emerging concepts serve tens of millions of

customers day in and day out, at home and abroad, in every imaginable

for-mat—kiosk, drive-through, take-out, sit-down, self-serve, full menu, food

trucks, and home delivery, while maintaining the quality, consistency, and

convenience that their customers have come to expect

The fi rst edition of Dr Khan’s book, published in 1991, broke new ground, giving both educators and entrepreneurs a comprehensive, insightful

guidebook into the many facets of the restaurant franchising industry The

book is an excellent introduction to prospective franchisees (those

consider-ing buyconsider-ing an existconsider-ing franchise) and to prospective franchisors (those

con-sidering using the franchise method to grow and expand their business) The

book covers many topics, including the pros and cons of franchising, concept

development, choosing the right franchise, fi nding fi nancial backing,

under-standing franchise legal agreements, federal and state franchise regulations,

selecting the right franchisees, developing healthy franchisor/franchisee

rela-tionships, international franchising, and nontraditional franchises Excellent

examples and case studies are included in the book that make this book much

more than a general, academic treatment of the subject

xv

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On behalf of the International Franchise Association, we are grateful to

Dr Khan for revising and bringing out a new edition of this classic book

on the subject of restaurant franchising It is a multi-purpose book, ing as classroom textbook, reference book, and business guidebook We are delighted to recommend it on the menu for anyone who wants to learn more about this fascinating, fast-paced, and dynamic industry

serv-—Steve Caldeira, CFEPresident & CEO, International Franchise Association

Washington DC, USA

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With technological advancements, the world is ever becoming a smaller

place This provides a conducive environment for the development of franchises, and especially so in the restaurant business A pioneering effort

was made to bring out in the fi rst edition of a book titled Restaurant

Fran-chising in 1991, followed by a second edition in 1999 Things have

drasti-cally changed since then; hence this book is a completely updated version

Five new chapters have been added to highlight new research and

informa-tion available in the area of franchising This ediinforma-tion is designed the to meet

the needs of the industry as well as academia Several tables, illustrations,

and photos are added to supplement the information

This edition covers all aspects of restaurant franchising—from defi tions, to pros and cons, and to the legal documents needed for franchising It

ni-goes into the concepts, practice, management, and legal aspects of

franchis-ing Selecting a franchise, franchisee, and franchisor is discussed in detail,

thus making this book valuable to prospective franchisees, current

franchi-sees, and franchisors, as well as to the customer Franchising demands a

symbiotic relationship between the franchisor and franchisee, and steps to

develop this mutually benefi cial relationship are described There are several

tables, which describe steps to be taken at different phases of management of

franchised restaurants Examples are provided as and when necessary

Several domestic and international restaurant franchises are described, giving selected information It should be noted that some information is

selected from available websites to explain certain points Since most of the

information can be secured from websites of individual restaurant franchises,

and since web addresses change often, those references are not included

However, it is strongly urged for the readers to seek more information related

to individual franchises if needed

xvii

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This book is suitable for classroom use, and an instructor’s manual to

accompany Restaurant Franchising: Concepts, Regulations, and Practices

is available as a teaching resource for instructors A template of possible syllabus is provided to fi t one semester within an academic calendar Each chapter’s contents are highlighted starting with the chapter’s objectives

Objectives are designed so that after reading and studying each chapter, the student should be able to complete specifi c knowledge components Key teaching elements and points are listed for each chapter, with special empha-sis on defi nitions and terminology References or other sources for additional information are also provided At the end of each chapter within this book, there is a case study, for which discussion questions are listed Possible top-ics for class assignments and fi eld studies are suggested in the instructor’s manual In addition, at least 20 PowerPoint slides are provided for each chap-ter Overall this manual is designed to provide teaching aids that will help

in making lectures a more productive, interactive, and interesting learning experience for students

It is the intent of the author to make this edition as useful as possible

to franchisors, franchisees, prospective franchisors, corporations, and ested individuals Every effort was made to collect, update, and add informa-tion to make this book a valuable source for readers The fi nal presentation

inter-of this manuscript would not have been possible without the assistance inter-of several individuals and corporations It is impossible to acknowledge every-one, but sincere thanks go to everyone who contributed to make this publi-cation possible

The author wishes to thank all those who helped in reviewing, ing and publishing this manuscript Special thanks are due to Ashish Kumar, President, and Sandra Jones Sickels, Vice President, Apple Academic Press, Inc., for their constant support and advice

copyedit-Finally, th e author sincerely hopes that this book will prove to be a tool for professional success and development of franchises It will be great to hear back from successful entrepreneurs

— Mahmood A Khan, PhDProfessor, Department of Hospitality and Tourism Management,

Pamplin College of Business,Virginia Polytechnic Institute and State University (Virginia Tech),

Falls Church, Virginia

email: mahmood@vt.edu

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The author would like to acknowledge all those who have supported him

and contributed to this edition of the book, without whom it would have been impossible to present such information on this multidisciplinary topic

Special thanks are due to following individuals and corporations who

pro-vided intellectual support or resources to strengthen the topics discussed in

Don Fertman, Chief Development Offi cer, Subway RestaurantsEric Gallender, Senior Intellectual Property Counsel,

McDonald’s CorporationAlison Goldberg, Public Relations Specialist, Subway FranchiseWorld Headquarters, LLC

Craig Hoffman, Senior Manager, External Communications, IHOP

xix

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Steve Joyce, President & CEO, Choice Hotels International Kris Kaffenbarger, Senior Vice President, Business Development, Wendy’s International, Inc.

Al Litchenburg, Chief Development Offi cer, Pizza Hut

Sarah Lockyer, Editor-in-Chief, Nation’s Restaurant News, A Penton

Restaurant Group publicationKitty Munger, Director, Communications, Wendy’s International, Inc

John Reynolds, President, International Franchise Association Educational Foundation

Megan Saint-John, Communications Coordinator, Chili’s Grill & BarJulia Stewart, CEO, IHOP

Doug Terfehr, Director, Public Relations, Pizza HutPhai Yingprasert, Media Center Coordinator, McDonald’s Corporation

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1

INTRODUCTION TO FRANCHISING

“Without franchising, Wendy’s could never have expanded so rapidly

From the beginning we’ve looked at our franchisees as important

‘partners.’ There’s no ‘I’ in Wendy’s ‘WE’ are Wendy’s Our franchisees’

commitment and their support means a great deal to me Their hard work and dedication have created countless opportunities for others to achieve their dreams of success.”

—Dave Thomas, Founder, Wendy’s

dominant force in the distribution of goods and services in the United States as well as in many other countries National and international experts

believe that franchising has become the primary method of doing business

worldwide Paradoxically, in spite of its popularity and distinct impact on

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the economy, franchising still remains a relatively obscure concept Some view it as an industry in itself, while others associate it with a particular type of business, such as fast food restaurants Much of the confusion stems from franchising being an umbrella term that covers a wide variety of busi-ness arrangements and activities It is not restricted to a particular type of business, rather it is a method that is applicable to a variety of business deal-ings In fact, its strength lies in its adaptability to an ever-expanding array of industries, markets, products, and services In addition to being responsive

to economic development and consumer demands, it is fl exible enough for the distribution of goods and services as conditions demand This is one of

the primary reasons why franchising is commonly referred to as a method or

channel for distributing goods and services.

Franchising means “a granting of right;” “an exemption” or

“freedom from servitude.”

DEFINITION OF FRANCHISING

The term franchise has its origin in the French word meaning “free from

servitude.” Roughly translated that would mean that a businessman is free

to run his own business It is used as a noun as well as a verb Strictly from the business point of view, a franchise is a right or privilege granted to an individual or a group

Franchising is a form of business arrangement which originated from

France in the 18th century The term franchising in French also means “a

granting of right” or “an exemption.” Strictly from the business point of view,

a franchise is a right or privilege granted to an individual or a group chises may be granted by government or private bodies From the point of view of economics, a franchise is a right granted to operate a business under the general regulation of one who grants its Simply defi ned, a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or priv-ileges (license) to someone else (franchisee) to sell the product(s) or services under specifi c conditions This method of doing business is referred to as

Fran-franchising and, like marketing or distributing a product or service, may be

adopted and used in a wide variety of industries and businesses

Franchising is also defi ned as “a continuing relationship in which a chisor provides a licensed privilege to the franchisee to do business and offers

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fran-assistance in organizing, training, merchandising, marketing and managing

Franchising is a form of business by which the owner (franchisor) of a product,

service or method obtains distribution through affi liated dealers (franchisees).”

Since there are certain rights that pass from one party to another, there are legal aspects that should also be considered in any defi nition of franchising

From a legal standpoint, according to a report by the U.S Congress House

Committee on Small Business (1991), “franchising is essentially a

contrac-tual method for marketing and distributing goods and services of a company

(franchisor) through a dedicated or restricted network of distributors

(fran-chisees).” Under the terms of this legal franchise contract, a franchisor grants

the right and license to franchisees to market a product or service or both,

using the trademark and/or the business system developed by the franchisor

The contract imposes obligation on both parties The franchisor must provide

the product, proven marketing support, and training The franchisee brings

fi nancing, management skills, and a determination to own and operate a

suc-cessful business Franchising happens when someone develops a business

model and sells the rights to another entrepreneur, a franchisee; the company

selling the rights is the franchisor The franchisee usually gets the rights to

the business model for a specifi c time period and in a specifi c geographic

area (Spinelli, Jr., Rosenberg & Birley, 2004) In the best arrangement

every-one wins: the franchisor expands its number of outlets and gains additional

income; the franchisee has a business of his or her own

According to Tarbutton (1986), a generally accepted defi nition for the

term franchise is “a long-term, continuing business relationship wherein for a

consideration, the franchisor grants to the franchisee a licensed right, subject

to agreed-upon requirements and restrictions, to conduct business using the

trade and/or service marks of the franchisor and also provides to the franchisee

advice and assistance in organizing, merchandising, and managing the business

conducted pursuant to the licenses.”

Justis and Judd (1989) defi ne franchising as “a business opportunity by which the owner (producer or distributor) of a service or a trade-marked

product grants exclusive rights to an individual for the local distribution and/

or sale of the service or product, and in return receives a payment or royalty

and conformance to quality standards.” Although similar to the above defi

-nitions, this one takes into account the conformity to quality standards by

a franchisee Franchising is also defi ned as a contractual business

arrange-ment in which a fi rm grants an individual or companies the rights to

con-duct business in a prescribed manner within a specifi ed territory during an

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agreed time period in return for royalty contributions or other fee payments (Justis and Judd, 2004) Franchising was viewed previously as a small busi-ness alternative to fully independent business ownership, within the broader context of the individual’s drive toward self-employment (Kaufmann, 1999)

In terms of legal contracts, franchising can also be defi ned as the network of

a contract-giving fi rm (franchisor) with (in principle) independent contract takers (franchisees) The grant of rights to use labels, names, trademarks, production procedures, prescriptions, etc., of the franchisor against payment

by the franchisee can be regarded as constitutive features of franchising The payment generally consists of a lump-sum fee to be paid when entering the system as well as royalties based on gross sales (Hempelmann, 2006) Com-pared to nonfranchised businesses, franchising is inelastic and is diffi cult to change The entire system is locked into legal and business boundaries, with several vested ownerships that makes it diffi cult to maneuver

Franchising is a method of doing business.

Franchising, particularly in the area of services, has two unique features;

fi rst, franchising typically occurs in businesses where there is a notable vice component that must be performed near customers The result is that service-providing outlets must be replicated and dispersed geographically

ser-Secondly franchise contracts typically refl ect a unique allocation of sibilities, decision rights, and profi ts between a centralized principal (the franchisor) and decentralized agents (franchisees) (Combs, Michael, and Castrogiovanni, (2004) The franchisor sets and enforces chain-wide stan-dards for performance, selects franchisees, approves outlet locations, man-ages brand image, and coordinates activities (Caves and Murphy, 1976) The franchisor’s revenue comes primarily from franchise fees and royalty pay-ments tied to franchisee sales Franchisees establish local outlets, set oper-ational policies such as price, hours, and staffi ng, and manage day-to-day operations in exchange for profi ts after royalties and other expenses Viewed from the perspective of entrepreneurship, franchising is a vehicle for entering business ownership (Shane and Hoy, 1996) From the perspective of market-ing, franchising is often considered as a distribution channel (Kaufmann and Rangan, 1990) From the fi nance point of view it is a capital structure issue (Norton, 1995) From the perspective of economics, franchising is a leading venue for understanding the structure of contracts (Lafontaine, 1992) From the perspective of strategic management, franchising is an important organi-zational form (Combs and Ketchen, 1999)

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respon-Although it has been suggested that franchisees are little more than employees (Rubin, 1978), a more encompassing view is that it represents a

method of controlled self-employment (Felstead, 1991) This dyadic

relation-ship affords franchisees many benefi ts, which may be broadly categorized as

marketing, fi nancial, and operational advantages derived from economies of

large-scale operation (Hing, 1995)

The importance of ongoing franchisor support and a proven concept in minimizing potential risk has been reported (Baron and Schmidt, 1991; Hunt,

1977; Withane, 1991) as one of the primary reason for selecting franchising

Other reasons include the role of an established name, lower development

costs and operational independence (Mendelsohn, 1999; Peterson and Dant,

1990) A franchise system is not only an economic system but also a social

system in which the franchisor and franchisees have a close working

rela-tionship (Strutton, Pelton, and Lumpkin, 1995) Accordingly, the fundamental

behavioral dimensions of power/dependence, communications, and confl ict

that characterize a social system (Stern and Reve, 1980) are also

characteris-tics of a franchise system

The U.S Department of Commerce defi nes franchising as a method of doing business by which a franchisee is granted the right to engage in offering,

selling, or distributing goods or services under a marketing format which is

designed by the franchisor The franchisor permits the franchisee to use the

franchisor’s trademark, name and advertising.”

The International Franchise Association, the major franchising trade ciation, defi nes franchising as “a continuing relationship in which the franchi-

asso-sor provides a licensed privilege to do business, plus assistance in organizing,

training, merchandising, and management in return for a consideration from

the franchisee.” In a widely circulated publication brochure entitled

Investi-gate before Investing, the association offers a further defi nition of franchising

based on a prototype franchise disclosure law: “a contract or agreement either

expressed or implied, whether oral or written, between two or more persons

by which (a) a franchisee is granted the right to engage in the business of

offering, selling or distributing goods or services under a marketing plan or

system prescribed in substantial part by a franchisor; and (b) the operation

of the franchisee’s business pursuant to such plan or system is substantially

associated with the franchisor’s trademark, service mark, trade name,

logo-type, advertising or other commercial symbol designating the franchisor or its

affi liate.” In short, franchising is a business method and relationship.

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In addition to mutual benefi ts provided to franchisors and franchisees, franchising provides economic benefi ts to a region by providing employ-ment, tax revenues, economic multiplier effect, and other related community benefi ts It also promotes expertise, skills, and expertise among available human resources within the region Since franchising is closely linked with entrepreneurship, it also helps in bringing forth entrepreneurial and manage-rial capabilities within the labor force.

BASIC CONCEPTS AND DEFINITIONS

OF FRANCHISING

According to the Federal Trade Commission (2007) the following terms defi ne various legal aspects pertaining to franchising:

Franchise means any continuing commercial relationship or arrangement,

whatever it may be called, in which the terms of the offer or contract specify,

or the franchise seller promises or represents, orally or in writing, that:

1 The franchisee will obtain the right to operate a business that is identifi ed

or associated with the franchisor’s trademark, or to offer, sell, or ute goods, services, or commodities that are identifi ed or associated with the franchisor’s trademark;

distrib-2 The franchisor will exert or has authority to exert a signifi cant degree of control over the franchisee’s method of operation, or provide signifi cant assistance in the franchisee’s method of operation; and

3 As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affi liate

Franchisee means any person who is granted a franchise.

Franchisor means any person who grants a franchise and participates in the

franchise relationship Unless otherwise stated, it includes subfranchisors For purposes of this defi nition, a “subfranchisor” means a person who functions as

a franchisor by engaging in both presale activities and postsale performance

Franchise seller means a person that offers for sale, sells, or arranges for the

sale of a franchise It includes the franchisor and the franchisor’s ees, representatives, agents, subfranchisors, and third-party brokers who are

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employ-involved in franchise sales activities It does not include existing franchisees

who sell only their own outlet and who are otherwise not engaged in

fran-chise sales on behalf of the franchisor

Parent means an entity that controls another entity directly or indirectly

through one or more subsidiaries

Person means any individual, group, association, limited or general

partner-ship, corporation, or any other entity

Leased department means an arrangement whereby a retailer licenses or

other-wise permits a seller to conduct business from the retailer’s location where the

seller purchases no goods, services, or commodities directly or indirectly from

the retailer, a person the retailer requires the seller to do business with, or a

retailer-affi liate if the retailer advises the seller to do business with the affi liate

Plain English means the organization of information and language usage

understandable by a person unfamiliar with the franchise business It

incor-porates short sentences; defi nite, concrete, everyday language; active voice;

and tabular presentation of information, where possible It avoids legal

jar-gon, highly technical business terms, and multiple negatives

Predecessor means a person from whom the franchisor acquired, directly or

indirectly, the major portion of the franchisor’s assets

Principal business address means the street address of a person’s home offi ce

in the United States A principal business address cannot be a post offi ce box or

private mail drop

Prospective franchisee means any person (including any agent,

representa-tive, or employee) who approaches or is approached by a franchise seller to

discuss the possible establishment of a franchise relationship

Required payment means all consideration that the franchisee must pay to

the franchisor or an affi liate, either by contract or by practical necessity, as a

condition of obtaining or commencing operation of the franchise A required

payment does not include payments for the purchase of reasonable amounts

of inventory at bona fi de wholesale prices for resale or lease

Sale of a franchise includes an agreement whereby a person obtains a

fran-chise from a franfran-chise seller for value by purchase, license, or otherwise

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It does not include extending or renewing an existing franchise agreement where there has been no interruption in the franchisee’s operation of the business, unless the new agreement contains terms and conditions that differ materially from the original agreement It also does not include the transfer of

a franchise by an existing franchisee where the franchisor has had no signifi cant involvement with the prospective transferee A franchisor’s approval or disapproval of a transfer alone is not deemed to be signifi cant involvement

-Signature means a person’s affi rmative step to authenticate his or her

identity It includes a person’s handwritten signature, as well as a son’s use of security codes, passwords, electronic signatures, and similar devices to authenticate his or her identity

per-Trademark includes trademarks, service marks, names, logos, and other

commercial symbols

Written or in writing means any document or information in printed form or

in any form capable of being preserved in tangible form and read It includes typeset, word-processed, or handwritten documents; information sent via email; or information posted on the Internet It does not include mere oral statements

The above legal defi nitions include certain terms that are used in the legal franchising documents and agreements In summary it can be stated as follows:

n Franchising is a method of distributing goods and/or services.

n A franchise is a right or privilege granted to an individual or a group.

n A franchise is a legal agreement business two parties.

n The owner who agrees to grant rights or privileges is referred to as the

franchisor.

n The individual or group to whom the rights or privileges are granted by

the franchisor is called the franchisee.

n The system under which franchisor and franchisee operate is known as

franchising.

The above defi nitions are crucial in understanding the concept of ing A franchise should not be confused with a subsidiary or branch operation

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franchis-of a business A business may have several solely owned subsidiary branches

of the original operation that are not franchises For example, Sears has branch

stores that cannot be considered as franchises The use of trademark alone

does not constitute a franchise There are multi-unit operations and groups of

restaurants owned by an individual or corporation that have the same

trade-mark but are not franchises For example, Red Lobster restaurants are a part of

a national chain; individual restaurants are not franchises What constitutes a

franchise is the legal agreement between a franchisor and a franchisee for the

conduct of specifi c business Further, a franchise-granting corporation may

itself be a wholly owned subsidiary of another corporation A good

exam-ple is Pizza Hut, which is a subsidiary of Tricon Global Restaurants, which

also owns Taco Bell Corporation and KFC Thus Pizza Hut is a component

of a large conglomerate Components of conglomerates are not considered

franchises, although some of them may individually be franchise-granting

corporations Another way of categorizing the different types of franchised

and nonfranchised unit is (a) fully franchised restaurant, where all units are

franchised such as in Baskin-Robbins; (b) dual distribution units, where some

units are franchised and some are company owned, such as McDonald’s; and

(c) wholly owned chains, where all units are owned by a corporation, such

as Red Lobster restaurants, which are also referred to as nonfranchised units

In summary, under the terms of the franchise contract, a franchisor grants the right and license to a franchisee to market a product or service,

or both, using the trademark and/or the business system developed by the

franchisor Franchising works because of “ownership attention.” The

fran-chisor’s motivation to use franchising as a means of retailing lies in the

attention that the franchisee as a semi-independent owner directs toward

the business (Dahlstrom and Nygaard, 1994) In other words, franchising

alleviates franchisors’ need to monitor their outlet managers because

fran-chisees are the residual claimants on the profi ts of their outlets (Norton,

1988a; Fama and Jensen, 1983)

The entire process of franchising starts with a concept, which may be based on an idea, name, process, product, or format The franchisor grants a

license to another party to use this concept The franchisor normally charges

a fee for this arrangement, which is called a franchise fee In particular,

fran-chising offers a method of extending capital (Oxenfeldt and Kelly, 1968), labor

(Norton, 1988b), and managerial limitations on future venture growth, while

maximizing the joint utility of network partners (principal and agents), thus

ensuring ongoing operational effi ciency (Bergen, Dutta, and Walker, 1992)

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FRANCHISING: A SYMBIOTIC RELATIONSHIP

A review of service franchises reveals the existence of a symbiotic and mutually benefi cial relationship between the franchisor and the franchisee If properly executed, franchising is a win–win–win situation There are signifi -cant advantages to franchisor, franchisee, and the consumer For an entrepre-neur, a small business, or a growing company with a potentially successful product, a service process, or plan, franchising provides a cost-effective and systematic strategy for marketing and rapid expansion with a minimum of direct involvement and fi nancial investment For a prospective franchisee, it represents an opportunity to own and operate a business involving a proven concept, product, or business format with a minimum of fi nancial risk For potential consumers, franchising provides a way to receive goods and services

in a reliable and predictable manner

For the franchisee, the most signifi cant characteristic of a franchise tionship is the minimizing of the risk of starting a new business A franchi-see also benefi ts from consumer recognition of the franchisor’s trademark and service mark Costly operating and marketing mistakes can be avoided because franchisors provide advertising, training, continuous supervision, and assistance On the other hand, a franchisee is not as independent as

rela-a nonfrrela-anchised businessperson becrela-ause of his or her contrrela-acturela-al dence on the franchisor for promotion, advertisement, training, technical support, maintenance of quality standards, and overall assistance in opera-tional matters This loss of independence is often the cause of friction and confl ict Other franchisor–franchisee relationship problems can be traced

depen-to the franchisee’s yielding of some options and controls The franchisor exercises a certain degree of control over the actions of the franchisees, primarily for the maintenance of quality and performance standards The degree of control varies from one franchise to another and is based on the type of business

DIFFERENCE BETWEEN SERVICE FRANCHISES AND RETAIL CHAINS

The importance of services franchising is increasing tremendously, and there are distinct differences between retail chains and service franchises

Some of the basic differences stems from the quality attributes of services, which include (1) intangibility of services; (2) simultaneous production and consumption; (3) perishability; and (4) heterogeneity

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The process of franchising starts with a concept, which may be based on an idea, name, process, product, or format.

Intangibility

Services are intangible and cannot be touched, felt, or tasted This is one

of the major differences between service franchises and retail franchises For

example, the concept of providing service with a smile is not easy to made

tangible since the service vary based on the customer expectation and

ser-vice provider This intangibility poses major challenges for serser-vices chains

It is diffi cult for the customers to evaluate services before they buy them or

after they use them For instance, when buying vacation packages from travel

agencies or using a hairstyle outlet, it is impossible for assessing what services

will be provided prior to purchasing them In order to reduce this intangibility,

services try their best to provide as much tangible evidence as possible This

comes in the form of service and satisfaction guarantees, employee uniforms,

menu boards, advertisement and promotion, slogans, logos, and many other

such evidences, which provide tangible evidence of the expected services

Simultaneous Production and Consumption

Services are provided mostly at the franchise unit or by the franchisees at

a customer location, thereby forming a direct link between the producer and

consumer of services For example, the customer is present at the premises

in a restaurant or sleeping under the same roof in a hotel Thus services are

generally created and delivered as the customer is consuming it

These simultaneous production and consumption makes services ferent than products since the customer is present, involved, may witness

dif-services being produced and maybe involved in its production process For

example, a customer using a buffet service in a restaurant is physically

pres-ent, sees what is being served, is involved in service is and may have direct

contact with the service provider Customer choices also are infl uenced by

those who are with the customer, such as friends, family, person in front of

him in line, etc This imposes a lot of variability and expectations in services

demanded by each customer Franchisors in the services industry have

there-fore the responsibility of building service component in the franchise concept

as well as providing a fi ne-tuned training program to provide that service

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Services are perishable since they cannot be saved, stored, resold, or inventoried Once the night is over and the room is not sold in a hotel, the opportunity is lost forever Similarly, when a fl ight takes off and the seats are not sold, then they cannot be resold Also there is a capacity constraint since there are fi xed number of seats in a restaurant or seats on a plane There are also peaks and valleys in the service timings and customer demands If a bus pulls in front of the restaurant, all guests have to be served promptly; if not, the business is lost This calls for different management arrangements and pricing structures to provide business at various time periods For instance, hotels have varying rates during peak travel and convention times

Heterogeneity

Services are performed, produced, and served by people (employees) to people (customers) People have different levels of performance and serving capabilities, which are affected by numerous psychological, social, econom-ical, and other factors For instance a waiter at a restaurant may be stressed out or not in a good mood and that will affect the service If a guest is in a bad mood, the expectation level and satisfaction is affected Combined with per-ishability of services this poses a major problem for service franchises For example, if a hairstylist messes up hair or a waitress drops coffee on a guest, the impact can be very negative for the services and service providers Also since franchises are linked, it has an impact on the entire franchise system

Thus providing quality service is always a challenge for service franchisees

The franchisors will have to spend time and effort selecting, training, managing, motivating, and controlling their services providers: franchisees, managers of company-owned units, and to a lesser extent the employees of all the units Contrary to a product whose quality can be controlled by the franchi-sor before marketing it through the franchisees, the services can be controlled only at the moment they are offered to the fi nal consumers (Perrigot, 2006)

TYPES OF FRANCHISE ARRANGEMENTS

A variety of business arrangements may exist within a franchise system

All of these arrangements can be classifi ed into two major groups: products and trade name franchising and business-format franchising

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Product and Trade Name Franchising

Product and trade name franchising began primarily as an independent sales relationship between supplier and dealer in which the dealer acquired

some of the supplier’s identity The dealer (franchisee) identifi es with the

supplier (franchisor) through the product line and, to some extent, with its

trade name or trademark Franchisees are granted the rights to distribute a

franchisor’s products or services within a specifi ed territory or at a specifi c

location, generally with the use of the manufacturer’s identifying name or

trademark This type of franchising can be considered as a distribution

chan-nel for products manufactured by the franchisor The franchisee becomes the

selected distributor of the franchisor’s products after securing the license

Examples of product and trade name franchising include automobile

deal-erships, gasoline service stations, soft-drink bottlers, and farm equipment

dealers This type of franchising dominates the distribution fi eld since the

franchisee has assigned territory for distributing franchisor’s products There

is considerable competition and, to a certain extent, saturation among

fran-chises within this category The benefi t to the franchisors using this type of

franchising is that they can penetrate into a market that they are not familiar

with or that they do not have resources to enter This type of franchising was

previously referred to as selective franchising; in fact, for a long period of

time franchising was treated as a method of distribution

Two types of franchising are product and trade name and

business-format franchising.

Business-Format Franchising

Business format franchising is defi ned as “the granting of a license for

a predetermined fi nancial return by a franchising company (franchisor) to

its franchisees, entitling them to make use of a complete business package,

including training, support and the corporate name, thus enabling them to

operate their own businesses to exactly the same standards and format as

the other units in the franchised chain” (Grant, 1985) It involves a complete

business format rather than a single product or trademark Although product

franchising (e.g., automobiles, gasoline) is the largest franchising segment,

business format franchising (e.g., McDonald’s, Holiday Inn) is the segment

that most clearly represents franchising and also shows its relationship to

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entrepreneurship It is characterized by an ongoing business relationship between franchisor and franchisee Compared to the product and trade name franchising, business format franchising may not have any product manu-factured by the franchisor However, they serve as a supplier of ingredients, equipment, technical know-how, fi nished products, and all affi liated services

In addition the franchisor provides training, advertisement, promotion, and business process guidance The franchisor also provides the trademark, trade dress, and other copyrighted information for use by the franchisees In the restaurant business sometimes the distinction between product and trade name franchising and business-format franchising can get be blurred For example a coffee shop may give license to a manufacturer to produce the product, which in turn is bought by the franchisee for use in their restau-rant Some of these products such as Taco Bell sauce may also be available through other outlets

Business-format franchising includes not only the product, service, and trademark but also the entire business concept itself: a marketing strategy and plan, operating manuals and standards, quality control, group purchas-ing power, research and development, and a continuous process of training, assistance, and guidance The franchisee is required to comply with the fran-chisor’s guidelines pertaining to all aspects of the business, including operat-ing procedures, the quality of the products and/or services, and the physical appearance of the business facility A two-way channel of communication is maintained

Examples of business-format franchising include restaurants (all types);

hotels; motels; and campgrounds; recreation, entertainment, and travel; motive products and services; business aids and services; construction, home improvements, maintenance, and cleaning services; convenience stores;

auto-laundry and dry cleaning; educational products and services; rental services (auto and truck); rental services (equipment); nonfood retailing; and food retailing (nonconvenience) Business-format franchising is responsible for much of the franchising in the United States and internationally since 1950

It has shown rapid growth and continues to offer numerous opportunities for individuals seeking to own a business Business format franchising has also been mentioned as an easier method for women and minorities to enter self-employment (Hunt, 1977)

Differences between the two types of franchising sometimes appear blurred, particularly among nonrestaurant franchises Where alternative

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business arrangements, such as distributorships and licensed agencies, are

concerned, it becomes hard to place franchises in one group or the other In

some cases, it is a question as to whether to classify them as a franchise or

not In case of any doubt the FTC’s franchise rules and regulations should

be referred to All states incorporate criteria similar to the FTC’s franchise

rule, although their defi nitions may differ, particularly with regard to the

threshold amount paid to acquire a franchise Thus regardless of what a

business arrangement is called, how it is advertised or sold, or even whether

it has a formal written contract or agreement, the contractual relationship

between parties in the business arrangement governs whether or not it is a

franchise

The dynamic nature and the rapid development of franchising will tainly change the nature and shape of future classifi cation of franchising

cer-arrangements and will lead to the introduction of new business terminology

New and creative methods of business arrangements are being introduced

to keep pace with the growth of franchising Some increasingly common

terms are dual-concept/multiple-concept franchising, master franchising,

and cobranded franchising.

Dual-concept/multiple-concept franchising as the name indicates refers

to the arrangement in which two or more concepts function simultaneously at

one location For example, some gas stations are teaming up with restaurants

or baked goods franchises and providing both types of goods and services

at one location Also, the presence of KFC, Taco Bell, and Pizza Hut at one

location is an example of multiple concepts working collaboratively

Simi-larly some brand hotels are including different brand franchise restaurants

within their premises This type of arrangement lends itself to effective cost

sharing and increase in sales by providing additional goods and services or

different brand choices to customers Customers stopping at a gas station

may fi nd it convenient to buy from a franchised restaurant or doughnut shop

located at the same premises At times these are also referred to as

cobrand-ing or dual brandcobrand-ing when two brands are involved

From a different angle, two types of multi-unit franchising have been

identifi ed as area development franchising and sequential multi-unit

fran-chising (Kaufmann and Dant, 1996) In area development franfran-chising, the

franchisee enters a contractual obligation to open a certain number of outlets

in a specifi ed period of time In turn the franchisee pays for having

devel-opment rights The developer may own one or more developed units After

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termination of the development agreement, each developed outlet signs a separate franchise agreement and starts operating as a traditional franchise

Franchisors can also buy some or all of the developed units Since it is a huge task of development, the franchisees should have enough investment and managerial capabilities The principle behind this type of franchising is that it leads to rapid development by someone who is very well acquainted with the area and has suffi cient construction experience The franchisor does not have to monitor the development or get involved in the tedious process of getting approvals and construction This could be very risky for the franchi-sors if the developer cannot perform due to fi nancial or other related reasons

In sequential multi-unit franchising, the franchisor grants the franchisee the right to open additional outlets, with each subsequent unit typically being governed by a separate franchise contract

The master franchising or subfranchising program is designed to provide

growth of a franchise in areas or locations where the original franchisor may not have easy access or a franchisor may not want to get involved In this pro-gram, an individual is trained to be a franchisor and, upon completion of a set

training, is referred to as a master franchisee A master franchisee is

respon-sible for selling a franchise and for assisting the new franchisee with the total franchise package, including the site selection, equipment purchase, and personnel training The master franchisor is also responsible for maintaining the quality of products and/or services in the assigned region on an ongoing basis The master franchisee assumes all functions of the original franchisor and acts as sole representative in the region This type of arrangement works effi ciently in international markets, where the original franchisor may not have easy access because of political, social, or cultural reasons The master franchisee can own units as well as grant franchises in the area assigned by the franchisor This way a minifranchisor is helped in developing an area and the master franchisee can develop by using the fi nancial resources col-lected by subfranchising The master franchisee can collect initial franchise fees, royalty, and other associated fees In return the master franchisee has to provide training, support services, monitor standards, and maintain controls

as required by the original franchisor There are shared responsibilities by which the local aspects are taken care of by the master franchisee and overall research and development by the franchisor A portion of the fees and royalty collected by the master franchisee has to be paid to the franchisor As far as agreements are concerned, there is one agreement between the franchisor and the master franchisee and another agreement between master franchisee and subfranchisees However, the franchisor retains the rights over brand name

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and other business practices This type of arrangement works well mainly in

international areas and where the reach of the franchisor is diffi cult There is

a risk of loss of control by the franchisor and depending on how strong the

master franchisee is from the business point of view Overall the franchisor

has the liability in case there are legal problems or bankruptcy of the master

franchisee In order to avoid giving all rights of franchising to a master

fran-chisee, sometimes franchisors enter into contract under area representation

In this case there are limited rights given by a franchisor

Another term, conversion franchise, is sometimes used to describe a

situation where an owner of an existing business decides to become a

fran-chisee by associating with a franchisor For example, a restaurant owner may

decide to convert his or her existing business into a nationally recognized

franchise The franchisor benefi ts by gaining an established clientele and a

tested business site, while the franchisee benefi ts by recognition and

franchi-sor’s assistance Conversion franchising can prove fi nancially benefi cial for

both parties In essence, the franchisor gains the expertise of an experienced

established business in exchange for services such as training, marketing,

advertising, and research and development Many franchisors started

grow-ing their distribution channels with dealers or licensees who would like to

convert their business The reason why a supplier or licensor would like to

convert to a franchise is to derive more revenue in the form of initial fees

and royalties as well as to increase advertising and brand awareness (Duvall,

2012) The advantage of conversion franchising is that the franchisor is able

to expand business without going through considerably large start-up costs

and time In return the franchisees gain immediate brand name recognition

and support services from the franchisor Also, the franchisee will have a

better chance to compete compared to when operating as an independent

business

Management franchises or quasi franchise relationships refers to a

relationship where franchisor provides management of a facility owned by

the franchisee Franchisees avail of the management techniques as well as the

brand name of the franchisor The entire management and operation is

han-dled by the franchisor, making the franchisee in essence a passive investor

Many hotel companies such as Marriott have this type of franchise

relation-ship The franchisor in this case provides identity, the reservation system, and

development In lieu of management services provided, franchisees pay

roy-alty fees Some hotels practically run the whole operation even with their

own managers and employees, thus making franchisees a passive observer

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This method may be costly for the franchisees; however, if a strong brand name is involved, they benefi t by a proven management system.

The different forms of franchising releases franchisors from the burden of expansion related to administration, fi nancial resources, controls, and franchise system maintenance Also it helps in developing franchisees in areas where the franchisor is not familiar with local bureaucracy and political issues On the other hand it provides opportunities for franchisors to devote time to research and development of the franchise system Ideally, it is a win–win situation if properly executed As expected, with the size of the franchisor, the impacts varies Stronger franchisors have more bargaining power and can implement more rigid requirements for prospective franchisees They often have a long list of prospective franchisees and prefer giving franchises to the existing successful franchisees Considering the power that established franchisors have, a prospective franchisee has better chance of getting a franchise from a start-up franchisor than an established successful franchisor Also, many large franchise networks are owned by established multioutlet operators, which are independent corporations This further restricts the chances of a prospective independent small franchisee Conversely, going with an established strong franchisor ensures to an extent well-established training program, sound oper-ational procedures, effective distribution system for supplies and equipment, marketing and advertising help, and eventual surety of success

HISTORY AND DEVELOPMENT

Franchising in principle, if not in its current form, has existed for many centuries In early ages, kings and rulers granted the right to certain individu-

als to collect taxes In the Roman Republic, offi cials referred to as publicani

were responsible for collecting taxes, a portion of which they withheld as compensation In the medieval period, churches granted individuals privi-leges to conduct business enterprises within their jurisdiction In England, many companies received charters of incorporation from the crown

The rapid development of franchising started in the late 1800s, ciding with the Industrial Revolution Changes became evident in the way business was conducted, and innovative distribution methods were sought

coin-All these industrial and business changes, coupled with the mass movement

of populations to cities and suburbs, led to the development of franchising

Individual enterprises found it profi table to expand into larger franchises, particularly in real estate, hardware, auto repair, and other retail businesses

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The fi rst formal form of franchising in consumer goods fi rms was in the year 1851, when Isaac Singer accepted fees from independent salesmen to

acquire territorial rights to sell his recently invented sewing machine Singer

Sewing Machines had experienced diffi culty in marketing the innovative

new product; there was a need for representatives to go out and educate

con-sumers regarding its versatility Because Singer did not have the capital to

hire such a large workforce, agents working on commission were the most

logical choice Franchising gained much broader recognition with the

mar-keting efforts planned by the automobile industry General Motors

Corpora-tion sold its fi rst franchise in 1898, after which franchising became common

throughout the automobile and gasoline industries

Franchising in the Early 1900s

The success of franchising in the auto and petroleum industries opened the door for its use in other types of retail businesses Basic principles of

franchising were introduced into retail marketing with events such as the

development of the Ben Franklin general merchandise store in 1920 and the

emergence of national A&W walk-up root beer stands in 1925 Also in 1925,

Howard Johnson offered three fl avors of ice cream in a drugstore in

Mas-sachusetts This ice cream business was expanded through franchising to a

group of restaurants on the East Coast The fi rst Howard Johnson Restaurant

appeared on a turnpike in 1940, and the fi rst Howard Johnson Motor Lodge

opened in the year 1954 Baskin-Robbins opened its fi rst ice cream stores in

1940 Thus major growth in franchising was witnessed after World War II As

the economy developed and the population grew after war, businesses

includ-ing franchisinclud-ing, grew rapidly The soft drink industry began franchisinclud-ing by

giving proprietary syrup or concentrate to bottlers The franchisor provided

marketing and other support services Independent wholesalers and retailers

also got involved in franchising, when seeing the advantages of franchising

It was in 1930s that the foodservice industry got involved with ing The fi rst recorded case of franchising is when Howard Johnson estab-

franchis-lished its fi rst franchise They had two ice cream businesses and a restaurant

but did not have enough capital to open additional restaurants Johnson

agreed to help his former classmate open a restaurant and sell ice cream

sup-plies as a Howard Johnson’s franchise When this fi rst franchise was

success-ful, more franchises were granted Since many of the franchisees did not have

any experience, they benefi ted from the franchisor’s expertise and guidance

and the franchisor benefi ted by supplying ice cream This idea was found to

Tiêu đề	Restaurant Franchising: Concepts, Regulations and Practices
Tác giả	Mahmood A. Khan, PhD
Thể loại	book

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