Franchising Strategies

The Entrepreneur’s Guide to Success

Ed Teixeira, Richard Chan

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000602517
• Edition: 1
• Topic: Commerce
• Subtopic: Franchises

A comprehensive and accessible companion to a proven business model, this book shows how to franchise an existing business, supported by case studies, data, and research reports on the franchise industry.

For small to medium sized businesses, franchising can lead to successful and profitable growth, and plays an important role within the US economy. Utilizing a proprietary dataset with the most up-to-date statistics regarding a range of franchising trends, this analytical guide is based on management research frameworks that will lead to better understanding of a range of franchising strategies. Issues covered include:

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• The franchising business model, including its history, economic impact, and regulations

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• Critical factors that significantly influence franchising success, enabling a comprehensive feasibility analysis of franchising potential or existing business ideas

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• Implementation components of franchising strategies, such as different franchise structures, regional development plans, and future trends

With its clear focus and practical orientation, this book will be a valuable resource for entrepreneurs, as well as undergraduate and postgraduate students, interested in acquiring the knowledge, skills, and abilities to succeed in franchising.

Chapter 1 Introduction to Franchising

DOI: 10.4324/9781003034285-1

From small- to medium-sized businesses, franchising has evolved into a proven business model that can lead to successful and profitable growth. An economic forecast conducted by FRANdata for the International Franchise Association (IFA) in February of 2021 projects that franchising's contribution to the U.S. economy is forecast to grow by 7% in 2021. More than 26,000 new franchised businesses will open in 2021, recovering most of the losses felt in the previous year due to COVID-19. Franchises will employ some 8.3 million people, adding nearly 800,000 new jobs.¹ Much of this employment will be in the retail, food, and services industries. Franchising creates many jobs, and some will be entry-level jobs for lower-skilled workers. Franchising offers these entry-level workers skills and job training and helps them to develop, leading to career advancement. The growth of franchise businesses is robust, making franchising an important economic development strategy on the national level.

The franchise business model plays an important role within the U.S. economy. In 2019, the economic output of franchise establishments in the United States was about $787.5 billion and represented 3% of the country's GDP. In a 2021 report called The Value of Franchising, Oxford Economics found that franchise businesses provide better pay and benefits than nonfranchised businesses, are diverse in industry and ownership, and offer entrepreneurial opportunities especially to women, people of color, and veterans. The report found that franchise businesses drive 1.8 times higher sales than comparable nonfranchise establishments, provide 2.3 times as many jobs than their nonfranchise counterparts, and provide a path to entrepreneurship that one-third of franchisees reported was critical to their chance to own a business at all.²

The complexity and potential benefits of franchising highlight the importance of understanding how it works. Although scholars have studied franchising along with its antecedents and consequences for over five decades,³ their findings have circulated mostly among academics and are generally not available to those entrepreneurs who might benefit from such knowledge, a finding that prompted us to organize and present the information contained in this book.

In this chapter, we define what franchising is and what it is not and go on to discuss the major theoretical frameworks in management research that are relevant to understanding franchising strategies. We illustrate franchising history by describing how the franchise industry has evolved and grown into a dynamic business model exported throughout the world. We also highlight its corresponding advantages and disadvantages. We conclude by presenting the economic impact of franchising, the various franchise sectors and categories, and relevant data pertaining to these franchises.

Definition of Franchising

Franchising is a business model that comprises contractual agreements between two groups of entrepreneurs: a franchisor who created a venture to advance an entrepreneurial opportunity, and a group of franchisees who purchase the right to use the brand name, operating process, and marketing system of that venture in new geographic markets.⁴ In such a relationship, the franchisor not only grants a license to a third party in order to conduct business under their trademark, and specify the products and services to be offered by franchisees, but provide them with an operating system, brand, training, and marketing and logistic support.

Although franchising often involves the use of a license, it is distinct from licensing, another entrepreneurial growth strategy. Licensing refers to an agreement whereby a company (the licenser) grants the right to utilize intangible assets as a brand, such as intellectual property or an operation process, in exchange for buying and selling the company's products or services. Franchising is more than just the use of licensing, however: it is a contractual arrangement in which the franchisor allows the franchisee to conduct business using the brand or intellectual property as an independently operated entity within its franchise network. Licensees usually make a significant capital investment in designing and implementing their business operations. They may receive operational and marketing support from the franchisor in exchange for royalty fees. Table 1.1 below summarizes the comparison between franchising and licensing.

Table 1.1 Franchising versus Licensing

	Franchising	Licensing
Trademark and Branding	Uses a common trademark or brand which can develop strong brand recognition.	They are identified by the business name of the Licensee. Challenging to promote strong branding.
Support	Franchisors supply trademarks, training, marketing, and ongoing support.	Minimal or no training, typically no ongoing support.
Standards	Franchisors require franchisees to meet performance standards and adhere to operational guidelines.	Limited guidelines that licensee must follow.
Noncompete	Franchise agreements have strong in-term and post-term noncompete provisions.	Little or no noncompete provisions.
Start-Up Costs	May be more costly to startup and run.	Usually less costly to start and operate.
Fees	Franchisees pay initial fees and royalty fees based on revenues.	Most licensing agreements do not have an initial startup, royalty, or continuing fees. There may be product purchase expenses.
Network Growth	A stronger brand image through the franchise model and familiar brand name.	As licensees use their company names, lack of typical brand name, which may diminish brand recognition.

Major Theoretical Frameworks

Scholars have utilized several theoretical frameworks to explain the nature, antecedents, and consequences of franchising strategies. Two main examples are resource scarcity and agency theory.⁵ Early researchers proposed resource scarcity to explain why firms would exchange firm ownership with financial capital to grow their business and increase market shares. However, this framework fell out of favor when increasing studies illustrated the lack of empirical support for the resource scarcity perspective.⁶ Indeed, firms do not need to limit ownership for business growth to result from franchising, as there are alternative funding sources that could be less costly and more efficiently acquired.

Eventually, agency theory became the dominant framework that explains the usage of franchising strategy. It was originally developed to explain the interplay between two stakeholders, the principal and the agent. In a typical setup, the agent makes decisions on behalf of the principal, but such decisions may favor the interests of the agent rather than the principal. Franchising provides a powerful incentive to align the interests of the principal (franchisor) and the agent (franchisee). It can ensure that franchisees invest their own resources to build and operate outlets, reducing the need to monitor franchisees’ efforts.⁷

This cost-reduction advantage of franchising strategy does not fully limit the incentives for franchisees which might damage a brand's reputation, keeping many firms small or growing mainly through company ownership. This point recently prompted researchers to advocate for a symbiotic perspective,⁸ suggesting that many franchisors adopt a “plural form” of ownership strategy. This strategy describes how many franchisors not only delegate authority to franchisees but also maintain ownership of their own outlets to deter free-riding by franchisees and foster system standardization to protect the franchise's reputation. Recent research has applied other frameworks, such as relational contracts literature and franchise performance data, in order to explain franchising.⁹ Such frameworks and related findings will be discussed throughout this book when relevant.

History of Franchising

While the word franchise is derived from the old French, meaning “privilege” o...