Motivations and Relations in Business Format Franchise Systems

Table of Content

A Introductory Part
A.1 Objective and outline of the paper
A.2 Foundations and terminology
A.2.1 Origins and development of franchising
A.2.2 Definition and dissociation from agency and pyramid selling
A.2.3 Typologies and the difference between business format franchises
and product or trade mark franchises
A.3 The role of franchising in the economy and the franchise community
in New Zealand
A.3.1 Franchising statistics
A.3.2 Uneven pattern of development in product/trade mark franchising
and business format franchising
A.3.3 Franchising industries
A.3.4 Regulations and institutions

B Theoretical Part
B.1 Motivations in business format franchise systems
B.1.1 Why franchise a business?
B.1.2 Why take up a franchise?
B.1.3 Disadvantages of franchising
B.2 Franchisor-franchisee relations
B.2.1 Power and control in business format franchises
B.2.2 Strategies for avoiding dissatisfaction
B.3 Structure of business format franchise agreements
B.3.1 General comments
B.3.2 Negotiability of the contract
B.3.3 Duration of the franchise contract
B.3.4 Territorial rights
B.3.5 Payments
B.3.6 Termination
B.3.7 Assignment

C Empirical Part
C.1 Survey design
C.1.1 Selection of franchise systems
C.1.2 Method of survey
C.2 Background
C.2.1 Company profiles
C.2.2 Franchise development
C.3 Franchisor perspective
C.3.1 Motivations
C.3.2 The pre-opening relation
C.3.3 Nature of the franchise
C.3.4 Key features of the franchise agreement
C.4 Franchisee perspective
C.4.1 Motivations
C.5 Franchisor-franchisee relations
C.5.1 Communication
C.5.2 Problems
C.5.3 Controls
C.6 Summary and conclusions

D Appendix
D.1 Definitions of franchising by the IFA and BFA
D.2 Covering letter to franchisors with interview outline
D.3 Guideline for semi-structured interviews with franchisors

References

Tables and figures

Table 1: Typologies of private capital franchising for only commercial reasons

Table 2: Summary of advantages and disadvantages of franchising

Table 3: Organisational structure of large real estate brokerage firms in New Zealand

Table 4: Comparison of support systems between the national survey and this study

Table 5: Key features of franchise agreements

Figure 1: Franchisee satisfaction and the 'life-cycle' of the franchise relationship

Abbreviations

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The masculine gender has been used throughout when referring to the franchisee – this is not meant to be discriminatory but is in the interest of brevity. Similarly, the franchisor is often referred to as ‘he’ although in practice ‘he’ will almost invariably be a limited company. Once again, this is merely supposed to improve the flow of text.

Abstract

Purpose – This study investigates the required business-related qualifications on the part of prospective franchisees of real estate brokerage services as well as the question why they may prefer to buy a business format franchise over running an independent business based on their own experience, expertise, know-how and skills. As for the franchisor perspective, a major focus was put on the management of potential areas of conflict between power and control along the lifecycle of a franchise relationship.

Design/methodology/approach – Comparative field study through semi-structured interviews with practitioners. Comparison of certain aspects of franchising in theory and practice between selected real estate brokerage franchise systems as well as with results from a large national survey on franchising across franchise systems from different sectors.

Findings – Anecdotal evidence from a convenience sample of three business format franchise systems highlight the importance of intangible indicators for the quality of professional services in customers’ decision-making with brand as the driving factor for franchisees’ motivation, whereas training especially prior to opening seems to be less crucial than franchise theory suggests. The possibility to blueprint professional services and real estate brokerage services in particular is limited due to the heterogeneity of properties and local market conditions, for instance. Because of divergent economies of scale especially with regard to information technology resources, network effects also play an important role. Both franchisors and franchisees agreed on the significantly increased efficiency of franchise owners compared to branch managers. No major differences have been found in the terms and conditions of the franchise agreements.

Originality/value – This paper focuses on business format franchises in the professional services industry, especially real estate brokerage services in New Zealand. The field study provides insights from practitioners.

Keywords – Franchising, professional services, real estate, brokerage, New Zealand.

Paper type – Empirical research paper.

A Introductory Part

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A.1 Objective and outline of the paper

Little requirements of business-related qualifications on the part of the prospective franchisee is widely perceived as an advantage of the franchise method and driving factor for the rapid growth of franchising in the economy worldwide. This study intents to investigate the validity of this hypothesis in the context of a professional service business such as real estate brokerage services. If it turns out, that a potential franchisee for a real estate service business well needs to be experienced in the industry, the question rises, why he prefers to buy the particular know-how of a franchisor over running an independent business based on his own experience, expertise, know-how and skills, which would save him the franchise fee as a continuous cost of his business operations.

Following this introductory part, the core of this paper is divided into two parts, a theoretical and an empirical one.

The introductory part deals with the basic concept of franchising, i.e. defining what franchising, especially business format franchising, is as well as its development and scope. It also gives a bit of a general background about franchising’s role in the economy and the New Zealand franchising community.

The theoretical part explains why and how franchising works in general. It forms the background against which three real estate brokerage franchises will be examined and compared in the empirical part. Thus, comparison of the case studies means both with each other but also with the ‘general theory of franchising’, which allows to look for a ‘typical’ franchise structure in the industry.

Some findings are also related to the results of The Survey of Franchising in New Zealand 1998 (in the following referred to as ‘national survey’), which were collated from 90 franchise systems who responded to a questionnaire. Therefore, the qualitative trends of this study are presented against the background of the quantitative characteristics of New Zealand’s franchise sector.

Both theoretical and empirical part are focused on two aspects of franchising: the motivation for setting up a franchise system respectively buying into a franchise, and the franchisor-franchisee relationship. A major focus of this research paper is on how the franchisor copes with the franchise method of marketing in respect of the potential area of conflict between power and control in franchise systems. This relates to the character of the franchisor-franchisee relations.

It should be noted, that this study is not meant to allow any quantitative statements. It should be considered as a small and purely qualitative pre-study into a special area, which then provides the grounds for further research.

Neither is this study about evaluating certain franchise systems but examining franchising as a concept by looking at separate aspects of it in practice and relating this to the theoretical discussions.

As a means of maintaining the assured confidentiality and for the sake of brevity, the findings from the field study are presented in a summary form comparing results for separate aspects rather than presenting each system as a whole in a case study form.

A.2 Foundations and terminology

Since the technique of franchising did not derive from one moment of inventiveness by an imaginative individual but rather evolved out of a number of business transactions, methods, and practices which have been common and popularly known for many years, chapter A.2.1 will give a short description of the history of franchising.

In this sense the discourse of the introductory part moves from definition by example to review a variety of formal definitions which have been put forward by researchers and franchise associations. This is found to be helpful with the definition of franchising and in particular business format franchising when dissociating it from other legal and organisational structures.

The following chapter will also give a basic impression about the problems that led to the development of franchising and links up to the question of motivation which will always come up on the way to the definition for this is inextricably linked with the purpose of franchising.

A.2.1 Origins and development of franchising

Although many authors (see e.g. Felstead, 1993; Hall and Dixon, 1991; Mendelsohn, 1992) searching through history find early examples of trading practice in Europe or Japan which have a resemblance to franchising such as the guild system during the Middle Ages or the pub-tied house system that still exists since the eighteenth century, Mendelsohn (1992) claims, that these exclusive purchasing arrangements lack many of the features of a franchise. In contradiction to Hall and Dixon (1991), Mendelsohn (1992) concludes that

one must credit the United States’ business community with the ingenuity which has led to such a widespread use of the technique (Mendelsohn, 1992:19)

of franchising as it is described in this paper, i.e. franchising that is set up by private capital purely for commercial reasons.

Leaping ahead to chapter A.2.3 two typologies shall be introduced here already, in order to structure the development of franchising not merely in a chronological way.

Hall and Dixon (1991) dissociate two generations of franchising, while Mendelsohn (1992) distinguishes four categories of franchising that he derives from distinct historic phases and that involve all levels in the chain from manufacturer to consumer.

Hall and Dixon’s (1991) first generation comprises Mendelsohn’s first three categories of “traditional” franchising:

- manufacturer and wholesaler arrangements
- manufacturer and retailer arrangements and
- wholesaler and retailer arrangements.

The forth category, retailer-retailer arrangements, represents Hall and Dixon’s (1991) second generation of “business format franchising”.

The first major industry to employ the franchise method of distribution was the soft drinks bottling industry in the USA around the turn of the twentieth century.

Two factors limit the profitable radius of distribution and therefore require many localised bottling plants rather than one large centralised plant: firstly, the bulky product in terms of both its high water content and the bottles in which it is sold and secondly, the use of returnable bottles with a refundable deposit. However, setting up many plants requires a great deal of capital and therefore franchising is an attractive proposition as it reduces the level of finance that the manufacturer must invest in the distribution network. This manufacturer-wholesaler arrangement grants the right within a defined area to use the packaging and brand name as well as a concentrate of syrup from which the final product is made. The bottler’s functions include making up and bottling or canning the drink using the manufacturer’s syrups in accordance with the manufacturer’s requirements and to distribute the resulting products. This concept is still practiced by Coca-Cola, Pepsi Cola and Schweppes for instance.

The second major industry to employ the franchise method of distribution was the automobile industry. Among several other reasons, again, the reduction of the amount of capital needed to set up a distribution network was the decisive argument for franchised rather than company-owned dealerships. The franchised form of car dealership from the manufacturer-retailer category was fully established by 1910 and is still predominant in all countries where cars are freely traded.

The petrol industry as the third major industry to employ the franchise method of distribution, however, decided to franchise their company-owned petrol stations for another reason. During the petrol price wars of the 1930s the oil companies found their own outlets disadvantaged over the independent stations because central management was unable to flexibly set competitive prices in each and every area across the country.

As far as actual companies are concerned, the Singer Sewing Machine Company is often credited as being the first to use a franchise method of distribution, albeit briefly. In the time between 1850 and 1860, the company found franchising an effective means of accelerating the market penetration of an innovative product.

Mendelsohn’s (1992) third category, wholesaler-retailer arrangements, is not so clearly identifiable as being distinctly different from the previous categories.

There can really be no commercial reason to differentiate between them except that the franchisor is a wholesaler rather than a manufacturer (Mendelsohn, 1992:38).

The types of business operating in this relationship include hardware stores, pharmacies and supermarkets. When in the United States in the 1920s and 1930s the ever-increasing expansion of corporate chains began to squeeze out the independent retailers, franchised chains were formed, that allowed small retailers to enjoy the benefits of discounts obtained through bulk purchasing by the wholesaler plus the benefit of the image of a large chain, while at the same time retaining the flexibility of an independent. Another reason for the growth in popularity of franchised chains was the fact that the franchised chains were usually large enough to be able to satisfy the lease requirements of the all-important malls as opposed to independent retails who were regarded by property developers as being high risk tenants since they face a high probability of failure within the first few years of starting up.

In contrast to these franchise arrangements of the first generation, business format franchising involves the exploitation, not merely of goods identified by a trade mark or services identified by a service mark, i.e. license agreements and distributor- or dealerships, but the preparation of the “blueprint” of a successful way of carrying on a business in all its aspects.

In this more comprehensive sense, franchising becomes a method of marketing rather than just distribution.

Howard Johnson with his famous hotel chain in the USA is considered the first to employ business format franchising in the 1930s. The 1950s and 1960s eventually saw the birth of the modern giants of the franchising community such as McDonald’s, Budget Rent-a-Car, Holiday Inn, ServiceMaster LP and many others.

A.2.2 Definition and dissociation from agency and pyramid selling

As Mendelsohn (1992) identifies, among the basic features of these business transactions, methods and practices, that evolved over time as described above, are to be found the following.

- The first is that one person (the franchisor) is the owner of a trade mark, service mark, an idea, a secret process, a patent, or a specialised piece of equipment and the goodwill and know-how associated with it.
- Secondly, the franchisor grants a license to another person (the franchisee) permitting the exploitation of such an item or items.
- The third feature is the inclusion in the agreement granting the license of regulations and controls relating to the operation of the business in the conduct of which the franchisee exercises their rights.
- Finally, the payment by the franchisee of a royalty or some other consideration in the nature of continuing fees, such as payments for franchisor-produced supplies, in return for the rights obtained and franchisor services provided.

With business format franchising, in addition and fundamentally, there will always be a continuing relationship which should provide the franchisee with full support of a comprehensive range of expert knowledge in the operation of his business in the form of the ‘head office organisation’ of the franchisor.

A.2.2.1 Definition

There are numerous definitions suggested by literature, franchise associations and such that have been prepared for legal purposes. Most of them have been coined for a particular purpose and are more or less limited.¹

Apparently, all of them fail to mention all aspects of the franchise relationship. Gunasekara (1997) puts this in a more positive way when stating

In general terms, a franchise is the grant of a right of freedom. Beyond this, the difficulties of formulating an all-encompassing definition illustrate one of the great strengths of franchising, viz. its flexibility and adaptability (Gunasekara, 1997:599).

Thompson’s (1971) definition, for example, fails to mention the ongoing payments made by the franchisee to the franchisor. Likewise, the definition of the International Franchise Association (IFA), which also omits the franchisor’s obligation to introduce the franchisee to and initiate him in the business which he will be acquiring. The definition of the British Franchise Association (BFA), that has been adopted by the Franchise Association of Australia and New Zealand (FAANZ), omits, for instance, to expressively say, that the franchisee must own his business.²

The point of the franchisor’s involvement in setting up the franchisee’s business is also missing in the otherwise very concise and comprehensive definition of the European Franchise Federation (EFF), which shall be used for this paper and is quoted as follows:

Definition 1: Definition of franchising by the European Franchise Federation (EFF)

Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and the Individual Franchisees, whereby the Franchisor grants its Individual Franchisees the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the Individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and/or service mark, know-how,* business and technical methods, procedural system, and other industrial and/or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.

* ‘Know-how’ means a body of non patented practical information resulting from experience and testing by the Franchisor, which is secret, substantial and identified;

- ‘secret’ means that the know-how, as a body or in the precise configuration and assembly of its components, is not generally known or easily accessible; it is not limited in the narrow sense that each individual component of the know-how should be totally unknown or unobtainable outside the Franchisor’s business;
- ‘substantial’ means that the know-how includes information which is of importance for the sale of goods or the provision of services to end users, and in particular for the presentation of goods for sale, the processing of goods in connection with the provision of services, methods of dealing with customers, and administration and financial management; the know-how must be useful for the Franchisee by being capable, at the date of conclusion of the agreement, of improving the competitive position of the Franchisee, in particular by improving the Franchisee’s performance of helping it to enter a new market;
- ‘identified’ means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality; the description of the know-how can either be set out in the franchise agreement or in a separate document or recorded in any other appropriate form.

Taking the definition and the critique into account, one can in summary identify the following basic elements that qualify a business as a (business format) franchise:

“Franchisor’s trade name, and/or trade mark, and/or service mark, know-how, business and technical methods, procedural systems, and other industrial and/or intellectual property rights”

Hence, the Franchisor must first develop a successful business format (the system) which is identified with a brand name which may be a trade mark, service mark and/or trade name.

“frame work […] of a written franchise agreement”

The franchise relationship is based upon a contract, that is no different from any other formal contract. Strictly legally speaking in most countries it is not required to be in writing.

“Franchisor grants its Individual Franchisee the right […] to use the Franchisor’s trade name”

There must be a right of license granted by the Franchisor to the Franchisee to operate under the branding (trade mark, service mark, trade name) developed and owned by the franchisor and to benefit from the goodwill associated therewith.

“supported by continuing provision of commercial and technical assistance”

As Mendelsohn (1992) points out, not only must the franchisor maintain a continuing business relationship with the franchisee in the course of which it provides the franchisee with support in all aspects of the operation of the business after the business is opened, but he must also initiate and train the franchisee in all aspects of the system prior to the opening so that the franchisee is equipped to run the business effectively and successfully. Therefore, the franchisor must assist in the opening, too.

“in exchange for a direct or indirect financial consideration”

The franchisee will periodically pay the franchisor in one way or another for the rights which he acquires and for the continuing services with which he will be provided.

“obligation to conduct a business in accordance with the franchisor’s concept”

There must be obligations or duties that the franchisee has to confirm to, though the businesses are separate, and he has to provide and risk his own capital.

It is important to notice that the fact that the trade name, format and the procedure are owned by the franchisor and used by all franchisees in common with each other is what makes an element of control over the franchisees’ businesses essential. Whatever the degree of control which is exercised by the franchisor over any franchisee, it should not be looked at by that individual merely as a restriction on his ability to run his business as he thinks fit. The franchisee in reality cannot enjoy the freedom which a non-franchisee has. The franchisee in taking up a franchised business is acquiring a right to establish business using someone else’s name and system within the framework established by the franchisor. A franchisee must appreciate that the franchisor and all franchisees (including himself) are dependent upon each other for the success. In effect, the franchisor and all the franchisees are presenting a combined operation to the consumer. Therefore, a customer lost at one outlet can also be a customer lost to all the others – and vice versa.

“legally and financially separate and independent undertakings”

The franchisee must own his business. The fact, that the franchisee must make a substantial capital investment from his own resources is significant, because it goes a long way in providing him with the necessary motivation. A person who has the money which he has invested at stake, and who can see that he has the opportunity to control the destiny and growth of his equity by his diligent attention to the correct operation of the business, will put everything he can into the business and not the lesser interest of a manager. That is fundamentally what business format franchising is about.

A.2.2.2 Dissociation from agency

The legal independence of the franchisee from the franchisor separates him from an agent.

In most franchise agreements the parties usually go to great length to ensure that no agency relationship arises (Mendelsohn, 1992:39).

An agent is a person who has the authority to act on behalf of another person or company, the ‘principal’ (Hall and Dixon, 1991:13).

Fundamentally, an agent is not a buyer and seller of his principal’s products unlike a distributor or dealer, who is a completely independent businessman. There is no separation of principal from agent in the eyes of third parties dealing with them. Whatever the agent says or does is completely and effectively binding upon his principal.

The franchisee, however, is not the franchisor’s agent or partner and has no power to represent himself as the franchisor’s partner or as being empowered to bind the franchisor.

Therefore, franchise agreements should require the franchisee prominently to state that he is a franchisee or licensee of the franchisor so that the consumer or others who deal with the franchisee are in no doubt as to the position (Mendelsohn, 1992:39).

A.2.2.3 Dissociation from pyramid selling

Franchising has also frequently been confused with pyramid selling, known in the American literature as direct selling organisations (Felstead, 1993:49). Hall and Dixon (1991) describe pyramid selling as

a highly dubious system involving the sale of the right to distribute a given product in return for an initial fee. However, the main objective of the system is not to achieve a distribution network for the product, but simply to recruit as many distributors as possible, thereby collecting large revenues in the form of initial fees. Existing distributors are given what appear to be very attractive financial incentives (often a percentage of a recruit’s sales) to recruit or ‘sponsor’ further distributors. Of course, the main beneficiaries of the scheme are the fraudulent originators (Hall and Dixon, 1991:46).

Felstead (1993) points out three essential differences between business format franchising and pyramid or multi-level selling that ground on the sponsorship structure.

- Firstly, in business format franchising, franchisees cannot recruit others into the organisation, although master franchisees can recruit a second tier of franchisees.
- Secondly, in business format franchising, no franchisee can simply buy their way into the organisation, but instead must go through an often rigorous vetting procedure administered by the franchisor.
- Thirdly, the business format franchisee is given continuous ongoing support by the franchisor, whereas in the case of multi-level selling the relationship between the manufacturer/supplier and distributor and hence downline to others in the chain is essentially one of supplier and wholesaler.

This study is confined to why and how private capital uses franchising as formally defined above. However, this definition still embraces a wide variety of franchising forms. Establishing a two-fold typology helps to reveal some of the most important differences and the uneven pattern of growth within franchising itself, which will be further discussed in chapter A.3.

A.2.3 Typologies and the difference between business format franchises and product or trade mark franchises

In addition to the two classifications above, a third one can be found with Chan (1997). He distinguishes three categories and their referring economy sectors: manufacturing franchise (manufacturing), product or trade mark franchise (retailing and distribution) and business format franchise (service).

Similarly, but simplifying, Felstead (1993) differentiates between product and or trade mark franchising on the one hand and business format franchising on the other hand.

As Table 1 shows, these four typologies do not cause a dilemma for they are comparable and very alike.

Table 1: Typologies of private capital franchising for only commercial reasons

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While Mendelsohn’s (1992) classification focuses on the contractual partners, Chan (1997) and Felstead (1993) organise franchises with respect to what is franchised. Hall and Dixon’s (1991) emphasis is on the historical development implying an evolutionary process towards a higher form of franchising. Hence Felstead’s (1992) and Hall and Dixon’s (1991) typologies are in its core similar, the difference being rather a matter of terminology.

With product/trade mark franchise the franchisor may provide some advertising, management assistance and training, but the franchisee generally conducts business as an independent distributor acquiring the identity of the franchisor through the product/trade mark. This form of franchising emphasises consistency of product. Chan (1997) mentions the Super Liquor chain as a New Zealand example. Basically, the same applies to the manufacturing franchise, where the only difference is, that the franchisee not only distributes but also in some way manufactures the product. The business format franchise encompasses most business operations in addition to the product or service itself and focuses on consistency of operations. Therefore, the franchisee must comply with a set of precisely laid-down procedures or a “format”.

Hall and Dixon’s (1991) typology of simply two generations as well as Felstead’s two-fold typology show clearly the significance in scope between business format franchises and the other types. The establishment of a two-fold typology of franchising serves to provide a barometer with which to track the uneven development of franchising in recent years, as later discussed in chapter A.3.

As Felstead (1993) advocates, the distinction between product or trade mark franchising and business format franchising also serves to capture some of the newer and more novel elements of how franchising is practiced today. Business format franchising is broadly different from its product or trade mark counterpart in at least four respects:

- Firstly, business format franchising is growing at a faster rate, offering more opportunities for aspiring entrepreneurs seeking to ‘be their own boss’.
- Secondly, the concentration among product or trade mark franchise networks is raising the capital required to become a franchisee, sometimes considerably.
- Thirdly, Felstead (1993) claims, that the number of potential franchisees may be on the increase. This is based on evidence from a poll conducted in the UK, which

found that 40 per cent of young people hoped to run their own company as opposed to 35 per cent content to work for others. Where these hopefuls lack a specific business idea to put into practice, business format franchisors can provide a complete, tried and tested business package. The franchise relates to the entire business, not just the product. A step-by-step approach to how to run the entire business is provided and the franchise is geared towards helping aspiring entrepreneurs in start-up situations. Little, if any, experience is called for. In general, experience is more likely to be sought by product or trade mark franchisors such as car manufacturers and soft drink syrup (concentrate) producers, since they are more concerned with the distribution of the products they made than with the supply of ‘off-the-peg’ businesses (Felstead, 1993:57)

- Lastly, a franchise based on the intangible assets of a ready-made business is more likely to be protective of its ‘know-how’ than one based on the supply of a branded product. For example, car dealership as well as soft drink bottling agreements do not impose restrictions on franchisees once they leave the network, whereas business format franchise agreements invariably do (Felstead, 1993).

The focus of this paper is on business format franchising or the second generation of franchising. Hall and Dixon (1991) differentiate business format franchises into three broad categories mainly distinguished by the level of investment from the franchisee.

- Job franchises are called ‘job’ franchises due to the fact, that the franchisee in effect is buying himself a job often in the form of a one-man operation such as domestic maintenance services or mobile vehicle servicing for instance. Because these franchises can usually be operated from the franchisee’s home, they do not require business premises and require only a fairly minimal financial investment.
- Business franchises require a much larger investment in stocks, equipment and business premises. The scale of operations is much larger and therefore the franchisee usually must employ additional staff. Hall and Dixon (1991) name business services such as accounting as an example for this category.
- With investment franchises the franchisee is primarily concerned with earning a return on his capital investment rather than with providing himself with employment. This type of franchises like, for example, a franchised hotel or in many cases a fast-food outlet, requires a large amount of capital. However, there can be no precise dividing line between an investment and a business franchise.

Since for this paper real estate brokerage as a professional service is considered a business franchise, in the following the term ‘business franchise’ may take the place of ‘business format franchise’ in some cases for the sake of brevity.

A.3 The role of franchising in the economy and the franchise community in New Zealand

Franchising – often misunderstood as an industry – is a method of marketing goods and services which has proved remarkably successful in something like 80 countries worldwide. Once the concept is understood and adopted by the business community in any country the rate of growth which is then achieved is quite startling (Mendelsohn, 1992:1).

The growth of franchising internationally has spread throughout all continents and regional zones with varying degrees of activities. The different levels of growth reflect business climate, availability of spending power, legal and political problems (Mendelsohn, 1992).

The U.S. House of Representatives Committee on Small Business has described franchising as “one of the greatest inventions of western capitalism.” The European Committee recognises the importance of franchising in the following terms:

Franchising agreements […] normally improve the distribution of goods and/or the provision of services as they give franchisors the possibility of establishing a uniform network with limited investment, which may assist the entry of new competitors on the market, particularly in the case of small and medium-sized undertakings, thus increasing interbrand competition. They also allow independent traders to set up outlets more rapidly and with higher chance of success than if they had to do so without the franchisor’s experience and assistance. They have therefore the possibilities of competing more efficiently with large distribution undertakings.

As a way of doing business, franchising has gained importance to the point where some have compared its significance to that of the limited liability company (Gunasekara, 1997).

A.3.1 Franchising statistics

In the USA franchising accounts for over one third of all retail sales and it is anticipated that one half of retail sales turnover will be through franchised systems. In Australia around 20 percent of retail sales are through franchise systems and the pattern of growth indicates that, as in the US, it will become the dominating force in the distribution of goods and services.

In New Zealand franchising statistics are rare. However, according to Germann (1997) the total turnover of the franchising sector in New Zealand was $53.4 billion with $45.6 billion generated from franchise operated outlets in 1993-1994. The Survey of Franchising in New Zealand 1998 suggests that the growth rate is still close to a remarkably high rate of 25%. Germann (1997) also claims that more than 5,000 New Zealanders have gone into franchise businesses which employ more than 25,000 people.

Hall and Dixon (1991) also stress the contributions of franchising to employment. They find particularly significant that many franchisees state that they would never have entered self-employment had it not been for the franchise concept. This indicates franchising’s suitability to provide an “excellent route into self-employment.”

A.3.2 Uneven pattern of development in product/trade mark franchising and business format franchising

As suggested by Felstead (1993), a differentiated look employing a two-fold typology reveals an uneven pattern of development. Looking at the US franchise sector, being the best established in the world, he found that while the sales generated by both product or trade mark and business format franchisors increased in real terms, the rate of increase was more rapid in the case of the latter. Consequently, business format franchising made up one-fifth of the total sales generated in 1972 whereas almost 20 years later this proportion had risen to about a third. The shift in terms of establishment was more dramatic. Business format franchising’s proportion rose from 42 percent in 1972 to 65 percent in 1991. While the number of outlets set up by business format franchisors leapt, the number of establishments operated by product/trade mark franchisors fell. For example, the soft drink bottlers halved from 1984 to 1990 as the two major players, Coca-Cola Company and PepsiCo Incorporated, began to rationalise their US networks. Similar results were found in European franchise statistics.

A.3.3 Franchising industries

As shown by Chan (1997), business format franchise in New Zealand has found its way into a variety of industries, such as for instance restaurants and cafes (e.g. Pizza Hut, BB’s Café), fashion (e.g. Just Jeans), accessories (Michael Hill Jewellers), sports (e.g. Stirling Sports), entertainment (e.g. Video Ezy) as well as home services (e.g. VIP, Jim Mowing and Green Acres). Teutenberg (1994) believes that the entry of corporates such as DB, Lian Nathan, Camalco, Carter Holf Harvey and New Zealand Milk Corporation into the franchising ring, reflects its acceptance as a credible business concept.

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¹ The word „franchise“ is derived from the French verb “franchir” or “affranchir” and means “to free”, which in this context expresses freedom from servitude of restraint (Hall and Dixon, 1991).

In strict legal terms “franchise” means a grant of rights from the crown or a governmental authority. In the UK, for example, to this day there exist ancient franchises to hold fairs, markets and to provide ferries, bridges and fords across rivers and streams (Mendelsohn, 1992).

² The definitions of franchising by the IFA and BFA are enclosed in the appendix.