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How did franchising start

Despite its association with big-name American brands, the franchise model is not quite as recent a phenomenon as many might think.

The term itself has its extractions in an old French word for ‘liberty’ – the freedom or ability to do something.

Dating back to feudalistic times, it referred to peasants being given certain rights by the local lord  for example, to run a market, operate a ferry, or draw water.

In comeback, the landowner would be paid a fee, which, in theory at least, he would use to protect the area from marauders. Later, of course, local councils or mayors would use the same system to fund local improvements.

This scenario also gave rise of the other significant meanings of the term – the electoral franchise – as, until the 20th century, only those with sufficient landholdings could vote in elections.

But it is obvious why this term came to be used in business: a larger corporation grants rights to people to operate certain services in return for a fee or partake of the profit.

Britain has perhaps one of the oldest examples of franchising: tied pubs. Partly a result of increased legislation, it became very difficult for licensees to afford to run a pub single-handedly.

Selling rights

Brewers realised that this could be the end for their trade unless they supported their outlets. So they developed a system whereby, in return for fiscal aid, pubs agreed just to sell the products of the brewery in question. Many British pubs are still ‘tied houses’ to this day.

Undeniably, however, the root example of modern franchising was in the US, when Isaac Singer, founder of the sewing machine company, wanted to find a wider distribution for the improved model he had developed.

He could not raise the monetary resource to increase output of the machine without greater sales. So he exclusive selling rights for his products in defined areas, raising the money to expand his factories so that his machines could be sold right across the US.

Those franchisees (although the term was not used) were also given the right to train people in how to use the machines, which were reasonably complicated.

The use of a contract is the reason why the origin of franchising is so often traced back to Singer.

The model was used in a limited way over the next hundred years or so – with General Motors, for example, granting exclusive rights to dealerships across the US, a model that remains the basis of car retailing nowadays?.

The early decades of this century saw a few more franchises set up, such as A&W Root Beer, a US restaurant brand, followed later by Howard Johnson, which would form the model for years to come.

But the real boom in franchising took place immediately after the Second World War, as the population and economy began to grow rapidly.

Advertising, branding and other aspects of consumer culture mushroomed in the fifties, and supposed business format franchising – providing a whole turnkey ‘package‘of doing business – accompanied this growth.

Soft drink manufacturers – including Coca-Cola – were among the first to get board the bandwagon. In a country as large as the US, transporting soft fizzy drinks was a problem. The high water content meant that costs were high compared to sales prices, especially if the bottles were transported from a central plant.

Given the mystique associated with the exact formula used, the companies in question did not want to simply sell the recipe. Instead, they opted to produce concentrated syrup in-house, while allowing franchisees to dilute it with carbonated water and sell it under the relevant brand name.

Perhaps the most illustrious franchise during this period is McDonald’s. Now, ostensibly, one of the most recognised brands in the world, the company began with a small burger stand in San Bernardino, California. It was discovered by a milkshake mixer salesman called Ray Kroc in 1954, who can be credited with developing the franchising system that is used so widely today.

The burger stand was buying a lot of Kroc’s mixers, and after some investigation, he discovered that it had developed a system for delivering burgers and fries very quickly – without any drop in quality.

Impressed, he became the company’s licensing agent, and starting selling the concept in the Chicago area. In 1961, he bought the McDonald brothers’ interest and became the senior Chief Executive. Today, of course, the success of this system is obvious – there are over 30,000 McDonalds’ around the world.

 

Kentucky Fried Chicken, perhaps the second most famous fast food brand internationally world after McDonalds, has similar origins. Harlin Sanders – the ‘colonel’ – had founded a successful chicken restaurant in Kentucky, which had expanded rapidly, even adding a motel to its original format. But a new highway threatened to take away passing trade, which accounted for most of his business.

He took the momentous decision of selling all his properties. He then took to the road in the US selling his recipe and format to restaurant owners, with each agreeing to pay him five cents per piece sold. It was so successful that by 1964 there were over 600 outlets across North America. Sanders sold the entire operation for $2m in 1964.

IFA formed

Legislation was enacted throughout much of the western world to outlaw such schemes, but it had the effect of diluting interest in perfectly valid franchising offers, which were tarred with the same brush by the public.

This period saw the formation of the Franchise Association, an attempt by the industry to divorce itself from pyramid selling and raise business standards. The FA has had great success since, having been supported by banks, which have set up dedicated franchise departments to help franchisees with finance.

The eighties, with its pro-business, pro-entrepreneur spirit, saw a vast number of new franchises enter the market, many of them very famous and successful to this day – such as a Subway franchise, Domino’s Pizza, Burger King, Swinton Insurance, Tie Rack and Hertz. Thanks partly to the efforts of the FA, the industry lost its poor image.

Franchising was no longer limited to just food franchises, cars and hotels. It had expanded to cover almost every imaginable business sphere, from hairdressing and printing to video renting and roof thatching, with the total economic value of the sector estimated at £10.3bn.

In the US, as might be expected, it is even bigger. According to the President of the IFA, Don DeBolt, over a half of all retail sales across the Atlantic occur in franchised outlets.

According to a PricewaterhouseCoopers study in 2001, franchises employed almost 10m people – more than the construction and financial services industries.

Related articles

• What is Due Diligence when Buying a Franchise? (dohertyassoc.com)
• Information About Franchise Startup Costs (thinkup.waldenu.edu)

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