Franchise

The word franchise comes from the Norman French word "franchise," which is derived from the French word "frank" free man, free to work something. The English word "franchise" was originally used to describe liberation from any prohibition, permission, or privilege by which a company is allowed to perform or to choose not to perform a certain action for which it would not normally have rights. It is widely believed that Albert Singer, founder of the Singer sewing machine, was the initiator of franchising. It is true that he was the first to use franchising as a business expansion method, but the truth is that franchising existed long before. Back in the middles ages, local leaders would designate privileges to citizens. Some of these rights included conducting fairs, running markets, and operating ferries. The franchising idea was then carried forward to the practice of Kings yielding rights to conduct activities such as beer brewing and road building. In addition, the expansion of the church is known as a form of franchising (Roquet, 2005).

The Evolution of Franchising

During the 1840's, several German ale brewers granted rights to particular taverns to market their ale. This was the beginning of the type of franchising that has become familiar to most of us in the twentieth century (Michael, 2008). Franchising then traveled from European brewers into the United States. Before franchising there was not much in the way of chain operations, which would eventually form the basis of franchising in the U.S.

Albert Singer came on the scene in 1851 with the Singer Sewing Machine Company. Singer made use of franchising to distribute his machines over a widespread geographical area. He is the first actual name to be recognized as an early franchisor. Additionally, Singer was the first to prepare franchise contracts. In the late 1800's and early 1900's many other forms of franchising took place. Some examples included monopolized franchises for several utilities as well as street car companies. Then as oil refineries and auto manufacturers found that they could sell their products over a larger geographical area, they began to franchise.

Transportation and increasingly mobile Americans were the basis for the establishment of retail and restaurant chains/franchises. The modern leading form of franchising, known as business format franchising, became popular post World War II. As time went on, a large number of establishments began to franchise. Some of the well-known franchises included Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950, Burger King in 1954, and McDonald's in 1955.

Franchising Definition

Legally speaking, franchising is primarily defined as a legal business agreement between two partners, the franchisor and the franchisee. The franchisor, who has previously established a market-tested business package of products or services, enters into a continuing contractual relationship with a number of franchisees, to market a product or service using the trademark or trade name of another business and must operate their businesses according to the franchisor's specified format (Curran & Stanworth, 1983).

The franchisor provides a proven method of operation, support, and advice on the setting up of the new franchisees, and he guarantees continuing support to the franchisee. In return, the franchisee pays a lump-sum entrant fee and other charges for regular services, e.g. royalty on sales, advertising fees, or marketing levy (Fulop & Forward, 1997).

Other writers regard franchising as a means of new entry that can reduce the risk of downside loss for the franchise (Hisrich, Peters & Shepherd, 2005). They see franchising as an alternative means by which an entrepreneur may expand his business by having others pay for the use of the name, process, product, services and trademark. It can be used as a growth mechanism by the organization (i.e. the franchisor). It involves sharing an entrepreneurial vision and working together to make it a reality.

The link of franchising to entrepreneurship (Altinay & Roper, 2005, Maritz & Nieman, 2005) evolves franchising toward an operant and dynamic approach (Vargo & Lusch, 2004). This dynamic approach is further evident in the growth of multiple-unit franchising, whereby franchisees in the system own two or more franchised outlets or units (Grunhagen & Mittelstaedt, 2001).

Franchising is a method of marketing goods and services, which knows almost no boundaries (Mendelsohn, 2004). It is seen as an entrepreneurial option towards creating and developing ventures (Maritz & Nieman, 2005). Michael, 2003, described franchising as a way for the entrepreneurs in the service industries to assemble resources in order to rapidly create large chains and gain first mover advantage. Mendelssohn, 2004, said that a franchise relationship will not be successful unless there is cooperation between both parties. He claimed that the franchise cannot succeed without certain elements including: successful franchisees and franchisors devoting resources to enhance relationships. He stated that the franchisor's duty is to establish and sustain a viable business, and that the franchisor must promote the basic principles on which franchising is based.

The link to entrepreneurship is that franchising is a capital efficient growth model. A review of multi-unit franchising identifies this dynamic entrepreneurial activity as a catalyst in the growth of international franchising (Altinay, 2004).

Furthermore, the entrepreneurial activity within the franchise system (Lindsay & McStay, 2004) is correlated to the application of specialized skills and knowledge. For certain businesses, such as restaurant chains, franchising may offer an appropriate strategy and governance structure in that it offers more flexibility and local adaptation than company-owned stores (Yin & Zajac, 2004).

The literature has developed two primary arguments for the existence of a franchised business, resource scarcity and agency theory. Resource scarcity theory considers three elements that franchisors often lack at the outset: (1) financial capital, (2) human capital, and (3) market knowledge (Oxenfeldt & Kelly 1969). Encountering difficulties in raising capital and developing managerial talent, during the early stages of a franchise system's existence, franchisors recruit franchisees that will invest the money needed and undertake a portion of the subsequent risk. The constraints of money, employee labor and management are reduced considerably for franchisors if they can find franchisees that are responsible for building and staffing units so that the franchisors can focus on the development of the system and the brand (Carney & Gedajlovic, 1991, Caves & Murphy, 1976, Oxenfeldt & Kelly, 1969, Shane, 1996).

"Ownership redirection" suggests that, while franchising often appears as the necessary means of expansion during the early stages of the franchise life cycle due to the earlier described capital constraints, at later life cycle stages the franchisor develops an inherent interest in buying back franchised units and reverting them to company-owned units, since diversified investors in the system would presumably require a lesser return than relatively undiversified franchise owners (Brown, 1998, Dant, Paswan & Kaufmann, 1996, Kaufmann & Dant, 1996, Lafontaine, 1992, Lafontaine & Kaufmann, 1994, Rubin, 1978). Lafontaine & Shaw, 2005, recently showed that franchisors over time appear to develop a target portfolio, i.e., a specific balanced mix of franchised and corporate units.

Moreover, the agency theory (Eisenhardt, 1989, Jensen & Meckling, 1976) provides justification for franchising from the perspective that franchisees are less apt to shirk their responsibility because they have a stake in the business. Their incentives are directly linked to their performance, which is typically not the case with managers of businesses. When the business is owned by a franchisee, the owner's livelihood is directly linked to the performance of the unit, so that the franchisor's costly need for monitoring individual units is greatly reduced (Fama & Jensen, 1983, Norton, 1988, Rubin, 1978).

Recently, agency and resource scarcity have been integrated by (Giovanni, Combs & Justis, 2006), indicating that a paradigm shift from the resource scarcity to the agency view might occur over time. While resource constraint concerns prevail during the early stages of the franchise system's life cycle, after an initial expansion, monitoring and the related costs appear to move into the franchisor's focus and agency motives start guiding the continued use of franchising, rather than reverting units back to the franchisor.

From the franchisee's perspective, the benefits of franchising in general lie in the proven concept and system. The availability of franchisor support services as a strong motivation for individuals to be attracted to franchising as a business concept has been noted elsewhere (Dant, 1995, Dant & Peterson, 1990).

Aspiring franchisees appear to be attracted to the perceived security that they associate with the franchisor backing them while as well being dependent on their success with the overall system. Clearly, as a franchise system expands, and an individual franchisee's importance as part of such a system begins to be reduced, at the outset simply by the number of new franchisee entrants, services provided by the franchisor could be expected to take on greater importance in connecting the franchisee with the franchisor.

Forms of Franchising

The term 'franchising' has different meanings to different people. Price) 1997, p.3) has listed several business relationships that have been labeled as 'franchising' by various authors. Price argues that in actual fact franchising does not exist in so many forms, but that the term 'franchising' is often applied incorrectly to express what is mostly described as a licensing agreement. The various applications of the term 'franchising' require a clear categorization of franchising forms. Kaufmann and Eroglu (1998) distinguish two forms of franchising:

  1. Product Distribution Franchising
  2. In this form, the 'franchisor' grants the 'franchisee' the right to sell specific goods by using the name of the franchisor. In the U.S. it is often referred to as 'first generation franchising' while in other countries it is not called franchising because it is actually a form of Licensing. The most important characteristics of this form are:

    • The products are licensed or 'franchised'.
    • The 'franchisees' operate by using their own names and do not really form part of a chain with a uniform identity.
    • The 'franchisees' do not follow certain standardized methods and ways of presentation toward customers. The cooperation only entails the distribution of goods for which sometimes an exclusive territory is established.
    • The 'franchisees' are often existing retailers who adapt or renew their assortments by means of these products.
    • The franchisees do not pay royalties or fees.

    In a product distribution franchise, the franchisee typically sells products that are manufactured by their franchisor. The industries where product distribution franchising is most often found are soft drinks, automobiles and trucks, mobile homes, automobile accessories, and gasoline. For example, Coca-Cola, Goodyear Tires, Ford Motor Company, and John Deere distributors are all product distribution franchises.

    Product distribution franchises look rather like the so-called supplier dealer relationships and they are. The difference between a product distribution franchise and a supplier-dealer is in the degree of the relationship. In a product distribution franchise, the franchisee may handle the franchisor's products on an exclusive or semi-exclusive basis, as opposed to a supplier-dealer who may handle several products even competing ones. With the growth in auto dealerships that sell multiple brands, this distinction is getting just a bit clouded. The franchisee in a product distribution franchise, though, is closely associated with the company's brand name and receives more services from its franchisor than a dealer would from his/her supplier.

  3. Business Format Franchising
  4. In business format franchising, the franchisor offers a complete 'business format' to the franchisees. Therefore, this format reflects a certain identity toward customers. The use of the term 'franchising' Worldwide is restricted to this type of cooperation. In the U.S, it is called 'second generation franchising'. Some of the earliest business format franchise systems in the U.S are: Holiday Inn, Mc Donald's and Kentucky Fried Chicken, which started franchising in the early and mid-fifties.

    According to Kaufmann and Eroglu (1998) a 'business format' consists of four elements:

    • Product/Service : they are the unique differentiating features of the format that define a competitive niche in the market. These are, for example, a unique menu or the quick preparation of food.
    • Benefit Communicators: these are the elements of the business format that make intangible benefits more tangible. For example, a mint on the pillow in a hotel could stand for elegance or prestige.
    • System Identifiers: they are the visual and auditory elements that link a specific retail outlet to a system or chain. For example, the trade name or brand name, color schemes, architectural features, characters and uniforms etc.
    • Format Facilitators: these are the policies and procedures that form the foundation of both the format's efficient functioning within the individual franchised outlets and the franchise system as a whole. At store level, examples are specification of equipment, layout and design, and at system level, matters such as financial reporting requirements, royalty payment procedures, and data collection.

    Business format franchising entails relatively closer relationships than the other two forms of franchising identified previously. It has the following characteristics:

    1. One firm, the franchisor, owns a business format -including a trademark or trade name- as well as know-how, and allows another firm, the franchisee, to use these. The franchisee, who often is a small business owner, is granted the exclusive right to use the business format and know-how of the franchisor.
    2. Both firms in the relationship are legally-independent firms. The franchisee retains the rights to the establishment's earnings (Rubin, 1978).
    3. The relationship is of a contractual nature.
    4. The franchisee pays a fee and/or royalties for the right to use the franchisor's business format and know-how.
    5. The franchisor supervises to a certain degree the use of the business format by the franchisee to preserve the uniformity in both of the presentation toward the customers and the quality of the provided goods and/or services (Evelien Coornen, 2005).
    6. The relationship is embedded in a 'franchise system' that consists of the franchisor and its franchised and possible company-owned outlets (Elango & Fried, 1997).

According to Evelien Coornen (2005) the intensity of the cooperation between franchise partners can vary from hard and/or full to soft and/or free. In the first form, cooperation is established by a large number of hard rules and entails almost all full fields of business. In the second form, the cooperation is subjected to fewer soft rules and the franchisees have more freedom in running their businesses. In other words, the looser forms merely focus on joint purchasing. In tighter forms, partners share as well systems of administration or marketing. In the tightest forms, the partners cooperate in various fields, such as assortment, promotion activities, store presentation, purchasing, automation and training.

Stokes (1998) argued that the word franchising is more commonly used to describe business format franchising. This, he said, is seen as a more in-depth relationship between franchisor and franchisee than the simple product distribution or trademark licensing agreement. Business format franchises, says Beshel (2001), do not only use a franchisor's product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals.

Business format franchising represents a complete package that allows the franchisee to use the format proven by the franchisor, whilst retaining independence as a business. There is an agreement between the two parties that sets out how the business will be run and the obligations of both parties. It is an organizational form based on a legal agreement between a parent organization (the franchisor) and a local outlet (the franchisee), to sell a product or service using the brand name developed and owned by the franchisor. The franchisor typically sells the franchisee this right to use this intellectual property in return for a lump sum of payment and an annual royalty fee based on sales for a specified period of time (Miller & Grossman, 1990).

In addition, the franchisee usually agrees to adhere to the franchisor's requirements for product mix, operating procedures and site selection (Robin, 1978).

Business format franchising is a popular example of a hybrid organizational format that incorporates elements of both markets and hierarchies (Williamson, 1991). It is a hybrid alternative since the franchisor retains both a degree of ownership and authority over the use of the trade name, operating procedures and the location of outlets and contracts with independent entrepreneurs to operate the units (Child, 1987).

Business format franchising provides a useful laboratory for examining the effect of hybrid organizational forms of growth rate. Franchisors exploit the same retail markets using the same business concepts through both franchised and company owned outlets.

Consequently, by looking at franchisors, researchers can examine the effects of organizational format on the rate of the growth of firms holding constant, firm and markets differences (Shane, 1996).

Franchise Arrangements

Because so many franchisors, industries and range of investments are possible, there are different types of franchise arrangements available to a business owner. Two types of franchising arrangements are as follows:

  • single-unit (direct-unit) franchise
  • Multiple-unit franchise
A Single-Unit (Direct-Unit) Franchise

A single-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise unit, as shown in figure (2.3). This is the simplest and most common type of franchise. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper. This is then considered a multiple, single-unit relationship.

In this type of franchise, the franchisee would only be responsible for running one unit. However he or she would be extremely involved with all of the daily operations of the business. The franchisee typically has a particular territory that is covered by the unit. Usually the franchisor assigns a number of miles to be covered by each unit in operation. With a single unit franchise, the investment costs are less than opening up multiple units (Daszkowski, 2009).

Multiple Unit Franchise Types and Characteristics

Multiple unit franchising as shown in figure (2.4) is an integral part of modem franchising as confirmed by a research conducted in the United States showing that more than 83 percent of new restaurants in one fast food chain were opened by existing franchisees (Kaufmann, 1995). A survey of fast-food franchises in the United States found that franchisees held nearly 5 units each on average (Baucus, Baucus & Human, 1996). In addition, more than half of the restaurant franchises in the United States are said to use multiple unit franchising arrangements currently (DeCeglie, 1993).

The attractiveness of this expansionary strategy lies in its ability to facilitate the rapid growth of systems (Kaufmann & Dant, 1996) allowing market penetration and competitive pre-emption (Kaufmann & Kim, 1995, Lillis, Narayana & Gilman, 1976). However, multiple units franchising is not a homogenous organizational classification. In fact, many distinct types of structural arrangements are encompassed within the umbrella term of multiple units franchising.

Multiple unit arrangements are distinguished by their influence upon the extent of direct franchisor control, rate of system expansion and management of system operations (Kaufmann, 1992, Kaufmann & Kim, 1995, Roh & Andrew, 1997). Master franchising and area representation agreements are indirect forms in which the franchisor abrogates some responsibilities to the multiple unit franchisees (Mendelsohn, 1991).

Alternatively, sequential and area development agreements are direct forms of multiple unit expansion in which franchisees are permitted to open, own and manage their own subsystem of franchised units. Franchising systems may employ more than one of these franchising forms. For example, the Pizza Hut fast food chain has endorsed the use of area development agreements, sequential expansion by incumbent franchisees, company-owned unit expansion and single unit proprietorships (Kaufmann, 1988). Although franchisors and franchisees use a variety of multiple unit strategies, direct multiple unit franchising forms are preferred both domestically and in the United States (Frazer & Weaven, 2002, Robicheaux, Kaufmann & Dant, 1994).

Master Franchising or Sub-Franchising

Pioneered in the United States by Century 21 Real Estate in the early 1970s, as shown in figure (2.5), it is characterized by the franchisor granting permission for a franchisee to recruit additional franchisees and provide ongoing support within a given geographic area in return for a share of the royalty payments received within that area (Justis & Judd, 1986, Mendelsohn, 1999, Roh & Andrew, 1997). Master franchising is used in a wide variety of business formats. Master franchisees or sub-franchisors act as independent selling organizations that sell franchises, sign contracts and offer support to franchisees within their designated regions. The sub-franchisor has the immediate right to grant franchises to multiple franchisees and sign a franchise agreement similar to area development agreements, with the parent franchisor setting out specific conditions in regard to sales and franchisee support obligations (Kaufmann, 1992). This represents a shifting of vertical (channel) management responsibility, that makes the original franchisor more dependent on multiple unit operation managers and consequently may reduce operational performance (Kaufmann, 1992, Raffio, 1986). Sub-franchising arrangements appear in a variety of industries including the fast food industry, retail outlets and other service industries.

  • A Sub-Franchise Agreement
  • It is a written contract detailing the responsibilities of master franchisees and sub-franchisees. It usually has a set term and (the franchisee) has the option to renew. Typically, the master franchisee receives the initial franchise fees and ongoing royalties payable under the terms of the sub franchising agreement. Frequently these agreements require master franchisees to own and operate a minimum number of units, which often sees the sub-franchisor incorporating a separate company to operate these units separately from the administrative portion of their business.

    Advantages:
    • Permits a more rapid development of the franchise system than would single unit sales.
    • Provides the franchisor with more control over the pace of development because all sales activity is conducted by the franchisor.
    • Encourages more coordinated development of natural markets by limiting the number of participants in each market.
    • Benefits the franchisor financially.
    • Helps in generating new ideas and improvements that provide substantial benefit to the entire franchise system.
    Disadvantages:
    • Master franchisees have more power over the franchisor, because they control a proportionally larger number of units in the system and are often as financially strong as the franchisor.
    • Under some circumstances, area development may actually hinder rapid development, by "freezing" development in large or significant territories.
    • Franchisors must customarily share fees with Master franchisees, and therefore lose revenue and income.
    • Franchisors lose inevitably considerable control through making use of the Master franchise arrangement.
  • Area Representation Arrangements
  • They are other indirect forms of multiple unit-franchising that allow area representatives as shown in figure(2.6), to solicit prospective franchisees and to provide services to existing franchisees within an assigned territory (Lowell, 1991). Unlike master franchising arrangements, the area representative has no legal right to contract with franchisees. All franchising agreements are accessed by the franchisor and franchisee. The franchisor maintains a contractual responsibility to provide ongoing support to the franchisee although franchisors may delegate some of these obligations, for example training and inspections, to area representatives. Area representatives often have to pay a fee to gain the right to solicit prospective franchisees within a given territory, and in return the franchisor gives a percentage of the initial franchise fee and a portion of the royalties.

    Advantages:
    • Franchisor retains the ultimate responsibility to service the franchisees (as required by the franchise agreement) and thus keeps control and monitor.
    • Increased knowledge of local conditions.
    • Added knowledge of local competition and ability to tailor programs to meet such competition.
    Disadvantages:

    The area representation has only one disadvantage where the franchisor loses part of the profits due to the effort exerted in the monitoring and support provided to franchisees.

    There are numerous advantages for those entrepreneurs who choose franchising as a growth option. Murray (2003, p.15), has emphasized faster growth, the development of better managerial skills, and benefits that accrue from local knowledge. Other advantages include minimizing business and financial risks to the franchisor, fewer employees in the field and less administration in the main office(s), and the faster establishment of a national image for the company because of franchise-system growth. As a result, the challenges associated with competition are diminished.

    Parivodic (2003, p. 54) states that the main disadvantage for a franchisor is the potential loss of the control over the franchise network. Murray (2003, p. 17) states further specific disadvantages to the franchisor: the dangers of franchisees not adhering to the franchisor's standards, the potential for a less profitable business, potential conflicts with franchisees, and lack of trust between the parties. Since the employees have the most important role in a given franchise's potential for success, another disadvantage is related to the fact that the franchisor cannot influence the franchisee's hiring policies, though some franchisors do mandate or try to mandate training and adherence to certain work rules throughout the franchise network.

From the Franchisee Perspective

The franchise relationship would not develop if a potential franchisee did not see advantages to conducting business using a field-tested business recipe and under the known name of the franchisor. Some of the advantages for accessing the franchise network from the franchisee's point of view are overcoming shortfalls of knowledge and experience compensated for by training provided by the franchisor, using a successful and established business name and reputation, retaining a certain level of independence as an entrepreneur, and realizing the group benefits of economies of scale (Spasic, 2006, p. 28).

Other authors note additional advantages: lower risk of failure, standardization of product and quality, help in choosing location(s) and other logistical activities, benefits from the franchisor's research and marketing program(s), and some protection from competition.

Thomas and Seid (2000, p. 39) have observed significant disadvantages for franchisees: lowered independence, greater addiction to franchisor's non-elastic franchise system, and unrealistic profit expectations. For some franchisees, an additional disadvantage is the obligatory, continuous coordination of contracts and standards that are prescribed by the franchisor and the franchise system, including those financial obligations which the franchisee has to pay regardless of his actual financial status.

FAST FOOD BUSINESS

Food that is prepared and served very quickly is termed Fast food. Fast food typically refers to food served in restaurants or stores with low preparation time and packaged form to be taken-out or taken-away. The term "fast food" was recognized in a dictionary by (Merriam & Webster, 1951).

Outlets can be kiosks or stands, which may not provide seating or shelter, or fast food restaurants. They are also called quick service restaurants. As a part of restaurant chains, franchise operations have standardized foodstuffs shipped to restaurants from central locations (Jakle & John, 1999).

Fast food restaurants can be opened with relatively low capital. Small, sole proprietorship fast food restaurants are becoming much more common throughout the world. Casual restaurants are one type with higher sit-in ratios, where customers sit and order food to be brought to them in a more upscale atmosphere (Talwar & Jennifer, 2003).

History

The idea of ready-cooked food to be sold is closely-connected to urban development. In Ancient Rome, cities had street stands which sold bread and wine. East Asian had noodle shops. Flatbread and falafel are today local food in the Middle East. Popular Indian fast food dishes include vada pav, panipuri and dahi vada. In the French-speaking nations of West Africa, roadside stands in larger cities continue to sell as they have done for generations a variety of ready-made, char-grilled meat.

Pre-modern Europe

In the old Roman cities, food vendors provided meals to much of the urban population living in isolated, multi-story apartment blocks. In the mornings, bread soaked in wine was a quick snack and cooked vegetables and stews later in the day at a popina (Stambaugh, 1988, pp, 200-209). In the middle Ages, numerous vendors that sold dishes such as pies, pasties, flans, waffles, wafers, pancakes and cooked meats were supported by large towns and major cities such as London and Paris. These vendors catered for those who did not have means to cook their own food at their homes. Other rich tenants could afford to rent housing with kitchen facilities or to buy cooking equipment. Authorities recognized this, and prices were controlled by English cities like Coventry and London. Travelers, rich or poor, such as pilgrims, were also among the customers (Martgacarling, 2008, pp.27-51).

Modern Era

Local seafood is included in "fast food" sold at coastal areas, such as oysters or, as in London, eels. Most of time, this seafood is cooked directly on the quay or close by (BBC, 2006). British "fish and chips" is partly famous because of these fast food quays due to the development of trawler fishing in the mid 19th century. British fast food had many regional variations due to a diverse availability of ingredients and tastes, until the Great War. Sometimes culture of a region was based on a dish. The content of fast food pies has varied, with poultry or meat. After World War II, turkey has been widely used in fast food (BBC, 2007).

The famous "sandwich" was first introduced when John Montague, the 4th Earl of Sandwich in 1762, did not want to interrupt his work or his gambling accounts. Thus, he wrapped dried meat in bread (James, 2008). Filled baguette is another version of the sandwich in France. Only recently has the sandwich gained its various forms and been considered fast food. Local fast foods have been adopted by other countries as well, such as; Italian pizza, Chinese noodles. More recently healthy alternatives have emerged. The Uk came first in a study in 2008 in the number of fast food restaurants per person. Australia came second and the USA came third. England alone accounted for 25% of all fast food.

A German butcher opened up the first hot dog stand in Brooklyn, New York City. The name "hot dog" cannot be agreed on. The "diner" idea goes back to 1872, when Walter Scott of Providence, Rhode Island prepared a horse-drawn lunch wagon with a simple kitchen to cook dinners for workers.

Fast food restaurants in the United States go back to July 7, 1912 with the opening of a fast food restaurant in New York City by Horn & Hardart. They had a cafeteria featuring prepared foods behind small glass windows and coin-operated slots. This was designed after a Horn & Hardart Automat that had opened in Philadelphia in 1902. Many Automat restaurants were soon built around the country to deal with the demand. They remained extremely popular throughout the 1920s and 1930s.

After the First World War automobiles became popular and affordable, drive-in restaurants were introduced. Billy Ingram and Walter Anderson founded The American Company White Castle in Wichita, Kansas in 1921. This was the first hamburger chain, selling hamburgers for five cents a piece. Walter Anderson built the first White Castle restaurant in Wichita in 1916, introducing the limited menu, high volume, low cost, and high speed hamburger restaurant. Customers were allowed to see the food being prepared. Later five holes to each beef patty were added to increase its surface area and speed cooking times. White Castle was successful and attracted numerous competitors (John, 1999).

A & W Root Beer introduced franchising in 1921 by franchising their distinctive syrup. In mid 1930s, the restaurant concept was first franchised by Howard Johnson with formally standardized menus, signage and advertising.

The largest fast food chain in the world which almost coined the term "fast food", McDonald was founded in 1940 as a barbecue drive-in by Dick and Mac McDonald. As hamburgers were the profit making item, the brothers closed their restaurant for three months and reopened it in 1948 as a walk-up stand offering simply hamburgers, French fries, milkshakes, coffee, and Coca-Cola, served in paper bags. Consequently, they produced hamburgers and fries constantly, without waiting for customer orders, and could serve them immediately. Hamburgers cost 15 cents, much cheaper than a typical diner at that time. Their unique production method, named the "Speedee Service System", was influenced by Henry Ford innovative production lines. The McDonalds' stand's biggest success was the milkshake machine and a milkshake-machine salesman Ray Kroc traveled to California to discover the secret of their success story. Kroc expanded their concept and bought the McDonalds' operation in 1961 with the goal of making cheap, ready-to-go hamburgers, French fries and milkshakes a nationwide business (McDonalds', 2008).

Kroc was the one behind the start up of McDonald's as a national chain. His first part of the plan was to promote cleanliness in the restaurants. He often took part in cleaning his own Des Plaines, Illinois, outlet by hosing down the garbage cans and removing gum off the cement. He introduced the glass walls to allow customers to view the food preparation. This was very important to the American public who paid much attention to hygiene. His promoted the motto "If you have time to lean you have time to clean". Cleanliness was only part of his grand plan which made McDonald's superior to the rest of the competition and attributed to their great success. He envisioned making his restaurants appeal to families from the suburbs (St..Martine, 1992).

FRANCHISING BEST PRACTICES

In the following section, the researcher will highlight the best practices of the franchising in Europe and USA. In addition, he will present several success stories of some successful fast food chains worldwide.

Franchising in Europe

In Europe, according to a European Franchise Federation Survey conducted in 2004, Germany and the United Kingdom followed by France, Italy and the Netherlands had the largest number of "domestic" systems. These are defined as those indigenous franchises not operating in other Insert European countries. France and Germany export the most franchise systems to other European countries with the United Kingdom, some way behind, and ranking third. France and Germany in fact were the only two countries, which had more franchise systems outbound to other member states than inbound from any other countries.

Denmark, Belgium and Austria have the highest percentage of inbound franchises, exceeding both domestic and outbound systems combined. The highest growth in franchises was in Sweden with a substantial 55 percent growth, followed by Germany, Hungary and the United Kingdom with growth figures of 22 percent followed by Spain with 18 percent and the Netherlands with a 17 percent growth. France dominated franchising turnover with 28.3 billion Euro, nearly twice the turnover of Germany and almost three times that of the United Kingdom. Of the 16 countries surveyed by the U.S. Commercial Service in Europe, France, Spain, Germany, and the United Kingdom, have the largest total population of franchise systems operating within their borders. This backs up a survey conducted by the European Franchise Federation in 2004, which stated that Germany, the U.K. and France are in fact the most dominant countries in franchising on the Continent. Between them these countries accounted for 40 percent of franchise systems, 50 percent of franchisees, 60 percent total employment and 55 percent of sales turnover in Europe. The next group in terms of franchising market development includes Greece, Portugal and Austria followed by Ireland, Italy and the Netherlands.

According to a survey conducted by the European Franchise Federation, 7,000 separate franchise systems existed in Europe in 2004 represented by 250,643 units, 85 percent of which were indigenous. The table (2.1) illustrates the Top six European brands.

Franchising in USA

Franchising is widespread-one out of every 12 retail businesses in the U.S. is a franchised business and more than 8 million people are employed in these franchised businesses. According to the International Franchising Association, franchising accounts for greater than 40% of all retail sales and totals more than a trillion dollars in revenue annually (International Franchise Association, 2005). Franchising has been one of the fastest growing methods of doing business in the U.S. and abroad for the last half century. It is a less expensive, less risky form of doing business than developing a startup company (Taylor, 2000). Starting with the fast food industry, franchising has now become pervasive in a variety of industries ranging from auto repair to day care.

Franchised businesses operated 909,253 establishments in the United States in 2005, counting both establishments owned by franchisees and establishments owned by franchisors. These establishments amounted to 3.3 percent of all business establishments in the United States. Franchised businesses provided 11.0 million jobs, met a $278.6 billion payroll, and produced $880.9 billion of output. Franchised businesses accounted for 8.1 percent of all private sector jobs, 5.3 percent of all private sector payroll, and 4.4 percent of all private sector economic output in 2005.To indicate economic size in a different way, franchised businesses employed about the same number of people in 2001 as did all manufacturers of durable goods, such as computers, cars, trucks, planes, communications equipment, primary metals, wood products, and instruments (International Franchise Association, 2005).

The economic impact of franchising goes beyond activities inside franchised businesses, because their purchases of products and services and the personal purchases of their owners and workers contribute to the growth of non-franchised businesses. As a result of these spillover effects, the total impact of franchising was to provide 21.0 million jobs (15.3 percent of all private-sector jobs) and $660.9 billion of payroll (12.5 percent of all private-sector payrolls) in 2005. The output produced because of franchised businesses grew from $1.5 trillion in 2001 to more than $2.3 trillion in 2005; an average growth of 10.9 percent per year. In 2005, the output produced because of franchised businesses accounted for 11.4 percent of all private-sector output (International Franchise Association, 2005). The table (2.2) illustrates the Top six US brands.

WORLDWIDE SUCCESS STORIES

The Case of McDonald's

Background

When people think about the franchising concept, McDonalds usually comes up first as a prime example. Besides, though McDonalds was not the first franchise business, Isaac Singer, the inventor of the sewing machine gets credit for originating the franchise idea; the hamburger chain certainly exemplifies franchising success. (Franchise Prospector, 2008).

The first "McDonalds" restaurant was opened by brothers Dick and Mac McDonald in 1940 on Route 66 in San Bernardino, California. The menu had about 25 offerings, and "carhops" brought the food out to patrons usually teenagers waiting in their cars (McDonalds', 2008).

Franchises

Today, McDonalds franchise network is the world's leading food service retailer, with more than 30,000 franchise restaurants serving 52 million people in more than 100 countries. Of those stores, more than 70 percent are owned by independent operator franchisees (Success guides, 2008).Each McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporations' revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion (McDonalds' Shareholder, 2008).

Critical Success Factors

How did the chain grow from a single store to the most popular fast food restaurant and successful franchise operation in the world?

Raymond Kroc gets the credit as the driving force behind McDonald's successful franchise growth. He did not start out as a restaurant owner, but as an equipment supplier to restaurants after mortgaging his home and investing all his savings in an exclusive distributorship for a milk shake maker called "Multi-mixer." In 1954, the McDonalds restaurant caught Kroc's attention because it was using eight Multi-mixers. Kroc went to visit the restaurant and was amazed at the speedy business operation that served so many people instantaneously. The McDonald brothers had already begun to franchise their restaurant concept and had four locations going by the time of Kroc's visit (Success guides, 2008).

Kroc recognized the opportunity to sell lots of Multi-mixers and made a proposal to the brothers to let him franchise restaurants outside of their home base in California. (Ray Kroc was not the only one impressed by the McDonalds restaurant, which was visited as well by James McLamore, founder of Burger King, and Glen Bell, founder of Taco Bell.). In 1955, Kroc launched "McDonalds Systems, Inc." as a legal structure to run his franchises, and by 1958 McDonalds had sold 100 million hamburgers. In 1961, the McDonald brothers agreed to sell all the business rights to Kroc for $2.7 million. The company went public in 1965, and 100 shares purchased then for about $2,250 would have grown to 74,360 shares now worth over $3 million (Success Guides, 2008).

The first McDonalds franchise opened outside the US in British Columbia, Canada in 1967. Since then, McDonalds has spread all over the world, with its largest franchise store featuring more than 700 seats opening in Beijing, China in 1992. One essential factor that contributes to franchise success is a consistent commitment to standards. McDonalds franchise restaurants became well-known for the inspired and defining vision created by Kroc for his restaurant business. "Quality, Service, Cleanliness and Value" was the company's motto, and customers knew that no matter where they travelled, they could rely on those qualities at every McDonalds they visited.

Kroc's brilliant marketing insights created many winning strategies. He initiated "Hamburger University" in 1961 in Elk Grove, Illinois, to train all franchisees in every aspect of McDonald's management. Furthermore, Kroc targeted families as his best market share. This resulted in the debut of the "Ronald McDonald" clown character on television in 1963, first played by Willard Scott.

McDonald's success thrives on adapting to consumer demands

Nevertheless, the franchise chain's success rests as well on another key component, which might at first glance seem contrary to franchising principles - continual innovation and adaptation to market conditions. First started as a simple hamburger, French fries and milkshake restaurant, McDonalds franchise operation experimented and expanded its menu to cater to the changing tastes and consumer demand.

  • In 1963, McDonalds introduced the "Filet-of-Fish" sandwich in the Cincinnati area for Catholics who did not eat meat on Friday. This was the first new offering added to the standard menu and went national the following year.

It is interesting to note that many of the new products added to McDonald's menu over the decades were developed by franchisees.

  • For instance, the "Big Mac" introduced in 1968 was the brainchild of Jim Delligatti, one of the earliest McDonalds Systems franchisees. The "Egg McMuffin" was developed in 1973 by McDonald's franchisee Herb Peterson. A Canadian franchisee invented The McFlurry in 1997.
  • In 2005, another adaptation to the times and consumer demand was the provision of WiFi with Nintendo in select locations; and delivery service in Singapore, where customers can phone in their order and have it delivered 24 hours a day, seven days a week. The company has also departed from its standard free-standing units, and installed quick service kiosks in busy places, like malls and airports.

McDonalds franchise business has not only survived but thrived through boom times and recessions and has successfully reacted to consumer trends. It was one of the first franchise restaurants to post nutritional information about its menu, and now offers salads and other healthy options in recent years.

The Case of Hardee's

Background

Hardee's is a restaurant chain, located mostly in the Midwest United States and Southeast regions. It has evolved through several corporate ownerships since being established in 1960. It is currently owned and operated by CKE Restaurants. Along with its sibling restaurant chain Carl's Jr., Hardee's is the number 4 U.S. fast-food restaurant burger chain after McDonald's, Burger King and Wendy's( CKE Restaurants, Inc., 2008).

Franchises

As of the second fiscal quarter ended, September 8, 2008, CKE Restaurants, Inc., through its subsidiaries, has had a total of 3,100 franchised or company-operated restaurants in 42 states and in 14 countries, including 1,917 Hardee's restaurants and 1,170 Carl's Jr. Restaurants.

Critical Success Factors

Hardee's founder Wilbur Hardee opened his first restaurant in Greenville, North Carolina in 1960. On the strength of its many menu items including the Huskee, the chain experienced rapid growth by franchising and, to a lesser extent, by acquiring other restaurant chains. The first company store opened in Rocky Mount, North Carolina in May 1961 by James Carson Gardner and Leonard Rawls on McDonald St in downtown Rocky Mount. That location has since been torn down. According to Wilbur Hardee, Gardner and Rawls won a controlling share of the company from him in a game of poker. After realizing that he lost control over his namesake company, Hardee sold his remaining shares to them as well. The chain was headquartered in Rocky Mount until 2001(Msnbc, 2008).

In 1997, the chain was acquired by CKE Restaurants, the parent company of the Carl's Jr. fast-food restaurant chain. (Imasco retained the few remaining Roy Rogers locations, though CKE is reported to do some supplying of them). Over time, some Hardee's restaurants were converted to serve higher-quality hamburgers and other products available from Carl's Jr.; in addition, they took on the Carl's Jr. Star logo in the process. Some locations were simply fully-rebranded Carl's Jr.; this was a year after Wendy's and Tim Hortons purchased most of the Hardee's stores in Michigan.

CKE Restaurants has been dual branding some Hardee's locations with Red Burrito, similar to its Green Burrito/Carl's Jr. dual brand concept. This is a similar strategy used by "Yum Brands" with its KFC, Pizza Hut, Taco Bell, and Long John Silvers concepts to help expand brands without the additional expense of new buildings and land. Hardee's has found a niche market in smaller towns that may lack franchises of the other major hamburger chains (CKE Restaurants, Inc, 2008).

The Case of Subway Background

Subway Restaurants, commonly known as Subway, is a fast food restaurant franchise that primarily sells subs and salads. It is owned by Doctor's Associates, Inc. DAI.

Franchises

There are over 30,643 franchised units in 87 countries as of January 2009. Subway is the fastest growing franchise in the world. Currently, Subway is the third largest fast food operator globally after Yum Brands with 35,000 locations and McDonald's with 31,000 locations. Subway's main operations office is in Milford, Connecticut, and five regional centers support Subway's growing international operations. The regional offices for the European stores are located in Amsterdam, Netherlands. Australia and New Zealand are supported from Brisbane, Australia. The Middle Eastern locations are supported from offices located in Beirut, Lebanon. The Asian locations from Singapore and the Latin America support center are in Miami, Florida. In the UK and Ireland the company hopes to expand to 2,010 restaurants by the year 2010 (Subway publication, 2008).

Critical Success Factors

Many restaurant analysts attribute Subway's fast growth to the growing concern on health by restaurant customers, a trend that Subway has taken advantage of in its marketing. In 1999, an Indiana University student named Jared Fogle lost 245 pounds (110kg) with a diet made up mostly of Subway sandwiches combined with exercise. The story has been used by Subway as a large part of their marketing campaign to this day. Fogle has emerged as a spokesman for Subway, furthering their image as a health-conscious restaurant chain. Doctor's Associates were founded by Fred De Luca and Peter Buck, PhD. in 1965, with the sole purpose of overseeing the Subway chain of restaurants. The term "Doctor's Associates" was chosen due to Peter Buck having a Ph.D. Neither Subway nor Doctor's Associates are affiliated with, nor endorsed by, any medical organizations or doctors (Doctor's Associates Inc, 2008).

Subway's logo used from 1974 to 2001 (Still in use in Australia and on many locations). Fred De Luca borrowed 1,000$ from family friend Peter Buck to start his first sandwich shop in 1965, when he was only 17 years old. He tried to raise money to pay for college. He chose a mediocre location for his shop, but by noon on the first day of the opening, customers poured in. On the radio advertisement they had promoted the name as "Pete's Submarines, which sounded like Pizza Marines, so they changed the name to "Pete's Subway"; eventually it was shortened to "Subway", as it is known to this day. As of December 30, 2008, the company has had 30,310 franchised locations in 87 countries and produces US$9.05 billion sales every year. In 2007, Forbes magazine named De Luca number 242 of the 400 richest Americans with a net worth of $1.5 billion. Besides the traditional restaurants, Subway operates in many non-traditional locations. For instance, there are over 900 Subway locations inside of Wal-Mart stores and 200 on military bases, including several in Iraq, in addition to three located inside The Pentagon - as well as an increasing number on college and university campuses.

Subway restaurants have been consistently ranked in Entrepreneur Magazine's Top 500 Franchises, and were selected as the number 2 overall franchises in 2008. Additionally, it was ranked as the number 3 "Fastest Growing Franchise" and the number 1 "Global Franchise" as well (Fastest Growing Global franchises, 2008).

FRANCHISING IN EGYPT

Background

Since the 70s, franchising in the food sector has actively been growing in Egypt. In the 90s nonfood sectors started to develop and in 2005 the fashion and life style European franchises started to enter the Egyptian Market. Franchise is prospering in Egypt due to the healthy environment for the franchise industry.

As per studies carried out by the Egyptian Franchise Development Association (EFDA), franchising has grew more than 1000% over the last 9 years from approximately 25 to 310 franchise systems of which 43% are local franchises. Those franchises directly employ more than 45,000 employees and generate more than 9 billion EGP of annual sales. Franchising has also helped in creating more than 500,000 jobs through franchise supply chains and its direct investments have exceeded 40 billion EGP.

The main franchises in Egypt are concentrated mainly in Cairo and Alexandria but other cities have started appearing on the map of franchising in Egypt. Those areas are the upscale tourist hot spots that have become an important target for investors as well.

Working in Egypt's favor as a franchise destination is the country's sizeable population base, as well as the affordability of other business basics such as land and labor. Howevr, equally appealing to international franchisors, argues Zaki, is Egypt's trade agreements with neighboring nations, such as the Greater Arab Free Trade Agreement (GAFTA) and Common Market for Eastern and Southern Africa (COMESA) (Business monthly, 2007).

"Egypt is a great market for franchising and everyone is starting to notice it," says Hatem Zaki, board member of the Egyptian Franchise Development Association (EFDA), a non-profit organization formed in 2001 to promote the franchising model in Egypt. "The country possesses a high number of skilled laborers, providing businesses with a strong supply chain of workers. It is one of the most competitive markets for franchising in the world at the moment."

"Since tariffs on goods transported between Egypt and neighboring countries are negligible], many international as well as local entrepreneurs and investors have started operations in Egypt," he says. It has encouraged as well local franchises to expand regionally. Just look at fast-food chain Mo'men, for example. They operate out of Egypt and send food and supplies to their branches in Sudan from their base here (Business monthly, 2007).

International fashion chains have been a large part of Egypt's booming franchising industry due to the recently lowered tariffs on clothing imports. "Since the tariffs were lowered two years ago, we have witnessed a 200-percent increase in clothing franchising in Egypt," Zaki says. While the majority of clothing franchises in Egypt used to be American, most of the new ones setting up outlets are European, including Mango, Promod, Morgan and Bata. And expect more European chains to arrive as investors gear up for the implementation of the Euro-Mediterranean Free Trade Area (EMFTA), a free trade agreement between the 27-member EU and eight partner states in the Middle East and North Africa (MENA) region expected to enter into force in 2010. EMFTA member states will enjoy a gradual implementation of free trade in manufactured goods and progressive liberalization of trade in agricultural products. The agreement too aims at increasing economic, social, cultural and financial cooperation between members.

When fully realized, the EMFTA will encompass some 40 states and 600-800 million consumers in Europe and the MENA region, including Egypt (Business monthly, 2007).

Retail sector represents 48.9% of the total systems conducted as it covers:

  • Clothing & fashion
  • FMCG (Supermarkets)
  • Home products & furniture
  • Leather products...

Other categories represent 51.1%, distributed among 20+ categories (including 23% for food outlets).On the other hand, 57% of the total franchise systems are foreign brands. Out of which since 2005, 90% of new foreign franchise concepts are European especially from Spain, France, Greece and Italy.

Capacity and potential for franchise expansion in Egypt continue due to the reception of 11 million tourists. Franchise has already showed an immense growth in Fashions, Accessories & Cosmetics, House wares, Food and Beverage. Furthermore, the expansion is in the Modern telecommunication networks such as phones, mobile phones, fast speed internet, courier services. A study was conducted on the Egyptian market to test the status of the Franchise sector in Egypt to determine the contribution made by Franchisors and Franchisees to the Egyptian economy; and the levels of employment and empowerment in the Franchise sector. The study was a joint effort between the Social Fund Development (SFD), Egyptian franchise association (EFDA), and a market research company (Business monthly, 2007).

Franchises

The study results revealed that Franchised outlets increased by 14% from end of 2002 till May 2004 and less than 1% of the total franchised businesses have been closed during the year 2003. The outlets are mainly located in greater Cairo with a percentage of 65% of the total outlets present in Egypt as shown in figure (2.7), (Census, 2004).

More than 50% of the total systems conducted provide operational training to their Franchisees/outlets. Operational training represents 41% of the total ongoing training provided. Sales and marketing as well has a significant share of 23%. Some operate on advertising and marketing fund, and some prepare the feasibility study / business plan for their Franchisees.

They found also that out of the 779 identified systems, 209 systems apply the Full Format Franchising in Egypt as shown in figure (2.8), 212 systems are considered Potential Systems of which:

  • 45% of the potential systems desire to apply Franchising System (Census, 2004).
  • 55% of the interviewed potential systems are not considering the application of Franchising System. As for the rest, they might be potential for applying franchising system, but they refused to participate in the study.

However, statistics illustrate that Egypt's franchise business represents less than one percent of the world's franchise market, which implies that there are some obstacles along the way. Several franchisees referred to lack of regulations and legislations that govern and organize the franchise market in Egypt, which could complicate the start-up process. "Egypt does not have specific franchise laws, and most of the franchise business is handled through contractual arrangements," stated Kayani. "Still, not every country has franchise laws. However, as the sector grows, perhaps Egypt will consider adding laws that will help develop the business."(Business Monthly, 2007).

Fast Food Franchises in Egypt

In the early 70s, franchising was first introduced into the Egyptian market through Wimpy fast food chain which is considered as the first food chain in Egypt. Ever since and the fast food concept started flourishing in the market, and local food chains began to evolve. This evolution attracted international fast food chains to place Egypt on their expansion map and as one of the profitable markets due to its sizable population and high food consumption. In the early 80s, more international chains started coming into the market to change the dining out food concept and announce the beginning of the new era of fast food chains. By the end of the 80s and start of the 90s, the major fast food world leaders such as McDonalds', entered the Egyptian market and open the door for further chains to spot Egypt and invest in it. The presence of those international food chains facilitated the local chains to develop their products and processes to be able to compete with the fierce competition in the market. Although the international food chains are dominating the market as shown in table 2.10, they own the highest number of outlets, yet they are nowadays facing a very fierce competition from local brands. Due to the continuous reform actions made to the Egyptian economy especially in the agricultural sector, most of the required food materials became available locally. This made several international food chains use local materials instead of importing to minimize the costs. This made the competition for the local food chains easier as they use the same quality of materials and their challenge was to formulate the appropriate products that would appeal to the customers. Some of the local food chains succeeded in competing with the international food chains that they started expanding into regional countries and they have plans to expand into Europe.

Dining out became one of life's essentials in Egypt among consumers with high purchasing power and the increasing number of tourists visiting the enjoyable areas of the country. There are many factors that helped in the spread of this concept among the Egyptian society. One of which is the evolution of the shopping malls concept which helped in establishing the eating out concept. Moreover, the wide spread of the coffee shops in the market, and the diversification of the products they sell to include food menu. The food business experts believe that the Egyptian market is still premature and there is a room for more food chains to come into the market. They said that although there are some chains that have closed down in Egypt, yet this is not an indication for the potential of the market. They further stated that Egypt is an emerging market and people are more exposed every day and their needs change, and they referred that in the past decade when the food business market share have doubled.

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