Why do companies use franchising?

Franchising has experienced unprecedented growth during the last two decades both in the United States and abroad (Alon and McKee 1999). In the United State of America, for example, according to the US Department of Commerce, the number of business format franchises increased almost tenfold between 1972 to 1988 (Kostecka 1988). While in 1992 franchise sales accounted for $803 billion in sales, the International Franchising Association (1995) predicted that franchise sales will reach $1 trillion by the year 2000. In 2004, the International Franchising Association reported that franchising accounts for 760,000 businesses generating $1.53 trillion, about 10% of the private sector economy. The study on the use of franchising is relevant to small business across multiple industries. According to the Uniform Franchise Offering Circular (UFOC), there were 1,178 franchisors with over 320,000 outlets, representing over 18 different sectors, operating in the United States in 1997. Twelve percent had no franchisee-owned units, 16 percent had less than 10 outlets, and 27 percent had between 11-50 units. Those with the largest number of units (500 and above) made up only nine percent, the smallest concentration of franchised systems (International Franchise Association 1999). In this chapter's sample of retail franchises, about a third of the franchisors had less than 10 franchisees, while 10 percent had no franchisees at all in their system. The median age and size were 11 years and 30 outlets, respectively. Therefore, this chapter is especially relevant to small business management, particularly from the franchisor's standpoint. This chapter uses two popular approaches, resource-scarcity and agency theories, to examine the proportion of franchising in the US retailing sector. Although there is some disagreement between resource-scarcity and agency theorists regarding the causal factors of domestic franchising, by integrating variables from both the agency and resource-scarcity theories researchers have developed models with greater explanatory power (Carney and Gedajlovic 1991; Combs and Castrogiovanni 1994). Using previously established theories and variables, this research innovates by examining franchising over time (longitudinally), rather than at a point in time (cross-sectionally), and by focusing on one industry, namely retailing. Examining one industry over time allows the researcher to (1) obtain an in-depth understanding of the industry, (2) control for competitive and industry variations, and (3) increase the sample size associated with the studied industry. Dant and his co-authors (1996) proposed that industry aggregation may hide industry differentials and margins, masking the true nature of the causal factors between organizational variables and the proportion of franchising. Resource and agency variables may also impact the relative proportion of franchising depending on the industry studied. Indeed, the meta-analysis conducted by Dant and others in 1996 found that industry-specific differences were such that analyses that did not take them into account could have flaws in their conclusions. Furthermore, comparing franchising across industries elides the obvious facts that different industries have different motivations for franchise-based expansion and that there will be variations in the degree to which individual industries will tend to franchise. In the conclusion of their meta-analysis, Dant and his colleagues (1996, p. 440) wrote that "as for future research, foremost, there is an urgent need to study ownership redirection in sectors other than restaurants." Our focus is on the retailing industry because (1) franchising has been associated with the retailing sector (Cross and Walker 1987); (2) much of retailing is franchised, accounting for $900 million in sales and 40 percent of aggregate retail sales in the US (Rubel 1995); and (3) franchising is expected to grow in importance for the retailing industry. Therefore, this chapter seeks here to expand Dant's suggestion that a focus upon one industry is appropriate, and moves from the perhaps stale ground of restaurant franchising into a focused analysis of the retail industry from a business-format franchising perspective (defined below), with appropriate sidelong glances at out-of-industry examples that illustrate our points.