How Franchising Feeds Restaurant Growth
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n the 1950s, Americans were on the move like never before. A few years earlier, Dwight D. Eisenhower had been amazed by the ability of Germany’s Autobahn to move people and goods quickly over vast distances. After Ike was elected president, he led the United States into the modern era of transportation by building the interstate highway system. Suddenly, a family could cross several states in one day of driving. Like any major infrastructure change, the building of the interstate system had some unintended consequences. One of the most important of these consequences involved food. Every day, legions of hungry travelers needed a place to buy a meal, and many wanted a meal that was predictable. This created a huge opportunity for restaurant chains such as McDonald’s, Burger King, and Howard Johnson’s. Mama Goldberg’s, which started in Auburn as a college hangout, is an example of a restaurant company using franchising as an expansion vehicle.
Meanwhile, a new form of entertainment— television—was beginning to grab consumers’ attention. Television commercials provide restaurant chains with the chance to advertise to a national audience and build a brand. When a traveler pulled off an interstate exit and had a choice between a well-known name such as McDonald’s and local “mom and pop” establishments, the former usually was considered the safer option. Many companies decided that franchising was the best way to meet these demands. In a franchising relationship, a franchisor (such as McDonald’s) lets franchisees operate stores under its brand name and using its processes. In return, franchisees pay the franchisor an upfront franchisee fee and an ongoing royalty fee. Because franchisees pay the costs of building their stores, using franchising allows modest-sized firms with big ambitions to grow much faster than they would by owning all the stores themselves.
Fast forward a few decades, and it is clear that franchising has been a huge success. According to the International Franchise Association, as of 2007 there were more than 800,000 franchised businesses in the United States that collectively accounted for more than 17 million jobs and $2.1 trillion in economic impact. As the economic role of franchising has expanded, so has academic interest in the topic. Franchising is complex because franchisors and franchisees are partners, but a high potential for tension and conflict between the two sides exists, too. This complexity gives rise to an array of interesting questions for business professors. I have been studying franchising in general and restaurant franchises in particular since the 1990s. One of the resulting research articles has been cited by other authors more than 500 times. Every spring, I teach a course on franchising as part of the Entrepreneurship and Family Business program in the College of Business. I also host
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