As a leading franchise attorney and renowned franchising expert for more than three decades, David J. Kaufmann has been witness to a multitude of changes in the marketplace, from the maturing of franchisor/franchisee relationships to the booming of household-name franchises. Here, he provides his inside perspective on how franchising has changed life as we know it.
What a different world both franchising and Entrepreneur were encountering when this now-indispensable magazine debuted in 1977!
In fact, my kids can't figure out how any of us even functioned back then. There were no personal computers, e-mail or cell phones. FedEx was just a startup. And we lawyers were still banging out documents on electric typewriters. Saturday Night Fever and Rocky were the hit movies of the year, President Carter took the oath of office, and my beloved New York Yankees won their first World Series following a 15-year drought.
You may not have recognized franchising back then, either. McDonald's signs still boasted of serving "millions," not "billions." Jiffy Lube? Wouldn't come on the scene for another two years. Gymboree? Still a year away from franchising. Sylvan Learning Centers? Three years away from the launch of its first franchise.
Since 1977, franchising has been defying a law of both physics and business cycles--that what goes up must come down. Franchising kept accelerating upward over the past 30 years, dominating certain industries entirely (such as guest lodging, real estate brokerages, quick-serve restaurants and convenience stores) while propelling itself to the forefront of not only the American economy but, more and more, the global economy as well.
According to the SBA, in 1977, franchise networks' total sales were approximately $250 billion, representing just over 30 percent of retail sales in the U.S. Back then, according to the SBA, approximately 450,000 franchise network units (that is, both company-owned and franchised) collectively employed slightly over 4 million people.
And today? According to the U.S. General Accounting Office, franchise networks account for more than $1 trillion in annual U.S. retail sales--an astonishing 50 percent of all retail sales nationwide. Indeed, a recent study conducted for the International Franchise Association Educational Foundation indicates that in 2001 (the latest year for which statistics are available), there were more than 767,000 franchise network establishments in the U.S. employing nearly 10 million workers.
The Next Frontier
How to account for franchising's explosive growth? The first factor is an element that was virtually nonexistent when Entrepreneur was first published in 1977: the globalization of American franchise networks. The International Franchise Association notes that over the past decade, almost half of all units established by U.S. franchisors were situated outside the country. Approximately 500 U.S. franchise networks have a global presence. InterContinental Hotels Group (the franchisor of Crowne Plaza, Holiday Inns and InterContinental Hotels, among other brands) has hotels in nearly 100 countries; 7-Eleven has more than 20,000 franchises outside the U.S.; Yum! Brands Inc. (A&W, KFC, Long John Silver's, Pizza Hut, Taco Bell) has more than 8,000 foreign franchises and opens an average of three restaurants each day outside the U.S.
The second element represents the cornerstone of franchising: Americans, and increasingly, citizens of the world, love recognized brands. They want the known quality associated with those brands. They want the reputations associated with those brands. They want the uniformity associated with those brands. And in franchising, that is what's delivered: the uniformity and predictability the public demands. McDonald's Big Mac tastes the same in Maine as it does in California; the restaurants look the same in Arkansas as they do in Ohio (or Tokyo, for that matter); and the name outside is always the same throughout the U.S. and around the globe.
For franchisors and franchisees alike, the franchise platform works in an enormously successful fashion. Franchisors are able to engage in rapid network expansion and market penetration in a fraction of the time it would take to establish company-owned units. And franchisees, in turn, are given that name recognition, systems of operation, advertising programs, know-how and--with other franchisees--collective buying power that would otherwise prove either unobtainable or obtainable only over a period of many decades, in which massive economic resources would have to be expended.