The Big Bang

How franchising became an economic powerhouse the world over

For the 25th anniversary of Entrepreneur's Franchise 500®, we asked franchising veteran David J. Kaufmann for his perspective on how franchising has changed the economy and opportunities for entrepreneurs over the past quarter-century. Among his accomplishments, Kaufmann, senior partner at law firm Kaufmann, Feiner, Yamin, Gildin & Robbins LLP in New York City, is author of the New York Franchise Act. He and his firm represent some of America's largest and best-known franchisors. Here are his thoughts:

The year was 1980.
Dallas, M*A*S*H and Three's Company ruled the television airwaves. People were boogieing (how's that for a 1980 word?) to Billy Joel's new release, It's Still Rock and Roll to Me. Jimmy Carter was president; Ronald Reagan only a candidate. The phrase "word processing" was largely unknown, as most folks were still banging out documents on their IBM electric typewriters. And Entrepreneur magazine published its first Franchise 500® ranking of the nation's leading franchisors, the first ever in the industry.

How far franchising's come since then! Defying the law of both physics and business cycles-that everything that goes up must inevitably come down-franchising over the past 25 years kept accelerating upward, dominating certain industries entirely (such as guest lodging, real estate brokerage, quick-serve restaurants and convenience stores), while propelling itself to the forefront of not only the American economy, but increasingly, the global economy as well.

In 1980, the Department of Commerce estimated franchising's total gross revenues at $350 billion. In 1985, that rose to $529 billion. And now? According to the International Franchise Association (IFA), franchising companies and their franchisees account for $1 trillion in annual U.S. retail sales-an astonishing 40 percent of all retail sales in this country-and employ more than 8 million people, which is more than 7 percent of total nonagricultural employment in the United States. These sources reveal that 1,500 business-format franchise networks operate more than 320,000 franchised units in the United States. Approximately one in every 12 retail establishments is a franchised business. Including both U.S. and foreign restaurants, McDonald's alone serves 47 million customers daily at its 30,000-plus restaurants, which employ 1.5 million people and earn a total of $41 billion annually.

Reality affirms what the statisticians tell us. Every time you install brakes or mufflers at Midas Auto Service Experts or Meineke Car Care Center; every time you dine at quick-service restaurants such as Pizza Hut and "casual" restaurants such as Denny's and Johnny Rockets; every time you buy or sell a house through Century 21, Coldwell Banker or ERA (these three franchised real estate brokerage networks alone, subsidiaries of Cendant Corp., account for a remarkable 25 percent of all residential purchases and sales in this country); every time you have your taxes prepared at a retail storefront such as H&R Block or Jackson Hewitt Tax Service; every time you seek or list a job at a personnel agency; every time you enroll your child at the local branch of a nationwide tutoring service such as Sylvan Learning Centers; and every time your office is cleaned by an outside janitorial service, the odds are extraordinarily high that you're doing business with a franchised establishment.

It's funny, because prior to the late 1950s and the '60s, franchising was virtually nonexistent. Before then, mostly auto manufacturers, soft-drink bottlers and gas station dealers used the franchise format on a regular basis as a prime vehicle for marketing and distributing their goods. In those decades, however, the giants entered the scene. 7-Eleven, Baskin-Robbins, Burger King, Dunkin' Donuts, Holiday Inn, H&R Block, KFC, McDonald's-they all geared up and franchised during this period.

But their true explosive growth came in the 25 years since Entrepreneur published its first Franchise 500® issue. That 1980 listing showed McDonald's had 1,576 company-owned and 4,173 franchised restaurants for a total of 5,749 restaurants. This year's Franchise 500® reveals that McDonald's operated 8,065 company-owned restaurants. It franchised another 22,116, for a total of more than 30,000 McDonald's restaurants-more than tripling the network's size in 25 years. (You could have done worse than to invest $10,000 in McDonald's stock in 1980-today, it would be worth close to $200,000.)

And what about this year's top-ranked franchisor in Entrepreneur's Franchise 500® listing, Subway? In 1980, according to Entrepreneur's first survey, the Subway network featured a grand total of 150 restaurants-16 company-owned, 134 franchised. Today? More than 15,000 U.S. restaurants, all but one franchised, for an astonishing 25-year growth rate close to 10,000 percent.

"Obviously, we've grown an awful lot," says Subway's founder and chair, Fred DeLuca, who started the chain when he was 17 years old because he needed money for college. With a loan from a family friend, DeLuca opened a submarine sandwich shop in Bridgeport, Connecticut, in 1965. "What's benefited us is that, before getting into franchising, we were in the business of running company stores for eight years and were able to develop a really good system of controls and great systems of operation. That system of controls-along with having a good basic business concept-has helped our franchisees to advance quickly. They themselves wind up expanding. Maybe 60 percent to 70 percent of our stores every year for the longest time have been opened by existing franchisees who have expanded."

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This article was originally published in the January 2004 print edition of Entrepreneur with the headline: The Big Bang.

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