The Big Bang

World Conqueror

Franchising's explosive growth in the United States has proved sufficiently groundbreaking itself. But now factor in an element that was virtually nonexistent when Entrepreneur published its first Franchise 500� in 1980: the globalization of American franchise networks. The IFA notes that over the past decade, almost half of all units established by U.S. franchisors were opened outside of this country.

About 500 U.S. franchise networks now have a global presence. McDonald's, now in 119 countries (in 1980, that figure was 28), features more than 10,000 foreign franchises; 7-Eleven, more than 18,000; Yum! Brands Inc. (A&W, KFC, Long John Silver's, Pizza Hut, Taco Bell), more than 11,000; and InterContinental Hotels Group (Holiday Inn and InterContinental Hotels & Resorts), 832.

Indeed, when the Soviet Union crumbled and the Iron Curtain fell in the late 1980s, it was American franchisors-principally in the quick-serve restaurant and guest-lodging sectors-who led the American economic foray into Eastern Europe. And those with really good memories will recall that in 1989, when the Soviet Union was coming apart and Boris Yeltsin was sealed off and isolated in the Russian White House in the midst of a power struggle, he and his supporters were sustained not by blini and borscht, but by Pizza Hut pizzas. (It helps to recall that Pizza Hut has had a presence in the Soviet Union and, following its demise, Russia since the mid-1980s.)

How do you account for franchising's stunning success and explosive growth? The answer is relatively simple and has always been the cornerstone of franchising's compelling attraction: Americans' love of recognized brands. Increasingly, foreign citizens have the same predilection. 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, for that matter, Tokyo); and the logo is the same throughout the United States and around the globe.

In their most recent fiscal years, Franchise 500� companies generated
$206.6 billion.
SOURCE: Entrepreneur's Franchise 500� 2004

Lasting Success
The benefits of franchising for franchisees are best reflected in the units' longevity. While the average rate of failure for new businesses is 65 percent within five years of inception, a recent study prepared by the IFA reveals that only 3 to 11 percent of franchised units (varying by industry segment) suffer "turnover" in any given year ("turnover" defined as closure of the unit or sale to a nonfranchised purchaser). And even these low figures may be inflated, since often a franchised unit may be closed or sold for reasons other than "failure," such as death or retirement. In a survey conducted by The Gallup Organization in 1997, 92 percent of all franchise owners reported they consider their franchises to be either somewhat or very successful, and 65 percent said they would repeat the investment in the same franchise if they were given the chance.

As franchising has flourished since the first Franchise 500� in 1980, so too have franchisors and franchisees. Virtually every franchise system began with the vision of a strong-willed entrepreneur who tirelessly worked to perfect his or her product, service, systems and name recognition. The legends include Ray Kroc of McDonald's; Kemmons Wilson of Holiday Inn; Art Bartlett and Marsh Fisher of Century 21; and Colonel Harland Sanders of KFC (who, at the age of 65, began the KFC chain by traveling the landscape with broilers, tubs of spices, chickens and other cooking gear in his car and serving dinner to prospective franchisees who paid a royalty of a nickel per chicken). With the exception of Bartlett, these pioneers are all gone. The trend over the past 25 years is for mature franchisors to be acquired by megacorporations.

Yum! Brands Inc., parent of A&W, KFC, Long John Silver's, Pizza Hut and Taco Bell, operates nearly 33,000 restaurants in more than 100 countries, racking up systemwide sales of more than $24 billion. Avis Rent A Car, Budget Rent A Car, Century 21, Coldwell Banker, Days Inns, ERA, Howard Johnson, Ramada, Super 8-national and international brands known to virtually everyone-are all owned by a single entity, Cendant Corp. Burger King was acquired by Pillsbury Corp., which in turn was acquired in 1989 by the British conglomerate Grand Metropolitan PLC (now Diageo PLC), which in 2002 divested the chain to conglomerate Texas Pacific Group. In the late 1980s, Holiday Inn was acquired by another British conglomerate, Bass PLC.

At around the same time, Blockbuster Inc. acquired Major Video, while Allied Domecq PLC acquired Baskin-Robbins and Dunkin' Donuts. Even Warren Buffet's Berkshire Hathaway got into the franchise game, acquiring a large stake in Dairy Queen within the past decade. (Editor's note: In the interest of full disclosure, the author's law firm serves as franchise counsel to Cendant Corp., Holiday Inn and Yum! Brands.)

While franchisors were growing, franchisees were as well. Although franchising's roots could be traced to the grant of an individual franchise to one entrepreneur possessing no prior knowledge of or experience in the subject industry (sometimes colloquially referred to as mom-and-pop operators), over the past decade, many of America's oldest and largest franchisors have not followed that paradigm.

Instead, they find it far more efficient and profitable for all concerned to largely restrict the grant of franchises to sophisticated corporations or to existing franchisees whose experience, profitability and mastery of the franchisor's system strongly suggest future success. Recent reports suggest that the top 50 American restaurant franchisees in terms of U.S. sales collectively own and operate more than 7,500 units; somewhere between 20 to 36 percent (depending on whose figures you refer to) of all franchisees own more than one franchised unit; and such multi-unit franchisees own more than half of all franchised units throughout the United States.

I Have My Reasons

The top six reasons people want to be franchisees:

  1. They want to be an entrepreneur.
  2. They wish to own a second business.
  3. They seek a more flexible schedule and/or want to work from home.
  4. They're ex-execs with layoff packages.
  5. They've retired.
  6. They're just out of college.

SOURCE: Entrepreneur magazine

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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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