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What a Ride!

Take a look at how franchising has evolved over the past 30 years.
May 1, 2007
URL: http://www.entrepreneur.com/article/177174
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.

Law and Order

Franchising's remarkable growth and success over the past 30 years owes much to federal and state franchise laws and regulations--and the enlightened individuals who enforce them. Many folks forget that, by the late 1960s and '70s, the words franchise and fraud had almost become synonymous. What happened was simple: As franchising exploded onto the scene in the '50s and '60s, story after story appeared in newspapers and magazines about how franchisors and franchisees were growing wealthy in this burgeoning arena. That's when the criminal community, including organized crime, jumped in. Tens of thousands of people nationwide collectively lost hundreds of millions of dollars through criminal franchise enterprises--enterprises that, using slick brochures and outright fraud, sold phantom, nonexistent franchises to hapless victims.

Fifteen states and the federal government fought back, enacting franchise registration and disclosure laws and embarking on an aggressive law enforcement campaign to eradicate fraud in the franchise arena. And you know what? It worked. Due to the diligent enforcement of these laws by federal and state regulators--who, at the same time, grew more understanding of legitimate franchisors' needs and wants--there hasn't been a major franchise scandal in this country in decades. In fact, during his time as New York's attorney general, current governor Eliot Spitzer observed how relatively clean the franchise marketplace has been. "There has been a notable absence of scandal," he said. "When we look at the franchise market, we say, remarkably, [that] we have a great market that is healthy, growing [and] generating jobs, investment and confidence on the part of all involved."

So, yes, franchising has had quite a run over the past 30 years. It's seen meteoric growth, consolidation of both franchisors and franchisees, the maturation of relationships between them and the continually growing public demand for franchising's products and services. Now, rarely a day goes by that any of us does not encounter or frequent a franchise establishment.

And what does the future hold for franchising? Seemingly, continued unbridled growth, further dramatic expansion into foreign markets and sharply increased numbers of U.S.-based franchise networks. "The past is prologue," observes IFA president Matthew Shay. "In the three-year run-up to Entrepreneur's 30th anniversary, nearly 900 new concepts began franchising in the United States. Today, prospective franchisees have a wide range of franchise opportunities to select from in over 100 lines of business, offering business formats of all shapes and sizes." State franchise regulators concur, observing that in the past year alone they witnessed a 20 percent spike in initial franchise registration applications submitted to their offices.

Pretty good for an industry that started with a Kentucky colonel (Harland Sanders) charging his first franchisees a nickel-a-chicken royalty; a beverage Mixmaster salesman (Ray Kroc) who just had to know why the McDonald brothers were ordering more of his machines than anyone; and a beleaguered father of young children (Kemmons Wilson) who, after finding no family-friendly hotels to stay in while on vacation, started the Holiday Inn chain.

David J. Kaufmann is senior partner of Kaufmann, Feiner, Yamin, Gildin & Robbins LLP in New York City, author of the New York Franchise Act, a member of the governing committee of the American Bar Association Franchise Forum and a franchise columnist for the New York Law Journal.