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.
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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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