An American Icon
Chances are, most people don't realize how much franchises have become an integral part of their lives. They could easily get goods and services from franchises on a daily basis without knowing it-the proliferation of concepts and models is so great, consumers often don't distinguish or discriminate between franchise or nonfranchise businesses.
Though franchising as a concept has existed for centuries, it became a prevalent force in American business just a few generations ago. And as anyone who has watched TV, listened to the radio or read ads can attest, franchising has become an icon of American life. Robert A. Robicheaux, chair of the Department of Management, Marketing and Industrial Distribution at the University of Alabama, Birmingham, says the "explosion of entrepreneurship made possible by franchising" began in the 1950s, punctuated resoundingly by Ray Kroc, founder of McDonald's. By using franchising, which Robicheaux points out is nothing more than a particular legal form of business, franchisees could be, as he puts it, "quasi-independent" business owners who basically assisted the franchisor in expanding the brand. Now, in addition to the vast hamburger empires, automobile dealerships, janitorial services and just about any other type of business imaginable can use franchising as a way to build and expand. In doing so, franchising has irrevocably shaped the nation. On a broad scale, here are five areas that have been significantly affected by franchising: the economy, jobs, entrepreneurship, uniformity and culture.
Money makes the world go 'round, and franchises have lent a hand in the rotation. In our 2005 Franchise 500®, there were over 387,000 franchise and company-owned establishments in 2004. And companies in the Franchise 500® generated $135.7 billion in their most recent fiscal year.
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Don DeBolt, president of the International Franchise Association (IFA), says franchising accounts for almost half of all U.S. retail sales. "Franchising has had a $1.5 trillion impact on our economy. It's bigger than the gross domestic product of China," DeBolt says. What could I say other than "wow," to which DeBolt countered, "'Wow' is the right word. We knew it had a terrific impact, but that kind of impact is overwhelming. [Franchising] is one of the more dependable generators of economic activity because small business tends to grow incrementally."
Jobs and Entrepreneurship
Franchising can be counted on to create new jobs every time a franchise expands or adds a new location, which, in our ever-growing retail and service landscape, is often. "Big business has not been creating jobs," DeBolt asserts. "Small business and franchising have created jobs. Franchising is really small business at its best."
In fact, franchising affects our economy and everyday lives more than we realize, according to a study released by the IFA in March 2004, which measured the direct and indirect impact of franchise businesses. The study showed that franchises directly employed almost 9.8 million people, (7.4 percent of all private-sector jobs)-as many people that year as all manufacturers of durable goods. Franchising also supplied a payroll of $229.1 billion (5 percent of all private-sector payrolls) in 2001.
Because franchising doesn't exist in a vacuum, it's also a boost to overall economic well-being. The study revealed that the total economic impact of franchising (which includes what occurs both in and because of franchises) resulted in more than 18.1 million jobs (13.7 percent of all private-sector jobs) and $506.6 billion in payroll (11.1 percent of all private-sector payroll). In addition, the study found that economic activity in franchise businesses generated "about the same amount of additional activity in nonfranchise businesses."
Franchising has created opportunities for job-seekers and business-seekers alike. Men and women young and old, high-ranking executives and those armed only with the dream of financial independence have entered the realm of franchise ownership. Those who have an entrepreneurial yearning but also appreciate the benefits of running a business with a support system in place have found a haven in franchising, and have planted their roots there. In fact, franchising, to a degree, is a brain drain on corporate America. "Corporate America's going to have kids fresh out of school who will work for a little bit of money, but they're not going to have peo-ple who have 20 or 30 years of experience and really know how to run a business," says franchise consultant George Knauf. "[Those former execs] are going to be sitting in franchises or independent businesses. They're going to be running their own operations and gaining the benefit of their hard work instead of giving it away."
And there are plenty of opportunities: Of the companies that comprise the franchise population, more than 90 percent of their total units are owned by franchisees, according to our 2005 Franchise 500®.
Going the franchise route can also give prospective franchisees assurance, due to stringent disclosure requirements. "The beautiful thing about it," says DeBolt, "is there's so much opportunity for people to investigate the investment in a way they couldn't if they were starting their own business, or buying a business that isn't a franchise." Being a franchise owner is another important avenue for achieving the American dream.
Franchising has come a long way in terms of the overall number of franchises sold each year, and this year, things are looking up. So what's in store for the future? Stay tuned.
Walk into one fast-food franchise, and then visit one of its other locations. Pretty similar, isn't it? There may be slight variations, but the overall concept remains the same. Though consumers may not be conscious of it, this type of consistency is what they want. "It's a comfort," says Knauf.
Thanks to branding, franchising also "conveys a sense of the familiar," says Michael Solomon, a human sciences professor of consumer behavior at Auburn University in Auburn, Alabama, and director of Mind/Share Inc., an Atlanta consulting firm.
Consistency gives consumers confidence in a business, says Robicheaux, and franchisors realize that imposing and maintaining a certain standard for all franchise outlets-encompassing appearance, quality and service-is what protects and reinforces their brand despite variances in location, culture and franchise operators. Some franchisors even tout this aspect in their marketing. Robicheaux points to one of Holiday Inn's past advertising efforts with its "The Best Surprise Is No Surprise" campaign.
Solomon believes this element of predictability makes sense for consumers. "It lowers their search cost-the amount of effort that goes into evaluating alternatives," he says. "To some extent, we're variety-seekers; but, especially if we're outside our home territory, we [sometimes] want the assurance of a McDonald's. You know exactly what you're getting."
The concept of uniformity within a chain has become such standard practice that it's sometimes hard to differentiate which businesses are franchises and which aren't. "[Independent] businesses realized [franchises'] value in cultivating and owning their brands," says Robicheaux. Some of today's most successful nonfranchise businesses espouse that very ideal. Barnes & Noble, Gap and Starbucks have each made a definite imprint and boast loyal followings.
For instance, Solomon observes, "Starbucks understands the importance of systematizing, where the quality and delivery are predictable. They also understand the importance of the design elements that go into their retail locations." Speculating that Starbucks perhaps learned from the success of some franchise operations, Solomon believes the company saw "that [it could] create a certain design philosophy and roll it out in a uniform manner and get similar results." Citing Barnes & Noble as taking the same cues when it comes to providing ambience, he adds, "they understand that they're providing an experience, not just a product. They've taken that basic insight and mass-merchandised that."
But having the same look isn't the only lesson that franchising has taught other businesses. "One of the things franchises are particularly good at is transferring something discovered at one establishment to another," says Linda Argote, a professor of organizational behavior at Carnegie Mellon University in Pittsburgh. She cites an article in a June 1998 issue of The Economist describing how Ford sent a task force to McDonald's to learn how they deliver and transfer knowledge on such a global scale. "We're seeing this mode of organizing being infused in other organizations," Argote says.
And the proliferation of franchises across the world has shown other businesses that the sky's the limit when it comes to expansion. "To see franchises that have 10,000 or 15,000 units is certainly an inspiration," says DeBolt. "I think [other businesses] saw an opportunity for growth."
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Robert Robicheaux, chair of the Department of Management, Marketing and Industrial Distribution at the University of Alabama, Birmingham, says, "McDonald's has shown a unique capacity to adapt and meet customers' expectations all over the world." And when it comes to what Robicheaux considers a cultural icon-Happy Meals-he adds, "McDonald's changed the way Americans fed their children."
The McDonald's sphere of influence has even affected other franchises. "Dave Thomas, founder of Wendy's, said he didn't invest a lot of money in market analysis and research when he first started the business. He just followed McDonald's," says Robicheaux.
Though International Franchise Association president Don DeBolt has a tougher time naming the "best" franchise, he admits that, "by pervasiveness and impact, it's McDonald's. They made franchising a household [word], and they grew faster and stronger."
Because franchises are so widespread in America and franchisors primarily hail from the United States, the concept is tightly stitched into the fabric of our lives and our culture. The fact that a meal can be made and given to us in a matter of minutes or that an oil change can be done in half an hour has reinforced our desire for instant gratification, which has become a cultural phenomenon. It's a phenomenon that has resulted from a need to provide services in the best, most efficient manner.
"By their very nature, franchises need to standardize to realize cost efficiencies. The very elaborate and rigorous systems that some of these companies are developing have benefited consumers in ways they don't even realize," says Solomon. "[People] criticize McDonald's, but the reality is they're able to deliver food products [conveniently and economically] because of the economies of scale and standardization of their whole supply chain."
The vast array of franchises has supplied our society with products and services that have led us to expect the best. "Franchising always creates a level or standard of service, quality and pricing that benefits the consumers," asserts DeBolt. "Time after time, when franchising has come into a field of endeavor, no matter what industry, there just seems to be a new level of efficiency and competitiveness. And the consumers win. They get better products, better prices, and usually more choice and selection." This allure has contributed to the spread of some of these franchises abroad, exporting a touch of our culture to theirs and offering a glimpse of what life is like here.
Franchising has changed the landscape of our nation and affected us in a myriad of ways. A permanent institution, it grows stronger with each passing year. While some people may only be patrons of franchises, others will find their dream businesses in franchising. The power of brand has taken hold in America, and whether it's the golden arches or any other franchise emblem, we recognize and identify them as part of our world.
"It's certainly a symbol of our economic structure," says DeBolt. "I really, truly believe deep in my heart, franchising will do more for world peace than anything because it creates jobs and economic stability, two of the most essential components [for peace]. It's not credited enough for accomplishing what it has. Many people think of franchising in more personal terms of how franchising can benefit them, and [they] simply don't realize this truly incredible impact franchising has on the peace and prosperity of this world we live in. Where else can we find a job creator, an economic growth stimulator and a personal wealth creator that gives [people] the opportunity to realize their dreams and financial security for their families beyond their wildest expectations? Franchising is something everyone can have a stake in, one way or another."