- What Is Franchising?
- A Very Brief History of Franchising
- Local Production in Limited Geographic Markets
- Physical Locations Are Helpful
- Industries Involving Local Knowledge
- Industries Demanding Local Discretion
- Standardized, Codified, and Easily Learned
- Brand Names: An Important Competitive Advantage
- Labor-Intensive Industries
- Cost and Risk
- Measuring Performance
A Very Brief History of Franchising
Most business historians date the beginning of franchising as a concept to the Middle Ages, when feudal lords initiated the practice of selling to others the rights to collect taxes and operate markets on their behalf. However, this makes the earliest examples of franchising a political activity rather than a business activity. The first examples of franchising as a way of doing business are found in mid-nineteenth century Germany, where brewers set up contracts with tavern owners to sell their beer exclusively in the taverns.
In the United States, the earliest example of the use of franchising was not found in breweries and taverns. Instead, it occurred in the sale of products to housewives located on the American prairie. In 1851, Isaac Singer became the first American product name franchisor when he began to sell to traveling independent salesmen the rights to sell his sewing machines to end users.
Although the Singer® Sewing Machine Company was the earliest American product name franchisor, it was relatively quickly outpaced by an even more important product name franchisor: Coca-Cola. In the early 1890s, Coca-Cola chose to franchise the rights to bottle its carbonated beverage to a large number of independent businessmen who received exclusive territories in which to distribute the product in return for paying for and assuming the risk of, distributing the product.
Certainly, Coca-Cola was an important early product name franchisor, but it might not have been the most important one to begin operations at the turn of the 20th century. That distinction might be reserved for the pioneers in the American automobile industry, which began to franchise at that time. Both Ford and General Motors began to franchise dealerships to independent business people to sell cars under their brand names to end users because the companies did not have sufficient funds to create the needed retail outlets when they first began operations.
Another important innovation in franchising was the development of conversion franchising. Conversion franchising is the process of turning independent businesses into franchisees under the umbrella of the franchisor's brand name. The major oil companies were the pioneers in this activity when they began to offer independent repair stations the right to use their trademarks in the 1920s.
We can also date several other pioneers in franchising in retail and service businesses to the 1920s and 1930s. Perhaps the earliest retail franchisor is Ben Franklin stores, which started in 1920 and began to franchise around that time. The earliest fast food franchise was A&W® Root Beer, established in 1924, with Howard Johnson® being the first to franchise restaurants in 1935. An early pioneer in service franchising was Arthur Murray® Dance Studios, which got its start in 1938.
Franchising really took off as a form of business in the 1950s and 1960s, when many of the current large franchise chains, businesses such as Tastee-Freez®, KFC®, McDonald's, and Burger King®, were established. The acceleration of franchising in the 1950s and 1960s can be attributed largely to two factors: the rise of television advertising and the establishment of the national highway system. The former made national advertising a viable way to build a brand name. As a result, for the first time, it became possible to have a national chain whose competitive advantage was based on a recognizable name. The latter made travel to unfamiliar locations more common and created the need to have national brand names as a way to demonstrate quality to customers in these locations.
Perhaps because of the growth of franchising in the 1960s, that decade witnessed the formation of a flurry of fly-by-night franchise operations that established their systems, sold them to franchisees, took the franchisees' money, and quickly shut down. The loss of many people's investment in these franchises led to the beginning of franchise regulation in the 1970s. The Federal Trade Commission (FTC) initiated its first franchise fraud investigations in 1975. In that same year, the North American Securities Administration drew up draft guidelines for Uniform Franchise Offering Circulars (UFOCs), which have become the standard form for disclosing franchise opportunities to franchisees. This growing federal effort in the 1970s also culminated in the establishment of disclosure requirements and business rules for selling franchises by the FTC in 1979 and the start of the regulated era of franchising. As a result of this effort, franchising is now a regulated form of business, making an understanding of the legal environment in which it operates important to you as a franchisor.