Page 353 - Encyclopedia of Business and Finance

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Franchising

FRANCHISING
Franchising is an arrangement whereby a supplier, or fran-
chiser, grants a dealer, or franchisee, the right to sell prod-
ucts or services in exchange for some type of
consideration. It is a business arrangement involving a
contract between a manufacturer or another supplier and
a dealer that specifies the methods to be used in market-
ing a good or service. The franchiser may receive some
percentage of total sales in exchange for furnishing equip-
ment, buildings, management know-how, and market
research. The franchisee supplies labor and capital, oper-
ates the franchised business, and agrees to abide by the
provisions of the franchise agreement.
Historically, franchising was a grant by a king to
allow a citizen an exclusive right to sell a product or ren-
der a service. For this right, the sovereign protected the
exclusivity and the subject paid the government an appro-
priate tribute in service, food, goods, or money. Franchis-
ing in the United States started shortly after the Civil War
(1861–1865), when the Singer Company began to set up
sewing-machine franchises. The concept became increas-
ingly popular after 1900 in the automobile industry.
Because of this, other automotive franchises developed for
gasoline, oil, and tires. In the 1950s, food operations
made a dramatic entrance into franchising with the devel-
opment of McDonald’s, currently one of the world’s Taco Bell is one of the leading fast food franchisers in the United
largest franchise organizations. States. PHOTOGRAPH BY KELLY A. QUIN. THE GALE GROUP.
Franchising operations account for billions of dollars
in annual sales, with more than 500 outlets employing
millions of people. A new franchise opens somewhere in TYPES OF FRANCHISE
AGREEMENTS
the United States every six minutes. Franchising accounts
for approximately 40 percent of all U.S. retail sales. Retail franchise agreements fall into three general cate-
Because of changes in the international marketplace, shift- gories. In one type of arrangement, a manufacturer
ing employment options in the United States, the expand- authorizes a number of retail stores to sell a certain brand-
name item. This franchise arrangement, one of the oldest,
ing U.S. economy, and corporate interest in more
is common in the sales of cars and trucks, farm equip-
joint-venture activity, franchising will continue to increase
ment, shoes, paint, earthmoving equipment, and gasoline.
rapidly.
About 90 percent of all gasoline is sold through franchised
Franchising represents the small entrepreneur’s best
independent service stations, and franchised dealers han-
chance to compete with the giant companies that domi- dle virtually all sales of new cars and trucks.
nate the marketplace. Without franchising, thousands of
In the second type of retail franchise, a producer
businesspeople would never have had the opportunity to
licenses distributors to sell a given product to retailers.
own their own businesses.
This arrangement is common in the soft-drink industry.
The largest percentages of franchise operations are in Most national manufacturers of soft drinks—such as
the recreation, entertainment, and travel fields, followed Coca-Cola, Dr. Pepper, and PepsiCo—grant franchises to
closely by business services, nonfood retailing, and auto- bottlers, which then service retailers.
motive products and services. Popular franchises include In the third type of retail franchise, a franchiser sup-
Subway, McDonald’s, Wendy’s International, Jackson plies brand names, techniques, or other services, instead of
Hewitt Tax Service, KFC, UPS Store, TCBY Treats, Taco complete products. The franchiser may provide certain
Bell, and Jani-King. production and distribution services, but its primary role

330 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION