Antecedents and consequences of external risk perception in franchising: evidence from the hospitality industry

In this article, we contribute to the understanding of the role that external risk perceptions play in decisions regarding the combination of company-owned and franchised units in the hospitality industry, and to knowledge of the impact of specific CEO characteristics on perceptions of environmental uncertainty. We examine the effects of tenure, an entrepreneurial nature and the innovative attitude of the CEO on the perception of external risk, and address the direct and indirect consequences of such perceptions of external risk on the configuration of the network of outlets. Our results show a significant relationship between the characteristics of the CEO and the perception of risk but, contrary to expectations, risk perception is associated with a lower degree of franchised outlets within the ownership mix.     

Structural and strategic dynamics in franchising

In this paper we examine the changes in ownership patterns of franchise systems as they mature. We compare the predictions made by three alternative theories within the context of the fast food industry. Signaling theory predicts that franchise systems will move toward a greater reliance on franchised outlets as systems mature, while resource acquisition theory (or as it is sometimes known, ownership redirection thesis) predicts a tendency in the opposite direction. A third theoretical perspective, tapered integration or plural forms, suggests a tendency toward maintaining a steady state of mixed distribution. Results indicate that although franchisors value the benefits of the mix of ownership types and do maintain that mix over time, there is some evidence of a greater tendency to permanently convert existing franchised outlets to company-owned outlets as fast food systems mature and gain greater access to resources.     

Plural form franchise networks: A test of Bradach’s model

This paper focuses on plural form organizations within franchise networks. Plural form can be defined as the simultaneous presence of both franchised and company-owned outlets in the same network. Bradach (1998) developed a model composed of four challenges that a franchisor should meet in order to benefit from plural form organization. The aim of the present article is to test the predictions of the Bradach’s model of plural form networks. A conceptual model regarding the determinants of the proportion of company-owned outlets (PCO) is estimated with data from French franchise networks. We show that the statutory choices are actually driven by the four challenges highlighted by Bradach, namely the challenges of expansion, concept uniformity, local responsiveness, and network-wide adaptation.     

Franchising versus corporate ownership: The effect on price dispersion

This paper uses data on the prices charged at fast-food restaurants in the metropolitan Pittsburgh and Detroit areas to assess the effect of franchising on price dispersion within chains in fairly narrowly defined geographical areas. A review of reasons why firms may face more price dispersion under franchising guides the empirical analyses. Results indicate that 1) franchisors do not aim for fully uniform prices even on the corporate side of their chains, 2) the degree of price dispersion is highest for firms with both franchised and company-owned units, as predicted by models implying a systematic price differential between units operated under these different contracting mechanisms, and 3) price dispersion for fully franchised chains is greater than for fully corporate chains. These last two results, combined with evidence from court cases that franchisors sometimes try to control franchisee prices directly, suggest that franchisors indeed lose some amount of control over prices charged to customers when they use franchising as opposed to corporate ownership. Finally, I find a positive effect of the royalty rate on price dispersion. This suggests that double marginalization is behind at least some of the higher prices found in franchised units in the existing literature.     

Information Asymmetry and the Franchise Decision

Abstract

A key explanation for the existence of franchising as a marketing channel has its underpinnings in the information asymmetry between the firm and individual outlets. Franchising is the preferred option for outlets where information asymmetry leads to prohibitive monitoring costs within a vertically integrated system. While modern information technology has the potential to reduce monitoring costs at geographically isolated locations, several factors are likely to limit its effectiveness. Thus, the incentive to franchise these outlets should continue to exist. The paper also discusses the possible implications of the increased use of information technology in the franchised channel.     

Should I Stay or Should I Go? Geographic Entrepreneurial Choices in Brazilian Franchising

In the broad empirical literature on franchising, performance outcomes of location decisions appear to be a largely forgotten issue. Yet franchising represents a rich context to study the impact of geographic entrepreneurial choices. Addressing this “blank spot” in the literature, we deal with the following question: Is it better for a chain to stay in the same geographic area, or to expand via distant franchised units? Our econometric estimations on new and unique Brazilian panel data show that spatial agglomeration of chain outlets leads to higher performance, suggesting that agglomeration gains outweigh cannibalization and spatial monopoly effects.     

Insights into Franchising: A Review of Empirical and Theoretical Perspectives

Business format franchising has expanded rapidly, over the past 40 years as an alternative method of distribution and business development. This literature review analyses the major issues which have been the subject of in-depth research and/or significant debate. These include: the determinants of franchising in theory and practice; why franchisors normally operate both franchised and company-owned outlets, and the factors which influence the balance between them; the role and position of franchisees within the franchisor/franchisee relationship and, finally, the continuing debate surrounding the kind of regulatory framework in which it should operate. These findings are evaluated and aspects of franchising which warrant further investigation are outlined.     

Examining the Drivers for Franchised Chains Performance through the Lens of the Dynamic Capabilities Approach

This paper draws on the dynamic capabilities approach to explain the performance of franchised chains. This approach is a useful lens to understand why some chains are more likely to drive superior performance than others. Hence, using this theoretical lens, we explore why and how several characteristics of franchised chains influence sales performance. This study includes 189 retail and service chains operating in the United States. Findings show that experience before franchising, length of training, chain age, franchising fees, and level of internationalization positively impact performance of franchised chains, whereas the proportion of franchised units has a curvilinear influence (inverted‐U shape) on chains' performance. Implications for franchising scholars and practitioners are discussed.     

Franchisor strategy and firm performance: Making the most of strategic resource investments

A key decision for entrepreneurs in many retail and service firms is whether, and how much, to use franchising. If the decision is made to franchise, the actor may assume one of two “identities” or tactics: (1) the “chain builder,” who uses a blend of company and franchised outlets, and (2) the “turnkey,” who sells business opportunities but does not own any outlets. To benefit from their chosen strategy, franchisors must put resources in place to support it. We argue that franchisors use the chain building strategy to strike a balance between standardization and innovation by building resources that foster trust and encourage knowledge sharing with franchisees. In contrast, for turnkeys, a valuable set of operational routines is the critical strategic resource. To better appreciate how franchisors choose between the chain builder and turnkey strategies, we gathered survey information from 263 franchisors. Via this data, and as described herein, we learned that franchisors perform better when they invest in resources that best support their selected strategy.     

Dual agency in retail chains

Abstract

Retail distribution is often organized into chain stores, where geographically dispersed units operate under a common trademark and operational routines. Franchising is an organizational form chosen by entrepreneurs to manage retail chains. Previous research has maintained that franchising is a solution to “the” agency problem. This article shows how franchising solves one agency problem, shirking, but creates another, free riding, giving rise to dual agency problems. We test which has a stronger effect on performance. Using stochastic frontier estimation, a technique from empirical economics, we show that marketing spending yields less sales for franchised chains relative to owned chains, suggesting that the loss associated with free riding dominates the gain from controlling shirking. Implications for theory and practice are discussed.     

How Do Franchise Ownership Structure and Strategic Investment Emphasis Influence Stock Returns and Risks?

Franchisors seek to maximize firm value by managing investments both in tangible and intangible assets and in the mix of company and franchised outlets, yet little is known about how investors respond to shifts in these strategic decisions. Our goal is to assess the impact of these decisions on shareholder value within franchise systems through panel-data models. Specifically, we provide evidence on how investors in publicly traded franchises evaluate both the ownership structure and the strategic investment emphasis between intangible assets (e.g., brand) and tangible assets (e.g., plant and property). We find that an increase in the proportion of franchised units is negatively associated both with stock returns and idiosyncratic risk. In contrast, an increase in the emphasis on strategic investments in intangible assets is positively associated both with stock returns and idiosyncratic risk. Moreover, strategic investment emphasis moderates the strength of the effect of franchise ownership structure when firms franchise internationally. Overall, this research provides a novel empirical examination of franchising economics and has managerial implications for franchised channel structure.     

Dual Distribution and the Penrose Effect

This paper develops an approach to analyzing an equilibrium in markets where firms can choose dual distribution to sell their products. Dual distribution involves a firm selling its product both through company-owned stores and through independently owned franchises. For a monopoly firm, the use of company-owned stores is assumed to play a number of roles. When the total number of markets is variable, an increase in company-owned stores can signal the quality of the product to potential franchisees, increasing the total number of markets served by the monopolist. Additional company-owned stores may also increase the royalty rate received by the franchisor, as well as increase demand in the local markets. There are limits, however, to the benefits of company ownership, called the “Penrose Effect.” For an equilibrium to exist, the monopoly firm must have no incentive to alter the the number of company-owned stores vis-à-vis franchised stores. The approach taken here yields a number of testable implications, which can form the basis of empirical tests of dual distribution.     

Strategic Debt in Vertical Relations: Evidence from Franchising

In this paper, we examine the strategic use of debt in franchise organizations. We focus on both the franchisee's and the franchisor's capital structures. The primary goal of this study is to examine whether franchisors impose limits on franchisees’ debt levels to be able to increase their own leverage. We find that the franchisor's leverage is significantly related to the maximum leverage allowed for the franchisee. As the franchisor sets an upper limit on the franchisee's debt ratio, the franchisor can raise more debt and therefore seizes tax benefits, since interest payments are tax deductible. We find that this effect is stronger in chains with larger fractions of franchised outlets.     

Tourists' purchase intentions: impact of franchise brand awareness

This study examines how an intention on the part of tourists to purchase items for daily use is determined by their awareness of franchise-branded stores, the image of those brands, and the perceived risk of purchase from non-franchised stores within Taiwan. In that country franchised chains are an important component of the retail mix, and their presence in tourist destinations can influence shopping patterns. The results indicate that positive relationships exist between intentions to purchase items from franchise convenience stores and perceived risk of buying from unfamiliar retail outlets. Equally familiarity with the destination acts as a moderating variable, and this variable facilitates higher patronage of non-franchised stores by tourists. The results indicate a general preference for purchases from well-established franchised outlets than locally independent owned stores. Managerial implications for both types of stores in tourist zones are discussed.     

Gender’s moderating role in the relationship between organisational form and performance in the Spanish supermarket industry

This research seeks to discover how the organisational form (franchising vs. vertical integration) of 305 supermarkets belonging to a Spanish franchise chain influences unit-level performance measured through three key performance indicators commonly used in the retail literature: sales per square metre, sales per employee, and service quality scores. Additionally, we assess the moderating role of the manager's gender in each individual supermarket. We have analysed the research questions using multivariate analyses, with a panel dataset that includes quarterly establishment-level data covering the period from January 2017 to December 2019. We have found that franchised supermarkets record higher sales both per square metre and per employee than vertically integrated ones. This positive effect of franchising is lower in establishments run by females than in those run by males. The findings also reveal that franchised supermarkets record lower service quality scores than their company-owned counterparts, and this negative effect is again lower in establishments managed by females than in those managed by males.     

US-Based Franchise Systems

Abstract

This study assesses both firm and relationship characteristics that may differentiate US-based franchisors that have internationalized operations from those that do not. Multiple discriminant analysis is used and shows that both firm and relationship characteristics are important discriminators. Not surprisingly, international franchise systems are larger and exhibit lower levels of solidarity. A surprising finding, however, is that international systems exhibit lower levels of opportunism, in spite of greater geographic and cultural proximity. Interestingly, a number of firm characteristics (number of domestic units, number of franchised versus company-owned units, firm age, and experience with franchising) and relationship characteristics (flexibility, trust, behavioral transparency, and effectiveness) were not significant discriminators between domestic and international franchisors. Implications of the findings and directions for future research are provided.     

Multi-unit franchising: Growth and management issues

Entrepreneurs in a number of retailing sectors have eschewed the creation of company-owned chains and have embraced franchising as a preferred method for growing their businesses. There have been two leading reasons proposed for this preference. First, that franchisees provide the financial capital necessary for expansion, and second that franchisees manage the outlets better than company employees would if the unit were company owned. Interestingly, although many entrepreneur/franchisors confirm the relevance of the capital acquisition argument in their decision-making, theoretical analysis has discounted its importance. Instead, researchers have focused on the incentives of employee store-managers to misrepresent their ability and their effort as the dominant impetus behind franchising. Misrepresentation by employees as to ability and effort imposes costs and inefficiencies on the entrepreneur's chain. Arguing that franchising solves these problems by having the stores managed by persons with claims to the profits, these researchers have, by and large, rejected the capital acquisition argument for franchising in favor of this incentive-based rationale.Within this view, multi-unit franchising presents a curious anomaly. Multi-unit franchising, either through the incremental expansion by the franchisee one unit at a time or through the rights to open multiple units contained in an area development agreement, creates a collection of mini-chains within the franchise system. These mini-chains are operated by employee store-managers. Of course, they are employees of the franchisee, but they are employees nonetheless, and as franchise researchers have traditionally argued regarding the entrepreneur's employees, they will have incentives to misrepresent their ability and effort. Moreover, multi-unit franchising is ubiquitous.If multi-unit franchising is at odds with the incentive rationale for franchising, and it has a positive association with the growth of franchise systems, it must be providing the entrepreneur with some other benefit. In this study, we argue that the benefit it provides is access to capital. Through a study of fast-food franchise systems, we demonstrate that the more a chain engages in multi-unit franchising (i.e., the greater the proportion of multi-unit franchisees it has), the faster it grows, even faster than franchise systems generally. Moreover, we show that the level of commitment franchisors feel toward continuing to franchise is negatively related to the average number of units per franchisee and negatively related to their ability to obtain financial capital elsewhere. In other words, although multi-unit franchising helps an entrepreneur grow his or her business by providing increased access to capital, store level incentive problems get increasingly troublesome as franchisees get more and more units. It would appear, therefore, that capital acquisition is a relevant reason for engaging in franchising after all.     

Singapore's Experience with Econ Minimart

This is an article about an innovative concept in retailing by means of a voluntary chain which combined the better aspects of a franchised connection with independent individual operation. In January 1983, the Provision Suppliers Corporation (PSC), a wholessaling organization which supplies a wide range of products to provision shops in Singapore, announced the opening of a chain of 49 retail outlets under the common name of Econ Minimarts. By the end of 1987, the chain had grown to 129 outlets. The turnover of its members had, on an average, increased three-fold, with significant improvements in profitability and productivity. The concept had not only succeeded in improving the performance of its members but had also contributed a great deal to the rapid growth of the PSC. The paper examines the Econ Minimart concept and the marketing strategy underlying the phenomenal success of this innovation to upgrade conventional retailing. Problems and applicability to other developing coutries are also analysed.     

Influence of Organizational Form and Customer Type on Online Customer Satisfaction Ratings

In this paper, we explore the impact of the organizational form (company‐owned versus franchised) and the type of customer (nonbusiness versus business) on online consumer‐generated satisfaction ratings in the hotel industry. Our empirical study deals with 6,348 TripAdvisor reviews regarding stays at one of 134 hotels of a plural form chain located in a Western European country. Our main finding reveals that the type of customer moderates the relationship between organizational form and customer satisfaction; business travelers having higher satisfaction with franchised hotels than company‐owned hotels in terms of satisfaction. We discuss the implications of these findings for the management of plural form chains.     

E-Commerce and Encroachment: Evidence From French Franchise Networks

Encroachment is a critical issue affecting relations among franchisees and between franchisees and franchisors. The Internet increases this risk when a franchisor adopts a transactional website, becoming a “ubiquitous outlet.” Using logistic regression we give evidence of the significant impact of the proportion of franchised outlets in the network on transactional website adoption by French franchisors. The analysis is carried out to facilitate comparison with the United States market. A web-to-store strategy and the click-and-collect system implemented by most French supermarket chains are presented as potential solutions to circumventing e-encroachment.