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.     

Contractual Design as a Determinant of Performance: Evidence from Franchising

This empirical note deals with the contractual design of relationships between producers and retailers. It provides evidence on the links between the features of vertical contracts organizing franchising networks and the performances of these networks. An agency perspective is used to understand the structure of contracts. We focus on the relevance of vertical restraints by the upstream firm to prevent retailers from free‐riding in the distribution networks. From six frequent contractual provisions we distinguish two types of contracts according to the degree of constraint imposed on the franchisees. Econometric estimations carried out on this basis offer evidence consistent with the hypothesis that within franchising systems, more constrained contracts for retailers encourage better performance at the network level.     

Possible Applications of Survival Analysis in Franchising Research

Time is an important variable for retailers. The concepts of survival and duration, linked to this time variable, can be very interesting in franchising research. For instance, what are the determinants of the survival of a network or a store? Which elements decrease the period before franchising or internationalising a network? There is a well adapted but little-exploited methodology in this research area: survival analysis. Consequently, this methodological paper presents in detail survival analysis methodology before giving relevant examples of applications in the franchising field. Managerial implications of these kinds of research are given before the conclusion.     

An Incomplete Contracting Model of Dual Distribution in Franchising

Dual distribution in franchising is addressed from an incomplete contracting perspective. We explicitly model cooperative (dual distribution) franchising as an organizational form, next to wholly-owned, wholly-franchised, and dual distribution franchise systems. Key conclusions of the model are: (1) dual distribution as an efficient governance mechanism does not depend on heterogeneous downstream outlets, and (2) whether dual distribution or some other organizational form is efficient depends on the size of the benefits to dual distribution relative to the parties’ costs of investing.     

Franchising and firm financial performance among U.S. restaurants

Franchising has attracted the attention of retailing and entrepreneurship scholars in the past three decades, but evidence pertaining to how franchising affects financial performance is mixed and inconclusive. Thus, the question remains as to whether franchising firms exhibit better financial performance than non-franchising firms in the same industry. In order to find an answer to this question, our study compares the risk-adjusted financial performance of franchising versus non-franchising restaurant firms over the 1995–2008 interval, using five different performance measures: the Sharpe Ratio, the Treynor Ratio, the Jensen Index, the Sortino Ratio, and the Upside Potential Ratio. For each measure, the results revealed that franchising restaurant firms outperformed their non-franchising counterparts. Thus, we provide very robust evidence that franchising is superior on average in the restaurant industry, which can help explain the increasing popularity of franchising as a business form.     

Online search – Online purchase in franchising: An empirical analysis of franchisor website functionality

The aim of this paper is to characterize franchisors’ e-commerce strategies by studying their website functionality. Franchisors can use their website to facilitate consumer search. They can also provide content and tools to promote online purchasing (e.g., promotion codes, online payment, delivery options). Why are some franchisor websites more “search oriented”? What are the factors that influence the provision of informational tools and/or transactional tools? This empirical study is based on a detailed observation of 130 e-commerce websites of franchisors operating their chains in the French market.     

Franchising Research Frontiers for the Twenty-First Century

About four decades ago, during the formative years of the franchising industry, visionary authors like Oxenfeldt and Kelly (1968) and Ozanne and Hunt (1971) proposed a rich slate of research agenda which still continues to guide some of the contemporary scholarship in the franchising domain. This article (1) explicates some of the unique features of the franchising context that presumably inspired these pioneering authors, (2) discusses four established elements of ontology unique to franchising and isolates the remaining research gaps therein, (3) specifies a new slate of more contemporary research agenda for future scholarship, and (4) concludes with a brief discussion of the ten articles featured in this Special Issue of the Journal of Retailing dedicated to the theme of Franchising and Retailing.     

Reducing the Size of Internal Hierarchy: The Case of Multi-Unit Franchising

Successive layers of supervisor–subordinate relationships in organizations often distort information, increase monitoring costs, and lead to a cumulative loss of control. This paper discusses how some organizations can reduce their internal hierarchy by slicing it into two components and substituting the supervisor–subordinate relationship with an independent contract. This substitution allows the organization to shift its lower-level hierarchy to the contractors. These contractors are less likely to indulge in moral hazard, which can further reduce the size of hierarchy required. The paper examines this theory in the domain of multi-unit franchising and tests the hypotheses with a longitudinal data set.     

Large established firms entry into franchising: an exploratory investigation of strategic and operational issues

Although franchising is traditionally associated with newly emerging businesses which need to finance growth, this marketing technique is being increasingly utilized by large established firms as a method of business development. This article analyses the business objectives which led a sample of such firms in the UK to introduce franchising as a means of channel management. The modes of franchising-including the master franchise-selected by these firms as well as their operational and organizational experiences are investigated. In particular, there is an examination of the major managerial/cultural issues which these firms encountered in trying to reconcile the decentralized organization and operating methods implicit in the franchising concept with the centralized decision making and organization of a corporate concern. The implications for management of this dichotomy are explored.     

Trust as a Mediator of Channel Power

Abstract

Thriving longterm channel relationships require trust. Previous empirical work and metaanalysis have emphasized the central role of trust but its potential as a mediator of power has not been tested empirically. A model is proposed that hypothesizes a central, mediating effect for trust between power constructs (power asymmetry, coercive and noncoercive application of power) and key behavioral and attitudinal relationship outcomes (conflict, cooperation and satisfaction). The model is tested on a large sample (N = 887) in a single channel where there is a variable, but generally asymmetric, power relationship between principal and agent, as exists in many franchise and agency channels. Trust was not affected directly by the level of power asymmetry, but rather the way power was used, either coercively or noncoercively raised or lowered trust. Trust was found to mediate the impact of the way power is used on the agent's perception of cooperation, satisfaction, and conflict, emphasizing the pivotal role of trust in understanding the behavioral aspects of channel behavior.     

On manufacturers complementing the traditional retail channel with a direct online channel

With the explosion of the Internet and the reach that it affords, many manufacturers have complemented their existing retail channels with an online channel, which allows them to sell directly to their consumers. Interestingly, there is a significant variation within product categories in manufacturer's use of the Internet as a direct distribution channel. The main objective of this study is to examine the strategic forces that may influence the manufacturer's decision to complement the retail channel with a direct online channel. In particular, we are interested in answering the following questions:

1. Why is it that in some markets only a few firms find it optimal to complement their retail channels with a direct Internet channel while other firms do not?
2. What strategic role (if any), does the direct Internet channel serve and how do market characteristics impact this role?

To address these issues we develop a model with a single strategic manufacturer serving a market through a single strategic retailer. In addition to the focal manufacturer's product the retailer carries products of competing manufacturers. Consumers in this market are one of two types. They are either brand loyal or store loyal. The retailer sets the retail price and the level of retail support, which impact the demand for the manufacturer's product. The retailer's decisions in turn depend on the wholesale price as well as the Internet price of the product if the manufacturer decides to complement the retail channel with an online channel. Our analysis reveals that the optimality of complementing the retail channel with an online channel and the role served by the latter depends critically upon the level of support that the retailer allocates to the manufacturer's product in the absence of the online channel. The level of support allocated by the retailer, in the absence of the online channel, depends upon the retail margins on the manufacturer's product relative to that on rival products in the product category. When the size of the brand loyal segment is small relative to the size of the store loyal segment then in the absence of the online channel, the manufacturer can lower wholesale price and enhance retail support, especially when the retail margins on the rival products are low. In contrast, when the size of the loyal segment is large and the retail margins on rival products are high the manufacturer will find it more profitable to charge a high wholesale price even if that induces the retailer to extend low levels of support. If the manufacturer decides to complement the retail channel with an online channel, some consumers who would have purchased from the retailer might prefer to purchase online. Our analysis reveals that when consumers' sensitivity to price differences across the competing channels exceeds a certain threshold it is not optimal for the manufacturer to complement the retail channel with an online channel. However, this price sensitivity threshold itself depends upon product/market characteristics, suggesting that manufacturers seeking to complement their retail channels with an online channel should look beyond the nature of threat the online channel poses to the retail channel in devising their optimal distribution strategies. When the retail margins on rival products are sufficiently small, complementing the retail channel with an online channel when optimal allows the manufacturer to price discriminate and enhance profits. In contrast when retail margins on rival products are sufficiently high, complementing the retail channel with an online channel serves to enhance retail support. We also identify market conditions under which profits of both the manufacturer and the retailer are greater with the online channel than that without it. This is particularly interesting since the online channel competes with the retail channel.     

An Examination of the Coercive Power-Satisfaction Relationship Within a Relational Exchange

ABSTRACT

The authors develop a oonoeptual model that examines the moderating effect of dealer resistance on the use of coercive power-satisfaction relationship. The results provide a possible explanation for inconsistent results within extant channel literature regarding relationships that are power and/or dependency asymmetric Within the context of the model, the authors also provide a conceptualization of the endogenous construct, conflict potential, as a means to examine what motivates a channel member to exercise coercive power as an influencing agent. The model also examines the dealer's tendency to yield or acquiesce decision-making control to the manufacturer within the context of the use of coercive power-satisfaction relationship. The model is tested, via two-group structural equation modeling using a sample of 324 high level executives from the office systems and furniture industry. The authors provide theoretical and managerial implications of the research results as well as directions for future research.     

Gains and losses of exclusivity in grocery retailing

Conventional wisdom dictates that convenience goods should be distributed as intensively as possible. Still, exclusivity arrangements are rapidly gaining way in grocery retailing. We discuss the possible performance outcomes of exclusivity deals, and propose a unified framework (i) to quantify the gains and losses of such arrangements in consumer-packaged-goods markets, and (ii) to decompose the total monetary gains and losses into a variety of sources. Our framework considers both the manufacturer and the retailer granted the exclusivity right, and accounts for the fact that both dyad parties may be active in multiple, inter-related, categories.     

Contractibility and ownership redirection in franchising: A property rights view

This paper offers a property rights theoretical interpretation of the ownership redirection hypothesis advanced by Oxenfeldt and Kelly [Oxenfeldt, Alfred R. and Kelly, Anthony O. (1968). “Will Successful Franchise Systems Ultimately Become Wholly-owned Chains?”, Journal of Retailing, 44, 69-83]. In a nutshell, couched in resource dependence theory, the ownership redirection hypothesis argues that successful franchise systems will eventually become corporate owned systems because of the reacquisition of franchisee units by the more powerful, and resource-flush franchisors. We argue that the structure and dynamics of ownership patterns in franchising networks depends on the contractibility of the franchisor's system-specific assets and the contractibility of the franchisee's local market assets. Under the property rights view, ownership redirection will result from an increase in the contractibility of the franchisee's local market assets (local market information, financial resources, and managerial capabilities) and the resultant increase of the franchisor's bargaining power during the contract period. We extend the franchise literature by arguing that informational, financial and managerial resource constraints are only relevant for the change of ownership structure if they are noncontractible. This hypothesis is evaluated using data collected from the Austrian franchise sector. The empirical results are largely supportive of the hypothesis.     

A model of trust and compliance in franchise relationships

Despite the danger of franchisee non-compliance as a severe impediment to overall franchise operation and performance, there is currently minimal understanding of the key factors that lead to these behaviors. Using a foundation of relational exchange theory, we construct and test a model that demonstrates how two distinct forms of trust, based upon perceptions of franchisor integrity and franchisor competence, are critical to explaining the roles that relational conflict and satisfaction play in influencing franchisee compliance. Implications of these findings are then demonstrated to have compelling relevance to the effective management of franchise systems.     

全面冲突管理视角下的员工关系管理

冲突管理是员工关系管理中非常重要的工作,组织能否趋利避害地驾驭冲突,关系着组织的生存和发展。传统冲突管理侧重于冲突的事后管理,全面冲突管理强调对冲突进行全过程、全系统和全要素的管理。本文试图从全面冲突管理视角下,分析员工关系管理中冲突的范围及产生的原因,并最终构建全面冲突管理模型,为组织趋利避害地驾驭冲突,建立和谐员工关系提供对策和建议。     

论特许经营中知识产权的滥用与规制

特许经营是21世纪国际经济贸易的主要商业经营模式。特许经营的核心是包括商标、专利、商业秘密等知识产权以及产品经销权、经营模式所构成的特许权的使用许可,特许人以此对被特许人进行持续的监督、控制。而知识产权本身是一种合法的垄断权,常常被滥用而引起限制竞争的效果。西方主要国家均对特许经营进行反垄断法规制,而且立法日趋严格,对我国具有借鉴意义,我国应建立完善以反垄断法为核心的法律体系,用以规制特许经营中的知识产权滥用行为。     

Channel Selection and Coordination in Dual-Channel Supply Chains

This paper investigates the influence of channel structures and channel coordination on the supplier, the retailer, and the entire supply chain in the context of two single-channel and two dual-channel supply chains. We extensively study two Pareto zone concepts: channel-adding Pareto zone and contract-implementing Pareto zone. In the channel-adding Pareto zone, both the supplier and the retailer benefit from adding a new channel to the traditional single-channel supply chain. In the contract-implementing Pareto zone, it is mutually beneficial for the supplier and the retailer to utilize the proposed contract coordination policy. The analysis suggests the preference lists of the supplier and the retailer over channel structures with and without coordination are different, and depend on parameters like channel base demand, channel operational costs, and channel substitutability.