Effects of restaurant franchising: Does an optimal franchise proportion exist?

Franchising has significantly affected the US economy, contributing to a rapid growth of its retail sales. To identify whether franchising influences a restaurant firm's financial performance, this study investigated (1) the profitability and intangible values of both franchise and non-franchise restaurant firms and (2) the effect of the combination of franchised and company-owned outlets of restaurant firms (i.e., franchise proportion). The results of this study showed that (1) franchise firms had significantly higher profitability than non-franchise firms and (2) the relationships between franchise proportion and firm profitability and intangible value were curvilinear (inverted U-shape), verifying the existence of an optimal franchise proportion. The results propose a possibility that restaurant franchisors could maximize their profitability and intangible value with an optimal franchise proportion when other variables held constant, implying that it is important to pay attention to the franchise proportion together with other management strategies.     

Is restaurant franchising capital a substitute for or a complement to debt?

Since Oxenfeldt and Kelly’s 1969 study, the resource scarcity hypothesis has been considered a representative theory to explain franchising motivations. Whether franchising capital is a substitute for or a complement to debt has been discussed in the franchise literature but the relationship remains unclear. Using Frank and Goyal’s (2003) financial deficit model along with trade-off and pecking order theories, this study shed light on whether franchising capital acts as a substitute for and/or to complement debt in the restaurant industry. This study discovered that the adjustment speed of long-term debt leverage was faster for franchise restaurant firms than non-franchise restaurant firms. Further, the average long-term leverage target was lower for franchise restaurants. Consequently, this study revealed that franchising capital functioned as a substitute for long-term debt. In contrast, the adjustment speed of short-term debt leverage was slower for franchise restaurants and, thus, franchising capital complemented short-term debt.     

Does a minimum wage increase endanger restaurant jobs? Examining the role of franchising

This study examined the effect of federal minimum wage increases on the U.S. restaurant industry. Based on the competitive labor market perspective, this study expected that minimum wage increases would negatively (positively) influence restaurant employment (compensation), while franchising would positively moderate the minimum wage-employment (minimum wage-compensation) relationship. The results of the analysis showed that minimum wage increases negatively influence employment, while franchising positively moderates the adverse effect of minimum wage increases on restaurant employment. This study also revealed that minimum wage increases positively influence per employee compensation, but franchising does not significantly moderate the relationship. This study suggested that franchising provides a buffer that absorbs the adverse effects of minimum wage increases on restaurant employment. Conversely, franchise restaurants may face potential service quality issues because franchise firms seem to strategically adjust full-time employees to part-time workers to address minimum wage increases.     

Does managerial ownership influence franchising in restaurant companies?

Although the link between managerial ownership and firm performance is often explained in relation to a firm’s risk-taking behavior, little is known about how managerial ownership affects corporate risk-taking in industries characterized by high financial and operational risks, like the restaurant industry. To understand this important and understudied link, our study draws upon agency theory to examine the relationship between managerial ownership and franchising, typically a risk-reduction strategy of restaurant firms. Our results from panel data analyses using a sample of 962 firm-year observations show that managerial ownership is negatively associated with degree of franchising. Further, we find that after considering the scope of managerial discretion, there is a U-shaped relationship between managerial ownership and degree of franchising such that the degree of franchising decreases as managerial ownership increases up to a certain level, but then increases in tandem as managerial ownership increases to higher levels. Our results indicate that there is an optimal level of franchising associated with managerial ownership, implying that owners can influence their firms’ risk-taking behavior by setting target managerial ownership goals and designing effective incentive contracts.     

Share repurchases and stock market reactions: Messages from the restaurant industry

It is generally accepted that investors tend to react favorably to share repurchases. However, it is actually not uncommon for investors to underreact to some share repurchases. Recently, a number of restaurant firms have spent huge amounts of internal cash on share repurchases but little is known regarding the market’s underreaction to share repurchases in the restaurant industry. Hence, this study attempted to identify factors that could mitigate market reactions to share repurchases. Analyzing U.S. restaurant firms, this study revealed that growth opportunities, franchising, dividend payments, and spending excessive free cash flows on share repurchases negatively impacted market reactions. However, the negative impact of growth opportunities was weaker for franchise restaurants than for non-franchise restaurants. This study provides useful managerial information regarding the timing of and the amount that can be spent on restaurant firms’ share repurchases.     

Does Franchising Create Value? An Analysis of the Financial Performance of US Public Restaurant Firms

It is commonly believed that the franchising method of distribution provides strategic and operational benefits to the companies that adopt it. These benefits should result in superior financial performance as compared to that of firms that do not use franchising. Yet, the empirical evidence of the effects of franchising on financial performance is sparse and mixed. The purpose of this article is to examine the empirical evidence of the impact of franchising on US publicly traded restaurant firms. The results provide some evidence that franchising firms create more market and economic value than do non-franchising firms in the US public restaurant sector.     

Efficiency comparison of multiple brands within the same franchise: Data envelopment analysis approach

As the restaurant franchising industry increasingly diversifies its brands, it is pivotal for a firm to accurately assess the efficiency of brands within its franchise system. This research compares and contrasts the efficiency of different brands belonging to the same franchisor using data envelopment analysis (DEA). The sample was drawn from three brands that are in operation under the same restaurant franchisor. The results of the study showed that the efficiency of each establishment, as well as the brands, differed significantly from each other.     

The impact of material and immaterial sustainability on firm performance: The moderating role of franchising strategy

CSR and sustainability engagement is growing rapidly with ever-increasing attention. Accordingly, restaurant stakeholders now demand restaurant companies to disclose relevant ESG information (i.e., materiality) to analyze risks and opportunities that ESG factors bring to firms over the long term. As established in stakeholder theory, restaurant materiality is shaped by a firm's key stakeholders and also by the industry's distinguishing factor, franchising. However, despite their importance and timeliness, materiality and franchising remain largely absent from scholarly discussion in the field of tourism and hospitality. Using a novel industry-specific materiality classification of sustainability initiatives, here we show that franchising positively moderates the impact of investing in immaterial sustainability on firm performance. The results provide early empirical validation of stakeholder theory in relation to restaurant materiality and franchising, and show the impact of allocating a firm's resources to material and immaterial sustainability issues on firm performance in the restaurant context.     

Duration of advertising effect: Considering franchising in the restaurant industry

How long do the effects of advertising actually last? This issue has received increased attention in the fields of marketing, accounting, and finance. However, despite the importance of advertising for firm management, research on the effective duration of advertising costs still remains in the exploratory stage. To address this research need, this study investigated how long advertising costs function to increase sales and intangible value in association with franchising in the restaurant industry. The results of this study showed that advertising expenditures had a positive short-term effect on sales growth, whereas advertising did not significantly impact sales growth in the long run. However, when advertising expenditures were considered together with franchising, the long-term interaction effect was positively significant. The results suggest that advertising has long-term positive effects on sales growth only in restaurant firms using a franchising system. This implies that advertising costs should be recognized as investment-like assets only in franchising restaurant firms. On the other hand, advertising ratio had both positive short-term and long-term effects on intangible value. In addition, once the advertising ratio was associated with franchising, the long-term interaction effect was negatively significant. More detailed explanations and implications are included in the conclusion.     

Acquisitions and shareholders' returns in restaurant firms: The effects of free cash flow,growth opportunities,and franchising

Restaurant firms extensively expand through acquisitions. While acquisitions can be an efficient business strategy, the extant literature presented evidence showing that acquisitions can be value–increasing or –decreasing investments. However, why acquisitions increase or decrease firm value is not clear. Corporate finance and franchising theories collectively suggest that the value of acquisitions may depend on firms’ free cash flow capacities, growth opportunities, and organizational forms. The purpose of this study is to examine the concurrent effects of free cash flows, growth opportunities, and franchising on restaurant firms’ returns from acquisitions. The results showed that firms with high-free cash flows gain lower returns compared to firms with low-free cash flows, suggesting that acquisitions reduce underinvestment problems but also increase overinvestment problems. Franchising firms also gain lower returns compared to non-franchising firms; however, the availability of free cash flows exacerbates overinvestment problems in franchising firms. Theoretical and practical implications are discussed.     

Working capital,cash holding,and profitability of restaurant firms

Efficient working capital management is becoming important for restaurant firms coping with weak financial conditions and increased economic uncertainty. This study investigates the impact of restaurant firms’ working capital on their profitability. We further examine the effects of firms’ cash levels on the relationship between working capital and profitability. The findings ascertain a strong inverted U-shape relationship between working capital and a firm's profitability, which indicates the existence of an optimal working capital level for restaurant firms. This study also reveals that a firm's cash level is an important factor for efficient working capital management. The results suggest that interactive effects exist among working capital, cash levels, and profitability. Thus, restaurant managers should consider these different roles and impacts when developing an efficient working capital management strategy. Detailed results and implications are presented in the main body of this paper.     

Impact of the COVID-19 pandemic: Evidence from the U.S. restaurant industry

The current study examines how the effect of COVID-19 on U.S. restaurant firms’ stock returns varies according to the firms’ pre-pandemic characteristics by employing three firm-level dimensions (financial conditions, corporate strategies, and ownership structure). Employing 795 firm-year observations obtained from annual reports and other databases, this study found that restaurant firms with past characteristics of larger size, more leverage, more cash flows, less ROA, and more internationalization are more resilient to stock declines reacting to COVID-19 than otherwise similar firms. Whereas, dividend, franchising, institutional ownership, and managerial ownership did not show any significant moderating effect on the relationship between COVID-19 and stock returns. This study sheds light on the research topic by providing insights into drivers of restaurant firm’s stock returns during the COVID-19 shock. Future studies can employ the variables and method used in the current study to extend the understanding of the issue.     

Capital structure in the hospitality industry: The role of the asset-light and fee-oriented strategy

An asset-light and fee-oriented strategy (ALFO), which reduces risk and facilitates firm growth with minimum capital investment, has increasingly gained attention from industry practitioners and academic scholars alike, especially in the service sector like the hospitality industry. We empirically examine how ALFO is employed and how it is related to the capital structure, i.e. the proportion of debt and equity financing, in hospitality firms. Using a sample of 982 firm-year observations over the period 2002–2016, we find that ALFO is widely used by the hospitality industry, and as expected, the fee-income ratio and the degree of franchising have increased, while asset tangibility and capital intensity have decreased. Interestingly, although ALFO is positively related to long-term debt ratios of hospitality firms, our sub-sector analyses indicate that the relationship is only significant in the restaurant sector and not in the hotel sector. Our study contributes to the literature by identifying an important industry-specific variable that affects the capital structure of hospitality firms.     

International franchising: Opportunities for China's state-owned hotels?

The hotel industry in China faces global competition. Most of the state-owned hotels have struggled during the period of transition from a planned economy to a market economy. Furthermore, international franchising hotel chains have entered China with their different operation modes. Could the franchising hotels bring opportunities for state-owned hotels? In an attempt to answer this question, the researchers carried out a study of state-owned independent hotels and state-owned franchised hotels to analyze their external and internal business factors, their intentions to join international franchise operations and the international hotel franchisors in China. The research technique used was qualitative. Two rounds of in-depth interviews were conducted. Content analysis was used in the data analysis. Results indicate that the majority of state-owned independent hotels have intentions to join an international franchise operation in the next 5 years. It also identified major factors affecting the franchising of state-owned hotels in China. However, franchising may not be attractive to those hotels that want to keep their management culture and characteristics. Implications of the study were discussed. Recommendations were provided to the state-owned hotels. Future research studies have been suggested to examine the relationships between franchisors and franchisees.     

Does franchising help restaurant firm value?

A company's financial performance is of keen interest to many groups of people, including management, employees, shareholders, government, and so on. Although franchising has been one of the most common strategies to maximize a firm's financial performance in the restaurant industry, little research has been conducted regarding the relationship between the degree of franchising and the restaurant firm's financial performance. This study initially proposed a sigmoid relationship between the degree of franchising and the restaurant firm's financial performance based on the diversification theory. Findings, however, do not fully support the sigmoid relationship; rather a more quadratic or inverted U-shaped relationship was found.     

Effect of diversification on firm performance: Application of the entropy measure

This study investigated the effects of diversification on firm performance in the restaurant industry. In prior studies, the theoretical rationales and empirical results appeared to contradict each other. These contradictory results may be due to factors such as industry-specific characteristics or a linear understanding of the relationship between diversification strategies and firm performance. Thus, this study suggested a non-linear hypothesis based on the costs and benefits of diversification strategies with businesses categorized based on their level of diversification. The results of this study showed that restaurant firms do not benefit from a low level of related diversification. This study also found that when restaurant firms are involved in both related and unrelated businesses, the optimal mixed ratio of diversification is approximately half and half. More detailed results, as well as academic and practical implications, are discussed in this paper.     

Antecedents and consequences of Franchisee satisfaction in the U.S. restaurant industry

This study surveyed 3,177 franchisees from 58 restaurant brands with the purpose of examining the antecedents and consequences of franchisee satisfaction in the U.S. food service sector. Findings indicate that a high level of franchisee income and franchisor care and trust are associated with a high level of franchisee satisfaction. Education had a negative impact on franchisees' satisfaction, suggesting that the higher the level of franchisee education, the less franchisees were satisfied with the franchise. Furthermore, the higher the franchisees' satisfaction was, the stronger the franchisees' intention to remain in the franchise system was, and the higher the likelihood of recommending the franchise to others.     

International hotel development: A study of potential franchisees in China

Franchising is a strategic partnership formed by the franchisor and the franchisee, and consequently partner selection between the franchisor and the franchisee is critical to the long-term success of a franchise. However, the literature has primarily taken the viewpoint of franchisors, but failed to explore the perspective of the potential franchisees. As China represents a significant growth opportunity for international hotel franchisors, this study examines the perspective of China's domestic hotel operators regarding franchising and analyzes a mix of factors that may affect such perspective. The study of 182 Chinese hotel general managers shows that China's hotel practitioners have considerable interest in franchising and are knowledgeable about the concept as it pertains to hotels. The findings indicate that the length of work experience and educational background of Chinese hotel operators may influence their franchising preferences. Hotel chains that have strong brand awareness, supportive centralized reservation systems, and offer relatively high returns on investment at relatively low franchise fees, are most attractive to potential Chinese franchisees.     

The value of cash holdings in hotel firms

Extant research in finance suggests asymmetric information increases the cost of external financing substantially and creates underinvestment problems. While franchising might reduce underinvestment problems, it might exacerbate overinvestment problems in poorly-governed firms. Using combined postulations from both the pecking order theory and the free cash flow theory, this study examines the value of cash holdings in hotel firms and the extent to which franchising, financial constraints, and corporate governance affect this value. The findings suggest that cash can be a curse and a blessing; cash is more valuable for financially constrained firms than for unconstrained firms and less valuable for poorly-governed firms than for well-governed firms. Also, financial constraints have a greater effect on the value of cash holdings than weak corporate governance. Although franchising could solve underinvestment problems, it makes poorly-governed firms more vulnerable to overinvestment. Practical and theoretical implications are discussed within realms of corporate finance and franchising.     

Advertising expenditure,intangible value and risk: A study of restaurant companies

This study investigates the relationships between advertising expenditure, intangible value, and risk in stock returns of restaurant firms between 2000 and 2005. Tobin's Q was used to examine intangible value, and the variance of common stock return was used to measure the investment risk. The results indicate that the level of advertising expenditure has a significant positive effect on the intangible value of the firm, suggesting that advertising expenditures could help generate intangible value in restaurant firms. However, this study did not support a significant relationship between the advertising expenditure level and the stock return risk of restaurant firms.