Many tyrannical warlords in ancient China granted trade routes. The first chain stores actually appeared around 200BC when a businessman called Lo Kass set up a number of shops in his province, then used local partners to establish a bigger network of stores all selling the same products. This seems to fit the basic franchise model.
1066 … Not Quite; The emergence of franchising
The forerunner to the word franchise is probably the Old French word franc, which means “granting legal immunity” but could now be defined as protecting a person’s right to do something.
In medieval Europe, landowners would grant rights to a variety of activities, such as hunting or brewing of ale. This was a win-win solution: the peasants used their rights to earn a living, and the landowner lived in style on his share of the profits. Sounds really good to me!
The aristocracy certainly had a keen eye for a business opportunity: the rich received a slice of the tolls charged on the roads, a share of produce or a share of the livestock, and even free horseshoes from the blacksmith who could also turn his hand to making swords as a bladesmith to pay for his agreement. In short, the nobles fed and equipped their men and servants without using their growing stockpile of gold. Lords became even richer.
In return, “men at arms” protected the land as part of the arrangement and eventually the agreement became a little more formal. Paper licences were as much use as chocolate teapots to the semi-literate peasants, so the agreements were later enacted into laws and bylaws to protect all the royal subjects.
Religion Plays its Part
The Catholic Church played its part as well, with the first form of territory planning that was certainly copied later by business people. These territories fell under the direct control of local men of the cloth who granted papal rights in return for vast sums of money that they filtered back to Rome.
A Whole New World
In the rapidly developing new world, exclusive rights to trade routes, such as the Cape of Good Hope, were granted by royal charter.
More followed and in 1607 the London Company received the Charter for Virginia until the British Crown withdrew the Charter for mismanagement in 1624. Was this the first termination of an agreement?
It was the Second Industrial Revolution during the mid-1800s when German brewers granted licences or franchises to taverns, thereby increasing production and turnover and taking a slice of the taverns’ income. Genius!
In 1851 the Singer Sewing Machine Company granted its first licence to distributors of its sewing machines. Some may say that this was not unique but Singer was the first company to have a written franchise contract with these distributors.
Frederick Henry Harvey opened the first of many restaurants in 1876 on the Topeka and Santa Fe line. The railroad company liked the concept and Harvey eventually opened one every hundred miles along the 12,000 mile route. Harvey saw the importance of control and instigated field visits and quality control, which are the basis of modern franchisor control systems.
A New Century
Transport changed everything as Americans started to move around in new automobiles from state to state. Branding became important, with the transient population looking for products they could identify with.
To cater for this explosion of brand awareness, companies like Coca Cola granted licences to other bottling plants that in turn supplied the famous drink locally.
Louis Liggett had a fabulous idea to expand his drug store chain in 1902. He charged $4000 to existing pharmacies to join the Rexall chain, invested the fees charged wisely and created a cooperative that supplied cheaper products to the licensees, so they benefitted financially. It went pretty well and at its height Rexall had 11,000 stores in the US, compared to 12,000 McDonald’s today. That’s quite a few!Western Auto went the other way in 1909 and recruited people without any experience as car salesmen; this was the forerunner of modern day franchises, with support given in return for a royalty fee. Regarded then as an innovative approach, this is the way most franchise companies operate today.
The Roaring Twenties and Through the Depression
Sherman and J Willard Marriott bought a franchise from the root beer giant A&W in the early 1920s. A&W used carhops on roller skates to generate more sales and the Marriott brothers added food to the menu, which worked even better. Their success is evident today with a certain hotel group that is rather large.
Howard Dearing Johnson tested the franchise concept in another market when he acquired a pharmacy in Massachusetts and began to sell three flavours of ice cream, as well as food, to supplement his drug sales. After success he awarded his first franchise in 1935 and the number of orange-roofed stores expanded dramatically. Another hotel giant we recognise today.
Hi Honey I’m Home
World War II came to an end, soldiers returned home and over the next decade people started to look for independence in their working life, owning their own business. Fast food franchising really took off. Kentucky Fried Chicken, Burger King, Dunkin Donuts and McDonald’s opened in the 1950s and franchised operations opened in far greater numbers than company owned operations, which meant rapid brand expansion. KFC got it absolutely right with quality and a separate image of the founder. Harland Saunders was a real person; he spent years cooking chicken and adopted the white suit and string tie as an image after he was given the title of Kentucky Colonel, hence Colonel Saunders. The reason he looked so old was because he started franchising aged 62 in 1952. It’s never too late! Success started a trend of copycat franchises which the big names tried to stop on numerous occasions through all legal means available. This was humorously depicted in the John Landis film “Coming to America”, starring Eddie Murphy, when the subplot revolved around McDowell’s, a fast food restaurant serving the Big Mick, a burger with two beef patties, special sauce, lettuce, cheese and onions on buns with no seeds, compared to McDonald’s Big Mac that used sesame seeded buns. McDowell’s had the Golden Arcs whereas McDonald’s had the Golden Arches. Light-hearted but so true of many “me too” franchises around today. McDonald’s obviously agreed to the comparison made by Landis, who made sure that McDowell’s portrayed similar standards to McDonald’s in the film.
Britain sits up and takes note … What a splendid idea
The Americans redesigned the franchise concept during the first half of the 20th Century. After making many mistakes, a hybrid version of a business format franchise evolved, and it looked good.
One of the first of the new style franchises in the UK was set up when J Lyons & Co acquired the rights to Wimpy from the US founder, Eddie Gold, in 1955. Lyons Maid and Mr Softee offered licences to their first franchisees in the 1950s.
Gradually, over the next ten years, more concepts were either brought into the UK from overseas or new concepts were developed and marketed as franchise opportunities. Names like DynoRod, KFC, and Prontaprint emerged as national brands in the UK.
The poor economy of the 1970s contributed to the stagnation of franchising until interest rates came down and growth returned.
The franchise industry was keen to develop a code of ethics to ensure controlled regulation and in 1977 the British Franchise Association (bfa) was formed by some of the pioneers in UK franchising with DynoRod, Service Master, KFC, Wimpy, Holiday Inns, and Prontaprint all contributing to the birth of the association.
Recent history for franchising in the UK shows the success of the industry. Many High Street names have a link to franchising; The Body Shop, Tie Rack, McDonald’s, Hertz, Domino’s Pizza, Cartridge World, Snap On Tools, Subway, Bargain Booze…the list goes on and is certainly impressive compared to the early days of franchising in the UK.
They all lived happily ever after …The future’s bright, the future is franchising!
I could stop here and say everything is wonderful in franchising, but that would be unprofessional. Franchising is not for everyone; some think it is a way of buying a job, with success a mere formality. Not everyone can make it happen, but for those who follow the system and work hard, a good concept can provide a great business.Nat West carries out a survey every year with the bfa, and the facts speak for themselves: over 85% of franchise businesses are still operating after five years compared to 20% for stand-alone businesses. Less than 3% of franchises suffer financial failure and over 400,000 people are employed in UK franchising, which had an annual turnover of nearly £13bn at the last count.
The future is bright and the wealth creation and thus asset security over the last twenty years through property prices has helped with the acceptance from the major banks that franchising is a lower risk lend than a non-proven business venture.
More companies today are considering launching their business as a new franchise, which is why section two of this book is dedicated to the operational side of running a franchise company. Recruiting new franchisees to gain a larger market share is a low risk strategy avoiding huge capital investment in premises and employees. If a franchise business develops in a proper manner then both franchisee and franchisor should benefit.
