The Use of Franchising by U.S.-Based Retailers

By Alon, Ilan | Journal of Small Business Management, April 2001 | Go to article overview

The Use of Franchising by U.S.-Based Retailers


Alon, Ilan, Journal of Small Business Management


The question of whether to franchise or to own has received much research interest in recent years. Two popular approaches used to explain the proportion of franchising (PF) in the franchisor's system are resource-scarcity and agency theories. This study combines both theories to explain the proportion of franchised outlets in the U.S. retailing sector between 1990 and 1997. The findings show mixed results with regard to both previous studies and hypothesized relationships. The study shows that the proportion of franchising used by retailers is positively related to size (number of outlets) and geographical scope, and negatively related to the rate of growth and the level of investment. Age and royalty rates are not found to he significant to the proportion of franchising.

Franchising has experienced unprecedented growth during the last two decades both in the United States and abroad (Alon and McKee 1999). According to the U.S. Department of Commerce, the number of business format franchises increased almost tenfold between 1972 and 1988 (Kostecka 1988). While in 1992 franchise sales accounted for $803 billion in sales, the International Franchise Association (1995) predicted that franchise sales would reach $1 trillion by the year 2000.

According to the Uniform Franchise Offering Circular (UFOC), there were 1,178 franchisors with over 320,000 outlets, representing over 18 different sectors, operating in the United States in 1997. Twelve percent had no franchisee-owned units, 16 percent had fewer than 10 outlets, and 27 percent had between 11-50 units. Those with the largest number of units (500 and above) made up only nine percent, the smallest concentration of franchised systems (International Franchise Association 1999). In this study's sample of retail franchises, about a third of the franchisors had fewer than 10 franchisees, while 10 percent had no franchisees at all in their system. The median age and size were 11 years and 30 outlets, respectively. Therefore, this study is especially relevant to small business management, particularly from the franchisor's standpoint.

This study used two popular approaches--resource-scarcity and agency theories--to examine the proportion of franchising in the U.S. retailing sector. Although there is some disagreement between resource-scarcity and agency theorists regarding the causal factors of domestic franchising, researchers have developed models with greater explanatory power by integrating variables from both the agency and resource-scarcity theories (Carney and Gedajlovic 1991; Combs and Castrogiovanni 1994).

Using previously established theories and variables, this research innovates by examining franchising over time (pooled cross-sectionally), and by focusing on one industry, namely retailing. Examining one industry over time allows the researcher to (1) obtain an in-depth understanding of the industry; (2) control for competitive and industry variations; and (3) increase the sample size associated with the studied industry. Dant, Paswan, and Kaufmann (1996) proposed that industry aggregation may hide industry differentials and margins, masking the true nature of the causal factors between organizational variables and the proportion of franchising. Resource and agency variables may also impact the relative proportion of franchising depending on the industry studied. Indeed, the meta-analysis conducted by Dant, Paswan, and Kaufmann (1996) found that industry-specific differences were such that analyses that did not take them into account could have flaws in their conclusions. Furthermore, comparing franchising across industries elides the obvious facts that different industries have different motivations for franchise-based expansion and that there will be variations in the degree to which individual industries will tend to franchise.

In the conclusion of their meta-analysis, Dant, Paswan, and Kaufmann (1996, p. 440) wrote that "as for future research, foremost, there is an urgent need to study ownership redirection in sectors other than restaurants.

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