The Role of Franchising on Industry Evolution

This chapter gives an overview of franchising, its defintion and how the franchise system works. The history of franchising is also explored—looking at the origins of franchising and tracing the three major stages of development. Business format franchising is also defined and its dominance across many industries is explored.

In order to address the theoretical perspectives on franchising it is useful to begin with an overview of the success and growth of franchising and looking at empirical data on franchising. This chapter looks at franchising in the USA, giving figures on the growth of the sector and also industry-specific information. The Irish and UK contexts of franchising are addressed by analysing the data on franchising in the UK and Ireland with figures on the growth of the sector and also industry-specific information. The Asian market and other emerging markets are also looked at; some of these markets are in introductory or growth phases of franchising when compared to the USA, which would be seen as a mature market in which franchising has been a successful and established organisational form for decades. Issues surrounding the growth of franchising in the emerging markets are explored; the very essence of this book which looks at the emergence and impact of franchising is particularly important, as these regions might benefit from the lessons learned in the more mature markets.

This chapter is largely theoretical in nature and explores the conditions and environmental context necessary for franchising to emerge. What drives the introduction of franchising? This question is explored with engagement of the franchising literature and literature from the industry evolution field. The reality is that most of the franchising literature relates to the emergence of franchising from the perspective of the firm. The decision to franchise has been a subject of interest for students of the economics of organisations and thus at the level of the firm for many years. Initial and still-insightful works are Caves and Murphy (1976) and Rubin (1978). Lafontaine and Shaw (1998) reviewed much of the empirical literature from economics and highlighted agency theory as a motivation for franchising; further amplification and analysis can be found in Blair and Lafontaine (2005). Most franchising research has been grounded in either resource scarcity theory or agency theory and also transaction cost economics. In addition variation, selection, and retention is explored in this chapter and is an evolutionary process which can trigger firms to adopt franchising. The answer to the emergence question aims to explain why firms adopt franchising and what they plan to achieve by doing so. For example, variation in an industry can be created by increasing demand for branding and high levels of product and service standards. If this happens, franchised firms can either influence this new selection criterion or facilitate their franchisees to comply with it in order to survive. This question also raises the issue of the role of agency and the involvement of entrepreneurs as addressed by the franchising literature with regard to the introduction of franchising at firm level. Furthermore as long as this selection criterion remains important, franchising firms and their franchisees will be retained in the industry.

This chapter explores the impact of franchising once it is adopted—what impact does franchising have both at firm and industry level? How does franchising alter industry structure? Franchising challenges and changes the prevailing institutional structures of an industry. The answer to this question explores the choice made by franchising firms between the alternative sets of strategies available to them within a certain environment. These strategies are dependent on ‘why’ some firms choose to adopt franchising and ‘what’ they want to achieve (‘what’ impact to make). The industry evolution literature explores the notion of firms co-evolving within their industry or industry architecture whereby firms can change the dynamics of the industry structure by their actions. This question of impact also explores the dynamics of franchising firms over time which is under researched from the franchising literature. The impact of franchising on industries is associated with the embedded contextual drivers behind a firm’s decision to franchise. Such impacts can be observed when franchise systems successfully challenge/defend the status quo against the prevailing preferences of other agents and environmental factors (macro-environmental and industry context as well as agency). For example, increasing demand for industry standards and branding creates new variation. As a response to this new variation, new industry entrants appear and begin to adopt franchising to compete with the leading firms and thus retain this new organisational form.

This chapter provides industry evidence by providing a detailed case study of the Irish fast food/quick service restaurant (QSR) industry. This case study provides empirical evidence as to the reasons for the emergence of franchising and its impact on industry evolution. This chapter presents an industry history of the Irish fast food/QSR industry from the beginning of the 1900s to the present day. The historical account is based on primary and secondary data collected from the Irish fast food/QSR industry. This case study is presented as a story, tracing the industry from its emergence right through to the introduction of franchising to the present day. The case-based empirical evidence is presented to show the reasons for the emergence of franchising and its impact on industry evolution. The boundaries that defined the Irish fast food/QSR industry throughout the twentieth century have undergone considerable transformation. Since its inception in the 1860s, the industry as a whole has grown considerably in revenue terms. At the beginning of the twentieth century, the industry comprised primarily of independently owned fish and chip shops. During the 1950s, a new wave of ethnic cuisine came to Ireland with the opening of Chinese and Indian restaurants and takeaways nationwide. From the late 1970s and early 1980s, international competitors began to enter the market bringing new product and service offerings. During this time, franchising was introduced by the international fast food chain McDonald’s, which resulted in a rapid adoption of franchising by many industry players from the 1980s onwards such as the indigenous Abrakebabra, Supermac’s, and O’Briens Sandwich Bars. In the late 1990s the industry underwent further changes. There was an even greater increase of international competitors such as Burger King, Domino’s, and Four Star Pizza. Since entry, these firms have grown in size and dominance. From the late 1990s, the growth in the number of firms has stabilised but the level of industry concentration has increased. Independent operators are now in the minority and a new industry structure has emerged, centred on national and international branded franchise systems. Following the introduction of franchising, the industry has witnessed significant efficiency gains, the importance of branding has come to the fore, and new industry leaders have emerged. This chapter tracks all of these changes right through to the present day.

This chapter provides industry evidence by providing a detailed case study of the Irish real estate industry. This case study provides empirical evidence as to the reasons for the emergence of franchising and its impact on industry evolution. This chapter presents an industry history of the Irish real estate industry from the beginning of the 1900s to the present day presenting following both firm and industry-level changes over the decades in a chronological account. The historical account is based on primary and secondary data collected from the Irish real estate industry. The focus of this study is on real estate agents predominantly trading in the residential property market. There are seven leading residential real estate agents in Ireland, namely Sherry FitzGerald, Douglas Newman Good (DNG), RE/MAX, Hamilton Osbourne King (HOK), Gunne, Lisney, and Property Partners (a co-operative organisation based in Galway composed of independent property real estate agents). However, in recent years, Sherry FitzGerald and DNG have emerged as the two industry leaders; with both firms claiming to hold 60 per cent of the total market share (see Table 6.1). The two firms have a nationwide presence in Ireland, and have grown using franchising as a business model Sherry FitzGerald first introduced franchising to the industry in 1999 pending the imminent threat of entry from the international franchise chain RE/MAX who entered the Irish market in the same year (2004) DNG adopted franchising. Today Sherry FitzGerald claims to hold the number one position in the industry with DNG in second position, based on sales and outlet presence. The industry consists of a large number of small independent real estate agents who have built up a reputation for themselves within their local areas. In recent years, many have become involved in co-operative or network affiliations, such as Property Partners, REA Ireland, and Property Team. These co-operative networks have helped independent real estate agents to develop collective marketing campaigns, and share market knowledge, which is vital for success in such a competitive industry. This chapter tracks all of these changes right through to the present day.

Overtime the industry is radically altered and threshold capabilities change. What happens next once the industry has moved to a more consolidated position, what do you need to succeed in such an industry? This chapter links the theoretical and empirical propositions from the literature on franchising and industry evolution to the comparative case study analysis from this study. This chapter will follow the conceptual framework in order to explore the emergence of franchising and its impact on the structural evolution of industries. Therefore, the central research question is: How does franchising impact industry evolution?

This chapter assesses the current research on franchising, gaps in the field, and future recommendations.