The Franchise Law Review: What is Franchising?
In 2010, the estimated turnover of franchised businesses in the United States was US$868.3 billion. However, its importance is not just restricted to the United States. In the EU it was an estimated US$300 billion.2
For some years, franchising has been 'playing an ever greater role in a wide range of national economies'3 and institutions, such as the European Commission, have recognised its role in 'stimulat[ing] economic activity by improving the distribution of goods and/or the provision of services' by allowing small and medium-sized businesses to 'establish a uniform network with limited investments', and 'to set up outlets more rapidly and with a higher chain of success than if they were to set up without the franchisor's experience and assistance',4 resulting in them being better able to compete with larger distribution undertakings.
Unfortunately, although franchising enjoys considerable commercial success, legislators and trade bodies around the world have failed to agree on how it should be defined. Perhaps the most complete, non-legal definition is offered by Blair and Lafontaine, who identify the brand, the business format, independence, ongoing support to the franchisee by the franchisor, the economic interests of both parties and the control and enforcement of the brand standards by the franchisor as the defining elements of a franchise.5
While currently in widespread use, the DNA of franchising shows it also to have been a long-lived and versatile mode of business that throughout history, time and time again, has provided effective solutions to problems thrown up by economic and technological changes. It has played a key role in enabling growing businesses to develop multichannel strategies to meet the challenges presented by changing economic environments and new technologies.
In the 1800s, it enabled brewers to create and sustain a market for their products. In the late 19th and early 20th centuries, companies such as Singer, Ford and Coca-Cola found that their then cutting-edge technology placed demands on market infrastructure that could not be met by the then traditional methods of distribution and product support. Franchising enabled them to create a full sales network that provided a requisite level of ongoing customer support across the vast expanse of North America. In the mid 20th century, similar logistical challenges led small family-based fast food businesses with significant growth aspirations, such as McDonald's, KFC and Dairy Queen, to use franchising to achieve those ambitions. In the late 1960s and 1970s, European brands such as Wimpy, Dyno Rod, Ihr Platz and Obi adopted similar growth strategies and by the mid 1970s franchising was being used to facilitate international growth.6
This boom in the use of franchising inevitably led to it being regulated and 1971 saw the adoption of the first franchise law, in the form of the California Franchise Investment Law, followed soon after by other US states.
The advent of regulation has not inhibited the growth of franchising. Businesses tend to adopt it as a part of their multichannel strategy to access appropriately qualified managerial resources and capital. There are also other commercial advantages that attract businesses to franchising, such as bulk purchasing, economies of scale and enhanced product development.
Franchisees are attracted to franchising as it increases the chance of success and allows them to be their own boss.
1 Mark Abell is a partner at Bird & Bird LLP.
2 PWC 2010 Franchise Business Economic Outlook, www.franchise.org.
3 UNIDROIT, Model Franchise Disclosure Law, Preamble.
4 Commission Regulation (EEC) No. 4887/88.
5 R Blair and F Lafontaine, The Economics of Franchising (Cambridge University Press, 2005), p. 294. '[T]he franchisor maintains ownership over the trade name and marks and . . . develops a complete “recipe” to run each outlet. It then licences the right to operate under the central trade name and business format in a given market for a certain period of time to individuals or small firms in exchange for various fees. The ownership stake of the franchisee in current and future profit leads him or her to put significant effort into the outlet. At the same time, the ongoing fees the franchisee pays to the franchisor ensure that the latter has incentives to maintain the value of the brand by, among other things, screening and monitoring the franchisees and keep abreast of market trends.'
6 When the British Franchise Association was established, followed by the French Franchise Federation and the European Franchise Federation.