History Of Franchising

Franchising is often referred to as a North American phenomenon, but the institution dates back to the UK's Middle Ages. Roy Seaman looks at the history of franchising.

During those times a feudal lord would grant certain rights to laymen by imposing a fee to carry out community activities like operating ferries and drawing water from wells. Local chieftains also enjoyed certain privileges in return for their obedience to the rulers. They used to collect taxes in a specified region in return for various services to the state such as providing soldiers and resources for an army. The elements of franchising are also visible in fairs and local markets, where citizens are permitted to set up stalls on city land by paying a fee to the state.

The elements of these rights - to utilise a situation in a specified area in return for a consideration - form the basis of franchising throughout the ages. Franchising acquired a solid format during the 18th century when certain industries in Europe facing financial difficulties formed the 'Tied House System' - the early form of Contractual Commercial franchise.

For example, when the mushrooming of public houses and widespread availability of alcohol began to have a negative affect on social patterns, the state introduced legislation to restrict the sale of alcohol through a licence system. The state also imposed certain guidelines for innkeepers and pub owners to improve the environments of their premises. These new rules increased the value of inns with licences, making it financially difficult for businessmen to procure one. The new regulations also drained the coffers of the licensees as they struggled to improve their properties as per the state guidelines. The rich brewers themselves realised that if the inn keepers and pub owners could not survive, their businesses would sink so they developed a defensive mechanism to retain their selling outlets. In allocating financial aid, the brewer secured the inn or pub as an exclusive outlet for its products. The 'Tied House System' still continues in the UK today.

The Singer Sewing Machine Company is credited with introducing the first franchise in the mid-1800s (at the end of the American Civil War). Its mass manufacturing production system allowed the company to sell the product at a very competitive price, but the company could not economically run a replacement part service as a central operation so it set up a service & maintenance franchise. The servicing engineers could, and did, also make many new sales.

General Motors became involved in franchising in the early 1900s, laying the foundations for the franchised motor dealership network - a system that still predominates in motor vehicle retailing today. The franchisee or dealer is granted an exclusive territory, giving protection against competition from other franchisees and offering the best opportunity for volume of sales.

Rexall and most of the leading soft drink bottlers closely followed General Motors. When Rexall franchised their drug stores, Coca-Cola, Pepsi and 7-Up initiated the use of franchising as an economic method of expansion for the sale and distribution of their brands. Soft drinks contain a high water and sugar content, which makes production and distribution from one central unit economically untenable. Through franchising the companies were able to produce the patented drink syrup at a central unit then distribute it to a local bottling plant owned and operated by a franchisee, they would in turn organise sales and distribution in their territory. Corona followed this method in the 1950s.

Franchising gathered further converts in the US such as oil companies, which began franchising their petrol filling stations to overcome stiff competition in local markets. Through franchising the stations, the oil companies received rental income and were able to dictate the use of the corporate image while the franchisees were able to set prices according to local competition. Similarly, wholesalers began franchising their retail grocery stores, and the majority of companies viewed franchising as an efficient method of distribution for existing products and services.

The franchising boom of the 1950s created the system, commonly known as the 'Business Format Franchise'. This new trend acknowledges the franchise system as a distinct method of doing business from the outset with the franchisor benefiting from rapid growth with limited risk and the franchisee buying into a proven business system.

The hamburger restaurant chain Wimpy was one of the first Business Format Franchises to set up in the UK. In 1955 J. Lyons & Co acquired the worldwide franchise rights outside the US from the originator of the concept Eddie Gold. American carpet and upholstery cleaning franchise ServiceMaster followed in 1958 when Raymond Crouch bought the Master Franchise Licence for Europe from Chicago-based ServiceMaster Industries Inc. Mr Softee and Lyons Maid are also credited with offering franchises during the 1950s.

Events in both the UK and the US slowed the growth of franchising in the 1960s. The franchise sector in the US slowed during the late '60s due to turmoil in the stock markets, while in the UK the image of franchising was tarnished by a fraudulent marketing scheme called pyramid selling. The UK government passed legislation in 1973 under the Fair Trading Act to control pyramid selling, but the law had many flaws, even today a legitimate franchisor may inadvertently infringe the Act and must for many reasons seek expert legal advice in formulating a franchise agreement.

The late 1970s saw the formation of the British Franchise Association (bfa) to weed out corrupt business practices. Within a short time the bfa earned all-party support in Parliament and its existence has been instrumental in leading a period of rapid expansion of franchising in the UK. The founder members of the bfa include Dyno-Rod, Holiday Inns, Kentucky Fried Chicken, Prontaprint, ServiceMaster and Wimpy. The size and reputation of the founders brought about a level of credibility and respectability for the bfa and franchising in the UK, which has grown to a position of great importance in the economy. The bfa went on to encourage banks to support franchising, and National Westminster, Barclays, Midland, Lloyds TSB and the Royal Bank of Scotland took the initiative and formed franchise departments.

In the late 1980s and early '90s many new franchisors came to prominence including The Body Shop, McDonald's, Tie Rack, Alfred Marks, Hertz, Dyno-Rod, Jani-King, Domino's Pizza, Burger King, ChemDry, Swinton Insurance and Amtrak.

FDS was formed in 1981 and is closely associated with the franchise sector in preparing franchise development business plans, manuals, systems, pre-entry studies, franchise strategies and promoting franchise opportunities through its publications, websites and database of investors.