Franchising

The rapid growth in franchising during the last three decades can be explained in large part by the mutual benefits the franchising partners receive. The franchiser (parent company) increases sales via an ever-expanding network of franchisees. The parent collects a fixed percentage of the revenue each franchise earns (as high as 15 to 20 percent, depending on the contract terms). The individual franchisee benefits from the acquired know-how of the parent, from the parent’s advertising and promotional support, and from the ability to sell a well-established product or service. Nonetheless, economic conflicts frequently arise between the parent and an individual franchisee. Disputes even occur in the loftiest of franchising realms: the fast-food industry. For some two decades, there have been ongoing conflicts between franchise operators and parent management of McDonald’s, Subway, and Burger King, among others. These conflicts have cantered on a number of recurring issues. First, the parent insists on periodic remodelling of the premises; the franchisee resists. Second, the franchisee favours raising prices on best-selling items; the parent opposes the change and wants to expand promotional discounts. Third, the parent seeks longer store hours and multiple express lines to cut down on lunchtime congestion; many franchisees resist both moves. How does one explain these conflicts? What is their economic source? What can the parent and the franchisee do to promote cooperation? At the conclusion of the chapter, we will revisit the franchising setting and offer explanations for these conflicts.