Franchising is about a lot more than restaurants. More than 30 industry segments are franchised in Canada, from specialty retail and cleaning services to business training and fitness centres. There are more than 1,000 franchise systems operating in this country, accounting for nearly 76,000 franchised outlets. Franchise sales represent $100 billion a year, and the fastest growing demographic of franchise buyers is women.
Obviously, Canadian franchising is alive and growing. However, franchising is not just a North American phenomenon. Canada and the U.S. combined represent less than 22 per cent of the global franchise industry, which contains more than 17,500 franchise systems and 1.2 million franchisees. In some countries, including Australia and South Africa, a large percentage of systems are homegrown. Franchising is truly an international business format, employing 13 million people and exceeding $1.4 trillion US in global sales each year.
The franchise model has proven remarkably adaptable. While initially developed for businesses serving consumers, there are now many business-to-business (B-to-B) franchises, as well. However, concepts totally dependent on the originator's skills or personality cannot be franchised. For example, a celebrated chef or successful lawyer could pass along his techniques through a procedural manual, but he couldn't transfer his talent the same way. Franchising is also a poor fit for manufacturing or primary industries, due in part to their high levels of capitalization.
How franchising got here
The origins of franchising stretch back several centuries. During the Middle Ages, members of the royal court and other nobles granted rights to hold markets and operate other business services in exchange for a royalty. ('Royalty' derives from 'royal tithe.') This royalty bought advantages for the one who paid it—most notably, protection. Without this protection, businesses were left at the mercy of marauding bandits, or even their own competitors.
The years to follow saw great expansion and creativity in the business world. The first murmurs of brand awareness appeared in 19th-century England and Germany, where pub owners became exclusive distributors for particular breweries. As the breweries maintained no regular control over the pubs, they were able to act as entrepreneurs, selling someone else's distinctive product.
True franchising appeared not long after. In 1850, American inventor Isaac M. Singer found himself too poor to manufacture his innovative sewing machines. He also struggled because people refused to buy his machines without being trained to use them—a service retailers couldn't, or wouldn't, provide. Singer solved both his problems by charging licensing fees to other businessmen, who then owned the rights to sell and repair his machines in certain areas. His scheme not only provided money for the machines' production, it also forced licensees to teach people how to use them. Singer opened his first franchise in 1851 to great success, expanding manufacturing to Canada in 1873.
The technologies of the 20th century drove franchising into many new industries. Among the first were gas stations, which franchised to keep pace with Henry Ford's franchised Model T dealerships. The postwar 'baby boom' furthered the demand for products of all kinds. Between 1950 and 1960, the number of franchised companies in the U.S. alone grew from about 100 to 900.
Perhaps the most well-known franchise of all was born in 1954 when a milkshake mixer salesman named Ray Kroc came across the McDonald brothers' San Bernardino, Calif., hamburger stand. The pair bought his mixers in large numbers, thanks to their high-volume, low-cost production system. Kroc saw the franchise possibilities, became their licensing agent and started recruiting franchisees. He bought the brothers out in 1961.
Franchising today
At its core, franchising can be defined as one party—the franchisor—providing services to another party—the franchisee—who in turn sells the franchisor's products to a consumer. Many franchises are 'turnkey' businesses; that is, the franchisor handles almost everything involved with setup and provides the franchisee with a unit ready to operate.
Franchisor and franchisee share the business's profits, with the franchisor usually taking its share from a royalty on the sale. The franchisee realizes his or her share from the sale itself, less the royalty, sales cost and operating expenses. It would be impractical for the franchisor to take royalties from the franchisee's profits—to do that, the franchisor would need to approve all the franchisee's expenses, since those expenses would affect the royalties. This is a closer partnership than either party typically desires.
Most franchisors want to expand their franchise systems to increase market share and profits, but there is a limit to how much capital can be invested and how well control can be maintained as the network of units grows. Successful franchise systems meet this challenge by combining the franchisor's experience with the franchisee's capital and desire to succeed.
Remember: while the franchise system is owned by the franchisor who created it, the franchisee contributes to its operation in vital ways.
