The Effects of Ownership and Investment upon the Performance of Franchise Systems

Abstract

An economic-finance perspective with defer ence to legal constraints and marketing objec tives is used in this paper to analyze perfor mance and ownership shares in franchised businesses. Pursuant to this line of thinking, the franchise system is regarded as a portfolio of operating units which is adjusted in response to changing costs and revenue opportunities (Mark land and Furst, 1974). When coupled with the cycle argument of franchise development (Anderson, 1984; Crandall, 1970; Hunt, 1973 and 1977; Lillis, Narayana and Gilman, 1976; Oxfeldt and Kelly, 1968), franchisee-owned outlets are the vehicle for marketing and distributing the product at the beginning fran chise, when the franchisor faces the constraint of limited capital and managerial resources. If the maturation of the organization increases the availability of capital and managerial resources, the franchisor shifts towards profitability and managerial control. Then, franchisors appropri ate the outlets which exhibit superior perfor mance and franchise the rest, completing the life cycle. To test this proposition we check for superior performance among company-owned outlets relative to franchisee-owned outlets. If the profits per establishment of franchisor-owned are consistently greater than franchisee-owned outlets, this supports the hypothesis of skimming or, at least, adjusting the portfolio of operating units to maximize company-owned performance. Unfortunately, U.S. Department of Commerce franchising data do not report profits. A proxy is sales per establishment. Using sales data, Anderson (1984) found no comprehensive performance differential favor ing company-owned establishments from 1969-1980, but did determine that some fran chised business activities did exhibit behavior consistent with skimming. O'Hara and Thomas (1986a), using sales data for an expanded 1969-1984 sample and accounting for certain institutional changes, examined 22 franchised business activities and found most to exhibit superior company-owned performance on a year-to-year basis. Significantly better growth in sales per establishment for franchisors was found for 8 of 14 business areas tested.

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