HOW FRANCHISING AFFECTS CUSTOMER PERCEPTION OF QUALITY IN

RESTAURANTS IN NEW YORK

BACKGROUND

Increasing competition in the restaurant business, especially in popular tourist destinations such
as New York, changing customer behavior and improvements of technology are some of the
major factors shaping the marketing strategies of restaurant owners (National Restaurant
Association , 2017). Restaurants need to differentiate themselves from the competitors, and to
position themselves favorably. Service quality is one source of the differentiation. However,
quality of services is not easily measured, due to the unique characteristics of the services
(Guseman, 1981). According to Hoffman and Bateson (2011,p. 319), service quality is “an
attitude formed by a long-term, overall evaluation of a firm’s performance”. As such, service
quality is achieved only through constant focus and commitment of the service provider.

FRANCHISING

Most global brands have marketing partners of some form in their international markets, ranging
from joint venture partners, licensees or franchisees, and distributors, to agencies and other
marketing support people (Keller, 2013, p. 34). Franchising is a form of business by which the
owner (franchisor) of a product, service or method obtains distribution through affiliated dealers
(franchisees) (Entreprenur, n.d.).

In restaurant business, the franchise concepts typically fall into one of several major categories,
such as quick serve restaurants, fast casual, retail stores, delivery only, and full-service
restaurants (Franchise business review,2011). Franchising is attractive to restaurant owners for
many reasons. First, opening a restaurant requires a large investment while profit margins in the
first years of operations are low. Second, independent restaurants have higher costs than chain
restaurants, which benefit from the economy of scope. Lower costs are achieved through high
level of standardization (ISO, 2014), and standardization requirements are important part of the
contract between franchisor and franchisees (Chiou & Droge, 2013). Third, in the highly
competitive and trend-driven food industry, creating and maintaining competitive advantage is
difficult. The franchisor offers a complete brand concept and operating system (Kotler &Keller,
2016, p.250). Thus, being able to benefit from the franchise brand from the very beginning
significantly reduces the risk of investment, as well as the costs of innovations in the maturity
stages of a restaurant.

One of the most important elements in franchising is franchisor’s brand image because basically
franchise is selling the brand (Suryana et al., 2016). According to Keller (1993), “brand
image is a perception about a brand held in consumer memory”. As brand image is related
to association about attributes and benefits of product or a service, strong franchisor’s brand
image attracts customers to franchisees, based on their positive associations with the brand
(Suryana et al., 2016). brand image and brand attributes are important for the franchising
industry as consumers differentiate them more easily (Gillis & Combs, 2009). Brand
knowledge also includes brand awareness, a “part of the memory node that consumers hold
when identifying a particular brand” (Wingove & Urban, 2017). Brand awareness
facilitates brand recognition which relates to the consumers’ ability to match a prior
experience to a product or a service, and therefore is an important factor in consumer decision
process (Mackay et al. 2013).

As the success of the franchising depends on the ability of franchisor to maintain the same level
of service quality in all outlets, franchising contracts provide detailed information about
obligation of franchisees. For example, the design services of the restaurant are provided by
franchisors – the same approach is used in selecting sites, architecture, construction, and
engineering (Khan, 2015, p.218). Most franchisors include general location in the rules. Interior
layout, decorations, equipment, exterior, technology, processes, materials used, uniforms,
training – all elements of the restaurant are prescribed by the franchisor in order to ensure
uniformity of operating procedures. High level of standardization is crucial ingredient of
competitive advantage and brand equity of the franchisor (Khan, 2015, p.219).

CUSTOMER PERCEPTION OF QUALITY

Perception is “the way people build up a view of the world”. Essentially, this process involves a
selection and analysis of stimulation from the environment. Human brain filters the information,
fills in the gaps between them by a process of synthesis using hearsay, previous experience,
imagination, and similar (Blythe, 2005, p.55).

Perception of quality is also related to the perception of risk during the decision making process.
Services are different from products – their unique characteristics include intangibility,
inseparability, heterogeneity and perishability (Guseman, 1981). These characteristics affect the
consumer decision making process – purchasing services involves higher risk than purchasing
products, which, unlike services, can be seen, touched, felt, tested. Higher levels of risk
associated with service purchases is due to the limited information that is readily available before
the consumer makes the purchase decision (Hoffman & Bateson, 2011, p.184).Thus, according
to Guseman (1981), consumers of services tend to perceive a higher level of risk during the pre-
purchase decision process. There are five types of perceived risks: financial, performance,
physical, social, and psychological (Kaplan et al, 1974). Performance risk is more likely to
appear when people purchase services, because it is difficult to ensure producing a standardized
service i.e. providing the exactly same service to customers (Guseman, 1981). As consumers
naturally wish to reduce the uncertainty and risks related to the purchase, they may tend to rely
on the provider whom they perceive as reliable in maintaining the quality standards.

Reducing the risks is also related to brand loyalty. According to Hoffman & Bateson (2011,
p.96) brand loyalty is based on the degree to which the consumer has obtained satisfaction in the
past. If consumers have been satisfied in the past with their supplier of service, they have little
incentive to change the supplier. In service sector, brand loyalty tends to be higher, due to the
limited number of alternative choices available and to the switching costs that can accrue when
changing from one service provider to another (Hoffman & Bateson, 2011, p.96).

According to Cronin and Taylor (1992), “consumer satisfaction assists consumers in revising
service quality perceptions”. Without prior experience with a brand, consumer perception of the
service quality is based on the consumer’s expectations. However, after consumption, consumer
goes through the disconfirmation process, i.e. comparison of perceptions and expectations, which
results in revision of the initial perceptions of service quality. Every encounter with the brand
further revises or reinforces service quality perceptions. This means that customer’s satisfaction
over time creates customer’s service quality perception, which results in desired change in
consumer purchase intentions toward the brand (Cronin and Taylor, 1992). At the same time, this
implies that dissatisfaction in a single encounter may change the customer perception of the
service quality, his future behavior and decision making process, as well as existing associations
related to the brand image.

Consumer perception of quality also depends on the physical surroundings, including lightning,
colour, spatial layout, ambient conditions, and others (Bittner, 1992). On the other hand, as the
concept of service quality is both transactional and relational in nature, perception of quality in
restaurants also involves a person who provides the service (Crosby et al, 1990). This means
that the franchisor’s brand is not enough – employees of the restaurant also contribute to the
consumer perception of quality. In fact, the system must be designed to support the provision of
quality (Cronin and Taylor, 1992). Parasuraman et al (1994) confirm that measuring perception
is sufficient indicator of service quality.

According to Hoffman and Bateson (2011, p.321), service quality process can be examined in
terms of five gaps between expectations and perceptions on the part of management, employees,
and customers. The knowledge gap is the difference between what consumers expect and what
management perceives that consumers expect (Hoffman & Bateson, 2011, p.322). Closing this
gap requires knowledge of consumer behavior. As franchisors usually have large number of
outlets, they are more likely to be able to finance the research and determine the needs of
consumers than independent restaurants. The standards gap is the difference between what
management perceives that consumers expect and the quality specifications set for service
delivery (Hoffman & Bateson, 2011, p.322). With the high level of standardization, franchising
outlets are more likely to be able to close this gap. The delivery gap is the difference between the
quality specifications set for service delivery and the actual quality of service delivered
(Hoffman & Bateson, 2011, p.322). Technology, operations and training of the employees are
strictly defined in the contract between franchisor and franchisees, thus franchising outlets are
more likely to close this gap. The communications gap is the difference between the actual
quality of service delivered and the quality of service described in the marketing communication
channels (Hoffman & Bateson, 2011, p.322). This gap is difficult to close, as it relies on the
competence of the employees. Again, large restaurant chains are able to fund careful selection
and training of the employees who will fit the organization culture and be committed to the
vision. At the same time, low wages may cause dissatisfaction of employees, as well as repetitive
jobs due to the standardization and automation of processes, which results in low engagement
and affects the quality of service (Gregory, 2011). The service gap is defined by these four gaps,
and can be explained as the distance between a customer’s expectation of a service and
perception of the service actually delivered (Hoffman & Bateson, 2011, p.322).

CUSTOMER PERCEPTION OF QUALITY IN RESTAURANTS IN NEW YORK

There are 833,400 restaurant and foodservice jobs in New York in 2017 making $43.3 billion in
sales (National Restaurant Association , 2017). Large share of those restaurants are the fast-food
restaurant chains - for example, there are more than one thousand Dunkin’ Donuts outlets, more
than 500 McDonalds and up to 200 outlets of Burger King, Pizza Hut, Taco Bell, KFC and
others (National Employment Law Project, 2015). Due to the increasing competition and since
rent and food costs are essentially fixed, restaurants tend to compete through cost cutting, even
though the restaurant jobs are considered to be among the ones with the lowest wage. This has
resulted in numerous violations primarily of labor laws in all industry segments, but appear to be
concentrated in expensive “white-table cloth” restaurants and independent family-style
restaurants, while fast food and chain and franchise restaurants appear to have fewer violations
(Brennan Center for Justice, 2007). Franchise restaurants have to ensure compliance with the
rules set by the franchisor, or they risk losing the contract. Thus, the employees, important factor
of the consumer perception of quality, are better trained and may be more satisfied compared to
the employees in independent and other restaurant, thus more interested in consumers and their
needs.

At the same time, consumer spending at restaurants maintains high growth pace both in the fast
food restaurants and table/full service restaurants (IHS Economics, 2017). As independent and
full service restaurants are usually located closer to the centre of the cities than franchised units,
and customers tend to choose easily accessible and national restaurants, fast‐food restaurant
franchises can be less attractive (Min & Min,2011). Customer may perceive the franchised
outlets as lower quality restaurants, due to the inconvenience of their location.

However, nutritional profile, brand, the distance from a consumers’ home are considered while
choosing a fast food restaurant to eat out (Richards & Padilla, 2009). Consumers attach great
importance to various factors such as quality of food, facility layout, service quality, speed and
cleanliness (Thakkar & Thatte, 2014). Although standardization is expected from the franchised
outlets, some outlets are not able to follow the same standards (Elzeiny & Cliquet, 2013).
Dissatisfaction of customer in one franchise outlet may lead to the low quality perception of the
entire brand.

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