Franchi

sing
Researc
h:
 Extant franchise academic literature has
failed to asses whether franchising delivers
as much as it promises in terms of
economic performance and financial
returns.
 Introduction

Extant franchise academic research has failed. It

has failed because it has not answered
empirically or holistically the central and only
question that pre-occupies the franchise
fraternity, the investment community and
regulators.

IS FRANCHISING ALL IT’S CRACKED UP TO BE?

Is franchising all it’s cracked up
to be?
For all the franchise fraternity’s success rhetoric and the propaganda,
the inescapable fact is that the extent to which franchising is all
it’s cracked up to be remains largely unproved—at least
scientifically.
- Lafontaine and Bhattacharyya (1995)

Exempli Gratia
One of the major selling points of franchising to franchisees over
the years has been the statistics vehiculated by the trade press on
the very low failure rates of franchised businesses compared to
independent operations.

It is not possible to determine conclusively whether failure rates

among franchised businesses are lower than among independent
businesses.
- Cross (1998)
 2 Main Reasons For This
Situation And One Outcome:
1. There has been a distinct lack of contribution by academics.
Exempli Gratia

Though the management of the operational

dynamics is critical to the success or failure of
an individual franchise unit, there are very few
studies examining the operational dynamics
within franchises.

Lack of research on implementation is very disturbing… the manner in which

franchising systems actually work to create value has been ignored.
- Elango and Fried (1997)
2. There has been a tendency for researchers to use
inappropriate methodologies—such as non-linear
product life cycle techniques—to examine the
dynamics of franchising.
- Easingwood et al. (1983)

Outcome
The franchise fraternity’s success rhetoric potentially
leaves ethical issues that have yet to be resolved.

* There has been a lack of regulation to keep such

contentions in check.
Franchise researchers have instead shown a
tendency to favor a particular perspective and a
tight focus on typically pragmatic issues, such as
‘encroachment’, location and franchise fee
policies, or more theoretical discourse on
transaction cost analysis, ownership redirection,
etc.
Practitioners and some researchers claim that the
academic literature is too fragmentary and
oblique to be of direct use to investors.
- Thompson (1968)

It is debatable whether this focus serves to answer,

directly or otherwise, the underlying issue of
whether and/or to what degree franchising is all
it’s cracked up to be.
Franchising offers potential investors a fast and safe
route into business that would otherwise be
fraught with risk and uncertainty. Aspiring
entrepreneurs are encouraged to choose the
franchise path in order to improve the chances of
their success and survival rather than alternative
forms of self-employment.
The failure rate is very low and if you ask me what
the main cause of failure in franchising is I would
say lack of two-way communication between the
franchisor and franchisee.
- G. Williams (1999)
They contend that some people become franchisees
because they are attracted to the franchise’s
brand name and the product itself.
- Housden (1984) and Felstead (1993)
Trap for the trusting
- Brown (1969)
Fraudsters induce investors to buy franchises,
holding out the prospect of large returns on
investment. But once the payment has been
made, the franchise proves worthless.
- Lord Roskill, Fraud Trials Committee
(1986)
Franchising cannot afford a truly high rate of
“financial” failures. If that were the case, it would
be the end of franchising. The fact that the
successful franchise is “packaged success” lies at
the very heart of the franchise boom.
- Kursh (1968)
Success rhetoric dominates franchising and
is now culturally embedded, leaving
important ethical questions unresolved
because of a lacuna of debate.
Entrepreneurship researchers may view franchising
as a programmed mode of entry, which they
perceive to be nonentrepreneural.
- Phan et al.

If true, this situation not only suggests that the

academic fraternity appears to be possibly as
self-serving as its franchise counterparts but also
important ethical questions remain unresolved
because of the lacuna of debate. For instance,
possibly due to lack of empirical evidence, there
has been a tendency for the franchise fraternity
and its supporters to dismiss the failures as mere
aberrations.
Possibly related to the belief that franchise failures
are an aberration and the belief that franchising
both generates economic wealth and reduces the
wasted resources that comes from organizational
failure, it is also seen to have a ‘boundless
future’.
The interference here is that the statistics on
franchise failures are being created, misused,
abused, and/or misinterpreted and that the
activity has higher rates of failure and lower
levels of financial success than has been either
openly admitted of acknowledged.
- Walker (1988) and Cross (1994)
Note that there seems to be some failure—it has
never been made explicit whether this failure is
intentional or not—by the authors to distinguish
between whether their subject is the franchisee
or franchisor.
The fact that there exists so much anecdotal
evidence questioning the extent of franchising’s
success and that some elements of the franchise
fraternity have employed dubious practices, is
partly responsible for the lack of academic
contribution.
- Thompson (1968)
Few have examined the propensity of franchise
businesses to survive and/or deliver returns.

Exempli Gratia
Because of the dearth of research exploring this
topic, the subject of franchisor attrition is a ‘very
quiet debate’.
- Stanworth (1995)
There also exists a plethora of case studies, press
reports and details of legal proceedings against
wayward franchise businesses.
- Giugni and Terry (1998)
If the conclusions of this latter stream of research
are to be believed, franchising’s promise is an
empty one.
To those that subscribe to such perspective,
investors are the victims of spurious success
claims, who often lose more than their life
savings in the process, and have fallen foul of the
significant vested interests in the franchising
fraternity.
The combination of the persistent success
propaganda and the lack of regulation has
resulted in the cultural-embeddedness of
franchising’s success rhetoric.
- Izraeli (1972)
To some observers, the lack of government
and regulatory body intervention and/or
a requirement to sound a caveat in regard
to the success rhetoric suggests that they
condone the message of success.
 Summary
It has been argued that extant franchise academic literature has
failed to asses whether franchising delivers as much as it
promises, in terms of economic performance and available
financial returns. In particular, there are few studies that
examine the operational dynamics within franchising, most favor
a particular perspective and tight focus on a typically pragmatic
issue. Furthermore, those that do exist have frequently used
inappropriate methodologies. An outcome of this ‘failed
literature’ is the dominance of a success rhetoric that tends to
neglect a range of ethical questions that remain unresolved
because of the lacuna of debate. Moreover, the combination of
persistent success propaganda and the lack of formal regulation
have resulted in the cultural-embeddedness of the success
rhetoric. This is concerning given its inadequate testing through
the application of appropriate research methodologies.
From my experience, from the moment I started
research into franchising in 1956, I would say that
franchising, perhaps because it has been
mushrooming, attracting the ‘little guys’, it has
more than its fair share gyps. The crooks that
have invaded and exploited the zooming interest
in franchising are among the nation’s vilest
thieves. They will think nothing of separating
anyone from his legacy of life’s savings.
- Kursh (1968)
Thank
You!!!
As such, the franchisor is seen to be as dependent
on the franchisee, at least for capital and promise
of increased efficiency, as the franchisee is reliant
on the franchisor. The implication from this
position is that franchising represents a form of
alliance between two independent parties with
mutual interests.
- Mcintyre et al. (1994) and Bradach (1998)
The messages of success are presented not as the
unusual case or exception to the rule, but rather
as typical of the possibilities open to all people no
matter how lowly the starting point. As such, in
spite of there being substantially different levels
of risk across different franchise ‘sectors’
(Lafontaine, 1996) a potentially misleading
message is compounded by the application of
one failure statistic across different economies
and industries. This practice is misleading as it
infers that all franchises, irrespective of economic
context and the status of the franchise itself, are
more or less equally safe and that franchising has
a boundless future.
There has been significant conditioning of
prospective franchisees prior to the offer by a
specific franchisor, and that there is an implicit
hollowness to the franchise fraternity’s contention
that self-regulation serves to protect such people.
One especially pertinent franchise research desert
is the dearth of independent research specifically
examining franchisee financial performance. Yet,
this lacuna persists even though the promise of
excess returns is a recurrent theme in the popular
franchise press. Some of that which does exist
(Price, 1993; Kaufmann and Lafontaine, 1994;
Bates, 1995, 1998) is problematic because of the
lack of specific consideration of accounting
practices that potentially reduce comparability of
performance among franchisees and between
franchisees and non-franchised concerns.
Researching the financial performance of franchise
organizations has not been helped by the lack of
transparency of financial statements. It is no
secret that the majority of franchise organizations
tend to be small firms that to take full advantage
of the accounting restrictions afforded to them by
the respective accounting standards.
The lack of disclosure places the burden of
researching the viability firmly onto the prospective
franchisee’s shoulders. Unfortunately, this burden is
made heavier by the fact that both the franchisor
and the existing franchisees (should there be any)
are small businesses and may not file complete
financial statements. However, the lack of
transparency cannot be solely responsible for the
inadequate questioning of the franchisee or, for that
matter, franchisor financial performance. Surely, if
extant strategic management thought (Porter,
1980, 1985) is correct, the promises of financial
success and supra-normal returns are somewhat
incongruous with the relatively low financial barriers
to entry into franchising (Price, 1997; Stanworth
and Purdy, 1999)
Industries characterized by low entry barriers do not
yield above average returns. But unfortunately,
even general observations appear to be the
exception to the rule in the extant franchise
literature.
- Porter (1985)
While the extant franchise literature evaluates
performance in survival, service quality and
profitability, much more work is required in
assessing the profitability of franchise firms.
- Lafontaine and Slade (1998)