THE IMPACT OF

FRANCHISING ON THE
DEVELOPMENT PROSPECTS
OF SMALL & MEDIUM-SIZED
ENTERPRISES (SMEs)
IN EUROPE

Professor John Stanworth

David Purdy

INTERNATIONAL FRANCHISE RESEARCH CENTRE

SPECIAL STUDIES SERIES NO.4

JUNE 1994

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS

ISBN 1 85919 011 1
THE INTERNATIONAL FRANCHISE International Journal (MCB University
Press). Additionally, Franchise Growth And
RESEARCH CENTRE (IFRC) 1993-2007
Failure In The U.S. And The U.K.: A
University of Westminster, London, UK.
Troubled Dreamworld Revisited received the
Best International Paper Award in 1997,
"The International Franchise Research
again from the Society of Franchising. This
Centre (IFRC) is committed to
paper was later published in Franchising
improving the understanding of
Research: An International Journal.
franchising. This is achieved by the
publication of impartial research and
Close links were fostered with universities in
by the encouragement of informed
Rome and Pisa (Italy), Haute Alsace
debate."
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
Franchising operates in a dynamic environ-
collaboration. Professor Pat Kaufmann of
ment, with new issues and challenges
Atlanta, Georgia, addressed our inaugural
emerging, including: globalisation, coping
annual strategy seminar, in 1994. Overseas
with competition, disclosure, industry
speakers in subsequent years included
regulation, managing relations with
Cheryl Babcock, Director of the Franchising
franchisee associations, franchisee
Institute, University of St. Thomas,
recruitment & market saturation.
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Against this backdrop, the IFRC was
Francine Lafontaine, University of Michigan
established in 1993 by Professor John
(1997), Professor Claude Nègre, University
Stanworth (Director of the Future of Work
of Haute Alsace (1997), Colin McCosker,
Research Group at the University of
University of Southern Queensland (1998),
Westminster), supported by Brian Smith (ex-
Professor Frank Hoy, University of Texas at
BFA Chairman, franchisee, franchisor and
El Paso (1998), Professor Jack Nevin,
author), and Chair of its Steering Group.
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
FOUNDER MEMBERS
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Founder members and sponsors included:
Professor Wilke English, University of Mary
Barclays Bank, the British Franchise
Hardin-Baylor (2000).
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
IFRC members were active supporters of the
(now Lloyds Group), Mail Boxes Etc.,
International Society of Franchising, and
Midland Bank (now HSBC), Prontaprint,
hosted the ISoF 2005 conference in London.
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
The IFRC ceased its research activities in
and Wragge & Co.
2007, when John Stanworth took retirement.
PUBLICATIONS
Web versions of IFRC Special Studies
Series Papers 1993-2001 (listed overleaf)
Their support enabled the IFRC to publish a
number of reports, including its Special
Many of the earlier papers have been re-set,
Studies Series Papers, journal articles,
to allow a successful conversion to Acrobat,
book chapters and conference papers.
and are now available online.
Two IFRC papers received three awards
John Stanworth, Emeritus Professor,
over a period of 12 months (1996-97). The
University of Westminster
first being Business Format Franchising:
http://www.westminster.ac.uk/schools/
Innovation & Creativity or Replication &
business
Conformity ?, which received the Best
International Paper Award in 1996, from the
David Purdy, Visiting Fellow,
Society of Franchising. This paper also
Kingston University
received the Outstanding Paper of 1996
http://business.kingston.ac.uk/sbrc
award from Franchising Research: An
December 2010

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.1
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.
IFRC Special Studies Papers 1993-2001
10 London: A Capital City For Franchisee
Recruitment, (Mills, Stanworth &
Purdy), 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
(Chapman, Mills & Stanworth), 1997
12 Franchising: Breaking Into European
Union Markets, (Stirland, Stanworth,
Purdy & Brodie), 1998

Web versions published online December 13 Succeeding As A Franchisor,

2010, via http://www.scribd.com/:
1 The Blenheim/University of
Westminster Franchise Survey:
Spring 1993, (Stanworth & Purdy),
1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, (Stanworth & Stern),
1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, (Purdy &
Stanworth), 1994
(Stanworth & Purdy, published jointly
with Business Link London Central),
1998
14 Direct Selling: Its Location in a
Franchise Typology, (Brodie &
Stanworth), 1999
15 Unravelling the Evidence on
Franchise System Survivability,
(Stanworth, Purdy, English &
Willems), 1999
16 Survey: Professional Services For
Franchising In The U.K., (Stanworth &
Purdy), 2001

4 The Impact of Franchising on the

Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, (Stanworth & Purdy), 1994

5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data,
(Stanworth, Kaufmann & Purdy), 1995

6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, (Stanworth), 1995

7 Franchising as a Source of
Technology-transfer to Developing
Economies, (Stanworth, Price, Porter,
Swabe & Gold), 1995

8 Aspects of Franchisee Recruitment,

(Macmillan), 1996

9 Business Format Franchising:

Innovation & Creativity or Replication
& Conformity ?, (Stanworth, Price,
Purdy, Zafiris & Gandolfo), 1996

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.2
INTRODUCTION
The growth rate of franchising in Europe since
the late 1980's has been disappointing
(Stanworth, 1994; Amoroso & Gandolfo,
1991: 66). After a period of fairly rapid
expansion in the early 1980s, expectations for
continued strong growth were high and
franchising was widely regarded as virtually
recession proof. However, the reality of slow
growth, or even shrinkage in recent years of
recession, has had a somewhat sobering
effect.
This paper will argue that the pessimism
currently surrounding the field of franchising in
Europe is misplaced and, as we come to
understand more about franchising, will be
replaced by a greater degree of optimism,
albeit based on a more modest and sound
basis than has been the case in recent years.
The paper will present two main arguments.
First that earlier unrealistic growth
expectations of franchising in Europe were
strongly influenced by misleading perceptions
of franchise growth emerging from America.
These were inflated largely by the American
franchise industry and its trade association,
the International Franchise Association
(IFA). The industry in America had long
recognised that it had a vested interest in
generating a dynamic and buoyant image,
both as an aid to persuading individuals to
invest in the industry as franchisees, and also
as a weapon for the IFA in its lobbying of
politicians. A key interest here was that of
combating pressures for franchise legislation
by coaxing politicians away from possible
'interference' in an industry seen to be
displaying substantial powers of wealth and
employment generation.
The second reason for the European
franchise industry being taken unawares by
the lack of growth in the late 1980s and early
1990s was a gross under-estimation of the
risks associated with the development of new
and developing franchise systems, particularly
in times of recession. Failure rates amongst
relatively young franchise systems are much
higher than is commonly realised. This acts as
a brake on growth rates for the industry as a
whole, particularly in times of economic
recession when the likelihood of success is
International Franchise Research Centre - Special Studies Series Paper No.4
likely to drop substantially. Empirical data
based on a sample of 74 United Kingdom
(Britain plus Northern Ireland) franchise
systems are presented here.
DEFINITION OF FRANCHISING
A franchise can be defined as comprising a
contractual relationship between a franchisee
(usually taking the form of a small business)
and a franchisor (usually a larger business) in
which the former agrees to produce or market
a product or service in accordance with an
overall 'blueprint' devised by the franchisor.
The relationship is a continuing one with the
franchisor providing general advice and
support, research and development and help
with marketing and advertising. In return, the
franchisee usually pays an initial franchise fee
and also an ongoing royalty or management
service fee, normally based on the level of
turnover and/or a mark-up on supplies
purchased from the franchisor. The franchisee
provides the capital for the outlet and is a
legally separate entity to the franchisor
(Curran & Stanworth, 1983).
Though the franchisor is usually a 'larger'
business than the franchisee, in only a handful
of cases does the franchisor truly meet the
description of 'large'. Most franchisors in
Europe (and indeed America) remain very
much small and medium-sized enterprises
(SMEs) with no more than a small handful
truly qualifying as large and these are almost
inevitably American in origin, e.g.,
McDonald's, ServiceMaster, Coke, Pepsi,
Holiday Inn, Burger King, Kentucky Fried
Chicken, Pizza Hut, Budget Rent-a-Car, Avis.
Overall, in the United Kingdom, the average
franchise involves around 30-40 outlets
according to British Franchise Association
statistics and could thus still certainly be
considered a SME, if not a small business per
se.
At one extreme, it has been argued that the
franchised enterprise is, in reality, a managed
outlet featuring in the larger marketing pattern
of another truly independent business - that of
the franchisor (Ruben, 1978: 225). This
distribution strategy has certain advantages
for the larger enterprise but, just because the
manager of the outlet has a capital stake in
the business dressed up in the language of
1
entrepreneurship, that is no reason to confuse
a franchise outlet with a genuinely
independent business. This is not to say that
the arrangement cannot be highly beneficial to
both parties but illusion should not be
substituted for reality in a rigorous analysis of
the status of the franchised outlet.
At the other extreme, the franchised small
business may be viewed as an emerging form
of independent small business in advanced
industrial societies whose distinguishing
characteristic is its overt and close
relationship with another, usually larger,
enterprise. This association might be seen as
being little different, except in degree and the
explicit form it takes, to that now found
between many small businesses and other
firms with whom they do business. In an
increasingly interdependent economy, such a
close association may simply be seen as a
reflection of the fact that 'no firm is an island
entire of itself'.
The independence of the small firm can never
be absolute and is often difficult to accurately
assess in practice. Any small enterprise,
whatever its form, is part of a wider network of
economic interaction summed up in the
economist's notion of 'the market' and,
arguably, it is from this source that the main
limitations on independence are derived.
Whilst economically, franchise relationships
may appear to render franchisees highly
dependent at a contractual level, at an
operational level, higher levels of
independence may manifest themselves than
appear at first sight likely (Stanworth et al,
1984).
The pioneering Bolton Committee researchers
in the United Kingdom were attracted to the
idea of classifying the roles of small firms
according to the type of market they supply
(Bolton, 1971: 31-32). Accordingly, they
located small firms along a typology of
reliance upon large firms. 'Marketeers', are
those firms which actually compete in the
same or similar markets as large firms
(examples are computer software companies,
fashion merchandise manufacturers and
restaurants). 'Specialists' are those firms
which carry out functions that large firms do
not find it economic to perform at all, though
they may include large firms amongst their
International Franchise Research Centre - Special Studies Series Paper No.4
customers (examples are repair and
maintenance in the building industry, jobbing
engineering and specialised retail outlets such
as bookshops).
Finally, and crucially from the viewpoint of the
current discussion, are small firms performing
the role of 'Satellites'. Here the small firm is
highly dependent upon a single larger
business for the majority of its trade. The
degree of dependence may be even greater if
the large customer actually designs the
product or service and merely sub-contracts
its manufacture or supply, as appears the
case with a franchise.
Franchisees would appear to fall under the
third category above. The clearest illustrations
of franchise satellite relationships in the
United Kingdom involve the relatively recently
developed areas of franchised (domestic) milk
distribution (Boyle, E., 1994) and parcel
despatch and delivery. Both of these, in some
ways, could be said to be close to 'product'
franchises with franchisees simply distributing
locally a product delivered to them by their
franchisors. 'Business format franchising', by
way of contrast, involves the 'cloning' and
support of a full business system as a channel
for the delivery of a service or service-related
business.
'Product' franchises, embracing the fields of
car and petroleum distribution, the soft drink
bottlers (Coke, Pepsi, Seven-Up, etc.) and, in
the United Kingdom, tenanted public houses
(drinking bars), are often categorised as 'first
generation' franchises and almost totally
side-lined from mainstream debates on
modern franchising. The terms 'franchising'
and 'business format franchising' are now
used practically interchangeably in the
franchise industry generally.
Business format franchises are typically
SMEs. However, given that the franchisor
levies a royalty-based charge on the
franchisee's level of turnover rather than
profit, pressures to achieve market
penetration and growth are institutionalised
rather than optional. This can be achieved by
expansion within a given franchise outlet or by
expansion of the overall population of outlets -
often involving multiple outlet ownership by
more successful franchisees. For instance,
2
 Fig 1 - EUROPEAN FRANCHISE STATISTICS

Number of Number of Sales

Franchisors Franchisees bn ECU

Austria 80 2,500 -
Belgium 90 3,200 3.3
Denmark 42 500 -
France 600 30,000 21.0
Germany (FR) 370 15,500 8.2
Rep. Ireland 20 - 0.1
Italy 318 16,100 8.5
Netherlands 331 12,640 6.5
Norway 125 3,500 3.0
Portugal 55 800 -
Spain 117 14,500 2.1
Sweden 200 9,000 6.0
UK 373 18,100 6.8

These figures were compiled from a range of sources and exclude sales of Cars,
Trucks, Gasoline and the Soft Drink Bottlers.

this is particularly common in the field of fast
food franchising where, in the US, it is not
uncommon for 50 per cent of a franchise
company's outlets to be owned by less than
20 per cent (and sometimes less than 10 per
cent) of its franchisees. A single large
franchisee may own several hundred outlets
(Bradach, J., 1994). Multiple ownership in
other sectors appears less common.

Fig 2 - NUMBER OF FRANCHISE SYSTEMS IN U.K.

500
450 432
396
400 379 373
350
295
300
253 244
250
200
150
100
50
0
1987 1988 1989 1990 1991 1992 1993
Year

International Franchise Research Centre - Special Studies Series Paper No.4 3

 Fig 3 - NUMBER OF FRANCHISED UNITS IN U.K.

30,000

24,900
25,000

20,000 18,300 18,600 18,100

16,000 16,600
15,000
15,000
10,900
10,000 9,000
7,900

5,000

0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Year

FRANCHISING IN EUROPE appear to be based on uncorroborated

estimates reported to them by national
Figure 1 presents data on Europe. These franchise associations from member
figures were issued by the European countries. Whilst industry experts sometimes
Franchise Federation (December, 1992) and view such figures with a certain amount of

Fig 4 - BUSINESS FORMAT FRANCHISING IN U.K.

6
5.2
5
5 4.7 4.8
4.5

4 3.8
Total
Turnover
3
£ Billion 2.1
1.9
2
1.3
0.9
1

0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Year

International Franchise Research Centre - Special Studies Series Paper No.4 4

scepticism, it should be recognised that data
collection in the industry (outside of the US) is
still very much in its infancy and that the
process of data collection will almost certainly
improve over time.
Possibly the most comprehensive source of
national statistics in Europe is that assembled
annually for the United Kingdom by the British
Franchise Association and the Franchise
Section of the National Westminster Bank
PLC. Figures 2, 3, and 4, drawn from the
above source, indicate numbers of franchise
systems, numbers of franchised units, and
levels of business format franchising turnover
for recent years. As can be seen from these
figures, franchising in Britain plateaued in the
late 1980s, following a rapid growth phase
immediately prior to that.
The figure of 24,900 franchised units for 1993
in the United Kingdom includes 8,000
franchised dairy roundsmen (otherwise
reducing the overall total to 16,900). Hence,
currently, around one franchisee in every
three in Britain is a dairy roundsman, involved
in domestic milk delivery . The recent
inclusion of milk distribution in these figures
does not indicate new economic activity but,
rather, traditional business activity being
'converted' to a franchise format. As such, it
represents part of a growing trend towards
workforce flexibility and casualisation in the
United Kingdom.
U.S. GLOBAL EXPANSION
In the mid-1970s, the British Franchise
Association was formed by eight franchise
companies:
■ Budget Rent-a-Car (vehicle rentals)
■ Dyno Rod (drain cleaning and hygiene
services)
■ Holiday Inn (hotels and motels)
■ Kentucky Fried Chicken (fast foods)
■ Prontaprint (fast print services)
■ ServiceMaster (carpet and furniture
upholstery cleaners)
International Franchise Research Centre - Special Studies Series Paper No.4
■ Wimpy International (fast foods)
■ Ziebart (vehicle rust-proofing services)
Only two of the above (Prontaprint and
Wimpy) were distinctly British and even the
latter was based upon an imported American
idea, albeit developed by a British company.
This dominant representation of American
involvement in franchising has continued with
US companies exporting to Britain largely via
the medium of granting 'master licenses' for
an individual or company in Britain to develop
their format nationwide.
A recent analysis by a key specialist in the
franchise field undertaken specifically for the
purposes of this current project, and based
upon Franchise Directory-listed franchises
indicates that there are around 87 US-based
franchises in the United Kingdom of a
maximum total of 506 (see Figure 5). This
amounts to only 17 per cent of the total
number of franchises in the United Kingdom.
However, it should be observed that, whereas
many of the United Kingdom-based
franchises are very small organisations with
weak brand names and small market shares,
the US franchises in the United Kingdom are
mainly household names and are large. Thus,
from a market share/number of outlets
perspective, the US-based franchises are
dominant within the United Kingdom with a 50
per cent-plus overall market share.
High profile American involvement in
international franchising is one which wins
favour at the highest levels in the US, as
summarised in a recent analysis by American
writer Sevgin Eroglu (1992: 19):
"... from a balance-of-payments
perspective, international franchising is
considered (in the US) as a safe and
speedy means of obtaining foreign
currency with a relatively small financial
investment abroad. It is notable in that
it neither replaces (American) exports
nor exports (American) jobs, all these
reasons making this business
arrangement one of the most preferred
and government-supported forms of
international involvement." (emphases
in brackets added)
5
 Fig 5 - U.K. FRANCHISE INDUSTRY:
Sectoral Analysis vs. Country of Origin

Sector U.S.A. U.K. Other Foreign Total

n % n % n % n

Business services 14 16% 65 17% 6 13% 85

Cleaning services 9 10% 15 4% 2 4% 26
Delivery/Haulage 1 1% 9 2% 2 4% 12
Distribution services 5 6% 19 5% 3 7% 27
Estate services 1 1% 22 6% 1 2% 24
Food Franchising 15 17% 42 11% 3 7% 60
Fast Print 2 2% 4 1% 2 4% 8
Health & Beauty 3 3% 14 4% 5 11% 22
Home care services 6 7% 39 10% 6 13% 51
Leisure/travel 4 5% 9 2% 1 2% 14
Motorist services 8 9% 27 7% 1 2% 36
Property care 5 6% 37 10% 5 11% 47
Specialised 2 2% 39 10% 2 4% 43
Walk-in retail 12 14% 32 9% 7 15% 51

TOTAL 87 100% 373 100% 46 100% 506

American global expansion continues franchisor's system in a specific country or

unabated, By the end of the 1980s, around
400 American business format franchisors
operated over 37,000 foreign outlets covering
most major countries of the world (Acheson,
1991:69). In an increasing number of
countries, the shift from manufacturing to
services, the process of urbanisation, rising
disposable incomes and expanding consumer
markets provide similar conditions to those
which fuelled the earlier franchising surge in
the United States.
There are a number of ways in which foreign
markets can be penetrated:
"...franchising directly to individuals,
company-owned operations, joint
ventures or master franchisors. Many
franchisors use more than one method
in conducting foreign operations but the
most popular, cheapest and fastest
method is the master license
technique." (US Department of
Commerce, 1988)
Under the master licence technique, a master
licensee receives the right to develop the
region. The US Department of Commerce
claims that:
"Compared to other service sectors,
the problems of franchise companies in
accomplishing international
transactions are relatively less
formidable." (US Department of
Commerce, 1986)
The heaviest foreign concentrations of
American franchise outlets are in Canada
(11,182); Japan (9,249); Continental Europe
(5,405 - especially France, West Germany,
the Netherlands and Belgium); the United
Kingdom (2,961); followed by Australia, Asia,
Mexico, the Caribbean, Africa and South
America (Acheson, 1991).
Walker (1989: 13), examined reasons given
by American companies in identifying a
country to receive their first venture in global
(non-US) expansion. Perhaps surprisingly, the
reasons given did not reflect the degree of
proactive planning that might have been
expected. For instance, 44.0 per cent had
simply responded to a first/only contact from a

International Franchise Research Centre - Special Studies Series Paper No.4 6

 Fig 6 - TRENDS IN TOTAL U.S.A. FRANCHISING SALES, 1975-1990

ACTUAL INFLATION-ADJUSTED
FRANCHISE SALES FRANCHISE SALES

Total % Change from Total % Change from

Year $bn Previous Year $bn Previous Year
1975 185.8 10.2% 185.8 1.0%
1976 217.9 17.3% 205.9 10.8%
1977 261.7 20.1% 232.1 12.7%
1978 282.2 7.8% 232.6 0.2%
1979 313.3 11.0% 232.6 0.0%
1980 334.4 6.7% 218.5 -6.0%
1981 364.8 9.1% 215.4 -1.4%
1982 376.0 3.1% 209.3 -2.8%
1983 422.8 12.5% 228.1 9.0%
1984 492.1 16.4% 254.4 11.5%
1985 543.0 10.3% 271.0 6.6%
1986 569.1 4.8% 279.5 3.1%
1987 599.4 5.3% 283.8 1.5%
1988 648.1 8.1% 294.9 3.9%
1989 677.9 4.6% 294.3 -0.2%
1990 714.5 5.4% 294.4 0.0%

Change 1975-90 284.6% 58.5%

Annual Change 1975-90 9.4% 3.1%

(Compound rate)

foreign 'prospect'. After that came, 'proximity
to the USA' (27.6 per cent) and 'similarities to
the US/English language' with 18.0 per cent
combined. The appeals of Canada and the
United Kingdom are obvious here.
Exports by European franchise companies, by
way of comparison, are currently modest and
United Kingdom franchise industry exports
are described by industry experts as 'trivial',
despite occasional exceptions such as Body
Shop and Prontaprint. Much the same
appears to apply to Italy, France and
Germany.
EUROPEAN PERCEPTIONS OF
U.S. FRANCHISE INDUSTRY GROWTH RATES
Franchising is more developed in America
than in any other country, as is research and
data gathering. Thus, much of what is known
about franchising tends to be American in
origin and other countries look towards US
experience as heralding the nature and scale
of future developments in their own societies.
As a result of the large-scale development of
franchising in the US, American experience is
invariably quoted (or misquoted) in
justification of franchising in Britain and
elsewhere in Europe. Three US statistics are
quoted above all others:
■ First, that franchising accounts for
approaching 35 per cent of all retail sales
in the US.
■ Second, that franchising accounts for 10
per cent of Gross National Product (GNP)
in the US.
■ Third, that franchising expanded by around
300 per cent between 1975 and 1990.
All of the above statistics appear essentially
true. However, as Figures 6 and 7 illustrate,
inflation adjusted figures for the growth of
franchising in the US over recent years pull

International Franchise Research Centre - Special Studies Series Paper No.4 7

 Fig 7 - TRENDS IN TOTAL U.S.A. FRANCHISING SALES,
1975-1990
$800bn
$700bn
$600bn
$500bn
$400bn
$300bn
$186bn
$200bn
$100bn
$0bn
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
down the overall growth figure for 1975-1990
dramatically from 284.6 per cent to 58.5 per
cent, and the average annual growth rate from
9.4 per cent to 3.1 per cent. Moreover, in 6
years of this 16 year period, franchise growth
in the US was either zero or negative (Trutko,
J., Trutko, J. & Kostecka, A., 1993). The
franchise industry in Europe appears almost
completely unaware of the existence of the
latter adjusted statistics.
Although academics, researchers and bodies
such as the International Franchise
Association (America's Franchise
Association) use the terms 'franchising' and
'business format franchising' almost
interchangeably, the fact remains that, for
statistical purposes, 'product' and business
format franchises are usually grouped
together in the US. In 1990, 48.4 per cent of
all franchising sales stemmed from the
automobile and truck sector and a further 18.0
per cent from franchised gasoline service
stations.
Whereas product franchising grew by only
42.4 per cent in inflation-adjusted (constant)
dollars in the US between 1975-90, against an
overall sector figure of 58.5 per cent, business
format franchising grew by 115.5 per cent, or
International Franchise Research Centre - Special Studies Series Paper No.4
$715bn
$294bn
Inflation-adjusted
Year
around 5.1 per cent in real terms per annum.
The expansion and contraction of franchising
in the US seems to have closely followed
general economic trends (Trutko, J., Trutko,
J. & Kostecka, A., 1993: 3-39). Between 1975
and 1989, Gross National Product (GNP) in
the US grew by 52.7 per cent in real terms
against a comparable growth in franchise
sales of 58.5 per cent. The decline in
franchise sales (in real terms) between 1979
and 1982 again closely reflected the wider
economic situation. As the US economy
recovered during the mid-1980s, franchise
sales reflected the upturn, as they did the
subsequent downturn towards the end of the
1980s.
Interestingly, however, whilst franchise sales
overall performed relatively well between
1975 and 1990, the number of franchise
establishments in the US grew by only 13.3
per cent compared to a 48.4 per cent increase
in the number of establishment units in the US
as a whole. It is predicted that this trend will
continue with franchisors concentrating on
generating higher profits per establishment in
the future rather than expansion via increased
outlets (Trutko, J., Trutko, J. & Kostecka, A.,
1993: ES-15). In this sense, franchising could
8
be said to be limiting the number of small
business outlets.
FRANCHISE FAILURE RATES
Allied to the US franchising industry's often
inflated claims on growth is also an implicit
assumption that franchising is a low risk
option. The assumption of low failure rates is
used by franchise salesmen when inducing
potential franchisee to invest their money in
franchising. However, franchise systems can,
and do, fail (Ozanne & Hunt, 1971; Price,
1993a and 1993b; English & Willems, 1994;
Cross, 1994; Cross & Walker, 1988) and
appear particularly vulnerable during the
demanding early years of their initial
development.
Once a franchise company is well established,
it will find a range of specialist services and
advice on offer from bodies such as franchise
trade associations and specialist units in the
clearing banks (Stern & Stanworth, 1994).
The weakest link in the chain of development
is almost certainly at an earlier stage -
between establishing a conventional small
business with franchise potential and
launching it as a fully-fledged franchise
operation, without short-cuts being taken that
could prove disastrous later.
Any completely new small business will need
at least 2 years in order to establish itself in
terms of testing out sales, marketing, product/
service, pricing and staffing strategies. After
all, every small business start-up plan
inevitably requires considerable modification
during the initial months of its implementation.
High failure-rate figures, particularly during the
first 30 months of operation, verify this fact.
Having established a basic business formula,
the aspiring franchisor should then, ideally,
establish an identical outlet in another
location. The process of finding new
premises, hiring personnel, organising a
launch and all the other tasks accompanying
a new outlet opening, is an essential test of
the owners' ability to replicate the success
achieved in the founding unit. Again, there will
be a steep learning-curve here and the
process could well take a further two years.
Finally, three key documents need to be
drawn up prior to beginning franchising.
International Franchise Research Centre - Special Studies Series Paper No.4
Firstly, an operating manual committing to
paper detailed instructions for the guidance of
franchisees when running an outlet for
themselves; secondly, a franchise contract,
stipulating the legal obligations of both parties
- franchisor and franchisee - and, finally, a
franchise prospectus, as a marketing tool
for use in recruiting franchisees. All three
documents require a great deal of time, hard
work and, usually, expensive external help
from consultants, solicitors and accountants.
Then begins the process of recruiting and
training new franchisees and this, again, is
liable to prove time-consuming and expensive
since the business involved has no previous
experience or public awareness to draw upon.
Overall, adopting a 'textbook' approach, a
business starting up from nothing may well
find itself involved in five years of hard work
before it recruits its first franchisee. The
founder/s will find that they are not simply
involved in testing out one business idea but
two - a conventional business configuration
plus an allied franchise format. Obviously, the
final package has to be one capable of
yielding notably better financial returns than
the average small business since these must
satisfy the franchisee's income needs, service
bank loans and pay off loan capital, plus
sustain the franchisor's needs for
management services fees, amounting to
usually around 10 per cent on sales turnover.
Obviously, the above timetable can be safely
reduced in the case of an already well
established SME wishing simply to convert to
a franchise format by cloning their previous
success, but the risks are still high. A recent
report commissioned by the US Small
Business Administration estimates that initial
franchise development costs can exceed
$500,000 (Trutko, J., Trutko, J. & Kostecka,
A., 1993: 7-1):
"The development of a business from a
proven concept through to the sale of
its first franchise is typically a long,
expensive, and risky process for the
franchisor. Even excluding the costs of
direct management involvement, the
franchisor bears sizeable 'upfront'
costs for developing a programme
before it can be marketed to
franchisees."
9
 Fig 8 - ASSESSMENT OF CURRENT STATUS OF 74 COMPANIES ADVERTISING
FRANCHISES IN 1984

80%
70%

52% 60%
Proportion of
50%
Franchise
40% Companies
30%
n = 74
20%

11% 10%
Failed/disappeared/Unsure (E) 13% 0%
Exists in some form/'failure' (D)
12% Expert 5
Exists/unsuccessful/turbulent trading (C)
12% Expert 4
Exists/successful/saturated market (B) Expert 3
Expert 2
Exists/successful/healthy growth (A)
Expert 1
Average

A B C D E
Expert 1 9 8 15 12 30 = 74
Expert 2 9 8 13 13 31 = 74
Expert 3 8 14 9 8 35 = 74
Expert 4 5 6 2 5 56 = 74
Expert 5 13 8 10 2 41 = 74
Average 8.8 8.8 9.8 8 38.6 = 74
12% 12% 13% 11% 52% 100%

In an attempt to generate some original data
on franchise system survival rates, it was
decided to focus upon a sample of franchises
known to be in existence in the United
Kingdom ten years ago. Seventy-four
franchise systems ran advertisements in the
January-April, 1984, edition of the first (and in
1984 the only) regular United Kingdom
franchise magazine, Franchise World, and it
was decided to investigate their survival rates.
This was a fairly stringent test of franchise
survival rates since, although the listing
contained 5 of the original 8 founder members
of the British Franchise Association, it also
contained a fairly strong representation of
'young' franchises. The latter, due to their
relative youth have little by way of a known
brandname and are dependent upon
advertising alone when seeking franchisees -
thus lists such as the current one are likely to
feature these young franchises quite strongly.
The exercise of categorising the 74
companies on the survival continuum was
undertaken by a group of 8 leading authorities
drawn from the industry, and was undertaken
on the basis of their current knowledge or best
judgement. Of these 8 experts, 3 bankers
acted in concert as did 2 journalists, thus
producing 5 overall responses. On average,
each response included 4 firms whose
situation was unknown to respondents. Given
the status of our respondents, it was judged
that the firms in question must inevitably have
failed.
Each of the panel of experts was asked to
classify each franchise company on a scale
ranging A-E (see below):

International Franchise Research Centre - Special Studies Series Paper No.4 10

A - The company is still in existence
- The company is generally considered a
franchise success story
- The company is still achieving healthy
growth rates
B - The company is still in existence
- The company is generally considered a
franchise success story
- The company appears to have reached
something near market saturation now
C - The company is still in existence
- The company is not generally
considered a franchise success story
- The company appears to have
experienced generally turbulent trading
conditions and failed to achieve its
earlier goals.
D - The company is still in existence in some
form at least - possibly now as a
company-owned operation
- The company is generally considered to
have failed as a franchise
E - The company failed as a franchise and
has since disappeared from view
The inescapable conclusion to emerge from
this exercise is one of a high franchise attrition
rate (Figure 8). At best, one franchise
company in four could be described an
unqualified success story (categories A and
B) over a ten year period. Firms in category
'C' are familiar enough amongst samples of
conventional small firms but cannot be
described as a success here since franchise
companies purport to be selling a 'proven
business formula'. Around half the sample
were judged to have failed completely and
utterly.
CONCLUSIONS AND POLICY IMPLICATIONS
The growth of franchising in Europe generally,
appears set to continue on a long term basis,
despite setbacks during the current recession.
The situation in Europe currently appears to
mirror that in America where the growth of
franchising overall (in real terms) is strongly
dependent on the performance of the
economy as a whole. Against this, business
format franchising, concentrated upon more
service-oriented activities, is likely to
International Franchise Research Centre - Special Studies Series Paper No.4
experience growth rates notably faster than
those which apply for franchising as a whole.
A number of factors appear likely to promote
future growth. First is the general world-wide
decline of traditional manufacturing industry
and its replacement by service-sector
activities. Franchising is especially well suited
to exploit service and people-intensive
economic activities, particularly where these
require a large number of geographically
dispersed outlets serving local markets.
A second factor is the growth in the overall
popularity of self-employment. Most European
Governments are looking towards
self-employment and small business as an
important source of future jobs. As franchising
becomes increasingly well known and
understood, it is likely to appeal to a growing
number of people. Alongside this trend, we
may expect to see an increase in the number
of franchise opportunities. This process will be
assisted, not least, by large companies
following the current trend towards divestment
from centralised control of an increasing
proportion of their business activities. A
notable example in the United Kingdom has
been the franchising of domestic
milk-delivery.
Increasing female participation in the
workforce will continue the current trend
towards dual-career and dual-income families,
resulting in both the need and the resources
to purchase services. Home service
franchises (cleaning, maiding, lawn-care,
house-minding, etc.) are likely to feature here,
as are child care and child development
services.
The demands of an ageing population will also
create opportunities, ranging from the need
for special diets to special needs in the fields
of leisure and care. In America the health-care
industry is turning to franchised medicine,
ranging from private-duty nursing agencies to
the provision of alternative medicine. Greater
awareness of health issues generally will also
throw up opportunities in sectors ranging from
food to exercise and counselling services.
Entertainment and leisure activities will also
offer additional franchise opportunities,
ranging from travel agencies to ventures such
as miniature golf courses, dance studios,
11
specialist movie theatres, etc.
On balance, it does not appear that franchise
operations substantially displace conventional
small businesses. Where they do challenge
them, it is often because they act as a new
force in the field with the flexibility to respond
rapidly to changes in technology and market
demand. They themselves may then
subsequently be threatened by exposure to
similar market forces, thus rendering their
businesses and their profit margins more
vulnerable than they and their franchisees
would have expected or hoped.
However, it is obviously untrue that those who
eat at McDonald's do so without any measure
of substitution concerning their former eating
habits, or that customers of Kall-Kwik or
Prontaprint still place their customary orders
with traditional print firms. Encroachment and
additionality appear to have developed hand
in hand, usually aided by developments in
technology, customer tastes and consumer
spending power.
If we look at the quintessential icon of the
industry - fast food franchising - it is unlikely
that it has not in some measure diverted trade
away from more traditional providers in the
field (many of them almost certainly small
independents). However, the conditions
fuelling a market restructuring here were
almost certainly the development of
technology capable of producing food quickly
on a standardised basis, and a growth
generally in trends towards convenience
foods and eating out.
Similarly, in the field of fast print franchising,
new technology reduced the training and skill
levels required to produce print copy and final
product from years to weeks. The result is
that print products can now be produced in
hours rather than days, using cheaper and
less skilled labour, whilst relocating from
manufacturing premises off the high street to
'business service' premises on the high street.
An additional key factor assisting the growth
of fast print franchising was the trend of large
firms in the 1980s to divest themselves of
many internal services, and 'buy-in' instead.
When a franchise first comes into being, it
ideally requires some 'unique selling point',
International Franchise Research Centre - Special Studies Series Paper No.4
giving it an advantage over its competitors.
Over time, however, competition arrives to
challenge its market position. This may come
in the shape of new franchise operations but
may, equally, take the form of conventional
small business operations.
Women and minorities appear to have
increased their representation in franchising in
recent years in the US and, though there is no
hard data for Europe, the position here is
almost certainly similar. The help afforded by
franchisors in setting up new franchisees,
particularly those with no prior business
experience, renders franchising a potentially
fruitful route for increasing female and
minority participation in small business.
However, it should be remembered that
minorities are already well represented
amongst the small business population in
some European countries - particularly the
United Kingdom - and are also heavily
represented in certain sectors of franchised
activity - especially fast food.
The long-term growth of franchising in Europe
appears inevitable, given the importance of
some of the factors examined above.
However, it is important for managers,
advisers and researchers in the industry to
realise that franchise growth rates will not be
totally immune from national and international
growth rates -franchising activity does not
take place in an economic vacuum.
Given the potential importance of franchising
in Europe, it should not escape the notice of
politicians and economic planners. Any future
government assistance to the franchise
sectors of European economies will almost
certainly be targeted on indigenous
franchises, particularly those with export
potential, rather than American imports.
Also, there appears little doubt that franchise
operations are quite vulnerable to failure in the
early years of their development. If special
help were to be made available by
governments, it might best be channelled
towards franchise operations in their early
stages of development when the strains
normally associated with small business
growth are magnified and concentrated. An
advisory service offering economical expert
help and counselling might prove invaluable
12
here. Given that the population of businesses
requiring such help would number, at most,
dozens rather than hundreds or thousands
each year, such a service could be
administered from a single central point,
possibly a university Business School or a
central Chamber of Commerce.
International Franchise Research Centre - Special Studies Series Paper No.4
REFERENCES
ACHESON, D. (1991)
Franchising in the Economy, IFA Educational
Foundation Inc./Stoy Hayward
AMOROSO, M. & GANDOLFO, A. (1991)
Il Franchising in Italia - Scenari Attuali e
Prospettive, ISEDI
BOLTON REPORT (1971)
Report of the Committee of Enquiry on Small
Firms, Chaired by J. E. Bolton, Cmnd. 4811,
HMSO, London
BOYLE, E. (1984)
'The Rise of the Reluctant Entrepreneurs',
International Small Business Journal, Vol. 12, No.
2, 63-69
BRADACH, J. (1994)
'Chains within Chains: The Role of Multi-Unity
Franchisees', Proceedings of the 8th Conference of
the Society of Franchising, Nevada, 13/14th
February
CROSS, J. (1994)
'Franchising Failures: Definitional and
Measurement Issues', Proceedings of the 8th
Conference of the Society of Franchising, Nevada,
13/14th February
CROSS, J. & WALKER, B. (1988)
'Franchise Failures: More Questions than Answers',
Proceedings of the 2nd Conference of the Society
of Franchising, California, January 31/February 1st
CURRAN, J. & STANWORTH, J. (1983)
'Franchising in the Modern Economy - Towards a
Theoretical Understanding', International Small
Business Journal, Vol. 2, No. 2, 8-26
ENGLISH, W. & WILLEMS, J. (1994)
'Franchise vs. Non-Franchise Restaurant Attrition:
Year-Four of a Yellow Pages Longitudinal
Analysis', Proceedings of the 8th Conference of the
Society of Franchising, Nevada, 13/14th February
EROGLU, S. (1992)
'The Internationalisation Process of Franchise
Systems: A Conceptual Model', International
Marketing Review, Vol. 6, No. 5, 19-30
OZANNE, U. & HUNT, S. (1971)
The Economic Effects of Franchising, US Select
Committee on Small Business, Washington, D.C.
13
PRICE, S. (1993a)
'Performance of Fast-Food Franchises', Chapter 4
in: The UK Fast-Food Industry, 1993, A Market
Analysis, Cassells

PRICE, S. (1993b)
'Performance of Fast-Food Franchises in Britain',
International Journal of Contemporary Hospitality
Management, Vol. 5, No. 3, 10-15

RUBIN, P. (1978)
'The Theory of the Firm and the Structure of the
Franchise Contract', Journal of Law and
Economics, Vol. 23, 223-233

STANWORTH, J. (1984)
A Study of Power Relationships and their
Consequences in Franchise Organisations,
University of Westminster

STANWORTH, J. (1994)
The Impact of Franchising on the Development
Prospects of Small & Medium-sized Enterprises
(SMEs) in the United Kingdom: Franchising as a
Form of SME Activity, (Report to Department of
Trade & Industry), International Franchise
Research Centre, University of Westminster

STERN, P. & STANWORTH, J. (1994)

'Improving Small Business Survival Rates via
Franchising - the Role of Banks in Europe',
International Small Business Journal, Vol. 12, No.
2, 15-25

TRUTKO, J., TRUTKO, J. & KOSTECKA, A. (1993)

Franchising's Growing Role in the U.S. Economy,
1975-2000, U.S. Small Business Administration

UK Franchise Directory (1993)

9th Edition, Franchise Development Services
Limited, March 1994

U.S. DEPARTMENT OF COMMERCE (1986)

Franchising in the Economy 1984-86

U.S. DEPARTMENT OF COMMERCE (1988)

Franchising in the Economy 1986-88

WALKER, B. (1989)
A Comparison of International vs. Domestic
Expansion by U.S. Franchise Systems,
International Franchise Association, 1989

International Franchise Research Centre - Special Studies Series Paper No.4 14

AUTHORS
John Stanworth is the director of the
International Franchise Research Centre
and has been engaged in research into
franchising since the mid-1970s. He also
leads the Future of Work Research Group,
based at the University of Westminster, which
has a record of specialist research in
Teleworking, Small Business Development
and Human Resource Management. Studies
have been undertaken for many clients,
including The Department of Trade &
Industry, The Department for Education and
The Economic & Social Research Council.
David Purdy is a researcher supporting the
Future of Work Research Group. He has
specialised in small business research since
1985, and publications include authorship of
'Risk Capital for Small Firms', commissioned
by the Small Business Research Trust. He
has also co-authored studies investigating
Small Business Management Development
and Teleworking.
International Franchise Research Centre - Special Studies Series Paper No.4
INTERNATIONAL FRANCHISE RESEARCH CENTRE
The International Franchise Research Centre
(I.F.R.C.) is committed to improving the
understanding of franchising. This is achieved
by the publication of impartial research and by
the encouragement of informed debate.
Membership is suitable for anyone with an
interest in franchising and further details are
available from the address on the rear cover.
SPECIAL STUDIES SERIES
Papers in the Special Studies Series are
supplied free of charge to I.F.R.C. members
and are published a minimum of four times a
year. They report upon a range of issues
which are felt to be of interest to the
franchising community. Subject matter
includes the findings of surveys of franchisors,
franchisees, and potential franchisees, and
also special interest matters, such as finance
for franchising.
15