Franchising has a long history in the United States, but this history is even longer in Asia and Europe. It is interesting to look at the timeframe and see how this model has evolved throughout history.
The first example of franchising as a concept of doing business was found in China year 200 BC, where the right for specific transportation routes was given to rickshaw drivers. In the United States, the earliest franchising example was found in nineteenth century, when the cities began approving franchises for transportation and utilities.
In addition to mentioning the forerunner of what we today call modern franchising, we will also mention the future of this concept of business. This type of business has a significant impact on the overall US market, but and in other countries, it is become recognized as a good way of doing business. You need to know that today there are thousands of franchisors and almost a million franchise business units.
Franchising history didn’t start with McDonald’s and Ray Kroc, as many younger people think. We will start from the very beginning so that in the end, it will be apparent to you how the development went to what we call franchising today.
History of Franchising
The franchising is old as human history, and it dates back to the Roman Empire. As it is said before, the first franchise concept was based around the right to specific routes that rickshaw drivers received for transportation in China 200 years before Christ. In England, the franchise began in the Middle Age – a local ruler would grant the right to hold markets or fairs or hunt on his land.
Throughout history, the concept of franchising was constantly expanding, so Kings began to approve franchises for all types of commercial activities. In the Middle Age, due to famine and severe religious conflicts, Lords allowed church officials and other important people to maintain order and set taxes. In return, these officials had the right to occupy the markets and to do business in them. The royal nobles protected these first franchisees in exchange for financial compensation.
European rulers also gave franchises to entrepreneurs who agreed to establish colonies, and they had Crown protection for taxes or royalties. This type of franchising is quite different from the modern type that we know today. However, when we know all the circumstances that prevailed at that time, this was quite a big step forward for the market.
In the middle of the 19th century in Germany, large beer producers granted certain bars the exclusive right to sell their beer. Local German taverns could sell Spaten beer under its original name in exchange for paying a certain financial fee to use the brand name of the brewer.
One of the interesting things is that Spaten brewery still exists and operates today. At that time, the franchise as a business concept was transferred to the United States, which was also used in the brewing and catering industry.
As far as the U.S. is concerned, the history of franchising was most influenced when the car was invented. Henry Ford started mass production because there was a great demand for vehicles, and he needed a good way of distributing cars. There were two modes of distribution at that time – through catalog mail orders and thru sales representatives who traveled along the U.S. in search of customers.
These two methods were not suitable for car sales, so Ford and other manufacturers needed a new approach. In 1896, William Metzger built and opened the first independent automobile dealership in Detroit. This practice is followed by H.O. Kohler, and these two people can be considered the first car franchise owners.
These dealerships proved to be the appropriate method of distribution that Ford and other carmakers needed. Henry Ford began issuing franchises to dealers, and he has created a network of car dealerships across the country.
After the car industry, oil companies began to franchise gas stations, so franchises appeared everywhere. With the development of the automotive industry and the construction of roads, there was a demand for food and accommodation. Initially, these were only independent restaurants, but soon franchises became take place in the restaurant industry.
History of Franchising in The United States
In the 19 century, U.S. cities began approving franchises for transportation and utilities. The automotive, oil, and soft drink manufacturers, started franchising in the late 19th and early 20th centuries because they were needed someone to distribute their products. Coca-Cola is one of the first examples of franchising in the United States.
In the 1900s, Ford and General Motors also started to use this business concept, and they entered into franchise agreements with independent entrepreneurs who were sold cars to end customers. Also, large oil companies like Standard Oil and Texaco started to offer so-called conversion franchises in the 1920s. These oil companies offered independent gas stations and car repair shops across the United States the right to use their brand name.
The franchising started shaping its current form during the 1950s and 1960s; at that time the Kentucky Fried Chicken, McDonald’s, and Burger King were founded. Ray Kroc and McDonald’s have significantly impacted the franchise business’s evolution- they started to “clone” the company by offering business format franchises.
Ray Kroc came up with the concept of offering a complete franchise package- every detail of the business is predetermined. So we must mention this entrepreneur because he changed the history of franchising, and he was a pioneer of franchising as we know it today.
If there was no visionary like Ray Kroc, franchises might not be what they are today. Kroc followed his instincts at the right time and improved the concept of a business format franchise. He saw the need to maintain good relations by helping franchisees, and he devised a system of food standardization and beverage production; this was crucial in creating the restaurant chain.
These changes during the 1960s greatly influenced the history of franchising because gas stations began to adopt standard operating procedures. Retailers also started to standardize the business processes, and soon every hotel, restaurant chain, and car dealer accepted the advantage of business cloning.
Isaac Singer, Henry Ford, and Ray Kroc played key roles in creating modern franchises. Singer needed a better distribution system, so he devised a licensing method that is the foundation of current franchises. Ford needed an appropriate distribution system, so he started a network of car dealerships (product distribution franchises) across the country.
Isaac Singer’s Contribution to The Development of Franchising
Isaac Merrit Singer developed the first commercial franchise, Singer Sewing Center. During the 1850s, Singer started networking with retailers according to a contract(franchise agreement) that was signed. With this contract, he starts giving rights for selling Singer products in certain territories. I. M. Singer & Co. was the first company that started mass production and sales of a home sewing machine.
In the 1850s, there was a lot of interest in buying sewing machines, but the price of $ 100 was something that most Americans could not afford. One of Singer’s partners came up with the idea that people could pay a certain fee every month until they repay the sewing machine’s total price. This was a game-changer because many people now could afford sewing machines.
Singer’s franchising model was working in this way: Singer and his partners were looking for people who wanted to become franchisees, that is, who wanted to buy rights to sell machines. These franchisees were paying a fee in advance, and they signed an obligation to teach customers how to use the sewing machines. Franchisees were intermediate between a manufacturer and the end-users.
We would generally consider this a commission business model. Still, since sellers’ have an obligation to teach people to work with the machine, we can consider this a forerunner of a modern franchise.
This distribution method has proven to be ideal for every party involved, and it has greatly influenced the history of franchising. The franchisees became entrepreneurs who sold a popular product, and Singer and his partners had a surplus of money (from licenses sold) to finance additional production. So this was a win-win situation for everybody.
The Singer business model could be compared to what we today consider licensing. However, we have to admit that this was the spark that ignited people’s imagination and prompted them to develop the franchising model that is known today. Franchise vs. license is an interesting topic because a lot of people confuse these two terms.
Influence of Ray Kroc / McDonalds in The History of Franchising
U.S. entrepreneur Raymond Albert Kroc changed the history of the franchise. He opened his first McDonald’s franchise in 1955 in Des Plaines, Illinois, and that can be considered the beginning of modern franchising as we know it today. Now we will explain how it all started.
Ray Kroc was sales representative of the foodservice equipment manufacturer Prince Castle. His job was to travel all over the country to sell Milkshake Mixers to people in the food industry. The users of the products that Kroc was sold also were Dick and Mac McDonald.
McDonald brothers were running a small hamburger stand in San Bernardino, California, and Kroc had heard that they were using eight of his machines simultaneously; because of that, he decided to visit them. Kroc was immediately impressed by the business system that the brothers used for running their business.
The McDonalds fast food establishments were different from others because they offered nine dishes – burgers, french fries, shakes, and pies for very low prices: 15-cent burgers and 10-cent french fries. In their establishments, there were no seating places, and they used plastic and paper cutlery instead of glass and porcelain. Also, the McDonald brothers designed the system so that customers could place orders in less than 60 seconds.
Kroc immediately recognized the potential of this small restaurant, and he thought that it would be a smart business choice to open such restaurants all over the country. As the McDonald’s brothers needed a franchise agent, the Kroc was the right person for the job.
Kroc suggested to the brothers that they start opening a restaurant chain, but they were not thrilled with the idea; they were happy with what they had achieved and did not want to take risks with new business ventures. Kroc was persistent, knowing it was his last chance to succeed because his shake mixer business began to decline due to fierce competition.
With a lot of effort, Kroc finally persuaded McDonald’s to start a restaurant chain, and Kroc opened his first in a series restaurant in Des Plaines. Today, more than 39,000 McDonalds restaurants are operating worldwide, of which more than 80% are franchises.
Changes That Kroc Make in The Franchising Business Model
Kroc immediately detected that he had to make changes in the way the restaurant was operating, and with these changes, he influenced the history of franchising. To successfully realize his vision, he had to perfect the so-called Standardized Operating Procedures or SOP. Kroc precisely determined the weight, size, and amount of ingredients in the burgers and the exact time of frying the potatoes.
Kroc demanded that all franchisees use pre-determined standard measures; the goal was to make all the burgers in each restaurant look the same. He considers franchisees as business partners after realized that the franchisee would invest more effort, work, and will in the success of every facility than a manager that is appointed by the company.
His vision distinguished Kroc from the competition because he sold his partners (franchisees) a ready-made work system (the way and time of food preparation, the same amount and size of ingredients in dishes). In this way, all McDonald’s restaurants were selling identical food.
In 1963, there were 500 McDonald’s restaurants, and today there are over 39,000 restaurants in more than 120 countries. After McDonald’s, many other companies have also applied Krock’s model, and because of that, we consider that this man has had a central role in the history of franchising.
The Evolution of Franchise Agreement Through History
Today’s franchise agreements are significantly different from those from the 1950s and 1960s. Nowadays, the franchisor is obliged to provide a franchise disclosure document or FDD before the franchise agreement is closed; this has not been the case in the past. Also, it has become standard that recipients must pay certain fees on a monthly or yearly basis.
The franchise disclosure document is essential because it describes the operation model of the franchisor. So, this document must be carefully studied by potential recipients before signing an agreement.
Franchisees usually accept (and pay for) all the requirements and obligations of a particular franchise system. By signing the franchise agreement, the recipient gets the right to use trademarks and help in the form of know-how provided by the franchisor.
Since franchising is described as an easier way of running and starting a business, most franchisors offer complete help to the recipients of their franchises. Today the franchisor is at disposal to the franchisee 0/24. In exchange for the franchise support package that they get, recipients must pay specific fees.
The modern franchisee must pay:
- Initial fee
- Royalty fee
- Marketing fee
Franchisees often complain that their franchisors are not flexible when it comes to changing business processes. This is true, but we must be aware that the franchisor’s interest is that every franchisee runs a profitable facility, which is assured by not allowing recipients to make business mistakes. This makes franchising less risky than starting a stand-alone business from scratch.
The franchise’s massive popularity has resulted in that the system is being organized and standardized to the maximum. In the past, it was possible to negotiate with the franchisor about obligations and rights because this system was still in its infancy, but today we have standards in franchising that most companies adhere to.
In addition, if the potential franchisee does not accept the franchisor’s terms, it is very easy to find another entrepreneur who will very gladly accept all the terms. Today, customers stand in line to start franchises, while providers had to look for franchisees in the past.
The Future of Franchising
The many changes today are happening in the U.S. franchise market. The leading franchising companies have started consolidating several franchise brands under the roof of one parent company – this was initiated at first by restaurant chains/ fast-food restaurants.
Examples of this practice are companies:
- YUM! Brands -owns three well-known franchise brands (KFC, Pizza Hut, and Taco Bell)
- Restaurant Brands International – owns and develops Burger King, Tim Hortons, and Popeyes franchises
However, in recent years, it seems that this practice has started to expand to other niches of the franchise business and that this will soon be regular business practice. So, the future of franchising will be exciting.
The benefits from grouping several franchise brands under the ”umbrella” of one company are many, and the owners of the franchise Trademarks are aware of that. The large investment groups, with share purchase, get the opportunity to control all or part of a larger number of franchise systems, and this makes the business expanding process more accessible and more effective.
Franchising has a bright future; after all, this concept has survived through all history in some form. Probably it will evolve more, and we can expect that most stores in the future will be franchises because this type of business is a win-win situation for everyone.
It may seem that the franchise market is oversaturated, but that is not the case – this looks like that because of the number of fast-food franchise restaurants. The truth is that franchising is the most common in the fast-food industry, but there are many other business niches in which this concept is not used enough. This opens up many opportunities for the future because this model can be implemented in every business.
The New Concept of Franchising
Franchising has been known for decades as a simple business model that is used as a tool for rapid business expansion through the U.S. and abroad. Many companies and entrepreneurs use this model because it is possible to expand the business more cheaply with it. Franchising has evolved a lot from the beginning, and today we have a new concept of franchising offered on the market.
We can see an increase in the number of franchisees who are run more than one franchise facility. This new concept of franchising has become so established that in the United States today, the number of multi-branch franchisees is more significant than the number of individual franchisees (one recipient-one branch).
Also, entrepreneurs often start different brands facilities; these are most often brands in the same or a similar industry. It is not uncommon, for example, that one franchisee runs a chain of Subway and Burger King restaurants at the same time or an N-Hance wood furniture maintenance and repair franchise with the Chem-Dry carpet washing franchise.
This practice is cost-effective; the increasing number of multiple franchise owners proves that the new concept of franchising will bring more profit for the recipients in the future. When a future franchisee finds himself in a situation to choose between two franchise systems from the same industry, he is more likely to opt for a company that offers Multiple Franchise possibilities.
It is clear that companies that offer multiple brand franchises are designed to meet the specific needs of recipients, and this model will grow and evolve more in the following years. This new concept of franchising is more efficient than the model that was used throughout history.
You can see for yourself how much franchising has evolved from the past to the present day. More and more entrepreneurs are starting franchises, so this trend says something about the success of this type of business. Franchising has become the locomotive of the US economy, so this business concept will evolve in the future even more.
As the history of franchising has shown countless times, only franchise systems whose franchisees operate profitably will survive. New, “young” franchises will have a challenging task in positioning themselves in the market. The new franchisor will need to offer an attractive concept with a quality management staff and enough capital for investing in growth and development.