Lesson 3: Franchising, how it started; the size of today's U.K. market.

When you look back into history you will see that franchising had its beginnings in medieval times. The very first commercial retail franchise, is considered to be the Singer Sewing Company. As long ago as the mid- 19th century, Isaac Singer invented his sewing machine, which he was keen to market extensively.

He soon realised that to move his business forward he would have to teach prospective customers how to use his new invention. An immediate problem he soon realised was that he lacked capital; necessary if he was to consider any form of mass production.

Isaac Singer thought about these problems and very sensibly, as history has proved, he decided to sell his proprietary rights, his business interest to people locally. Now armed with this information they were then able to sell the machines, whilst at the same time training others in the best way to use them. This is the bedrock of franchising and it was not surprising that the enterprise as a whole developed and expanded quickly. The enterprise generated income from the licence of the right's Singer had provided and this help ed him in his manufacturing capacity. Because each new Franchise owner was in fact self - financing, it was not necessary for Singer himself to recruit a manager for each of the sewing machine centres. By the early 20th century this form of business enterprise had been followed by other industries.

A good example, at that time, would have been Coca-Cola. They were able to expand nationally, allowing other organisations to obtain bottling rights and in this way passing the burden of manufacturing, storing and final distribution to local people, best able to complete these functions.This was amazing, when you consider that by 1921, when the US population was approximately 30 per cent of its current size, Coca-Cola could claim at that time to have 2000 bottling facilities in operation.

As was seen a century earlier by assuming the business risks, franchise owners recruited locally, produced the capital for Coca-Cola's impressive expansion. The owners receive in return, exclusive marketing and distribution rights in their particular areas.

American culture was extensively changed through the concept of franchising, this can be seen by the way the motoring industry, developed its mass production capability. Most notably, Sir Henry Ford introduced his revolutionary assembly-line and mass-production methods to satisfy the increasing demand for cars at that time.

This provided a catalyst for new and distinctive ways of saving fuel and in the way new cars were serviced. It was not long before suitable eating facilities were provided by roadside establishments for drivers and their families.

As you can see franchising met all these new and developing needs. Car manufacturers having already spent enormous amounts of their own capital setting up their own production lines could now concentrate on developing distribution networks, using the money provided by their independent dealers. Small business operations, like repair garages and family convenience stores were seen extensively across the country. Some were very successful and remain so today, e.g. Standard Oil and Texaco. Other well known brand names, like Travelodge and Sleepy Bear was seen extensively in the early 1940's. This followed in the 1950's and 1960's with an even greater expansion of the concept. When one looks at these early franchises, it becomes apparent that there was a better balanced agreement created between the parties that might be the case today.

To encourage a new franchise owner, the Franchisor would guarantee an exclusive territory and protected market. The Franchisor could quickly see the benefit of creating a local identity, an increase in the goodwill through the individual service provided.

The Franchise owner had quite considerable bargaining advantage at that time; as long as the Franchisor still wanted to have a presence the new franchise owner's location. The agreements drawn up were fairly short at that time, covering price and payment terms. They tended to be silent about who owned the location, the telephone number applying to the business and the important concern of the right of the new owner to stay and operate at the location after his franchise period expired.

Generally, early franchisors did not rely on the Franchise owner paying a monthly fee; he made his income on the sale of his goods and service he sold to the new Franchise owner. Healthy margins and attractive prices kept the volume up and this was satisfactory to both parties.

In the event of his Franchisor not delivering quality goods and fair prices, the Franchise owner could sever his relationship, change to a different franchise, if he thought it was to his advantage.

During the early part of the last century, events have proved that the simplicity of the Franchise formula and its Agreement were written in favour of the Franchise owner. The situation changed, because franchise owners themselves created captive markets for their franchisor's goods or services. Margins were often squeezed by the Franchis or, especially in difficult trading times.

Car Manufacturers required their dealerships stock even larger inventory levels as a condition of maintaining the Franchise. Encroachment starts to appear, oil companies began to develop company owned service stations compet ing directly with their own dealer networks. To attempt to address this situation, car manufacturers and petrol dealers developed national trade associations; dealer protection laws were set up.

Looking at franchises in those early years in would have been apparent that franchisors did not attempt to control the look or feel of any particular franchise. The owner was free to develop his own business style; the only identification was the common trade name. Unlike today in the U.S.A., each roadside petrol station did not have a common look nor did any motel, car dealership or convenience store. In essence a majority of franchise owners were truly independent, they ran their business es as they saw fit.

Moving on to the mid-1950s another great sea-change occurred, in the history of franchising. A man, now greatly admired, Ray Kroc recognised the cloning potential of franchising, he repeated a successful formula and launched business format franchising as we know it today.

The story itself surrounds this successful salesman who sold milkshake mixing machines, who fortunately had, as one of his accounts, a business called Mac Donald's in San Bernando who was also successful running hamburger stands. Kroc saw a straight forward business, using part time workers preparing and selling fries and shakes directly to the public. He was convinced that this method of distributing and selling could be delivered elsewhere. It would require a careful replica of the business format, each outlet would be a look a like. The customer's experience in each establishment should be the same.

The story of Ma c Donald's is visible to everyone; historians have compared Ray Kroc to Henry Ford in bringing assembly line techniques to the fast-food industry. He did more than just that. He developed the concept of trade dress to create, not just the look and feel of the business's décor, but put in place controls, made sure that sufficient investment was made, so that from the customer's point of view, every outlet was identical.

In the USA, Kroc's theory proved so successful that it spread throughout the Franchise industry. By the early 1960's, petrol stations started to adopt this uniform trade dress and standardise the ir methods of offering their services. Conversion stores, motels and flower shops followed this practice; even car dealerships, hotel properties and restaurant chains, saw the advantage of business franchising. Some were successful and remain so to this day i.e. Kentucky Fried Chicken, Holiday Inn, Taco Bell. S ome chains found initial success like Howard Johnson's Motor Inns, B ig Boy Restaurants and Shakey's Pizza, but they failed to control their quality and uniformity throughout their entire system and they disappeared.

Franchisors needed to show more control over their franchise owners, this resulted in those relatively simple franchise agreements of early years, becoming more complicated and more detailed. They then started to cover virtually every aspect of the business. Franchise owners realised that uniformity brought success and so acc epted these new agreements. We see today, to protect the trade name, the trade dress and the system it self, the agreement has become ever more restrictive and one-sided.

Fortunately for you, as you consider franchising as a means of improving your standard of living, the buying public continues to buy. The Franchise marketplace offers little resistance to the increasingly onerous terms that continues to be part of the modern-day Agreement between the parties.

To emphasise how Franchising has grown and to appreciate the size of the present day U.K. franchise market, we show the results of the Nat. West. Bank's recent 2006 survey in some detail. The Bank produces regular surveys and the results are eagerly awaited by all in the industry.

As their findings have shown over the last twenty years, the Franchising industry is vibrant and prosperous; it continues to progress with a large proportion of franchisors and franchise owners profitable. Their 2006 survey saw record figures, in all their key findings as shown below.

Turnover
The estimated annual turnover of the business format franchise sector exceeded £10 billion for the first time to £10.3 billion. It should be noted that this figure was £1 billion in 1984.

Franchisors
Using a strict definition of business format franchising, the number of active franchises identified was 759. This represents an increase of 6% on 2005 and demonstrates the increasing choice for potential franchise owners. 73% of franchisors operate an independent system, 13% as a subsidiary of a parent company and 15% on a master licensee basis. On average franchise systems have been operating for 10.3 years, compared to 7.6 ten years ago The cost to a business in setting up as a franchise in the first year ranges from £25000 to £250000 the average being almost unchanged at £166000.

Franchise owners
The number of non-dairy franchised units is estimated at 30,800, an increase of 8% on 2005. The mean average annual sales per unit were over £300000 for the first time at £318,000. This however reflects a wide range in individual unit turnover. 1.5% of units experienced some form of forced change, such as ill health and financial failure (0.9%). These are the lowest figures ever recorded. 35% of those who responded operate on a sole trader basis, 16% partnerships and 48% limited companies. The average age of a franchise owner is also rising. In 1992 over half of all franchise owners were under 40, now it is one third. Also confirming the stability and maturity of the sector is the average time a franchise owner has been running their business. In 1992 the figure was 3.9 years and in 2005 it was 6.8.

Action taken prior to purchasing a Franchise
Franchise owners now undertake a number of activities before purchasing a franchise, which include checking the Franchisor's website (77%), investigating a number of franchises (54%), attending an exhibition (31%), checking the B.F.A. website (40%), obtaining an information pack from the B.F.A.(22%), attending a Nat. West. sponsored seminar (16%), or attending a B.F.A. seminar (5%).

Employment
The employment generated by franchising is at the core of its contribution to the economy as a whole. It is calculated that some 364,000 people are directly employed in the Franchising sector, another record.

Profitability
The proportion of franchise owners reporting profitability in the survey was 92% (compared with 70% in 1991 and 88% in 2004).

Recruiting Franchise owners
On average it takes a franchise owner 5 months to decide to purchase a franchise and a further 2 months to be trained and set up in business. Therefore it can take a new franchisor up to 7 months to recruit their first franchise owner. Lack of suitable franchise owners continues to be the main barrier to growth, quoted by over half of franchisors (55%). This is the first time the figure has exceeded 50%.

Regional distribution
This year's figures show that regional representation is evenly spread across all regions, although Northern Ireland, Wales, Scotland, the Northwest and East Anglia remain below the average.

Franchise owner profile sought by franchisors
Franchisors do not require their franchise owners to have any specific skills or experience, looking for a combination of skills such as self motivation, marketing, sales, business, drive and commitment.

Finance
The average initial outlay for setting up a franchise is £44, 000. Banks continue to be the most important overall source of finance. Around half of franchise owners borrowed money to set up. Of these 82% borrowed from the Banks. The average amount borrowed, by those that did, was £40, 000, up from £29, 500 in 1992. The average ongoing management service fee and advertising levy is 8.1% and 1.9% of franchise owner's turnover respectively.

Franchisor-franchise owner Relationships:-
Franchisor-franchise owner relationship is of great importance in determining the success of the business and reassuringly 85% of franchise owners regard their relationship as satisfactory. The majority of those that were dissatisfied unsurprisingly were also loss making.

Outlook:-
The Franchising marketplace as a whole is generally optimistic about their future, although less so about the economy generally. When asked about their expectations over the next 12 months 86% of franchisors and 61% of franchise owners forecast an improvement in their business.

To appreciate franchising as a world wide concept, we show below, major country figures extracted from statistics provided by the National Franchise Association for the period 2005/6.

Self assessment question

Next lesson..

Lesson 4:
What's needed to be a good franchise owner