Franchising has a fascinating history that dates back centuries. It's a journey that takes us from feudal Europe to the bustling streets of modern America, from the printing presses of Benjamin Franklin to the golden arches of McDonald's. Let's take a closer look.
The Origins of Franchising
While not franchising in the modern sense, there are examples of similar business models in ancient civilizations.
Franchising in Antiquity
In Ancient Rome, the state hired "publicans" to build public works projects like buildings and roads. The publicans then hired subcontractors to complete the work. In this early example, we can see the idea of leverage – people growing their wealth by overseeing the work of others.
The Birth of the Franchise Concept
The term "franchise" originated in the Middle Ages. Derived from the Old French word "franc," it means "freedom from servitude" or "granting of a right or a privilege."
It strikes me that this meaning is still relevant today! Franchising is a privilege that frees us from drudgery, allowing us to focus on running systemized processes efficiently to maximize wealth.
In feudal England, the Crown owned and controlled all land. Royalty granted rights, or "francs," to noblemen and the Church. The noblemen and the Church were charged with protecting and managing the land they accepted responsibility for. In return, the noblemen and the Church were allowed to charge commoners a tax for their “protection”. The noblemen and the Church in turn had to pay a portion of this tax back to the Crown.
This system of granting rights or privileges looks a bit like franchising today. Like the noblemen of the past, franchisees today earn a great income by controlling the domain they’re granted (whether that’s land or a franchise territory). While yesterday’s noblemen and today’s franchisees both share a percentage of proceeds with the entity that helped them, the system ultimately is relatively easy and very profitable for this group of individuals. That likely explains why these types of systems were and are so widespread and enduring.
From Land to Business
In Europe, businesses used franchising systems to grow and control their operations.
Queen Elizabeth I, recognizing the economic potential of the East Indies, granted an exclusive trading charter to the British East India Company in 1600. In simple terms, this was a golden ticket. It meant that only this company could engage in trade with the East Indies. This monopoly encouraged the company’s and ensured the company’s prosperity when their investment went well.
Fast-forward a bit, and we see King James I taking a page out of Elizabeth's book. He handed the London Company a royal charter, but this one had a twist. Instead of trade, it was about colonization. This exclusive charter gave the London Company the sole rights to set up shop (or, more accurately, colonies) in America. And they didn't waste time; using this privilege, they went on to establish the famous Jamestown colony in Virginia.
Franchising in the Brewery Industry
In the mid-18th century, franchising took root in the beer industry.
During this period, pubs were the social hubs of towns and villages.
The brewing giants hatched a smart plan. They approach individual pub owners with an offer: "Sell only our beer, and in exchange, we'll give you some exclusive perks."
It was a win-win. The pub owners could get their beer straight from the source, sometimes even renting the space directly from breweries. They also cashed in on the popular reputations of breweries.
On the flip side, breweries saw a golden opportunity. They could amplify their presence, ensuring their brews flowed exclusively in certain pubs.
This was a mutual exchange of trust and profit, much like modern-day franchising. Both the brewery and the pub owner found themselves in a beneficial partnership, each aiding the other's growth.
The Pioneer of American Franchising
The first American franchisor was probably Benjamin Franklin.
When you reflect on Ben Franklin, you probably think of his contributions to science, politics, and philosophy. Actually, he was able to pursue all these interests largely thanks to his successful printing business which depended on a franchise model.
Leveraging Government Power
In the mid-18th century, Franklin served as the Postmaster General of the colonies. This role gave him control over the supply of paper. This was a strategic advantage in an era when paper was a critical resource for communication and commerce.
Franklin's printing business began in Philadelphia. Here he published "The Pennsylvania Gazette" and his famous "Poor Richard's Almanack."
But Franklin wanted more than a single printing shop, and he saw a way to expand by partnering with ambitious entrepreneurs in other cities.
How Ben Franklin Formed Business Partnerships
Franklin formed co-partnerships with printers. He provided them with the resources and support they needed to set up their own printing businesses. These partners operated under Franklin's brand and business system. In return, Franklin’s partners shared a percentage of their profits with him.
These partnerships allowed Franklin to expand his brand and increase his profits without large capital investments in new locations. Simultaneously, these partnerships gave Franklin’s partners (men like David Hall) a ready-made business model and ongoing support. This reduced their risk and the uncertainty typically involved in starting a business from scratch.
Franklin's approach to business laid the groundwork for the franchising model that we know today. By leveraging his brand and business system, he was able to expand his reach, build a network of successful businesses, and play a significant role in the growth of the American printing industry.
The Birth of Business-Format Franchising
In the late 19th century, franchising underwent a pivotal transformation with the advent of "business-format franchising." Unlike earlier models that emphasized control over products or assets, this new approach recognized the significance of the entire business operating system. Martha Matilda Harper was a central figure in this shift, pioneering this modern franchising concept. By the early 20th century, companies like Western Auto Supply Company further advanced the franchising landscape, showcasing the effectiveness of the model.
Martha Matilda Harper Invents the First Modern Franchise
Martha Matilda Harper, a Canadian immigrant and former servant, opened her pioneering hair salon in Rochester, New York, in 1891, introducing an innovative approach to the beauty industry.
Unlike many of the hairdressing services of the era, which were often reserved for the wealthy and provided in private homes, Harper's salon was accessible to the general public. This shift democratized beauty services, offering everyday people an opportunity to experience salon treatments that had previously been exclusive to elite circles. By breaking down these barriers, Harper not only changed the landscape of the beauty industry but also set a precedent for future entrepreneurs.
The norm at the time was to hire agents to work for a salary. However, Harper aspired to help other working class women become business owners. This led her to license her idea as a franchise. She trained poor women in her methods, then allowed them to open their own Harper Method Hair Shop, using her products and following her guidelines.
By the mid-1920s, there were approximately 500 Harper Method shops in the United States, each with a consistent brand image, service system, and product line.
The famous journalist Sir Harold Evans credits Harper with founding the first business-format franchise system. He states, “Half of retail sales in America are through Martha Harper's franchising idea.”
Evans details Harper's journey in a short TED Talk where he shares how Harper overcame 19th century prejudice en route to her success.
Western Auto Supply Company Starts a Mail Order Business
Around the same time as Harper was building her beauty empire, the Western Auto Supply Company was developing its own franchise system. Founded in 1909 by George Pepperdine (who later founded Pepperdine University), Western Auto started as a mail-order business for auto parts.
The company quickly grew and began opening retail stores. Recognizing the potential for further expansion, Western Auto began offering franchises. These franchises included both the product (auto parts) and a business operating system, along with many of the support services that are now standard in business-format franchising.
Western Auto's story is a testament to the power of franchising in enabling rapid business expansion.
The 1950s Golden Age of Franchising
The 1950s marked a significant turning point in the history of franchising. This decade, often referred to as the "Golden Age of Franchising," saw a dramatic increase in the number of franchise businesses, particularly in the fast-food industry.
Post-War Prosperity Fuels Franchising Growth
The post-World War II economic boom in the United States created an environment ripe for the expansion of franchising. With the economy thriving and consumer spending on the rise, many entrepreneurs saw franchising as an opportunity to capitalize on this growth and fulfill their dreams of business ownership.
Fast Food Takes the Lead
Fast-food chains were among the first to seize this opportunity. Brands like Burger King, Dunkin', KFC, Pizza Hut, and Taco Bell all established themselves during this period.
These companies recognized the potential of the franchising model to enable rapid expansion while maintaining consistency across locations.
Franchising Diversifies
While fast food was certainly a dominant force, the 1950s also saw the diversification of franchising into other sectors.
Companies in industries such as automotive services, retail, and hospitality began to adopt the franchising model. Holiday Inn began franchising in 1954, and Midas automotive service centers started offering franchises in 1956.
The "Golden Age of Franchising" had a profound impact on the U.S. economy and the business landscape. It demonstrated the potential of franchising as a business model, leading to its widespread adoption in various industries.
The McDonald's Fast-Food Revolution
The story of McDonald's is a testament to the transformative power of franchising. What started as a single restaurant in California became a global fast-food empire, largely thanks to franchising.
The Birth of a Fast-Food Giant
The McDonald's story began in 1937 when Richard and Maurice McDonald opened a hot dog stand in East Pasadena, California, called the Airdrome. In 1940, they moved the business to San Bernardino and rebranded it as McDonald's Bar-B-Q, a drive-in restaurant with a large menu.
However, the McDonald brothers noticed that most of their profits came from hamburgers, so they decided to streamline their operations. In 1948, they closed their restaurant for renovations and reopened it as a self-service drive-in restaurant with a simplified nine-item menu. This marked the birth of the "Speedee Service System," a precursor to the modern fast-food model.
The First McDonald's Franchise
The McDonald brothers' innovative approach to fast food was a hit, and in 1952, they decided to start franchising their concept. The first franchised McDonald's, opened by Neil Fox in Phoenix, Arizona, was a success, proving the viability of the franchise model for the fast-food industry.
How Ray Kroc Scaled McDonald's
In 1954, Ray Kroc, a Multimixer milkshake machine salesperson, visited the McDonald brothers' San Bernardino restaurant. Impressed by their efficient operations, Kroc proposed to the brothers that he franchise their brand across the country. In 1955, he opened the first McDonald's franchise under the newly formed McDonald's System, Inc., in Des Plaines, Illinois.
Kroc's vision for McDonald's was far-reaching. He believed in the power of uniformity and predictability, ensuring that every McDonald's restaurant offered the same high-quality products, fast service, and affordable prices. This commitment to consistency became a cornerstone of the McDonald's franchising model.
In 1961, Kroc bought out the McDonald brothers for $2.7 million, gaining exclusive rights to the McDonald's name. Under Kroc's leadership, McDonald's expanded rapidly across the United States and later, the world.
Navigating the Challenges of Fast-Food Franchising
The McDonald's story is a pivotal chapter in the history of franchising. The company's success demonstrated the potential of the franchising model to enable rapid expansion while maintaining consistency across locations. Today, McDonald's is one of the world's largest and most recognized franchises, with over 36,000 restaurants in more than 100 countries.
McDonald's story also highlights challenges associated with food franchising.
- The original fast-food industry emphasized fatty, convenient meals, which have been linked to health issues including obesity, heart disease, diabetes, and high blood pressure.
- The quick service and low prices that made McDonald’s a success among consumers also came at the cost of low wages and precarious employment conditions.
- The demand for uniform ingredients continues to drive industrial farming practices that prioritize efficiency over sustainability. This has implications for biodiversity, water and air quality, and climate change due to the high levels of greenhouse gasses produced by industrial agriculture.
These challenges highlight the importance of responsible and ethical practices in franchising. As an entrepreneur, you have a choice in what kind of impact the business or franchise you start will have on your community and the environment.
Regulating the Franchise Industry
The 1970s was a decade of explosive growth for franchising. As more and more businesses adopted the franchising model, the industry began to experience growing pains.
Some franchise companies, eager to cash in on the franchising boom, started selling poorly designed franchise systems. Others made false representations about potential earnings, leading many franchisees to invest their life savings based on misleading information.
The FTC Creates the Franchise Rule
Recognizing the need for regulation, the US Federal Trade Commission (FTC) stepped in. In 1978, the FTC issued “The Franchise Rule,” a regulation designed to protect prospective franchisees.
The Franchise Rule required every franchisor to create and maintain an up-to-date disclosure document. This document, known as the Uniform Franchise Offering Circular (UFOC), was designed to provide transparency and help prospective franchisees make informed decisions.
The UFOC included information about the franchisor's financial status, the business experience of key executives, litigation history, and details about the franchise agreement.
The Franchise Rule Evolves
The franchising industry didn't stand still, and neither did the FTC. In 2008, the FTC updated “The Franchise Rule,” resulting in the current Franchise Disclosure Document (FDD).
The FDD replaced the UFOC and provided more detailed, structured information to make it easier for prospective franchisees to compare franchising opportunities. It includes 23 specific items of information about the offered franchise, its officers, and other franchisees.
Regulation Maintains Trust in the US Franchising Industry
The introduction and evolution of these regulatory measures helped level the playing field between franchisors and franchisees. Today, FDDs ensure that people considering a franchise investment have access to the information they need to make an informed decision.
These regulations have also helped to maintain trust and integrity within the industry, which has been crucial to the continued growth and success of franchising as a business model.
As you get started in your franchising journey, remember that you're stepping into a field that's not just exciting and full of potential, but also regulated to protect your interests.
The Evolution of Franchise Types
Over the years, franchising has evolved to include different types of franchises, each with unique benefits.
Unit Franchises
A unit franchise is the most basic and common type of franchise. It involves the franchisor granting a franchisee the rights to operate a single franchise unit. This is the type of franchise most people are familiar with. It's a great option for first-time franchisees as it allows you to focus on running one location and learning the ropes of the business.
Area Developer Franchises
An area developer franchise involves a franchisee obtaining the rights to open multiple units in a specific geographic area over a set period of time. This type of franchise is ideal for franchisees who have more capital and are looking to rapidly expand in a specific market.
Master Franchises
A master franchise allows the master franchisee to not only open their own units but also sell franchises to other people within a specific geographic area. This allows the master franchisee to benefit from both operating their own units and receiving royalties and fees from the units sold to other franchisees.
A Time-Tested Path to Business Ownership
Franchising isn't a new or trendy idea. It's a time-tested, proven path to business ownership. It's a business model that has weathered economic changes and stood the test of time.
At Learn2Franchise, I’m passionate about helping you find the right franchise opportunity. If you’re interested in owning a franchise, I can assess your personal style and goals, help you find a franchise that fits you like a glove, and guide you through the process of starting your very own franchise unit. When you have questions along the way, I’ll be available to answer them.
So, are you ready to step into the world of franchising?
Schedule a free consultation with me today and let's get started.