Dual Distribution and Intangible Firm Value: Franchising in Restaurant Chains

Abstract

Dual distribution systems where firms simultaneously use vertical integration and market governance are widely used across diverse marketing contexts (e.g., restaurants, retailing, and industrial selling). A prominent example of dual distribution includes business format franchising, where firms, the franchisors, license operation of some of its units to franchisees while simultaneously owning and operating some units themselves. Despite the widespread prevalence of dual distribution, there are few insights on their performance implications. In this paper, I examine the relationship between a firm's dual distribution strategy and its intangible value. Franchising in restaurant chains serves as the empirical context for the study. I propose that a firm's dual distribution strategy will affect its intangible value both independently and jointly with a set of firm characteristics. I consider the firm's age, the scope of its vertical integration, advertising, financial leverage, and financial liquidity as firm characteristics influencing the relationship between dual distribution strategy and intangible value. I measure the firm's dual distribution strategy by the proportion of its franchised units to its total units and intangible value by its Tobin's Q. I estimate the proposed model using panel data on 55 publicly-listed U.S. restaurant chains for the period 1992-2002. Unobserved firm heterogeneity is accommodated using latent class regression analysis. Results support a four segment model. Dual distribution increases intangible value for some firms, but decreases intangible value for others, both independently and, in conjunction with other firm characteristics.