Abstract
We analyze the allocation of ownership in a franchise system by focusing on location-specific characteristics of the outlets. This study uses a comprehensive data set on McDonald’s restaurants in Germany to investigate the drivers of the decision on whether outlets are company-owned or franchised. We find strong evidence for the repeat-customer hypothesis by showing that outlets are significantly more likely to be company-owned when they are located at places with relatively few repeat customers. We observe the same for outlets that are closer to McDonald’s headquarters. Finally, we find pronounced clustering of multi-unit franchisees.
Highlights
Franchising has experienced significant growth over the last few decades and has played an important role in a variety of sectors globally
Dual distribution prevails, and company-owned outlets co-exist with franchised ones
While the franchising literature rests on agency theory and transaction cost arguments to explain the coexistence of company-owned and franchised outlets, the observable economic geography of franchising is little explored
Summary
Franchising has experienced significant growth over the last few decades and has played an important role in a variety of sectors globally (see, e.g., Hoffman and Preble, 2004). While the franchising literature rests on agency theory and transaction cost arguments to explain the coexistence of company-owned and franchised outlets (see Combs and Ketchen Jr., 2003), the observable economic geography of franchising is little explored (see Minkler, 1990, for an exception). We investigate the determinants of company-owned versus franchise outlets with data on all McDonald’s outlets in Germany. The agency-based explanation highlights locational aspects by stressing lower local search costs of the franchisee and lower agency costs of franchised outlets (Minkler, 1990). We contribute to the literature by focusing on these arguments with the help of the geo-location of the outlets. By relying on German data, we complement the literature on franchising that has focused mainly on the largest market, the US (e.g., Combs and Ketchen Jr., 2003; Perryman and Combs, 2012)
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