'What's the Name of the Game?' - Franchisee versus Company Ownership - An Analysis of Franchisor Profit

Abstract

In this paper, we examine ownership structures of franchise chains and evaluate their impact on franchisor profit. Specifically we compare pure forms of franchising with those that use both company-owned and franchised outlets within one chain - a phenomenon termed the plural form. Theoretically such plural arrangements are supposed to provide franchisors with lower costs, higher growth, greater total-quality, and reduced business risk. Empirical results of this study indicate the superiority of company-owned businesses over franchised units in generating franchisor profits. Moreover plurally organized systems compensate for losses from franchising with profits from company units and outperform purely franchised competitors in overall profitability. Despite a clear financial inferiority of franchise outlets, franchisors of our sample do not convert plural structures into wholly-owned chains. We suspect the lack of entrepreneurial initiative (a non-financial aspect of franchising) to be one reason of the reasons for this. Hence when organizing the chain, franchisors face an inverse u-shaped profitablity curve with both pure franchising and pure company-ownership lying at the (undesirable) extremes and with a performance peak somewhere in between these extremes.