FRANCHISING IN THE UK

Franchising in the UK

Chapter Two

Literature Review

Retailers appear to have found franchising to be a valuable means by which to develop their business. In both the UK and USA retail franchising has shown substantial growth, and now accounts for approximately one-third of all retail sales (BFA/NatWest, 1999). Forecasts suggest that by 2005 at least 50 per cent of retail sales will come from franchises in the USA (Tikoo, 1996). It seems, then, that there is a particular affinity between franchising and retailing, with, for example, retailing being the largest franchise sector in the UK, and accounting for 37 per cent of all franchise systems in Australia (McCosker and Frazer, 1998).

Thus, the importance of franchising in retailing is evident. However, although many studies have examined the decision to franchise at the level of the unit (Caves and Murphy, 1976; Brickley and Dark, 1987), or internationally (Quinn, 1998; Doherty and Quinn, 1999; Quinn and Doherty, 2000), there has been little empirical work considering the motivations to franchise per se within a domestic setting. Thus, the reasons why some industries have a greater prevalence of franchising than others are still not fully understood. This paper seeks to address this and, in particular, to determine whether business risk, scale economies and human capital requirements can explain the incidence of franchising in retailing. In addition, given that the retail sector is experiencing rapid change through developments in e-commerce (e-tail), the paper goes on to consider this development and its likely impact on the future of retail franchises and franchising in the retail sector.

To achieve these objectives, the paper examines the principal existing theoretical frameworks to determine whether they can provide an insight into the incidence of franchising in the retail sector, and examines them in the context of retailing in the UK in order to propose possible explanations for the growth of retailing through franchising. This leads to a consideration of the future of retail franchising, particularly given the changes this sector is presently experiencing consequent on the development of e-commerce.

Theoretical background

Two main branches of theory have been put forward to suggest reasons for the adoption of franchising as an organisational form, namely resource scarcity (Oxenfeldt and Kelly, 1968; Norton, 1988) and transaction cost analysis[1] (Felstead, 1993; Dahlstrom and Nygaard, 1999).

It is argued that companies are motivated to franchise primarily as a means of raising capital (Oxenfeldt and Kelly, 1968). For firms with limited resources, the financial capital franchisees provide enables them to expand (Golisano and Worth, 1989; Curran and Stanworth, 1983). Not only do franchisees pay an initial fee, but generally they also pay for fixed assets, such as equipment, signage, or even the premises or land from which the business operates (Lafontaine and Kaufmann, 1994). Thus, the theory predicts, those companies lacking in resources will favour franchising compared to firms that are relatively resource rich, a proposition supported by research undertaken by Carney and Gedajlovic (1991).

It should be noted that the validity of the resource scarcity argument has been questioned (Rubin, 1978; ...