The History of Franchising
To Begin at the Beginning...
The first signs of franchising can be traced back to feudal England, when lords allowed peasants certain rights on part of their land in return for a fee (to perform tasks such as operating wells for water provision or running a market, for example). Components of a franchise system could also be found in the provision of resources for an army by local lords and chiefs in return for tax-collecting privileges.
Many years later, franchising became more entrenched in the UK with the advent of the tied pub system. Following the introduction of legislation making it very expensive to keep and maintain a public house in the 18th century, licensees began to struggle to operate successfully. Recognising that it was in their interests to have a secure and stable market for their products, brewers began to offer publicans the opportunity of financial support in return for exclusivity over what was sold in the pub. Thus a familiar system, that remains widely-used in the licensed trade today, was born.
The Singer Effect
The origins of franchising as it’s come to be known and defined today can be clearly pinpointed to one man: Isaac Singer. After the US Civil War in the 1860s Singer had achieved the ability to mass-produce his famous sewing machines, but had no economically viable way of repairing and maintaining them across a country as geographically vast as the USA.
He began to license out servicing and repairs to local merchants around the country, who were later permitted to become regional salesmen for the machines too. Singer’s use of a contract for this arrangement introduced the earliest form of franchise agreements, and the first modern franchise system was born.
Over the following century, forms of franchising became more widely used in the US as a way to standardise products and standards from one coast to another. First was the car dealership model pioneered by General Motors in the early 1900s, granting exclusive rights and territories; then oil companies and grocery stores began to take advantage of a business model that offered them a route of fast growth towards national distribution with reduced risk.
Business Format Franchising is Born
After the Second World War franchising grew rapidly, propelled by companies looking to expand quickly. Soft drinks giants like Coca-Cola and Pepsi couldn’t economically operate US-wide with such high water content in their products and expensive transportation relative to its cost, so they developed a franchise system whereby franchisees would carbonate and add water to the companies’ centrally-manufactured and distributed highly-secretive syrup recipes, bottling and selling it locally.
This was the start of ‘business format franchising’ as we now know it; offering a turnkey package from franchisor to franchisee in many instances, it was firmly established as a distinct business model and proven system in the 1950s.
The huge growth in this modern system of franchising is attributed to milkshake machine salesman Ray Kroc who, while visiting San Bernardino in California, frequented a popular and busy drive-thru restaurant that had bought his machines – which was owned and run by the McDonald brothers...
He opened the first restaurant in their name in Des Plaines, Illinois and purchased the brand outright in 1961.
UK Boom and Slowdown
In the 1950s and 1960s the popularity of franchising really took off, in tandem with huge growths in population, economic output and social change, and began to appear internationally including in the UK for the first time. Catering companies led the way.
Amongst the earliest practitioners in this country was food giant J Lyons & Co., who franchised the hamburger chain Wimpy in 1955 as well as ice-cream brands Lyons Maid and Mr Softee in the 1950s. ServiceMaster, still a huge international franchise business today, began franchising in the UK in 1959. By the mid-1960s some of the largest fast-food brands had become well-established international franchises, led by McDonald’s and KFC.
This boom period in franchising was not to last long; by the 1970s franchising in the UK slowed, partly in response to the faltering economy but more as a result of the damage done to its reputation by non-franchise systems such as pyramid schemes describing themselves as franchises; they were based around the handing over of money for a promised lucrative return on investment, which of course rarely came.
Despite still offering some very real opportunities, franchising was unfairly tarred with the same brush by many and its popularity waned.
Franchisors Fight Back!
Eight of the largest franchise brands in the UK at the time decided they needed to do something to differentiate their own ethical business practices from those companies with bad ones, and as a result in 1977 the British Franchise Association (bfa) was formed.
The founding member companies of the bfa were ServiceMaster, Dyno-Rod, Holiday Inns UK, Kentucky Fried Chicken, Wimpy International, Ziebart GB, Prontaprint and Budget Rent a Car.
With no previous set standards in the UK, the industry thus created its own regulatory body and accredited a company’s suitability for membership on strict criteria related to operational practices, business procedures, franchise agreement terms and the support offered to franchisees.
The size and stature of these founding members and the bfa’s early work on business ethics restored credibility to the business model, and with the economic boom of the 1980s and 1990s many new brands came into UK franchising and remain there today.
The Association recognised that it had to be more representative of a growing industry, and adapted to also accept professionals with particular expertise and experience in franchising as Affiliate Members.
Franchising has since flourished into an industry which now has nearly 1,000 brands in a multitude of different sectors. Long-gone are the days when it revolved around cars and catering, and nowadays its eclectic mix of businesses includes everything from hairdressing to photography, pet care to children’s sport coaching. There’s something to suit your passion whatever it may be.
Franchising has never been in better health than it is now. The authoritative annual research into the state of the industry, the NatWest/bfa Franchise Survey, has shown both short- and long-term growth trends to be very strong in the sector, including prior to and since the economic downturn in 2008.
After a slight downturn in that year, every year following has shown growth in terms of numbers of brands franchising, numbers of franchisees, numbers employed in franchise businesses and the overall turnover of the franchise sector.
These figures combine with impressive trends going back to before the turn of the century, uninterrupted by the recession, which consistently show around 90% of franchisees reporting profitability and less than 4% of franchise businesses failing for commercial reasons each year.
Those statistics compare favourably to figures estimating that between half and two-thirds of all independent start-ups close within their first 3 years. It’s clear that the advantages inherent within a franchise business, including economies of scale and support of a large brand combined with local marketing and business owners, make them particularly robust and statistically much more likely to succeed.
One of the biggest recent changes in franchising occurred during 2012, with the advent of Franchisee Membership to the bfa. Franchisees, for the first time, have the opportunity for direct representation on the board of the bfa, and therefore are able to contribute to the future evolution and governance of their industry. It was the first membership scheme of its kind for any franchising association in the world, and ensures all stakeholders of ethical franchising can continue to move the UK industry forwards as it grows further in size, stature and importance to the economy.
From its feudal roots to becoming one of the fastest-growing sectors of the UK economy, franchising has come a long way. With many more people now looking to take charge of their careers and family life by running their own business, it looks set to go a whole lot further in the years to come too.