The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry

Abstract

While there has been significant research on the reasons for franchising, little work has examined the effects of franchising on establishment performance. This paper attempts to fill that gap. We use restricted-access US Census Bureau microdata from the 2007 Census of Retail Trade to examine establishment-level productivity of franchisee- and franchisor-owned restaurants. We do this by employing a two-stage data envelopment analysis model where the first stage uses DEA to measure each establishment’s efficiency. The DEA efficiency score is then used as the second-stage dependent variable. The results show a strong and robust effect attributed to franchisee ownership for full service restaurants, but a smaller and insignificant difference for limited service restaurants. We believe the differences in task programmability between limited and full service restaurants results in a very different role for managers/franchisees and is the driving factor behind the different results.

Keywords: Franchising, restaurants, data envelopment analysis, efficiency

JEL Classification: D23, D24, L83