Why Do Franchisors Combine Franchises and Company-Owned Units?

Abstract

This work explores the strategic motivation of franchisors to combine franchised and company-owned stores when structuring their distribution networks. In the United States, such plurally organized chains have already outnumbered purely franchised competitors.

Based on a review of existing research work, we explain how plural franchise chains theoretically outperform purely franchised or wholly company-owned systems through realizing cost reduction, quality enhancement, growth stimulation and optimized control of business risk.

We then challenge these theoretical explanations with the historic data of 925 US-franchise systems, covering almost twenty years of franchise development.

While we find little or no support for those strategies - cost, growth and risk improvement - that tend to benefit the franchisor at the expense of franchisees, our data reveal strong support for the quality arguments. By combining a plural form structure with high franchise fees and low royalty rates, franchisors signal outsiders how to be a reliable and cooperative principal. By simultaneously operating company-owned stores and independent franchise outlets, chains successfully force themselves into cooperational and less opportunistic behavior towards their franchisees and (thus) manage to attract more and better members to join the system.

Keywords: Franchising, Company-Ownership, Distribution Channels, Plural Form, Dual Form

JEL Classification: J33, L22, L25