Why Do Franchisors Combine Franchises and Company-Owned Units?

29 Pages Posted: 26 Sep 2005

See all articles by Thomas Ehrmann

Thomas Ehrmann

University of Muenster

Georg Spranger

University of Muenster

Date Written: September 18, 2005

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

Suggested Citation

Ehrmann, Thomas and Spranger, Georg F., Why Do Franchisors Combine Franchises and Company-Owned Units? (September 18, 2005). Available at SSRN: https://ssrn.com/abstract=807346 or http://dx.doi.org/10.2139/ssrn.807346

Thomas Ehrmann

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

Georg F. Spranger (Contact Author)

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

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