Despite its association with big-name American brands, franchising is not quite as recent a phenomenon as many might think.
The term itself has its origins in an old French word for ‘liberty’ – the freedom or ability to do something.
Dating back to feudal times, it referred to peasants being given certain rights by the local lord for example, to run a market, operate a ferry, or draw water.
In return, the landowner would be paid a fee, which, in theory at least, he would use to protect the area from marauders. Later, of course, local councils or mayors would use the same system to fund local improvements.
This scenario also gave rise of the other significant meanings of the term – the electoral franchise – as, until the 20th century, only those with sufficient landholdings could vote in elections.
But it is obvious why this term came to be used in business: a larger corporation grants rights to people to operate certain services in return for a fee or share of the profit.
Britain has perhaps one of the oldest examples of franchising: tied pubs. Partly a result of increased legislation, it became very difficult for licensees to afford to run a pub single-handedly.
The use of a contract is the reason why the origin of franchising is so often traced back to Singer
Selling rights
Brewers realised that this could be the end for their trade unless they supported their outlets. So they developed a system whereby, in return for financial assistance, pubs agreed just to sell the products of the brewery in question. Many British pubs are still ‘tied houses’ to this day.
Undeniably, however, the first example of modern franchising was in the US, when Isaac Singer, founder of the sewing machine company, wanted to find a wider distribution for the improved model he had developed.
Franchising history at a glance
- Franchising has its roots in the feudal world, where lords of the manor would grant rights to hold markets or draw water in return for fees
- The British system of tied pubs is an early example of a form of commercial franchise
- The first modern franchise, however, can be attributed to Isaac Singer’s decision to licence the manufacture of this machines around the US
- Early franchises were often an attempt to procure investment, a contrast with today, when the system is mostly used to reduce risk for both parties
- The early part of the twentieth century saw franchising used for restaurants, soft drinks (such as Coca-Cola) and the motor trade, but the real expansion occurred in the 1950s and 60s
- The blossoming of consumer culture after the war saw world-famous franchises like McDonalds and Kentucky Fried Chicken set up shop
- But this expansion was cut short by the slowdown of the 1970s and a lack of confidence in the sector as a result of the poor image conveyed by pyramid schemes
- Faith in the sector was restored by trade associations and the burgeoning entrepreneurial spirit of the 1980s. Today, franchising is fundamental to the British and American economies
He could not raise the funds to increase production of the machine without greater sales. So he exclusive selling rights for his products in defined areas, raising the money to expand his factories so that his machines could be sold right across the US.
Those franchisees (although the term was not used) were also given the right to train people in how to use the machines, which were reasonably complicated.
The use of a contract is the reason why the origin of franchising is so often traced back to Singer.
The model was used in a limited way over the next hundred years or so – with General Motors, for example, granting exclusive rights to dealerships across the US, a model that remains the basis of car retailing today.
The early decades of this century saw a few more franchises set up, such as A&W Root Beer, a US restaurant brand, followed later by Howard Johnson, which would form the model for years to come.
But the real boom in franchising took place immediately after the Second World War, as the population and economy began to grow rapidly.
Advertising, branding and other aspects of consumer culture mushroomed in the 1950s, and so-called business format franchising – providing a whole turnkey ‘package‘of doing business – accompanied this growth.
Soft drink manufacturers – including Coca-Cola – were among the first to get board the bandwagon. In a country as large as the US, transporting soft fizzy drinks was a problem. The high water content meant that costs were high compared to sales prices, especially if the bottles were transported from a central plant.
Given the mystique associated with the exact formula used, the companies in question did not want to simply sell the recipe. Instead, they opted to produce concentrated syrup in-house, while allowing franchisees to dilute it with carbonated water and sell it under the relevant brand name.
Perhaps the most famous franchise during this period is McDonald's. Now, obviously, one of the most recognised brands in the world, the company began with a small burger stand in San Bernardino, California. It was discovered by a milkshake mixer salesman called Ray Kroc in 1954, who can be credited with developing the franchising system that is used so widely today.
The burger stand was buying a lot of Kroc’s mixers, and after some investigation, he discovered that it had developed a system for delivering burgers and fries very quickly – without any drop in quality.
Impressed, he became the company’s licensing agent, and starting selling the concept in the Chicago area. In 1961, he bought the McDonald brothers’ interest and became the senior chairman. Today, of course, the success of this strategy is obvious – there are over 30,000 McDonalds’ around the globe.
