The History of Franchising
Considering a big leap into the franchising world? Whether you’re investing in franchising your business or becoming the owner of one or more franchises in the UK, find out how this sector has evolved over the years.
The definition of franchising
Before looking at the history of this sector, it’s a good idea to start with a definition of the term. Franchising is when a company authorises a business to sell and/or ship its goods or services in a locality, which could be an exclusive territory. The franchisor will license its business concept, intellectual property and processes to a franchisee, who will usually pay a fee in exchange for ongoing training and support.
Unlike business operating as an independent brand, franchisees will have to conform to the franchise model. For example, the franchisor will require all franchises to use the brand logo in all their communications and use an approved list of suppliers. All these obligations should be stated in the franchise agreement, which will also set out the rights of franchisees, as well as the rights and responsibilities of the franchisor.
As you might imagine, the definition of franchising today is much more complicated than it was many years ago.
When did franchising start?
Although the business models that many famous franchises operate with today might seem very new, the franchise business model may originate in the medieval period. Back then, privileged individuals were granted rights to acquire and develop on areas of land that were owned by the monarch. However, author Lloyd Tarbutton argued in his book 'Franchising: The How-To Book' that the franchise model was already an established concept in China over 2,200 years ago when the first business format franchise was created. Therefore, there’s plenty of scope for debate.
The 18th century
Managing Director of MSA Worldwide Michael Seid wrote a detailed blog in 2017 entitled 'The History of Franchising', in which he examined the role of franchising in the creation of the modern-day United States. In the early 18th century, when the American colonies were under British rule, Benjamin Franklin had a co-partnership with Thomas Whitmarsh for a printing business in South Carolina. This provided Franklin with a six-year contract to provide printing services under Whitmarsh's business model, which prohibited him from entering into any other partnership with another printing services provider during the contract.
Eventually, Franklin had acquired an extensive portfolio of franchise chains, including co-partnerships with other colonies in the Caribbean and other regions. Having met with French officials to gain support for America's War of Independence to weaken the British empire in the late 18th century, Franklin played an essential role in the formation of the United States. However, it could be argued that he might not have achieved this without the substantial income he had earned from his successful franchise model.
Seid also argued that commercial franchising started in Georgian London when a new tied-house system developed in the brewery industry to enable a more extensive distribution network.
The 19th century
The new tied-house developed quickly by the Victorian era. Franchises in the UK become increasingly common as more brewers permitted pubs to obtain leaseholds and sell their beers. The pub owners were also given exclusive rights in exchange for paying the lease fee, a trend which accelerated after the British government restricted the sale of alcohol due to the rise of antisocial behaviour related to alcoholism.
Franchising by the 20th century
This was when the fast-food sector had a highly influential role in the growth of North American franchising. Howard Deering Johnson is credited with opening the US's first restaurant franchise when he allowed franchisees to operate under the same brand name and building layout as his Quincy restaurant in New England. However, it was not until the mid-20th century, when Business Format Franchising was born, that the world’s most successful and famous franchises became established. This format ensures that the franchisor must provide the franchisee with an established business with its own brand name and trademark for the franchisee to run their franchise on their own.
The 1970s onwards
By the 1970s, many franchises became international household names, from Pizza Hut to Holiday Inn, although some franchisors had a vested interest in selling the franchise on as opposed to helping their franchises become successful. In response to this, the U.S Federal Trade Commission published the Franchise Rules in 1979, which sought to define bad practice in the US franchise sector and help franchisees make more informed decisions. One of the most critical aspects of this act (which has been regularly updated over the decades) is the Franchise Disclosure Document. This obliges franchisors to provide information on the franchise's exclusive territory, litigation, the support the franchisee will receive, the cost of acquiring and setting up the franchise, and other topics.
Franchising in the UK
Although there is still no UK legislation that deals specifically with franchise law, the British Franchise Association (bfa) is the self-regulatory body for the UK's franchising sector. It was founded in 1977 after several UK franchise brands such as KFC and Holiday Inn sought to differentiate their business models from illegal practices such as pyramid scheme fraud.
Now almost 1,000 franchise brands are operating in all kinds of industries in the UK, from fitness brands to famous franchises with global networks. The sector has shown remarkable resilience over the past ten years, despite relatively modest growth in the economy. Indeed, the bfa/Natwest Franchise Survey in 2015 showed that the number of franchise-owned businesses in the UK exceeded 44,000 in 2015.
About the bfa
The bfa remains a powerful voice for ethical franchising, offering membership to franchisors, professional advisors, franchisees of bfa-approved brands and suppliers to the franchise sector. All members must meet the bfa's strict accreditation criteria, which includes the Code of Ethical Conduct and procedures regarding disciplinary action, complaints and appeals. Essentially, what the bfa looks for is a viable business concept that can be easily transferred to another location, follows the ethical principles of the European Code of Ethics for Franchising, and discloses all material information to the franchisee without ambiguity.
So, if you’re interested in running your own business under established franchises in the UK, or would like to become a franchisor, visit the bfa website, which provides excellent impartial advice.
The Editorial Team, Point Franchise ©
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