Dual Distribution and Royalty Rates in Franchised Chains

Abstract

Most empirical studies concerning franchise systems have dealt with the monetary contractual provisions, especially with the determinants of royalty rates. But the organizational design of franchised chains has received less attention and dual distribution is still a misunderstood phenomenon in economic theory. What determines the proportion of company-owned units or franchised units within a chain? How does the level of the royalty rate interplay with the extent of company ownership? This paper supports the idea that dual distribution enables to mitigate contractual hazards due to information asymmetry and incomplete contracting. Thus a chain's efficiency should strongly depend on the correct balance between royalty rates and the extent of company ownership. The interdependence between these two strategic decisions is analyzed by using a panel data set of 745 French franchisors. Econometric tests show that brand name value has a positive impact both on Thierry Pénard is affiliated with the University of Rennes 1 and CREREG, 7 place Hoche 35065 Rennes, royalty rates and the proportion of company-owned units. Moreover, we put forth evidence that royalties and company ownership are complementary variables for the organizational design of chains.

Le choix de la franchise ou de l’intégration verticale : une étude empirique

“…Alors que la plupart des travaux sur la franchise portent sur des réseaux d'origine nord-américaine, notre étude a mis l'accent sur les réseaux implantés en France. A ce jour, le nombre d'études empiriques portant sur le choix de la franchise ou de l'intégra-tion verticale dans ce pays est encore limité (Chaudey et Fadairo, 2007;Pénard, Raynaud et Saussier, 2003).…”

“…Aux Etats-Unis, une étude longitudinale menée par Lafontaine et Shaw (2005) suggère que la proportion de points de vente détenus en propre se stabilise autour de 15 % (avec des différences importantes d'un secteur à l'autre). Une étude menée en France par Pénard, Raynaud et Saussier (2003) observe un phénomène similaire avec une stabilisation de la proportion de points de vente détenus en propre autour de 25 %.…”

Plural form franchise networks: A test of Bradach’s model

“…Another difference is reflected in the average PCO per country: PCO equals approx. 35% in France (Pé nard et al, 2003), whereas it barely reaches 15% in the United States . Such contrasts make international comparisons all the more important toward understanding the essence of franchising beyond the cultural and managerial differences across countries.…”

Contractual relations and organizational structure in franchising

“…For the latter, we use % time not franchising, i.e., the number of years the franchisor has not been franchising as a percentage of the total number of years the franchisor has been in business. This is a proxy indicating how much time and effort it took to set up the franchise system (see, e.g., Lafontaine 1992;Pénard et al 2003). We expect that a franchise system which was difficult to establish and whose development took a long time requires a high franchisor input at any time, i.e., even after the business has been turned into a franchise system.…”