Factors Affecting Franchise Decisions in the Restaurant Industry

Abstract

Franchising captures a sizeable portion of the restaurant industry and plays an important role in its growth. However, despite the importance of franchising to the restaurant industry, little has been done to investigate the characteristics of restaurant firms that engage in franchising. This study intends to explain what characteristics of restaurant firms relate to franchising. Accordingly, a logistic regression model was developed to identify variables that best differentiate restaurant franchisor firms from nonfranchisor firms. The results indicated that (a) the degree of geographic dispersion and involvement in foreign countries increases the probability of becoming a restaurant franchisor; (b) as a restaurant firm ages, the probability of franchising decreases; and (c) the decrease of specific knowledge requirements increases the probability of franchising. This study also provides suggestions to help restaurant firms considering franchising for their operations.

Antecedents and consequences of external risk perception in franchising: evidence from the hospitality industry

“…The so called adverse selection and moral hazard problems in agency theory highlight the difficulty of assessing the abilities and monitoring the performance of increasingly distant outlet managers (Contractor and Kundu 1998). However, although this argument may explain the adoption of a franchise system or not when making choices about how to grow and develop a company's distribution network (Hsu et al 2010;Hoover et al 2003), it is equally useful to explain the percentage of franchised outlets versus company-owned ones, once the company has already adopted a franchising system. According to Maruyama and Yamashita (2010), in the principal-agent model, franchising provides higher performance incentives than company-owned outlets, so that franchises would overshadow company-owned outlets.…”

“…According to this perspective, firms engage in franchising systems to obtain the required capital and managerial experience needed to grow (Combs and Ketchen 1999b;Maruyama and Yamashita 2010). Thus, smaller less-established firms frequently use franchising to obtain the economies of scale required to compete, because they often encounter difficulties in raising capital and developing the managerial talent to grow (Castrogiovanni et al 2006;Hsu et al 2010). However, once a company achieves a certain scale, it can shift more attention to profitability, which means more firm ownership according to the resource-scarcity theory (Caves and Murphy 1976).…”

“…The second stream of arguments regarding ownership mix is related to the lack of resources that firms need to address their desired development and growth objectives (Oxenfeldt and Kelly 1969;Hoover et al 2003;Hsu et al 2010). According to this perspective, firms engage in franchising systems to obtain the required capital and managerial experience needed to grow (Combs and Ketchen 1999b;Maruyama and Yamashita 2010).…”

“…Another of the most commonly cited is the resource-scarcity theory (Oxenfeldt and Kelly 1969), which sees franchising as a means of growing when resources-particularly financial and managerial ones-are scarce. It has also been suggested, via the risk-sharing theory, that franchising reduces risk for the franchisor (Hsu et al 2010) in the sense that the probability of failure decreases in the case of intensely aggressive growth strategies. However, the decision between franchising and ownership has been often considered as the decision to substitute one for the other.…”

“…Globalization has also meant that firms are increasingly turning to franchising in the hotel industry, as hotel companies still believe that they need to reach all continents to grow and prosper, and that franchising is considered the best entry mode to deal with the risk involved in international operations (Pine et al 2000). Equally, in the restaurant industry, franchising plays an important role in the growth of the industry (Hsu et al 2010;Rodríguez et al 2011). For example, according to reports by PriceWaterHouseCoopers in 2004, in the US, more than half the fast-service restaurants and more than 13% of full-service restaurants are franchises.…”