In 1954, a milkshake mixer salesman named Ray Kroc drove into San Bernardino California and signed a deal with the McDonald brothers to franchise their hamburger restaurant concept. He changed the world. For better and for worse, the franchise model has spread American retail businesses to the farthest corners of the earth. McDonald’s now has almost 13,000 franchised locations in the US with thousands more abroad. However, with fierce competition, same-store sales under pressure and increasing operating expenses, it seems at least for now that the magic has run out for McDonald’s. There may be reason to think that the franchise model as a whole is facing serious challenges for the first time since it really took off in the boom years after the Second World War.
The Franchise Operation: a Guarantee of Quality
Beginning slowly in the 1950’s and accelerating through the 1970’s, the franchise model helped small entrepreneurs address the establishment challenges that confront all small businesses. These challenges include both internal (operational) issues and external (marketing) issues. Operationally, the extensive training franchisees underwent, and the voluminous manuals they received from HQ helped to establish uniform business processes that were constantly reviewed, updated, and improved. Better product preparation, employee management, and cash controls were all operational issues that may have been a real challenge to small local entrepreneurs outside the franchise system. From a marketing perspective, the national branding of the franchise model (coupled with the aforementioned rigorous operational model) was a sort of guarantee to the consumer of a predictable product quality and consumer experience. Whatever town you might drive into off the highway anywhere in the US, if it was a McDonald’s or a Holiday Inn, you knew exactly what you were going to get and at what price. If it was a Heavenly Pig or El Rancho, you were taking chances.
An Old Model Disrupted by Tech
The Internet is disrupting the franchise model just as it has disrupted so many other things in our economy. From the internal (operational) perspective, the Internet has made small business management expertise as freely and immediately available as every other kind of information. Even more powerfully, from the external (marketing) perspective, crowd-sourced reviews of every kind of business under the sun have reduced the uncertainty of patronizing quirky local ventures to an almost negligible level. Using sites like TripAdvisor and Yelp, travelers and everybody else can find out about product quality, the cleanliness of premises, price, hours of operation and anything else they care to know about a business – usually from their smartphone just as they are pulling off the highway. In fact, “location aware” applications can even make recommendations for local businesses based on pre-chosen preferences. The franchise model seems to have completely lost the “consumer guarantee” function it had before the Internet.
The Cultural Trend to “Localism”
Beyond technology, there seems to be a much deeper cultural trend moving against the franchise model. In the restaurant business, it is the “slow food” movement. In apparel, it is a preference for hand-crafted, artisanal garments. Across the board in retail, the momentum seems to be against mass corporate fare for small, organic, real experiences in food, beverage, clothes, music and practically every other consumable. As only one example, look at beer. Since the 1980’s, small local craft brewers have steadily gained market share at the expense of big national brewers to the point that now the craft brew segment has a bigger market share than Budweiser. There are now over 3,000 craft brewers in the US, and every single one of the mass national beer brands has shown steady market share and volume declines in recent years.
Franchising as a national business model obviously is still extraordinarily valuable for an lot of US business people and consumers. It is also very clear that the momentum in the marketplace – at least for now – is creating real headwinds for further growth of franchising. The local retail real estate market is as healthy as it has been in a long time. There are and will continue to be plenty of tenants. Whether those tenants will be predominantly national franchises or local small businesses remains to be seen.