The History of Franchising

While many people think about franchising as starting with McDonalds, the most popular single franchise chain in the world, franchising actually has a much longer history – the kinds of social structures that one can think of as being franchises can potentially be traced back hundreds and hundreds of years to early churches and religious / political institutions, and even companies such as the East India Company of Great Britain can be thought of as a kind of franchise. The franchise in the modern sense of stores such as McDonalds, however, can probably best be traced to breweries and taverns which were established in the United States in the 1800s. Here is an overview of some of the businesses which have developed the concept and the legal status of the franchise and have revolutionised the way that companies do business as a result.
England and Europe were the part of the world which first gave rise to what we would think about as franchises today. Breweries would create purchasing agreements with the taverns throughout Europe so that the taverns would only sell products from certain breweries and in exchange would receive preferential rates on their products. With the exception of the purchase agreement and the resulting financial assistance, there would be no continuing control between the breweries and the taverns. This kind of purchase agreement also existed between various retail stores and the companies which produced different kinds of products. A store would agree to only stock a particular brand of a certain product and would get a better price as a result.
Franchising would change to include the area of a “chain” element – the idea that all of the stores in a franchise would look and act the same way – for example when transportation was improved. The more mobile people were, the more of a call that there was for people to be able to enjoy the same products and consumer experience as they did at home in the places where they would visit.
There were a couple of chain stores before the birth of the modern highway system – the first restaurant chain that there is any record of in the entire world is the Harvey House restaurant chain, which was created by Englishman Frederick Henry Harvey in 1852. The Harvey House restaurants were created along a line of transportation – the Atchison, Topeka & Santa Fe Railroad. A partnership between Frederick Henry Harvey and the railroad allowed him to acquire discounts on railroad shipping of the goods needed for his restaurants – in exchange Frederick Henry Harvey set up his restaurants at the railway depots and provided the passengers on the trains with a consistent dining experience within the stations. Over several decades the Harvey House restaurant chain expanded until there were restaurants spaced along the railway every hundred miles.
Drive-in restaurants became popular with the rise of the automobile, and one of the earliest chains during this period was the A&W restaurant chain. Now known also solely for their root beer product line which is represented in stores across the United States, A&W was at one point a drive-in restaurant chain which offered sandwiches along with their famous root beer floats. Another franchise which remains today, but not in its original restaurant form, is White Castle – a well known hamburger chain. Many of the things which we take for granted about the restaurant industry were invented by White Castle. For example, White Castle was the first restaurant to provide its customers with packaging for take aways as well as napkins which were disposable and made from paper instead of cloth.
The first White Castle restaurant was founded in Wichita, Kansas in the year 1921. The Howard Johnson restaurant chain with its many flavours of ice cream would begin franchising in 1935. Franchising was on the rise along with the automobile and the growth of the transport system, and more and more restaurants were drawing up franchising agreements so that managers from other towns could create their own instances of the most popular regional attractions.
The 1930s, 1940s and 1950s saw the birth of many of the restaurant chains which have become the largest fast food / restaurant franchises today – these include Carvel, Kentucky Fried Chicken, Dairy Queen, Dunkin Donuts, Burger King, the International House of Pancake, and McDonald’s.
Of course, there was also franchise chains which were not restaurants – some of the earliest of these were related to automobiles, as you would expect. Instead of taking their chances at a service station run by locals which might not have the right parts or expertise to handle a car problem, drivers would prefer to stop at a location which had a consistent supply of tools, parts and service know-how – a place which would operate the same way on the outside and the inside as any of the other locations in the chain. Sales and service centre businesses which focused on mechanical goods were another kind of business which profited from the franchise – Singer Sewing Centers catered to people who wanted to buy or repair their Singer brand sewing machines, while the McCormack Harvesting Machine centres grew across the rural areas of the Midwest and gave farmers access to quality assistance with their harvesting / combine equipment.
Mass production was a big influence on the growth of the franchise industry – back in the days when products had to be created mostly on site; it was difficult for people to provide a consistent experience in restaurants or any other kind of business. The differing levels of skill as well as intrinsic differences in the ways that people would create the same product would lead to natural variations. When products were being created in centralized factories a level of quality control could be arranged and consistency could be easily achieved – improved transportation then made it possible for these identical products to be sent to distant locations and to provide people with the same kind of product wherever they lived.
One of the most influential companies in the rise of the franchise industry was Western Auto, which developed the franchisor / franchisee relationship to an extent which was previously unknown – while today it is common for the franchisor in the relationship to provide the franchisee with extended services such as training, help in site selections, merchandising and marketing / advertising assistance, these things were uncommon in the past and what was called franchising was actually quite similar to what is today simply called licensing.
There was a large increase in the franchise industry after the Second World War, which resulted in an explosion of all kinds of franchises (particularly restaurant chains). Families grew after the war, and with many families owning their first automobiles people would go on long vacations and would want to enjoy the same kind of food in different states. Hundreds and hundreds of franchise locations opened up at this time and franchisors during this period became more interested in selling large numbers of franchise agreements (and taking advantage of large franchise fees) than in making sure that the individual franchise businesses were successful.
These changes led to regulation – states started to enact laws which made it necessary for franchise companies to adhere to certain policies of disclosure. In today’s franchise market, for example, any franchise operating in the United States or in Canada has to have a disclosure document available to potential franchisees which contains information on business practices, profit and expense numbers and lots of other useful pieces of data which can help a person interested in starting a new business decide whether or not it has a good chance of being profitable. The goals of the franchise companies have also changed so that they spend more time providing advice and aid to their franchise locations and less time simply adding franchise locations.
The franchise business has certainly had a long and interesting history and has continued to grow in recent decades. Many of the most popular franchise chains have expanded from the United States into other westernized countries as well as various emergent markets around the world. We can only expect that the franchise business model will continue to be successful with the further increases in international opportunities for travel. If you are interested in learning more about franchises, a franchise fair would be a good place to go to learn about some of the opportunities which are available to investors Franchise owners are also good sources of information regarding the growth of their franchise business and problems or otherwise they may have encountered on the way. I wish you the best of luck learning more about the franchising business model and the kinds of franchises that may be of particular interest to you