Franchising professor Udo Schlentrich
Q. What is franchising? A. Franchising is a marketing and distribution system where the franchisor systemizes a product or service and sells it to another party, providing the specifications, the standards, the training, and above all the brand. It allows the franchisor to expand without his or her own capital. It gives the franchisee a way to get into business; banks will seldom finance start-ups which are not proven. The chance of failure is much lower, because the franchise has an organization and a brand name behind it. Q. The most famous franchises are in fast food and motels, but it goes far beyond that. A. Yes. Franchises are present in about 75 different sectors of the economy. It represents close to 10 percent of America’s GDP, $1.4 trillion of turnover, employing 19.3 million individuals directly and indirectly. It’s also very strong internationally. Lifestyle changes are helping to drive the growth. An aging population no longer has the ability to do the lawn or clean house on their own. In dual-earning households, time is at a premium. They use cleaning services and fast food to save time. It also fits into our increasingly mobile society. If you live in a community for a long time, you know the local businesses you can depend on. But if you’re on the go, it’s easier to depend on the brand name you know. Q. Did all this start with McDonald’s? A. It started with Howard Johnson’s in the hospitality area. But actually it started with car companies and Singer sewing machines, where manufacturers needed national distribution, so they made agreements with local dealers. But McDonald’s really turbocharged it. I had the good fortune of knowing [McDonald’s founder] Ray Kroc personally. He always came to my hotels in London and New York. He was a highly dynamic individual, an entrepreneur at heart. A uniquely American spirit. Q. Let’s talk about some of the criticisms of franchising. Sometimes a franchise comes in, and displaces local businesses. Is that a loss for the community? A. I think it is. I would hope that local business will learn from franchises and understand that you need to have standards, that you cannot have fluctuation in quality. I enjoy local places. I like to go to Calef’s [Country Store in Barrington] to buy cheese and bread. In Dover, there’s a wonderful little pancake and breakfast place. Both places are clean, they provide value, management and staff are attentive, and I am a satisfied customer. Just because you are local doesn’t mean that you will gain me as a customer forever. You need to provide a value experience. Q. How about the quality of employment? A lot of franchises offer low-paying jobs with not much hope of advancement. A. You’re right, and America is often accused of training a generation of hamburger-flippers. However, the high school kid who takes a minimum-wage job learns discipline. We do not have that anymore, in my opinion, in the family, in the schools. Also, franchising has offered opportunities to people who would be in dire circumstances otherwise. The corporate culture has changed; lifelong employment no longer exists. So you’re laid off at age 45 or 50, and where do you go? These people are well educated, highly motivated, and they say, “I don’t want to repeat the same story, I want to be independent.” And franchising gives them that opportunity. We have a strong indication that there’s probably no industry in America which has created more millionaires than franchising. Once you’ve worked in a franchise, you work your way up to supervisor or manager, and then you can become an owner. Q. What about the effect of franchises on regional culture? In New Hampshire, there is relatively little penetration by franchises. You still have local businesses, and a distinctive character. A lot of places in the country, it’s McDonald’s, Taco Bell and Motel 6 everywhere you go. A. Yeah, at heart I’m a country person, and I feel New Hampshire is one of the best places in the world to live. I don’t think we’ll be able to change the culture, but the more we see this trend into a labeled, branded society, the more I think the pendulum is swinging in the other direction. Many people want to have individual attention, and unique local products. Often, the large corporations will have distribution channels that the locals do not. And there you need to jointly promote your products and services. I have seen it work very successfully in Scotland, where I lived for five years. It was overshadowed by England, but they worked in romancing their location, their culture, their heritage, their music and arts. When you compare New Hampshire with our neighbor Vermont, Vermont has central marketing operations that actively promote tourism and specialty foods, and Vermont has established itself as a brand. Q. Why are you so interested in franchising? A. It is a sector which is not well understood, it covers so many industries and sectors, it’s very much part of our culture. And it’s fascinating to have the opportunity to bring it alive through teaching, research and outreach. At the Rosenberg Center, we have the largest financial database of franchise companies in the world. We also started the first online research library for franchising. Most of the material is free, except for copyrighted material. We publish a quarterly index, the Franchise 50, comparing the 50 largest franchise companies to the S&P 500. The index has outperformed the S&P 500 by close to 60 percent since the year 2000. Q. Is there any talk of setting up a sector fund? A. Yes, we’ve received quite a number of calls from investment companies. Some want our data, which we’re not willing to give. Some of it is proprietary information from franchisors. But we might at some point do a fund, preferably a hedge fund. Q. Is there a sector of the market that’s ripe for a new franchise operation? A. I see two trends. One, I believe people want to stay younger and healthier. They want to look better longer. We see growth in the local spa element — fitness, massage, creams, and all this stuff, is a field ripe for tremendous growth. I see a number of food and service concepts in Asia that are interesting. A lot of it is healthy and cheap to produce, and could be packaged really well, and is suitable for franchising, particularly in the Korean, Thai sector. Obviously we have local restaurants, but it requires a look — just like Domino’s Pizza took the Italian concept and packaged it.