Franchising and Chain Stores
Successful small businesses sometimes grow through a practice known as franchising. In a typical franchising arrangement, a successful company authorizes an individual or small group of entrepreneurs to use its name and products in exchange for a percentage of the sales revenue. The founding company lends its marketing expertise and reputation, while the entrepreneur who is granted the franchise manages individual outlets and assumes most of the financial liabilities and risks associated with the expansion.
While it is somewhat more expensive to get into the franchise business than to start an enterprise from scratch, franchise are less costly to operate and less likely to fail. That is partly because franchises can take advantage of economies of scale in advertising, distribution, and worker training.
Franchising is so complex and far-flung that no one has a truly accurate idea of its scope. The SBA estimates the United States had about 535,000 franchised establishments in 1992 – including auto dealers, gasoline stations, restaurants, real estate firms, hotels and motels, and dry-cleaning stores. That was about 35 percent more than in 1970. Sales increases by retail franchises between 1975 and 1990 far outpaced those of non-franchise retail outlets, and franchise companies were expected to account for about 40 percent of U.S. retail sales by the year 2000.
Franchising probably slowed down in the 1990s, though as the strong economy created many business opportunities other than franchising. Some franchisors also sought to consolidate, buying out other units of the same business and building their own networks. Company-owned chains of stores such as Sears Roebuck & Co. also provided stiff competition. By purchasing in large quantities, selling in high volumes, and stressing self-service, these chains often can charge lower prices than small-owner operations. Chain supermarkets like Safeway, for example, which offer lower prices to attract customers, have driven out many independent small grocers.
Nonetheless, many franchise establishments do survive. Some individual proprietors have joined forces with others to form chains of their own or cooperatives. Often, these chains serve specialized, or niche, markets.