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Franchise Industry Grows Despite Legal Challenges Ahead

28 Aug 2015 by Teresa Meek

Franchise Appreciation Day is Saturday, Aug. 29, 2015, and your local retailer may be offering discounts.

Why not celebrate? The industry that started in the 1800s is thriving, and it is expected to outpace the economy as a whole — though it does face threats from new legislation that could set it back.

Franchising is a behemoth. According to a PriceWaterhouseCoopers report, franchise businesses are responsible for 40% of U.S. retail sales. More than 750,000 franchise businesses generate almost $1 trillion in annual sales, and franchises employ more than 18 million Americans directly and more than 25 million indirectly.

Imported from England

Franchising — of a sort — can be traced back to feudal England, when lords allowed peasants on their land to hold markets or operate wells for a fee. The word “franchise” comes from an old French word for “free,” as in free to exercise a right to sell goods or supply water.

In 18th century England, when pub owners struggled with high government fees, brewers supported them by providing exclusive rights to sell beer.

Thank Singer

The franchising model we all recognize today started with Isaac Singer, who in 1851 patented a new kind of sewing machine that was much faster and easier to operate than previous versions.

Without sewing machines, women worked long hours, hand-stitching clothes. But few could afford Singer’s $125 machine — which would cost $3,788 in today’s dollars.

Singer attempted to solve the problem by offering customers one of the earliest versions of an installment plan. But to distribute the machines widely and affordably, he needed money to expand manufacturing. Also, his customers needed training to operate the machines.

Singer killed two birds with one stone by charging a licensing fee to salesmen who sold the machines in defined geographic areas and were responsible for teaching customers how to use them.

Today’s franchising model was born.

Rapid expansion

Franchising, which helps businesses expand quickly, really caught on after World War II.

In 1954, Ray Kroc paid a visit to the McDonald brothers to learn why they were selling his milkshake-mixing machines in droves. Their secret was high volume, consistent results and low costs. In 1961, Kroc bought the brothers’ business and expanded it through the franchise model.

In just 10 years, he opened a thousand new stores. During the same time period, Midas Muffler opened 400 franchises, Holiday Inn grew to 1,000 locations and Budget Rent a Car opened more than 500 garages.

In the heady franchise expansion of the ‘60s and ‘70s, some poorly managed companies went bankrupt, leaving franchisees in the lurch. As a result, the International Franchise Association (IFA) was created to set standards, and the Federal Trade Commission tightened regulations.

After a cool-off period, the industry made a comeback in the late 1980s and early 1990s.

Threat of new laws

Though growth continues, many franchise companies believe new legislation could throw a wrench into the works.

Last year, Domino's pizza workers won a settlement holding the parent corporation accountable for a franchisee’s labor-law violations.

In June, the National Labor Relations Board said it might consider McDonald’s to be a joint employer of all the employees at its 30,000 franchises, a ruling that is causing fear and commotion in the industry.

Franchisees also are concerned about uneven distribution of new minimum wage laws that could negatively impact their business. Additionally, industry security regulations — such as the Payment Card Industry Data Security Standard (PCI DSS 3.0) and Europay, Mastercard, Visa (EMV) mandate — represent major expense items.

Nevertheless, franchises are unlikely to go away anytime soon. They remain popular with people who want to start a business with much of the work done for them and fewer risks.

“The franchise industry creates opportunities, not just for thousands of business entrepreneurs around the country, but also for the communities their businesses impact, and we look forward to working with Congress to make sure a supplemental increase to avoid shutdown of the program and credit access and lending remain strong,” said IFA president and CEO Steve Caldeira, CFE, about the additional Small Business Administration funds approved by the House of Representatives.

The IFA predicts the industry will grow 5.1% this year, compared with 3.1% for the economy as a whole.

Technology brings exciting opportunities to enhance convenience, service and appeal to tech-savvy customers. In order to benefit from new technologies, retailers must contend with a variety of practical implementation challenges and potential business disruptions. If you need help with a small launch or a multisite deployment, Insight has your rollout covered