Article 4: Tracing the origins of franchising… to current growth

Wambugu Wa Gichohi December 5, 2018 No Comments

The EABC Franchising Project aims to create 370 indigenous Tanzanian franchise brands and attract at least 100 international franchises into Tanzania by 2023. Regardless of your sector, we have equity finance sources interested to finance your business up to USD 100m if you choose to grow through franchising. For more details, please email franchising@eabc-online.com  

The term franchising has its roots in the middle ages where it was used to describe granting of rights by a monarch to an individual to develop and govern over an area of land owned by the state. In early nineteenth-century it was used to define the act of voting local members of parliament in modern-day Europe where at the same time it was used in the beer industry by many brewers allowing certain pubs to obtain leaseholds and sell the brewers’ beer. Legislation passed in the nineteenth century to control widespread alcohol abuse by imposing rules on where alcohol could be sold meant loss of many pubs as distribution points, with the richer brewers starting to offer special rights (franchises) to selected pub owners, paying a lease on the property and working closely with the owners at local and national level-the Tied System

As a general business concept as we know it today, the genesis of franchising is attributed to a Canadian domestic servant, Ms Martha Matilda Harper, who in 1888 founded a beauty- hair and skincare-salon network at Rochester in the USA using her USD 360 life savings and a scientifically-based secret shampoo formula, The Harper Method. As celebrities visited her salon, they asked her to open in their locations, which she did using fellow working-class women whom she supplied all requisite inputs. The first franchised outlet opened in Chicago in 1893 and by the turn of the 1920’s there were over 350 outlets across the US and 500 worldwide. Martha also invented the reclining salon chair that is the mainstay of salons today.

Although Isaac Merritt Singer of the Singer sewing machine and Cyrus McCormick the inventor of the Mechanic Reaper are sometimes credited to have applied franchising before Martha, the exclusivity element in franchising was more present in The Harper Method than in those before it, which allowed their retailers to stock goods related to the main product but not produced by the owner of the main product. The models applied by Singer and McCormick were more of licensing than franchising. These initial models were followed by many others including General Motors who set up a nationwide network of dealers with rights granted to sell and service General Motors vehicles in specific areas of the USA.

However, large scale commercialization of modern-day Business Format Franchising) is traced back to 1954 when Ray Kroc, a 52-year old retired multi-mixer machine salesman walked into a hamburger stand in San Bernardino, California to sell the multi-mixer to Mac & Dick MacDonald’s and what he did next would transform the franchising world. At the brothers’ stand he saw the most efficient business method, producing hamburgers, fries and beverages quickly, efficiently, inexpensively and identically and best of all, school children could do it for themselves. He successfully pitched his vision of creating MacDonald’s restaurants across the US, bought exclusive rights to the MacDonald’s name and later bought out the MacDonald’s brothers to form modern day McDonald’s Corporation.

With over 36,000 outlets (80% franchised) each producing an average of USD 1.8 million in annual sales in over 100 countries and creating about 1.9 million direct jobs worldwide, McDonald’s Corporation is today not only more profitable than most retail businesses but also one of the largest retail prepared food distribution system in the world, competing mainly with Subway for honors. Moreover, their business model places them among the largest landlords in the world since they own real estate on which most of the 36,000 outlets operate, which include excess office space on upper floors of the buildings they buy for ground floor shops!

Rapid growth: Development of franchising as a business concept was further inspired by the deep inroads made by chain stores in certain fields of retailing and the need to become better operators in different areas. Franchising is sometimes referred to as the “best ambassador of free enterprise in the world” and as a business strategy has become a global phenomenon by highlighting the value of entrepreneurship and the importance of the Small and Medium Enterprise (SME) market in the development of countries. In the developed world, franchising has changed the lives of people, created wealth and revived the spirit of hope for many through jobs creation and skills development. According to the World Franchise Council, Asia (particularly China, South Korea and Japan) today is the leading franchise continent followed by North America, Europe and Australia.

Unfortunately, much of Africa and most of the developing world has not embraced franchising and the concept is yet to take root and yield its enormous benefits. Most franchising activities are concentrated in South Africa where about 90% of franchise opportunities are based on locally developed concepts, thanks to the economic embargo of the apartheid era among other factors. Some little pockets of franchising activity are also found in West Africa (Nigeria) and in North Africa (Egypt, Tunisia and Morocco). In East Africa, locally developed franchises are very rare and the franchising sector is driven by a handful of foreign franchises which dominate their individual market segments to the detriment of local brands. This offers a challenge to local businesses to explore the possibilities availed by franchising as a viable growth model.

Embracing franchising is a good step towards guarding against business failures and offering a solution to poorly trained entrepreneurs and burgeoning demand for everyday goods and services. According to the Africa Investor magazine, research into wider business failures from the African Development Bank found only 15% of franchised SMEs folded in the first five years compared to an 80% failure rate among independent businesses. This is because in a franchise system, franchisees do not really start new businesses, they plug and play into an already tried, tested and trusted business, and although franchising offers no guarantees to success, chances of failure are lower. And there lies the hidden jewel for indigenous brands, and the BIG reason for governments in East Africa to support the growth of a vibrant franchising sector as a way to generate stable jobs, skills transfer and create wealth!

The writer is a Franchise Consultant at EABC helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.

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