The Evolution and Importance of the Franchise System in the U.S.
Franchising is a cornerstone of modern business, especially in the United States, where its roots are deeply intertwined with the country’s post-World War II economic recovery. During this period, the U.S. government faced the monumental task of reintegrating millions of former combatants returning home. To stimulate the economy and provide veterans with sustainable business opportunities, the government facilitated access to loans and other financial support. However, ensuring these new businesses’ success was crucial to guarantee the repayment of the debts incurred. This need gave rise to the widespread adoption of the franchise model, which offered a structured, proven system with lower risks for new entrepreneurs.
The Role of Models, Systems, Standards, and Quality Control
The franchise model’s success lies in its standardized systems, quality control measures, and operational consistency. These elements create a blueprint that new franchisees can follow, reducing the likelihood of failure and ensuring that the brand’s reputation and customer experience remain intact across all locations. By adhering to these standards, franchises offer a level of reliability that independent businesses often struggle to achieve. This reliability is not only attractive to consumers but also to investors and stakeholders seeking stability and a lower-risk investment.
Let’s take a closer look at some of the most successful franchise brands and their financial achievements in 2023:
McDonald’s - Fast Food
- 2023 Sales: $23 billion
- Revenue: $23.18 billion
- Profit: $6.15 billion
- Number of Associates: ~200,000
Subway - Fast Food
- 2023 Sales: $9.8 billion
- Revenue: $9.8 billion
- Profit: Private company (profit data not publicly available)
- Number of Associates: ~410,000
Keller Williams Realty - Real Estate
- 2023 Sales: $500 billion (in transactions)
- Revenue: $393 million
- Profit Share: $1.7 billion distributed since inception
- Number of Associates: ~190,000
7-Eleven - Convenience Stores
- 2023 Sales: $95.8 billion
- Revenue: $31 billion
- Profit: Private company (profit data not publicly available)
- Number of Associates: ~50,000
Hilton Hotels - Hospitality
- 2023 Sales: $9.1 billion
- Revenue: $8.98 billion
- Profit: $1.26 billion
- Number of Associates: ~173,000
Marriott International - Hospitality
- 2023 Sales: $22.9 billion
- Revenue: $22.9 billion
- Profit: $2.3 billion
- Number of Associates: ~120,000
Dunkin’ - Coffee and Baked Goods
- 2023 Sales: $1.4 billion
- Revenue: $1.37 billion
- Profit: $242 million
- Number of Associates: ~270,000
Ace Hardware - Retail
- 2023 Sales: $22 billion
- Revenue: $22 billion
- Profit: Private company (profit data not publicly available)
- Number of Associates: ~100,000
The UPS Store - Shipping and Business Services
- 2023 Sales: $1 billion
- Revenue: $1 billion
- Profit: Private company (profit data not publicly available)
- Number of Associates: ~19,000
- Starbucks - Coffee
- 2023 Sales: $32.25 billion
- Revenue: $32.25 billion
- Profit: $4.2 billion
- Number of Associates: ~402,000
Franchising and Longevity in the Business Landscape
The structured approach of franchises, which includes rigorous models, systems, and standards, has been instrumental in their longevity. Unlike many independent businesses that face high failure rates, franchises benefit from a support system that includes ongoing training, marketing, and operational assistance. This support helps franchises maintain high survival rates over the years, often outlasting non-franchise businesses by significant margins.
Comparison of Franchise vs. Non-Franchise Failure Rates
When comparing franchise brands to independent, non-franchise companies, the failure rates differ significantly, particularly when looking at long-term sustainability:
First Year:
- Franchise Brands: The failure rate is typically lower, with some franchises experiencing just a 1% failure rate in the first year.
- Non-Franchise Companies: About 20% of new independent businesses close in the first year.
Fifth Year:
- Franchise Brands: Around 17% of franchises fail within the first five years, meaning they have an 83% success rate.
- Non-Franchise Companies: More than 50% of non-franchise businesses close by the fifth year.
Tenth Year:
- Franchise Brands: Franchises tend to perform better, with many maintaining higher survival rates compared to independent businesses.
- Non-Franchise Companies: The failure rate typically increases significantly by the tenth year, with many businesses unable to sustain operations.
Twentieth Year:
- Franchise Brands: Long-term franchises that have a well-established brand and support system tend to have lower closure rates even after two decades, although specific data can vary by industry.
- Non-Franchise Companies: Very few independent businesses survive beyond 20 years, with failure rates well above 80% by this time.
This data underscores the stability and support that franchises offer, providing a more structured path to long-term success compared to independent businesses.
The Real Estate Market: A Model of Antifragility
In the real estate market, where success often hinges on performance-based fees, the concept of “skin in the game” becomes particularly relevant. Real estate franchises that employ state-of-the-art processes and models offer a level of antifragility—resilience against volatility—that is highly appealing to investors. By reducing risks and ensuring consistent performance, these franchises attract stakeholders looking for secure, stable investments.
Conclusion
The success of the franchise system in the post-war U.S. economy serves as a reminder of how well-structured models can mitigate risks and drive long-term growth. This model remains a viable option for modern investors, employees, and partners who seek stability and a secure return on their investments.
FAQs
- What is a franchise?
A franchise is a business model where individuals can own and operate a business under the established brand, systems, and support of a larger company. - Why are franchise businesses generally more successful?
Franchises benefit from established systems, continuous support, and brand recognition, which significantly reduce the risk of failure. - How does the failure rate of franchises compare to independent businesses?
Franchises generally have lower failure rates due to their structured approach and ongoing support, making them more resilient over time. - What role did the U.S. government play in the rise of franchising?
After World War II, the U.S. government supported franchising to help veterans start businesses, ensuring economic stability and loan repayment.
Closing Segment
Franchising has proven to be a powerful model for business success, offering a combination of structured systems, ongoing support, and reduced risks that appeal to a wide range of stakeholders. Whether you’re an investor looking for a stable opportunity, or a business owner seeking a proven path to success, franchising continues to be a relevant and effective model in today’s business landscape.
Sources:
- franchise.org - The History of Modern Franchising
- scielo.br - A Model of Influential Factors in Franchise Operations
- fmsfranchise.com - 6 Benefits of Franchising for the Local Economy in the USA
- center-forward.org - Unlocking Growth: Business Franchising
- investopedia.com - What Is a Franchise, and How Does It Work?
- kilcommonslaw.com - How to Assess if a Franchise Will Stand the Test of Time
Jonas Federighi