Franchise explosion - news about the growth of franchising - Franchise 500 - includes related article on the hottest franchises - Cover Story

Entrepreneur, Jan, 1996 by Lynn Beresford

Since franchising began taking off in the mid-1950s, there hasn't been a dull moment in the industry. Although franchising hasn't been without its share of ups and downs, most analysts agree the industry is bloominguand is headed for even greener pastures.

That's due, in part, to years like the past one, when there was so much growth and innovation in franchising that the world couldn't afford to take its eyes off the industry for a minute. Combination franchises. International expansion. Large, well-established companies jumping on the franchise bandwagon. You name itulast year franchising had it.

And did you expect anything less from an industry whose 540,000 franchises ring up sales of $758 billion annually? Franchising is most certainly a force to be reckoned with.

History In The Making

In 1995, franchising was marked by at least one truly earth- shattering first. Franchisees were permitted to attend the White House Conference on Small Business in June after being banished from the previous two conferences in 1980 and 1986. Of 2,000 total attendees, the 137 franchisee delegates may have been relatively small in number, but they managed to get two important measures onto the conference's list of 60 final recommendations.

One measure would give franchisees more latitude on the issue of where to conduct mediation, arbitration or litigation with their franchisors; the other was a recommendation that would establish minimum standards and give franchisees more rights. Andrew Selden, a Minneapolis franchise attorney, says the conference was a milestone because "it elevated franchising to a much more visible position in the American economy."

Selden says another major milestone, which took place last August, was the Kodak case, in which a jury awarded more than $20 million to franchisees. In the lawsuit, the plaintiffs claimed Kodak attempted to monopolize the market that serviced its own photocopiers. Selden believes this could have broad implications for certain franchise systems. In the future, he says, "business- format franchisors that attempt to monopolize aftermarket supply arrangements in their system could be liable for violation of federal antitrust laws."

What's In Style

Most franchise watchers agree that one of the biggest industry trends is the internationalization of American franchise systems. It seems overseas markets are more ravenous than ever for American products and services. From fast food to business-to-business services, American franchisors are leading the way in franchising, showing other countries how it's done.

"International expansion is so attractive because many countries are willing to pay substantial amounts for the use of a Western trademark and the training and knowledge that go with it," says Edward Kushell, president of Los Angeles-based Franchise Consulting Group.

Many experts believe the success of U.S. franchises overseas can pave the way for the further success of American companies in general. "American marketing practices are expanding around the globe and competing aggressively with European and Japanese businesses," says Selden. "The leveraging strength of franchising will give [other] American companies a real advantage in penetrating underdeveloped markets around the globe."

In addition to marketing their products and services overseas, U.S. franchisors are also seeking new avenues of distribution at home. Dual-branding, convenience stores offering branded franchise products, and combination franchises are part of another sizzling industry trend. Increasingly, noncompetitive franchisors are pairing up to offer their complementary products. Retail couples like coffee shops and bakeries are gaining popularity among a fickle crowd looking for as many options as they can get.

Proving what smaller businesses have long knownuthe power of franchising to grow a companyua few corporate powerhouses joined the franchising ranks in 1995. Among them were language services company Berlitz, financial services giant Dun & Bradstreet and health-club chain Bally Total Fitness.

Crystal Ball

So what do franchise experts predict for 1996?

Don DeBolt, president of the International Franchise Association, foresees a continuing explosion of combination franchises. DeBolt also expects the popularity of nontraditional locationsusuch as stadiums, department stores, airports and military basesuto grow as domestic markets become even more crowded.

Selden believes there's always going to be opportunity at the fringes of market segments. "For some [franchisors], the really significant growth opportunities are going to come from outside their traditional markets, either in new distribution channels or in trends like coffee and bagels," says Selden.

Franchising will not likely see the passage of significant legislation in the months to come. Kushell, who feels franchisors should self-police, points out that the Republican Congress "is more laissez-faire in their thinking, business-wise"; he believes this will work in franchising's favor in the long run.