Foodservice's theory of evolution: survival of the fittest

Nation's Restaurant News, Jan, 1998 by Robin Lee Allen

Harland Sanders was nearing desperate straits when in 1952 he visited Leon W. "Pete" Harman in an effort to persuade the Salt Lake City restaurateur to sell his specially seasoned chicken.

After 13 years of perfecting an herb-and-spice chicken recipe at his roadside restaurant, Sanders, a former streetcar conductor and justice of the peace, recently had learned that he was going to be a former operator as well. The new interstate 75 was planned to bypass his hometown of Corbin, Ky., taking with it much of the traffic that had patronized the long-popular Sanders Court & Cafe.

So Sanders, then 66 years old, hit the road, lugging his secret recipe, a pressure cooker and a lofty plan to make his fortune by allowing other restaurateurs to add his chicken to their menus in return for a few cents each time the product was sold. Harman, who knew a good deal when he tasted it, obliged. Together, the two pooled their talents and began to build the world's largest quick-service chicken chain.

"I was the first franchisee, so it was a handshake thing," recalls Harman, founder of 264-unit Harman Management Corp. in Los Altos, Calif. "There were no other documents floating around."

In the 46 years since then the relationship between KFC Corp. and its franchisees has grown far more complex. As the chain took flight and the white-suited colonel became one of the country's most recognizable icons, several suitors came looking for their share of the proceeds. Along the way the rules of empire-building changed. and the simple franchise relationship vanished forever.

Investors Jack Massey and John Y. Brown bought the business during the 1960s, and Heublein stepped up to the plate in 1971. Each purchase tested the franchisor-franchisee bond, but it was after PepsiCo Inc. made its bid in 1986 -- six years after the beloved colonel's death -- that the relationship nearly hit the skids.

In 1989 Harman -- the man who coined the phrase "Kentucky Fried Chicken" and soon after had the evolutionary idea to put the chicken in a bucket with potatoes, biscuits and gravy and market it as a meal -- joined other franchisees in a bitter legal battle over a new franchise contract. The dispute raged on for seven years, crippling the trust that had helped the system thrive. The company, which now operates 9,000 outlets worldwide, still is working to recapture the fragile balance of franchisor and franchisee interests crucial to longevity.

"One thing we all recognized is that we couldn't settle without it being a win-win for both parties," David Novak, former head of KFC and current leader of KFC-parent Tricon Global Restaurants, said when the settlement was announced. "But our job really has just begun. There's more pressure on us now to work closer together."

KFC's growing pains are by no means unique or isolated. As franchise systems have matured and competition within the foodservice industry has increased, many a chain has found itself plagued by the dual challenges of continuing to grow a concept without choking the livelihoods of existing franchisees.

The widespread use of nontraditional locations only complicates the conundrum.

"The challenge today has less to do with franchising than it has to do with different segments of the industry," says Larry Hantman, senior vice president and general counsel for Randolph, Mass.-based Allied Domecq Retailing USA, which operates the Dunkin' Donuts, Baskin Robbins and Togo's chains.

"As the industry matures, the number of franchised units in any one segment increase and competition intensifies," Hantman explains. "So individual franchising systems have to keep concepts alive, keep them meeting consumer expectations and keep them vibrant.

"Franchising works best when it's growing," he continues. "It's a business, and the major challenge is not to get involved in the internecine battle on how you divide the pie, but how do you grow the pie? Is the product all it can be? The constant striving for excellence within the system -- that is the challenge."

Sewing up a new kind of deal

Widely accepted as the fastest means by which to distribute a product, franchising has proved over the decades to be both savior and sore spot. While many people have struck it rich linking their destiny to a franchise system, many also have kissed their life savings goodbye. Just as surely, franchisors imbued with honest dreams of creating thriving and mutually beneficial enterprises have been undermined by crooks perpetuating scams that depleted the wallets and souls of unsuspecting victims.

Today franchising accounts for nearly 41 percent of all retail sales in the United States, or $800 billion annually, according to statistics published in 1996 by the Washington, D.C.-based International Franchise Association. The group estimates that there are about 550,000 franchised businesses in the United States alone, employing 8 million people. And, the IFA estimates, a new franchise opens every eight minutes.

"Franchising is growing very rapidly worldwide," says Mahmood Khan, Ph.D., head of the Department of Hospitality and Tourism Management at Virginia Tech in Blacksburg, Va. "It started first in the United States, and now almost 60 percent or more of the business in restaurants is franchising."