Foodservice's theory of evolution: survival of the fittest

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

To better compete with the growing number of eateries lining the roadsides, the McDonalds also had crafted for the restaurant a distinct appearance. In addition to delicious burgers and fries, patrons were lured by an eye-catching red-and-white-tiled building in an octagonal shape. It was flanked by twin arches enhanced with neon.

Struck by the operation, Kroc sought out the McDonalds in search of his piece of the action. If the brothers would grow the chain, then he could sell more multimixers, he reasoned. But the brothers refused. Over the years they had already sold 21 franchises -- of which nine were operating -- and they were quite content with their already upscale lifestyle. Shortly thereafter, however, their sole franchisee retired. In 1955 Kroc gave birth to the McDonald's System Inc.

McDonald's eventually would become notable for its size, its marketing savvy and its "billions and billions" of burgers sold. But its true contribution to the evolution of franchising is slightly less obvious. According to Southwest Missouri's Dicke, Kroc and his colleagues would foment the development of the outlet as the product.

"The customer shifted," Dicke states. "McDonald's sells hamburger stands and Howard Johnson was selling clams."

Success spawns fraud

Concepts like KFC, Howard Johnson's, Dunkin' Donuts, McDonald's and myriad others spread like wildfire. Six years after its formation McDonald's had 228 units. Within eight years of its founding Dunkin' Donuts had 100 units. And by the time KFC reached its ninth anniversary it had 600 units.

During the 1960s Wall Street also took numerous franchise companies public, raising millions of dollars for investors. In Howard Johnson's first day of trading in 1960 the stock jumped from $38 to $52. Similarly, the day in 1965 that McDonald's stock was made available to the public it climbed from $22.50 to $30. Dunkin' Donuts made its offering debut in 1968. That same year KFC stock was trading at $90. Euphoria abounded, and the public was deluged with a steady stream of articles touting the joys of franchising.

In "Roadside Empires," Luxenberg writes: "In 1969 a group of Harvard Business School students reported that 40,000 people a year were purchasing franchises, and 90 percent of the new operators were surviving. The figures were alluring indeed."

It is not surprising that the apparent panacea attracted the dishonest as well as the honest. As more and more people turned to franchising as a way to rise from rags to riches, more and more bogus schemes surfaced. Charismatic characters found throngs of wide-eyed followers eager for their share of franchising's pot of gold. By the 1970s pyramid schemes proliferated.

Almost a decade earlier in 1960 Dunkin' Donuts founder Rosenberg was struck with the idea to found a franchise association. He was attending a "Start Your Own Business Show" and recalled hearing complaint upon complaint about the rapidly changing industry. Because of more questionable operations, government officials were beginning to intervene.