This chapter seeks to achieve the first objective by showing that although franchising is a specific, distinct and uniform type of commercial activity with a positive influence in the EU which stimulates economic activity by offering economic advantages to all those involved, improves distribution and gives business increased access to other member states, it is not fulfilling its full potential to contribute to the realisation of the single market.
In order to understand the reasons for this under performance in the EU and the way in which the regulatory environment might be re-engineered to improve franchising’s contribution to the single market, it endeavours to better understand what franchising is. It does this by analysing both the economic and legal features of the architecture of franchising, distinguishing it from agency and distribution, identifying to tensile stresses that arise within franchising and deconstructing the economic and sectoral contextualisation of franchising and its economic rationale and risks. It concludes that, despite the impact of variable determinants such as the value of the investment required from franchisees and the commercial sectors in which the business operates, the architecture of franchising comprises six fundamental features that are always present. These are independence of the parties, economic interest, use of a brand, use of a business format, control of the franchisee by the franchisor and assistance provided to the franchisee by the franchisor. This architecture withstands the tensile stresses placed upon franchising by its long term and dynamic nature. It also suggests that those economic drivers that constitute the commercial rationale for franchisors using franchising as part of their business strategy are distinct from those which attract franchisees to buy a franchise and that the risks inherent in franchising also differ between the parties.
2.1 Deconstructing the Contextualisation of Franchising
This is critical analysis towards the first objective. It considers the development of franchising as a specific, distinct and uniform commercial activity and its role in national economies.
2.1.1 The Historical Contextualisation of Franchising in the EU
Business format franchising has evolved over many centuries to what is now a distinct and commercially impactful way of doing business.
Chronology of the Historical Development of Franchising DATE MILESTONES
The Middle Ages71
Source of Franchising’s Historical DNA
1215 Magna Carta “enfranchises” Barons to collect taxes until ended by Council of Trent in 1562
1600 onwards “Norenkai” system of restaurant chains developed in Japan during the Tokugawa Shogunate72
1700’s Need for Distribution Channels Promotes early form of
Franchising
“Tied House” system develops to secure the distribution of beer by brewers in the UK
Technical Demands Promote use of Primitive Forms of Franchising
1800’s73 US Manufacturers such as Singer, Coca-Cola and McCormick adapt franchising as method of distribution
71 Early references to franchising include “All franchises and liberties of the bisshopericks……....deryvid from the crowne 1559. and Fairs, Markets and other franchises c.1630” (Oxford English Dictionary, 1933). The origins of franchising lie in the mercantile codes and common law of the Middle Ages when the crown offered feudal lords the right to maintain civil order, determine and collect tax revenues, and make other special tax assessments. The barons paid the crown a specified sum from the tax revenues collected. In 1562 the Council of Trent ended this system of patronage.
72 The “Norenkai” system in Japan has existed for several hundred years. It involves a long term employee of a restaurant being allowed by the employer to set up an restaurant in a different location under the same name and using the same menu. “Noren” is the Japanese word for the small curtain that lies across the entry of traditional Japanese restaurants and houses. “Kai” is the Japanese word for club or association. “Mai Toi” or table rent agreements have long existed in Chinese communities around the world. These enable individuals to run a small number of tables in a restaurant owned by another party.
73 One of the earliest examples of franchising in the United States was the McCormick Harvesting Machine Company. This manufacturer commissioned local agents to sell and service its machinery around 1850 (Mendelsohn. M, 2004, The Guide to Franchising, 6th Edition, Cassell). This gave birth to what the US Department of Commerce calls “traditional franchising”. The Singer Sewing Machine Company (Ibid Mendelsohn and Stanworth. J and Smith. B, 1991, Barclays Guide to Franchising for Small Businesses, Blackwell) was another early franchise business that sprung up in the US during the 1850’s. Agents working on commission demonstrated, sold, and repaired the Singer sewing machines. Both the McCormick and Singer franchises were after some years replaced by a company owned network. Coca- Cola was conceived in 1886 as a non-alcoholic alternative to “hard “ drink such as beers and spirits. It was dispensed from a soda fountain by mixing syrup with carbonated water. It was not potable and so this severely limited the size of its market and growth (Felsted. A, 1993, The Corporate Paradox: Power and
Controlin Business Franchise, Routledge, p 41). The advent of bottling technology changed all that and the
rights to bottle and sell Coca-Cola everywhere in the US (other than New England, Mississippi and Texas, where prior arrangements where in place), were granted to two traditional franchisees – Messrs Thomas and Whitehead in 1899. The franchisees were granted the rights to make up and bottle Coca-Cola from