RTM: And you see that becoming more and more the trend?

AN: Oh yes, third-generation franchisees are simply manning the front end with the customer. All the accounting and back office is cared for by the franchisor. That makes the system incredibly powerful.

“The best franchisor pushes the pace and puts franchisees under stress.”

RTM: So far franchising has been a business-to-consumer phenomenon. Why?

AN: Franchising works in markets that are stable and not too complex. Many business-to-business markets, such as IT for instance, are not like that. Where things are unpredictable and there is a lot of competition, then it makes sense for suppliers to let intermediaries take the risk. But I see no reason why, if the conditions are right, franchising shouldn’t spread into areas like IT. Its growth continues to be exponential. And it is constantly moving into new industries. In Norway recently I found that home handymen and funeral parlours were both moving towards the franchise model.

RTM: I was recently researching the automotive industry, and BMW were described to me as “brand fascists” – that as franchisors they were extremely directive and put some fairly large burdens on the franchisee. But the upside of that was that BMW franchisees tend to make lots of money. So this very directive behaviour, which would be totally unacceptable to suppliers selling through independent resellers, was welcomed by BMW franchisees. They know that, if they do what they are told, they will do well.

AN: Yes, I think a franchisor certainly has to protect the brand – that is part of his role. But I also think that the most successful franchisors are those who constantly force franchisees to change and innovate.

RTM: Really? I suppose I had this idea that a franchise was a closed, static system: that as long as you could live with Holiday Inn inspecting your toilets with dentists’ mirrors you just ran the business.

AN:  No, I think the best franchisor pushes the pace and puts franchisees under stress. Our findings are that when you put more stress on the retailer it actually increases the level of customer satisfaction. If you put enough stress on the franchisee they will learn and contribution more. The market is always developing and your concept is always under threat.

RTM: OK, so we have looked at how, when markets mature and become predictable, we see a move away from independent dealer networks and towards franchising. When do you see companies moving away from franchises and towards vertical integration? 

AN: Whenever you get a certain level of market concentration, it becomes essential for the supplier to control the outlet. Suppliers then start to buy up the most important outlets.

Suppliers also shy away from franchising when the balance of power shifts in favour of the franchisee. In the US, whenever a state legislature reinforces the legal rights of franchisees, suppliers buy up their businesses or freeholds.

RTM: Yes, we are seeing that in Europe with Mercedes, Honda and VW buying freehold sites, because they are scared of new EU laws.