The History of Franchising

06/06/2014
Until recently, most articles about the history of franchising in the United States began with a claim that "Albert Singer" was the first commercial franchisor in the United States. As it turns out, John “Albert” Singer was only seven or eight years old when his father, Isaac Merritt Singer, founded the I.M. Singer & Company in 1851 – and at no time in its long history did the Singer Manufacturing Company ever franchise.

Other articles put the crown on Martha Matilda Harper, who was an early Rochester, NY franchise pioneer for her development of the Harper Method Shop franchise system. But even though the International Franchise Association proclaimed her the first franchisor in 2000, the year they also elected Joanne Shaw (President and Co-Founder of The Coffee Beanery) as their first female chairperson, Ms. Harper was also not the first franchisor. The title of first franchisor in the United States actually predates our independence and is held by… Benjamin Franklin.
1891: Martha Matilda Harper licenses her first franchisee

Harper was an important business innovator, and the franchise system she created developed many of the elements we have come to expect in a modern commercial franchise system. She provided her franchisees with initial and continuing training, branded hair care products, field visits, advertising, group insurance, and motivation. Her approach to developing a support system for her franchisees and branding her salons is an integral part of franchising today.

Ms. Harper started her salon business in 1888, licensed her first franchisee in 1891, and grew the system to over 500 salons and training schools at its peak. Following her retirement and death in 1950 at the age of 93, and after her husband died in 1965, the Harper Method Shops were acquired in 1972 by a competitor and ultimately were closed. Ms. Centa Sailer, whose salon was in Rochester, NY, owned the last remaining Harper Method salon: her more famous clientele included Susan B. Anthony, Jacqueline Kennedy, Helen Hayes, and many other influential men and women of the times.
1731: Benjamin Franklin enters a “co-partnership”

While technically the United States had not yet been born, the first franchisor in what was to become the United States appears to be one of our illustrious and innovative founding fathers: Benjamin Franklin. His more commonly known inventions include the lightning rod, swim fins, bifocal glasses, the odometer, daylight savings time, the Franklin Stove, a library chair that converted into a stepladder, and the flexible catheter (I don’t want to know what they used before). He also invented a musical instrument in 1761 called the Glass Armonica, for which Beethoven and Mozart both composed music. He gave us our first understanding of the properties of electricity, founded the nation’s first hospital, charted the temperatures of the Atlantic Ocean, drafted the Albany Plan, co-wrote the Declaration of Independence, and somehow also found time to create what is likely the first franchise system on these shores.

On September 13, 1731, in the city of Philadelphia, Benjamin Franklin entered into a contract with Thomas Whitmarsh for a “Co-partnership for the carrying on of the Business of Printing in Charlestown in South Carolina.” The printing shop that Franklin formed with Whitmarsh also published the South-Carolina Gazette as well as being the local printer of many of Franklin’s writings, including his Poor Richard’s Almanac.

The co-partnership agreement required that during its six-year term “the Business of printing and disposing of the Work printed shall be under the Care, Management, and Direction of the said Thomas Whitmarsh and the working Part performed by him or at his Expense.” Whitmarsh was also obligated to purchase his printing materials from Franklin: “Thomas Whitmarsh shall not during the Term of the Co-partnership aforesaid work with any other printing Materials than those belonging to the said Benjamin Franklin.” Whitmarsh even agreed to an in-term covenant that he would not be in any other business but printing,“…nor follow any other Business but Printing during the said Term, occasional Merchandize excepted.” The agreement did not impose any of these restrictions on Franklin, which was essential if Franklin were to enter into similar arrangements elsewhere.

During this period Franklin was Postmaster General of the Colonies, enabling him to control, to a great degree, the distribution of news throughout the Colonies. From that position of power, Franklin entered into similar co-partnerships with other printers throughout the Colonies, including Louis Timothé (1733), Elizabeth Timothy (Timothee), Louis’ widow (1739), Peter Timothy (Timothee), Elizabeth’s son (1747), James Parker (New York), Thomas Smith (Antigua), Benjamin Mecom (Antigua), James Franklin Jr. and Ann Franklin (Newport, RI), William Dunlap (Lancaster, PA), Samuel Holland (Lancaster, PA), John Henry Miller (Lancaster, PA) and Thomas Fleet (Boston, MA), who published The Boston Evening Post. Franklin established additional franchises in North Carolina, Georgia, Dominica, and Kingston, Jamaica. There also exist records of Franklin entering into similar arrangements in Canada and Britain in his later years.

During his long stay in France where he successfully negotiated the French participation in our War of Independence, a substantial portion of Franklin’s income came from his franchised chains of printing stores. Without the French, there is little doubt that there would be no United States today; and without the income which Franklin earned from franchising and which supported him for many years, the argument can be made that there might not have been a United States.

Franklin was not alone in using franchising as our nation grew. There are numerous references in early American business history concerning government monopolies and early business relationships that appear to be quite similar to modern-day commercial franchising. These include Robert Fulton’s licensing of his steamboats in the United States, England, Russia, and India, and the licensing of general stores at military outposts and certain markets that sold livestock and other goods in which exclusive territorial or other rights were granted.
Franchising in Antiquity

Throughout its long history, three constants have fueled the growth of franchising:

    The desire to expand and control
    Limitations on human and financial capital
    The need to overcome great distances

The use of franchising can be traced to the expansion of the church and as an early method of central government control, probably before the Middle Ages. Some historians have written that franchising may date back to the Roman Empire or earlier, a reasonable assumption given the necessity of large territorial controls coupled with the lack of modern transportation and communication. In his book Franchising: The How-To Book, Lloyd Tarbutton dates the first business format franchise to China in 200 B.C.
Franchising and Feudalism

Franchising was used in England and Europe where the Crown owned lands and other properties and granted land rights to powerful individuals including within the church. In exchange for these land grants, the noblemen and church officials were required to protect the territory by establishing armies and were free to set tolls and establish and collect taxes, a portion of which was paid to the Crown. As it was an agrarian society, control over the land gave enormous power and was the foundation for the feudal system where nobles paid royalties to the Crown for the rights to own and work the land, as well as other professional and commercial activities. In turn, the nobles divided the land among local farmers or vassals, who paid for that right usually as a portion of the crops they grew or the animals they hunted. This system of governmental control existed in England until it was outlawed at the Council of Trent in 1562.
Government-Sponsored Franchising and Colonialism

With the economic opportunities presented by the discovery of the New World in 1492, as well as emerging international trading opportunities, governments and private companies utilized franchising to expand and exercise control over great distances, especially in Asia and Africa.

The Dutch East India Company was founded in 1602 as a franchisee of the Dutch Republic to conduct trade between the Cape of Good Hope at the southern tip of Africa, and the Straits of Magellan at the southern end of South America. The company’s stock was valued at 6.5 million guilders at the time. Acting almost as a sovereign power, they pushed eastward from Cape Town to what is now Indonesia, conquering territory from the Portuguese and establishing a headquarters in Jakarta in 1619 as a base of trade with Japan.

In 1641 the Dutch East India Company fought off British attempts to break into the spice trades and turned westward to explore the New World. The company engaged the services of Captain Henry Hudson, a former employee of the English Muscovy Company, a franchisee of the British Government. Hudson’s discovery of the Northeast Passage gave the Dutch their claims over the Hudson Valley in upstate New York as far as Albany. But by 1799 fortunes had turned against the Dutch East India Company and they filed for bankruptcy; all of their assets were taken over by the Dutch Republic.

In 1606, King James I of England granted an exclusive charter for Virginia to the London Company, which hired Captain Christopher Newport to bring settlers to Virginia and settle the area. They set sail from London in December 1606 and made landfall on April 26, 1607. Captain John Smith succeeded Captain Newport in managing the first permanent British settlement in the New World, which was named Jamestown. The colony struggled and, though Jamestown itself was spared in the 1622 massacre led by the Powhatan Indian Confederacy, 347 settlers in surrounding outposts were slain – almost a third of the English-speaking population. Charging mismanagement by the London Company, in 1624 King James I revoked the charter and brought the Colony of Virginia under direct British control. Much of the colonization and exploration by British and European powers in the New World was conducted under similar ‘"franchise relationships.”
Origins of Commercial Franchising

Commercial franchising originated in the 18th century London, where the brewery industry used a “tied house system” to create a downstream distribution system for its products. In exchange for financial assistance from the breweries, tavern owners agreed to purchase all of their beer and ale from the sponsoring breweries. The breweries did not exercise any control over the day-to-day operations of the taverns except for the sole purchase arrangement. The “tied house system” continues today in the UK and is similar to the co-partnership structure used by Benjamin Franklin in the Colonies; it is also similar to Traditional or Product and Trade Name franchising in the United States today.
Transportation Advances Restaurant Franchising

By the mid-1800s, railroad expansion and Americans’ growing mobility inspired the establishment of restaurant chains. An Englishman named Frederick Henry Harvey founded the first restaurant chain in the United States around 1850. Although his first restaurant failed during the Civil War, Harvey opened the first of the Harvey House restaurants in 1876 in a terminal of the Atchison, Topeka & Santa Fe Railroad. The railroad wanted to open depot restaurants for its passengers, and provided Harvey with locations and free transportation of restaurant supplies. By 1887, there was a Harvey House restaurant every hundred miles along the 12,000-mile-long Atchison, Topeka, & Santa Fe line. Harvey believed strongly in quality control, established regular field visits to his restaurants, and provided services similar to those used today by franchisors. The Harvey House chain was company-owned, but many of the lessons learned by Harvey became part of the standard franchise system we know today.

At the turn of the century, the high cost of transporting finished product in glass bottles kept soft drink bottling a localized industry. By shipping syrup concentrate to its franchisees, and requiring the local franchisees to bottle under strict formulas and processes, soft drink manufacturers like Coca Cola were able to control the quality of their product in distant markets, and expand rapidly without the capital that company-owned development would have required. Franchisees obtained the rights use the Coca Cola formula and a valuable trade name; and the bottlers were able to overcome the transportation issues that had to that time restricted their growth. In 1901, Coca Cola issued its first franchise to the Georgia Coca Cola Bottling Company.

After World War I, the advance of the automobile inspired another dining innovation: the drive-in restaurant. In 1919 Roy Allen purchased the formula for his root beer recipe from a pharmacist and opened his first stand in Lodi, California. Two years later Allen began franchising his root beer, then partnered with root beer maker Frank Wright, combining their talents (and initials) to begin producing A&W Root Beer in 1922.

In 1923, Allen and Wright opened the first A&W drive-in restaurant, creating the nation's first system of franchise roadside restaurants. Needing capital to expand, Allen bought out Frank Wright in 1924 and began to franchise the A&W Restaurant concept. A&W Restaurants offered innovative car-side service provided by "tray boys," then later added women servers or "carhops" on roller skates.

Providing curb service and an innovative hamburger cooked on onions, Billy Ingram and Walter Anderson opened their first White Castle drive-thru in 1921 in Wichita, Kansas. White Castle originated many standards of the quick-service restaurant industry, particularly in their use of advertising and discount marketing, take-out packaging to keep food warm, and the folded paper napkin.

Also during the 1920s, Howard Dearing Johnson acquired a pharmacy in Quincy, Massachusetts and began to sell three flavors of ice cream together with a limited menu of cooked items in his Howard Johnson restaurants. Howard Johnson awarded its first franchise to Reginald Sprague in 1935, and over the years expanded its menu to include 28 flavors of ice cream. Developing a distinctive roadside presence with orange roofs and pylon signs bearing its name and logo, the company secured the first turnpike contract on the Pennsylvania Turnpike.

Many legendary franchised chains began franchised operations over the following three decades, including Kentucky Fried Chicken (1930); Carvel (1934); Arthur Murray Dance Studio (1938); Dairy Queen (1940); Duraclean (1943); Dunkin Donuts (1950); Burger King (1954); McDonald's (1955); and The International House of Pancakes (1958). The stories of these early pioneering concepts have been the basis of many books over the years, and the lessons learned are evident in the many food service chains that followed them.

While the innovation of the earliest restaurant pioneers still influences franchising today, it was the automobile industry in the 1900s and the movement of a growing nation that created the opportunity and the need for these early restaurant chains to grow.
Manufactured Goods and Services Franchising

The earliest non-food franchises were relationships in which manufacturers established licensed selling and service locations for their manufactured goods through franchising. This can be seen in the McCormack Harvesting Machine Company, to a limited extent in the Harper Method salons, and later in automotive and oil franchises.

The American Industrial Revolution brought the mass production of consumer goods, fueling consumer demand as well as the need to sell and distribute products efficiently and cost-effectively over greater distances. Many methods of sale and distribution had been tried before franchising, including direct factory sales, sales through non-branded locations such as pharmacies, direct mail, and traveling salesmen. While all of these methods were insufficient to achieve the downstream distribution needs of the manufacturers, the use of local sales representatives proved the most effective. The Singer Sewing Machine Company, while not franchised, employed a method of local control within company-owned offices to make it appear as if each location was owned by the local manager.

Most early franchisors were manufacturers; some, like Harper Method and Rexall, were primarily service-based systems. In 1902, Louis Liggett formed a manufacturing cooperative among 40 independent drug stores, each investing $4,000 to start the manufacturing cooperative of the Rexall Drug Store chain. After World War I, the Rexall cooperative began to franchise independently-owned retail outlets under the Rexall trade name, supplying franchisees with branded Rexall products. The main service provided by Rexall as a franchisor was its ability to efficiently buy and distribute products for the franchisee, not necessarily the ability to sell company-manufactured product.

General Motors sold its first franchise in 1898 to William E. Metzger of Detroit. Ford Motor cars began to be sold through dealerships in 1903. By selecting franchisees and providing them with exclusive territories, hard goods manufacturers like General Motors and Ford were able to bring their products to market effectively, efficiently, and over longer distances. Oil companies quickly followed suit, establishing franchised gas stations across the United States to serve the rapidly growing number of internal combustion vehicles. Hertz began rental car franchising in 1925; Avis in 1946.

One of the greatest innovations in franchising came in 1909 with the establishment of the Western Auto Supply Company franchise. Up to that time, product franchisers sought franchisees with industry experience and, except for the supply of branded product, did not provide any significant business-related services. While still relying on the markup on product sales to franchisees rather than royalties on sales, Western Auto, similar to Harper, provided its franchisees with many of the same services that modern franchisors provide today: site selection and development, retail training, merchandising, marketing assistance, and other continuing services. Western Auto also sought franchisees without industry experience, as many franchisors do today.
The Post-World War II Franchising Boom

While franchising grew steadily before World War II, truly explosive growth did not occur until after the war was over. Franchising emerged as a powerhouse economic force in the post-war 1950s, taking advantage of pent-up consumer demand, available franchisees, ideas from returning veterans, and capital provided by separation pay and the GI bill. The growth of franchising was further advanced through the 1946 enactment of the Federal Lanham (Trademark) Act that enabled property owners to safely enter into licenses with third parties – essential for modern franchising. Once potential entrepreneurs became confident in the licensing of intellectual property, more and more individuals began to offer and invest in franchise opportunities.

In the 1950s and 1960s, the franchising boom achieved almost mystical stature. Franchisors of convenience goods and services grew throughout the United States, including the automotive aftermarket (Midas Muffler and Lee Myles), hotels (Holiday Inn and Sheraton), ice cream and treats (Dairy Queen, Tastee Freeze and Orange Julius), convenience stores (7-Eleven), trades (Roto-Rooter), professional services (Dunhill Personnel, Pearle Vision and H&R Block), and laundry and dry cleaning (Martinizing Dry Cleaning).

Richard and Maurice McDonald began franchising in 1952, selling their first franchise to Neil Fox, a General Petroleum distributor whose franchise in Phoenix, Arizona opened in 1953. Their second franchisee was partners Roger Williams and "Bud" Landon, who opened their Downy, California location also in 1953. It was not until 1954 that Ray Kroc licensed the rights to franchise McDonald’s outside of certain markets in California and Arizona from the McDonald’s brothers in exchange for ½ of 1% of gross sales, and formed the McDonald’s Corporation. By 1958, in addition to the McDonald’s brothers restaurants and franchises, there were a total of 34 McDonald’s restaurants. By the end of 1959 the chain had grown to 102 restaurants. Ray Kroc bought out the McDonald brothers in 1961. By 1965, when it went public, there were 1000 locations. The stock opened that day at 22½, closed the day at 30, and closed the first month at 50. During the same ten-year period, Nate Sherman's Midas Muffler had grown to 400 locations, Kemmons Wilson's Holiday Inn grew to 1000 locations, and Jules Lederer's Budget Rent A Car opened their 500th franchise.

This rapid growth of franchising did not come without problems. By the latter half of the 1960s, the bloom had left the rose: many franchisors were more focused on selling franchises than on operating sound franchise systems and providing services to their franchisees. Many franchisors during that period made misrepresentations in the promises they used to attract franchisees; some based their sales efforts on the use of celebrity names and endorsements; and many of those franchise systems failed. Some even sold franchises for concepts that didn't exist.
Franchise Regulations and the FTC Rule

Out of the problems of the 50s, 60s and 70s, franchise regulations began to emerge. Beginning in 1968 with the enactment of disclosure laws in California, various states enacted laws regulating the offer and sale of franchises. Generally, these laws required a franchisor to deliver to a potential franchisee, in advance of a sale, a disclosure document providing specified information on the opportunity. It was not until the summer of 1979 that the United States Federal Trade Commission issued the Federal Trade Commission Trade Regulation Rule on Franchises and Business Opportunity Ventures (the FTC Rule), which required franchisors in the United States to prepare a pre-sale Offering Circular and established minimum disclosure requirements throughout the United States.

The emergence of pre-sale disclosure regulation is one of the most significant reasons for the success of franchising in the United States. While there are still tensions in the franchise relationship, and likely always will be, typical issues between franchisors and franchisees now mostly center on management of the relationship, and less on how the franchise was offered.

Tracing the course of franchising demonstrates the difference between history and evolution. History is a documentation of what has happened in the past and is no more. Evolution is the tracking of an ongoing phenomenon that has continuously changed over the years and keeps altering its present form and future course. No one can doubt that the evolution of franchising has also been a genuine revolution of ideas, business concepts, and the entire economic process.

The evolution of modern franchising, created by innovative companies and the pioneers that have led them, is an exciting tale in itself. The future, energized by still unimagined new concepts, new business techniques and international expansion, promises to add even more dynamic chapters to the continuing and growing adventure of franchising.

One closing note on the future, though. In The Demolition Man, a movie released in 1993, Sylvester Stallone, awakens in the middle of the 21st century from a cryogenic sleep and is taken to a "fine restaurant" for dinner. As the car he is riding in pulls up to the restaurant, the camera reveals a sign that says - Taco Bell. Stallone’s character, a product of the 1980s, is surprised and asks, "Taco Bell, I thought we were going to a great restaurant. Is this a mistake?" To which his driver replies, "Not at all. Since the great franchise wars, all restaurants are now Taco Bell."

Fonte: http://franchises.about.com

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