In franchising, playing tough early may support long-term benefits

Retail signs along Duff Ave in Ames, IA, April 2022. Credit: Christopher Gannon/Iowa State University

From McDonalds to Marriott, 7-Eleven to Ace Hardware, we’re surrounded by franchises. They are the dominant retail model in the U.S., and underpinning their success are franchisors who grow a network of franchisees who use their own resources to open and run brick-and-mortar stores.

But Stephen Kim, a marketing professor at Iowa State University, says focusing on growth alone misses a big opportunity to understand how franchises become profitable.

“There is another aspect, which is termination,” says Kim.

Terminating a contract with a franchisee is the ultimate form of enforcement that is rarely publicized, he explains. Franchisors generally use this last resort in an effort to uphold uniformity and protect their brand when franchisees repeatedly violate or deviate from the chain’s standards. Kim gives the example of a pizza outlet that’s skimping on quality ingredients; rubbery cheese could damage the restaurant chain’s reputation, causing it to lose customers and revenue.

But cutting ties with a franchisee also carries costs for the franchisor, including the risk of lawsuits, the possibility of upsetting customers and other franchisees in the network, and an immediate drop in royalties, which is usually 5-7% of the franchisee’s sales.

To better understand these tradeoffs and how termination affects the multi-year profitability of franchises, Kim led a study that dug into 4 years of data from more than 6,000 chains in South Korea. The results, which are now available in the Journal of Management, found franchisors’ profitability decreased right after termination but essentially bounced back in two years.

The researchers also discovered young, rapidly growing chains benefited more from ending contracts with wayward franchisees compared to mature, slow-growing chains.

“For the younger chains, termination can have a spillover effect. It signals to other franchisees early on that they need to follow the rules or else they may suffer the same consequences,” says Kim. “For mature chains, there’s a higher chance that the franchisees have already established their way of doing business.”

Perks and drawbacks of being a franchisee

In their paper, the authors pointed to previous research that found 9-10% of contracts with franchisees are terminated, which begs the question: why take on risk as a franchisee in the first place?

Kim says the biggest benefit is that the franchisee gets to open a business using a model that’s already established and tested. They face lower risks and start-up costs compared to launching their own independent business, and they benefit from the chain’s brand recognition and marketing.

But people may feel boxed in when they can’t try something new or make a change to fit local tastes.

“Often people who want to run a franchisee want to be their own boss, but they find there are very tight procedures and rules that the franchisor wants them to follow. They realize they don’t have that much freedom,” says Kim.

Collecting and analyzing data

One of the reasons the researchers decided to analyze franchises in South Korea is that, compared to the U.S., it’s easier to access the data. The South Korean government requires every franchisor operating in the country to submit annual reports to the country’s Fair Trade Commission, which the government then compiles and makes publicly available online.

To understand how terminating franchisee contracts affected performance over multiple years, the researchers focused on profitability (return on asset), rather than profit. Kim explains profit is driven by the size of the franchise whereas profitability is a metric used to determine the scope of a company’s profit in relation to the size of the business. Profitability captures more nuance and accurately reflects the impact of termination on the franchise’s success.

The researchers also investigated whether “franchisee addition” and “customer mobility” eased or exacerbated the effects of dropping a franchisee’s contract.

They found franchisee addition (i.e., the rate at which franchisors sign new contracts to add more stores) lessened the negative effect of termination on the chain’s profitability while customer mobility showed no discernable effect. Customer mobility refers to what extent someone visits different outlets of the same chain on a regular basis. For example, customers going to a lot of different McDonald’s stores may expect more uniformity than someone who dines at only one location.

Kim says future studies may be able to tease apart the relationship between franchisee termination and high and low customer mobility.

While the data for this study comes from franchises in South Korea, the researchers say the findings are applicable in the U.S. and can help inform franchisors as they make decisions to grow or trim their business.

Sungwook (Sam) Min at California State University Long Beach contributed to the study.

More information:
Stephen K. Kim et al, Terminating Franchisees: Does It Improve Franchisor Performance?, Journal of Management (2022). DOI: 10.1177/01492063221088507

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Hexbyte Glen Cove Playing detective on a galactic scale: Huge new dataset will solve multiple Milky Way mysteries thumbnail

Hexbyte Glen Cove Playing detective on a galactic scale: Huge new dataset will solve multiple Milky Way mysteries

Hexbyte Glen Cove

Half right image taken in the late afternoon, the Moon is up. Half left image taken just some few minutes before the beginning of the morning twilight of the same night. Orion and the Pleiades shine over the AAT on a very dark night. 4-5 November 2011. Siding Spring Observatory, NSW, Australia. Credit: Dr Ángel R. López-Sánchez/Australian Astronomical Optics/Macquarie University/ASTRO 3D

How do stars destroy lithium? Was a drastic change in the shape of the Milky Way caused by the sudden arrival of millions of stellar stowaways?

These are just a couple of the astronomical questions likely to be answered following the release today of ‘GALAH DR3’, the largest set of stellar chemical data ever compiled.

The data, comprising more than 500 GB of information gleaned from more than 30 million individual measurements, was gathered by astronomers including Sven Buder, Sarah Martell and Sanjib Sharma from Australia’s ARC Centre of Excellence in All Sky Astrophysics in 3 Dimensions (ASTRO 3-D) using the Anglo Australian Telescope (AAT) at the Australian Astronomical Observatory at Siding Spring in rural New South Wales.

The release is the third from the Galactic Archaeology with HERMES (GALAH) project, which aims to investigate , chemical enrichment, migration and mergers in the Milky Way. It does this using an instrument called the High Efficiency and Resolution Multi-Element Spectrograph, or HERMES, which is connected to the AAT.

The new data covers 600,000 and takes the project very close to meeting its goal of surveying one million.

“It’s a bit like a galactic version of the game Cluedo,” said ASTRO 3-D’s Sven Buder, a research fellow at the Australian National University.

“The chemical information we’ve gathered is rather like stellar DNA—we can use it to tell where each star has come from. We can also determine their ages and movements, and furnish a deeper understanding of how the Milky Way evolved.”

And, just like in Cluedo, the information can be used to get to the bottom of mysterious events.

“For instance, while we are mainly surveilling our solar neighbourhood, we have found more than 20,000 stars which do not have the same chemical composition or age our Sun and its neighbours,” explained Dr. Buder.

“We know that roughly eight billion years ago the shape of the Milky Way changed drastically when it collided with another, smaller galaxy, which contained millions of stars. We’ve now used the stellar DNA to identify some of the prime suspects for the assault. These stowaways are so different they can only have come from somewhere else.”

Another mystery likely soon to be solved thanks to new evidence uncovered is called the ‘Cosmological Lithium Puzzle’.

Lithium was one of the elements created during the Big Bang. It is also destroyed by some types of stars. However, modelling aimed at estimating its abundance has so far always come up short—with the calculated total not matching the empirical evidence.

GALAH DR3 looks like offering a solution.

“Basically, a lot of the oldest stars have burned much of the Big Bang lithium, so our measurements for this element come out lower than the amount that was initially synthesised in the early Universe,” said ASTRO 3-D researcher Dr. Sanjib Sharma from the University of Sydney.

“At the same time, we have found that one type of star, known as evolved giants, should have burned through pretty much all of their lithium by now, but a lot of them have much more of it than we expected. The GALAH data will help us discover why.”

As with the two previous data releases from the GALAH survey, the information is freely available to astronomers around the world.

“Making large datasets like GALAH DR3 widely available is really important for astronomical research,” explains Associate Professor Sarah Martell from ASTRO 3-D and UNSW Sydney.

“Since the start of the GALAH project we have focused on building a dataset that can answer our questions about the history of the Milky Way, and also many others. I’m excited to see what our international colleagues will do with GALAH DR3.”

More information:
The GALAH DR3 dataset can be found here:

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