How To Develop A Franchise System: Part 3: History Of Franchising


Understanding the history of franchising is an important part of understanding the industry itself and how regulations have shaped it over time. This video will walk us through where franchising came from, where it is today, and where it is going, including the inception of franchise industry regulations up to the first FTC rule.

Video Transcript:

The early commercial franchising in the U.S. is really as we move from an agrarian economy into a merchant economy. So you start to see companies like McCormick harvesting machine franchising in 1843. The first beauty salons come out, Matilda Harper has her franchise in 1891; the last of those locations didn't close until the 1950s, 1960s. GM in the 1890s, Ford in the 1900s. If you think of the Ford Motor Company, when Henry Ford first started to sell his cars, he sold them through pharmacies. How inefficient would that have been once he moved them into franchising. You have the expansion of the car industry. Coca-Cola, Western Auto, Louis Liggett, A & W, Ben Franklin stores... 

Western Auto was an interesting company, 1909 up into the point of Weston Auto, you have companies that are just franchising their product. Trademark franchising is what we call that. Weston Auto is the first one that actually adds services to that. They provide training to franchisees, they provide marketing to franchisees, so a whole new area of franchising begins. 

Hertz begins in 1925. We're taking franchising back to a period where it's not a modern invention, it's something that's been part of the economy for many years. 

You get into the 1930s and 1940s. We're now becoming a market that is moving. Howard Johnson's opens up in 1935. Roto-Rooter. Arthur Murray dance studios in 1938. Carvel ice-cream with its with its silly cakes and all of that comes out of 1948. 

1946 is the most important year for franchising because at that point, the federal government passes the Lanham Act which allows us to license to somebody our brand and our system, our trademark, our intellectual property, without the risk of loss. An important moment on that, what happens in World War II? World War II is taking place, all these guys are overseas. They have great ideas and they come back and we have not built anything for the consumer market since we entered the war. 

You got guys like Bill Rosenberg that come back and he creates Dunkin Donuts in the 1950s, and the Colonel is running around in the 1950s doing Kentucky Fried Chicken. Dave Thomas, the founder of Wendy's, is actually a franchisee of Kentucky Fried Chicken. He invents the bucket that we all see. He invents the snake so that when you wait in a line at a KFC, he's the person that slimmed down the entire operation of Kentucky Fried Chicken which is still a major portion of their brand. You go into a Kentucky Fried Chicken, there's less items in the menu. It makes it much more efficient.

In the post-World War II period, we’re seeing McDonald's coming out. Ray Kroc, by the way, did not start McDonald's - he bought it from the McDonald brothers out in California, and he reinvigorated that brand so that it was all of a sudden licensing. Tastee Freez, H&R Block, Holiday Inn in the 1950s, International House of Pancakes, 7-eleven in 1964, that post-World War II period is where we saw the major explosion of franchising. 

All of a sudden, we're now in a market of regulation, and why? Because public franchisor stock started to slide. One-time fees were recorded about sales when they shouldn't have been, and you get the lending by celebrities of their names to systems that actually didn't exist, to which the celebrity didn't have a major connection. Minnie Pearl, Johnny Carson, Jerry Lewis movie theaters, you have Fats Domino lending his name, Arthur Treacher, Rocky Graziano, Dizzy Dean, all of these folks were lending their brands, Joe Namath; and a lot of these systems never existed, and all of a sudden we're starting to see franchise chinchilla farms - and the government steps in. 

Litigation starts, Standard Oil has an antitrust suit, Carvel gets tied up in a tying, where Carvel is making profits by selling their products to a franchisee in a tying relationship. Chicken Delight, a brand that had gotten up to 1,400 locations, within a year is down to a half a dozen. There's still a couple of them left in in Canada but Chicken Delight, which I will tell you is one of the greatest products of all time, vanishes during that period of time. There's public hearings, there’s federal and state looking at it, and regulation starts to begin. It actually started with pre-sale disclosure coming out of in Delaware back in the 1970s. And then in 1971, California passes a franchise law which requires pre-sale disclosure. New Jersey follows. After that, Washington State later on in the 70s, and you start to get the birth of regulation in the United States. 

Somewhere around that time in the 1960s, a group of gentlemen got together and they formed the International Franchise Association simply because they were afraid of the regulations that were coming down the pike; they they actually negotiated with California the launch of really the first disclosure requirement in the United States. 

1971, they start to have hearings in the federal level. ‘72, the hearings go on. In 1978 we see the birth of federal regulations which are not regulations as you saw in California where the documents were registered. So you submit your franchise documents to California, they register them. At the federal level they followed California and they came up with a pre-sale disclosure where you disclose to the potential franchisee what the relationship is going to be. There's no relationship laws provision, and it's just a matter of this is information which the franchisee is entitled to. 1978 we see the first Federal Trade Commission rule on franchising.

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