Introduction

The benefits of joining an established franchised chain for a franchisee, and thus the reasons why franchisees are willing to pay fees to be part of a franchised chain, can be grouped into two broad categories: cost-reducing and demand-enhancing benefits. The cost-reducing benefits include established supply relations and economies of large-scale purchasing, comprehensive and ongoing programs to develop efficient production processes, management training and consulting, and so on. Demand-enhancing benefits arise mostly from the brand and the products associated with it. In other words, when franchisees join a chain, they do so under the expectation that the brand that they get to operate under will bring in customers who might otherwise not have visited their store. A rare case of a McDonald's franchisee who “lost his arches” illustrates how important the brand can be to franchisees: the restaurant in question was operated very similarly by the same individuals in the same place after terminating its relationship with the McDonald's system. Despite all that, its sales fell by 60 percent immediately. Sales continued to go down after the initial shock, and never again exceeded 35 percent of the level they had achieved as part of the McDonald's system. The restaurant closed for good some 12 to 18 months later.