Nov 14, 2017 - Blog by |

Own ’em all or franchise ’em out? Or, do some of each, and dual-distribute? According to famous Economist Ronald Coase, firms exist to minimize transaction costs. On its face, this theory, even though it is from 1937, generally explains whether particular brands or firms decide to operate as a chain or franchise. In essence, the fewer transaction costs the more likely a firm will contract for distribution services with third parties in the market (thru franchise contracts, for instance) versus doing the distribution functions in-house. Coase’s theory can also explain to some extent the proportion of company-owned stores in any given system that has chosen to offer franchises. However, the empirical evidence regarding such franchise integration decisions does not always dovetail with the theory.

Indeed, a recent debate between two CEOs of two smaller pizza chains shows that decisions regarding whether to franchise, or the degree of dual-distribution in a particular franchise system, can derive from individual personality predisposition, and not explicit economic theory. Blaze, &Pizza CEO’s Square Off in Franchise Debate. For instance, Mizes, who explained that he wanted “to expand as fast as possible”, grew his company through franchising. In contrast, Lastoria, who felt that “the goal was to embellish the uniqueness of each restaurant” developed his business through company-owned stores. Interestingly, both Mizes and Lastoria felt that “it would be difficult” to ‘have it both ways” by employing both strategies simultaneously.

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