History of Franchising

The birth of franchising was a result of the same business needs that drive it today: the opportunity to expand distribution, and limited capital to fund expansion.  Given this common challenge, the first "franchising" was probably a licensing relationship where products were sold from town to town through a license granted for territorial rights.  Possibly as far back as 200 B.C. in China, according to the book, "Franchising - The How To Book" by Lloyd Tarbutton.

The common answer to the first franchisor is Albert Singer and his sewing machine in the 1850's.  However, there are numerous examples of franchising or licensing throughout Europe as far back as the Middle Ages.  Chain restaurants are often seen as the prime example of franchising.  The first known example was in the 1850's by Frederick Henry Harvey.  By aligning with the Atchison, Topeka & Santa Fe Railroad, he established over 100 restaurants along the line to the passengers.  In fact, Harvey often make regular field visits to his restaurants to maintain quality.

The automobile industry was born in the 1850's and 1860's, with the first franchise for General Motors issued in 1898 to William E. Metzger of Detroit.  Then as the automobile manufacturers solved their distribution problems through franchising, the oil industry began to establish dealerships through franchising; overcoming the capital requirements to purchase real estate and distribution systems to meet the needs of automobile drivers.

At the turn of the century, the American soft drink business was a localized industry.  The franchisor would ship soft drink concentrate to its franchisees and demand the local franchisees to bottle under strict formulas and processes, which would allow rapid expansion without the need for the capital which company ownership would have required. In 1901 Coca Cola issued its first franchise to the Georgia Coca Cola Bottling Company.

Innovation in the restaurant industry came following World War I.  In 1919, Roy Allen and Frank Wright started A&W Root Beer, offering car-side service.  The first White Castle restaurant opened in 1921 in Wichita, Kansas introducing take-out packaging to keep the food warm.  In 1935 Howard Johnson awarded its first franchise to sell ice cream and cookies under the distinctive orange roofs.

Over the next three decades many of the legendary franchised restaurant chains that began franchised operations including Carvel in 1934; Kentucky Fried Chicken in 1930; Dairy Queen in 1940; Dunkin Donuts in 1950; Burger King in 1954; McDonald's in 1955; and The International House of Pancakes in 1958.  In addition to restaurants, dry cleaners, hotels, rental car, automotive aftermarket services, temporary help agencies, and many other industries took advantage of the strength of franchising.

Franchising began to grow rapidly in the post war 1950's due to consumer demand, the capital provided to returning veterans by separation pay and the GI bill, and trademark protection provided by the Trademark Act of 1946.  Once business owners became confident of trademark and logo protection, more confidently jumped into franchising.

With explosive growth typically comes problems.  Some franchisors made misrepresentations prompting several states led by California in the 50's and 60's to enact laws governing disclosure to franchise buyers.  Then in 1979 the federal government issued franchise rules through the Federal Trade Commission establishing disclosure requirements in the United States.  The disclosure rules are undergoing change to further strengthen consumer protection and disclosure laws.

Today there are more than 4,000 franchisors and over a half-million franchisees that speak to the size and strength of the franchise industry.

Much of the content from By Michael H. Seid, Managing Director Michael H. Seid & Associates