Effects of Restaurant Franchising: Does an optimal franchise proportion exist?January 22Suh-hee ChoiHTM 681 2nd ArticleSpring 2009Hsu, L.,& Jang, S. (in press)

Spinelli et al., 2003; Aliouche and Schlentrich, 2005ResearchQuestionsAlon et al., 2004Does franchise influence a restaurant firm’s performance? franchiseVs. non-franchiseprofitability intangible value Research based onthe empirical evidenceDoes optimal franchise proportion exist? • reduces investment cost / risk • disadvantages Other things being equalBradach, 1997“marginal costs= marginal benefits”Organizational learning theory (Sorenson & Sorenson, 2001)Resource scarcity theory (Hunt, 1973; Norton, 1988; Oxenfeldt & Thompson, 1968, Oxenfeldt & Kelly, 1969)TheoriesAgency theory (Rubin, 1978)

Methodology

Methodology Dependent variables ROAROETobin’s Q

Methodology (cont.)Independent variablesfranchise proportionControlled variablesleveragefirm size (economy of scale) advertising profitability (in Tobin’s Q model)

MethodologyT-testcompare the means between franchise / non-franchise ROA(ROE, Tobin’s QRegression analysis

MethodologyRegression analysis • normality  natural log transformation• multicollinearity • heteroskedasticity

Resultsdescriptive information

Results franchise vs. non-franchiseprofitability and intangible values are significantly higher in franchise firms than non-franchise firms

Results franchise vs. non-franchiseH1: Franchise restaurant firms have higher profitability and create more intangible value than non-franchise restaurant firms.

Results effects of franchise proportionH2: There is non-linear relationship between franchise proportion and profitability and intangible value.

Results effects of franchise proportionmaximum ROA (ROE, Tobin’s Q)? shaped

Results geography mattersnot significantsq% coefficient:negative linear relationshipless dispersed max: 35% 36%

less dispersed

Results geography mattersdispersed hard to monitor  more franchising max: 52% 55% 43%

dispersed hard to monitor  more franchising

ConclusionsFranchising betters financial performance / intangible value.Optimal proportions of franchising can be found (to maximize financial performance / intangible value).other factors of optimal proportions might be significant : geographical dispersion was tested.

limitations Didn’t include positioning and marketing concepts.Focused only on restaurant industry. Limited data available (what about small franchisors?)

Further studies Develop methodologies to find optimal points that consider both maximizing profits and reducing risks at the same time (e.g. Agency Theory (Rubin, 1978)) What happens if OTHER THINGS ARE NOT EQUAL?Other benefits of franchising?social valuessustainable relationships between the firms

appendix: White's testAssumption: V(ui) = s 2 + g(E(Yi))2i.e. the variance of u depends on the expected value of Y (and hence on at least one of the x variables).  V(ui) = s2 + g(b1 + b2x2 + ... + bkxk)2H0: g = 0  homoscedasticity otherwise heteroscedasticity. Regress e2 on x22, x32, etc and x2x3, x3x4, etc. Obtain nR2 ~ c2(k-1) as an LM statistic. www.sussex.ac.uk/economics/documents/lecture_4.ppt