Industry

ROAD FOOD
Company-run chain restaurants more consistent than franchises

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

3/1/2001

Photo by Bill Wiegand Steven C. Michael reports that restaurants under franchise ownership lack the consistency of restaurants that are corporate-owned and -managed.

CHAMPAIGN, Ill. -- As anyone who travels the Interstate knows, consistency is the selling point of a chain restaurant. Whether you’re parked between the tumbleweeds at a windswept Wyoming exit or crammed into a shopping mall in New Jersey, a brand-name restaurant is supposed to deliver the same quality of food and service.

Do the chains deliver? It largely depends on the type of corporate ownership, according to a University of Illinois business professor. Steven C. Michael reports that restaurants under franchise ownership lack the consistency of restaurants that are corporate-owned and -managed.

"A greater reliance on franchising leads to lower quality," he wrote in the Journal of Economic Behavior and Organization. Michael based his conclusions on 35 dinnerhouse and "family" chains ranked by the readers of Consumer Reports. The rankings were based on nine measures, including food taste, menu selection, friendliness of service, knowledge of server, atmosphere and cleanliness.

Franchised chains in the survey included Big Boy, Country Kitchen, Denny's, International House of Pancakes (IHOP), Perkins and Western Sizzlin. Corporate chains included Bob Evans, Cracker Barrel, Olive Garden, Red Lobster and Steak and Ale. Some chains have a mix of franchised and corporate outlets. Michael did not rank the restaurant chains individually, but grouped them together according to their organizational structure.

Under the franchise system, quality and service were dependent on the profitability, location and cost of a restaurant. "Quality costs money," Michael said in an interview. "A franchisee has an incentive to skimp on quality, while the unit manager of a corporate chain has less incentive to lower quality because it's not coming out of his or her own pocket."

Who started franchising is an open question. Some point to the 19th century Singer sewing machine as the start of franchising in America. The system spread to roadside ice cream and hamburger stands after World War II and, more recently, to restaurants with more ambitious menus.

The system calls for the franchisee to buy or lease a store site and pay a fee to gain rights to the name brand. The owner-operator then pays royalties, usually as a percentage of sales, to the franchiser, but is responsible for employee wages and menu prices. (Under antitrust law, a franchiser may recommend, but not mandate, prices.)

Franchising is attractive to business people because they can expand swiftly. "An objective is to locate as many stores as possible in strategic shopping areas and Interstate exits, pre-empting competitors and gaining valuable real estate," Michael said.

What is less certain is whether the franchise system will continue to grow in established markets or "whether we'll see companies reclaim and restructure franchise chains into corporate chains to better position themselves in terms of quality and service."