Retail Franchising 9781845446536, 9780861766840

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International Journal of Retail & Distribution Management Volume 30, Number 5, 2002

ISSN 0959-0552

This issue is part of a comprehensive multiple access information service comprising: Paper format International Journal of Retail & Distribution Management includes 12 issues in traditional paper format. The contents of this issue are detailed below.

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Retail franchising Guest Editors: Anne Marie Doherty and Barry Quinn

Contents 222 Access to International Journal of Retail & Distribution Management online 223 Abstracts & keywords 224 Guest editorial 228 Franchising, retailing and the development of e-commerce Anna Watson, David A. Kirby and John Egan 238 Towards plural forms, franchising/company-owned systems, in the French cosmetics retail industry Ge´rard Cliquet and Jean Phillipe Croizean

251 The failure of business format franchising in British forecourt retailing: a case study of the rebranding of Shell Retail’s forecourts Emily Boyle 264 International retail franchising: a conceptual framework Barry Quinn and Nicholas Alexander

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drawn from this type of organisation compared to pure franchise or company-owned arrangements. A model is proposed to explain the evolution of organisational forms in cosmetics chains.

Abstracts & keywords

The failure of business format franchising in British forecourt retailing: a case study of the rebranding of Shell Retail’s forecourts Emily Boyle Keywords Franchising, Brands, Retailing, Case studies

Franchising, retailing and the development of e-commerce Anna Watson, David A. Kirby and John Egan Keywords Retail trade, Franchising, Internet Franchising has shown considerable growth in recent years and in advanced economies, such as the USA and the UK, and currently accounts for approximately one-third of all retail sales. It would seem, therefore, that franchising and retailing represent a fruitful partnership, though there has been little research as to why this should be. In this article the authors seek to address this situation by considering those characteristics that make retailing particularly suitable for franchising, through an examination of the UK context. Given the changing nature of the retail industry and the advent, in particular, of e-commerce, consideration is given to the future for retail development through franchising.

International retail franchising: a conceptual framework Barry Quinn and Nicholas Alexander Keywords Franchising, Retailing, Globalization, Development, Strategy

Towards plural forms, franchising/companyowned systems, in the French cosmetics retail industry Ge´rard Cliquet, Jean-Philippe Croizean Keywords Cosmetics industry, Retailing, France, Franchising The cosmetics retail industry in France is changing for at least two reasons: first, more and more services are available within cosmetics stores and, second, large groups like LVMH or Marionnaud are themselves looking for retail chains in order to exert greater control over their distribution systems. The findings from an exploratory study of several cosmetics retail companies operating in the French market seem to indicate that developing services is the best way of retaining business independence and resisting predators. Moreover, the development of new services leads these companies to implement plural form organisations. Many managerial and strategic advantages can be International Journal of Retail & Distribution Management Volume 30 . Number 5 . 2002 . Abstracts & keywords # MCB UP Limited . ISSN 0959-0552

As a result of an increasingly competitive petrol retailing environment and the rise of convenience stores in the food retailing sector, oil companies in Britain in the 1980s began to diversity into food retailing and convert their petrol stations into forecourt convenience stores. Drawing on case study evidence of Shell Retail, the paper examines how the company attempted to build its organisation into a strong brand by rebranding its forecourt outlets and introducing business format franchising to manage them. Utilising franchising, branding and food retailing literatures, the work investigates not only why Shell Retail believed business format franchising was more appropriate than traditional franchising or in-company management for its rebranded forecourts but also the factors that eventually caused the arrangement to fail. In particular, the paper analyses the problems relating to business format franchising that Shell Retail encountered in order to provide guidance for other retailers who may be considering using it as an instrument in the rebranding process.

Franchising has become a major driving force in the globalisation of service businesses. Likewise, international retailing has become an important feature of global distribution systems. This has been brought about through changing socio-economic patterns, favourable political and cultural environments, and a shift from manufacturing to service based economies. Both developments have contributed to the globalisation of marketing activity. However, there remain fundamental conceptual inconsistencies in the literatures that explain the development of international retailing and the internationalisation of franchise operations. This paper considers the use of franchising in the internationalisation of retail operations and places the experience of retail operations that use the market entry strategy within the context of other franchising activity. The paper evaluates the literature on the internationalisation of retailing alongside the literature on franchising. It identifies the different perspectives that have emerged within the two literatures and conceptually reconciles the contradictions that exist.

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Retail franchising: current themes and an agenda for future research

Guest editorial

The Guest Editors Anne Marie Doherty is a Lecturer in the School of Business, Retail and Financial Services at the University of Ulster at Coleraine. Her research interests lie in the area of international retailing, particularly retail franchising, entry mode strategy and fashion retail marketing. Her research has been published in the Journal of Marketing Management, the International Marketing Review, the International Review of Retail Distribution and Consumer Research, and the International Journal of Retail & Distribution Management. Previously she has been guest editor of the International Marketing Review and is currently in the process of editing a Special Edition of the European Journal of Marketing on Fashion Marketing. Barry Quinn is a Lecturer in International Retailing at the University of Ulster. He holds a PhD from the University of Ulster on retailer internationalisation. His main area of research interest is retailer internationalisation and he has published a number of research papers and articles on a variety of related issues including the motives for international expansion, entry mode choice, SME internationalisation, international retail divestment, and financial aspects of retailer internationalisation. Barry has also published widely on the subject of international franchising and his work can be found in journals such as the International Marketing Review and the International Review of Retail, Distribution and Consumer Research.

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Franchising has long been a popular mode of expansion for manufacturing firms and service sector companies, particularly those operating in the fast food restaurant business. However, in recent years retailing has become a major sector of franchise growth in advanced economies. Indeed, one of the more pertinent recent trends in the retail industry in developed countries has been the increasing proportion of retail sales accounted for by franchise activity, spread across a number of subsectors such as fashion, home furnishings and cosmetics. Since the 1980s franchising has developed as a popular mode of expansion for new niche retailers which have been able to establish a network of stores quickly and at a relatively low financial cost. The Body Shop has been, perhaps, the best known retail proponent of franchise use. However, the adoption of franchising by established retail companies such as Marks & Spencer and Arcadia is particularly noteworthy. For these companies, franchising has become a major international expansion tool, offering opportunities for internationalisation into certain markets where it is more feasible for the company to externalise its operations. Despite the growth of interest in franchising among retail practitioners, the academic community has not kept up with developments and there has been little attention given to the subject of retail franchising. The academic debate on franchising has been informed, for the most part, by the activities of the manufacturing sector and other service sectors without considering, in any real depth, the unique characteristics of the retail sector. The purpose of this special issue is to develop a richer understanding of retail franchising. The aim is to provide a collection of articles on contemporary research in the field of retail franchising which draws together the current strands of academic inquiry and provides an indication of future needs and directions. Given the lack of attention the area has received hitherto, the contributions in this special issue provide some much needed insights into the specific nature of retail franchising and in doing so aim to advance the academic debate and signal directions for future research.

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Research context The past 20-30 years have witnessed significant levels of franchise research. There is now an established franchising literature, due, in most part, to the contribution of researchers from several different disciplines including marketing, economics, law and management science. Much of the literature has been concerned with the creation and management of franchise systems and, to a lesser extent, the wider public policy/societal aspects of franchising. Traditionally, research into franchising has been conducted from a predominantly US perspective, reflecting levels of franchise activity and the USA’s standing as the world’s single largest franchise market. Today though, franchising is a global business activity, widespread across advanced economies and increasing in scope in lesser-developed regions. Recent research studies have recognised the global dimension of franchising and have considered franchising growth in the context of many markets worldwide, helping to move the debate away from a purely US agenda. Academic research into franchising has been undertaken on a general, rather than industry specific, level. Empirical research studies have been based, for the most part, on the findings from large-scale postal surveys and thus have concentrated on producing a set of results that may be generalisable across sectors. However, it may be argued that a greater focus on the sector of activity would help to produce more accurate and relevant findings, and thus lead to the further refinement and development of existing conceptualisations of franchising. A sector such as retailing possesses a set of operating characteristics which makes it quite distinct from other sectors within which franchising is employed. Over the past decade or so several contributions in the retail literature have focused on the issue of retail franchising (Baron and Schmidt, 1991; Sanghavi, 1991; Whitehead, 1991; Manaresi and Uncles, 1995; Sparks, 1995; Quinn, 1998; Doherty and Quinn, 1999; Quinn and Doherty, 2000). While such studies have helped to raise awareness of the particular nature of retail franchising, a coherent body of knowledge remains to be developed.

Current research The articles published here address various aspects of retail franchising and highlight the need for a more complete understanding of the activity. The first three articles discuss the choice of organisational form and explain, first, the circumstances in which retail companies decide to employ franchising and, second, the balance between franchise and, company-owned outlets within the retail organisation. In the existing franchising literature resource constraints and agency theories have been offered as explanations for the adoption of franchising. The resource constraint argument for franchising assumes that company ownership is the preferred method of operation, while the agency argument suggests that where outlets are difficult to monitor incentive advantages will be gained from franchising the outlets. The first article in this special issue, by Watson, Kirby and Egan, seeks to develop understanding of franchise adoption by retail companies. This paper examines the principal existing theoretical frameworks with the intention of determining their ability to explain the incidence of franchising in the retail sector. The limitations of the explanatory power of existing franchise theories are noted. With reference to the UK market, the authors seek to explain the incidence of franchising in retailing through factors such as business risk, scale economies, and human capital requirements. The paper assesses the future development of the sector and considers the development of e-commerce and its likely impact on the future of retail franchising. Following the organisational form theme, Cliquet and Croizean’s article builds on Bradach’s (1998) earlier study on plural forms. Cliquet and Croizean examine the issue of plural forms and the evolution of organisational forms within the context of the French cosmetics retail market. Their article examines whether or not plural forms can benefit companies operating in a market where large multinational companies are acquisitive. In examining Bradach’s (1998) model in the context of the French cosmetics retail market, Cliquet and Croizean’s paper provides a valuable consideration of the applicability of existing theory within the retail sector and an alternative market environment. 225

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Boyle’s article considers not only the franchise versus company owned choice but also the choice between the various types of franchise arrangement. Boyle highlights the important role of branding in this decision making process, particularly in respect of companies operating in the retail sector. The paper takes a case study approach and focuses on Shell Retail’s efforts to introduce business format franchising in its rebranding process for the UK market. In discussing the factors that hindered the company’s progress, the paper illustrates the practical difficulties that may be encountered by a retail company attempting to introduce a new franchise development programme. The final article, by Quinn and Alexander, takes a different perspective to the other papers in that it considers the adoption of retail franchising in the context of the firm’s international operations. While franchising has facilitated the rapid international expansion of niche retailers, its increasing popularity among established retail companies without a domestic franchise presence, such as Marks & Spencer, makes its adoption in the retail sector quite distinct from other franchise sectors. The authors note the different perspectives that have emerged within the retail and franchise literatures to explain international retail franchising. They attempt to reconcile the contradictions that exist in the literatures, by providing a conceptual framework to explain the development of international franchising within the particular context of the retail internationalisation process. Conclusion The articles in this special issue attempt to build on the existing franchise literature by considering the particular context of the retail sector, and the authors pay careful attention to sector characteristics in their attempts to provide insights into franchising in the retail context. The articles highlight the need for researchers to recognise the idiosyncrasies of the commercial sector under consideration when studying franchising. While it may be argued that an appreciation of the particular characteristics of retailing can help to develop franchising knowledge, it is equally true that the insights from the study of franchising and its associated literatures can develop understanding of retailing in general. Indeed, given the significant role that franchising plays

in retailing, it may be argued that studying franchising is in a sense studying retailing itself. Knowledge on retail franchising is underdeveloped and therefore there is a wide ranging research agenda available to researchers in this area. As the articles in this special issue show, the reasons for franchise adoption, or the choice of franchising as an organisational form, and the international dimension of retail franchise activity are fruitful areas for research. Future research studies should also consider the operational, strategic and managerial issues associated with retail franchising. In particular, the trend for large, established retail companies using franchising is an interesting development. It would be beneficial to examine further how and why such firms have become involved in franchising and the implications for existing management structure and culture. Such research would build upon Forward and Fulop’s (1996) exploratory study into the strategic and operational issues facing large, established firms’ entry into franchising. In terms of methodological approach, researchers should be encouraged to be innovative in their outlook. Franchising research studies have typically undertaken a postal survey approach and employed quantitative techniques. However, methodologies employing qualitative techniques would be best suited to provide the depth of insight and information which is required at this point in time to develop understanding and initial conceptualisations of retail franchising. Studies of individual company experiences would substantially improve understanding and define research questions for exploration in further research. The importance and value of individual company experiences has been illustrated by previous studies in retail franchising (Sparks, 1995; Quinn, 1999). There remains much scope for developing our understanding of retail franchising. A coherent framework for the study of retail franchising is needed, one which utilises existing theories and conceptualisations on franchising, while at the same time recognising the particular characteristics of the retail sector and the relevance of the industry context within which franchising is employed. On a final note, we would like to thank sincerely the editor of the IJRDM, Professor

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John Fernie, for giving us the opportunity to edit this special issue and for his support and guidance throughout. We would also like to voice our appreciation and thanks to all the reviewers and contributors without whose work this special issue would not have been possible. Anne Marie Doherty and Barry Quinn

References Baron, S. and Schmidt, R. (1991), ‘‘Operational aspects of retail franchises’’, International Journal of Retail & Distribution Management, Vol. 19 No. 2, pp. 13-19. Bradach, J.L. (1998), Franchise Organisations, Harvard Business School Press, Boston, MA. Doherty, A.M. and Quinn, B. (1999), ‘‘International retail franchising: an agency theory perspective’’, International Journal of Retail & Distribution Management, Vol. 27 No. 6, pp. 224-36. Forward, J. and Fulop, C. (1996), ‘‘Large established firms’ entry into franchising: an exploratory investigation of strategic and operational issues’’, The International Review of Retail, Distribution and Consumer Research, Vol. 6 No. 1, pp. 34-52.

Manaresi, A. and Uncles, M. (1995), ‘‘Retail franchising in Britain and Italy’’, in McGoldrick, P.J. and Davies, G. (Eds), International Retailing: Trends and Strategies, Pitman, London, pp. 151-67. Quinn, B. (1998), ‘‘Towards a framework for the study of franchising as an operating mode for international retail companies’’, The International Review of Retail, Distribution and Consumer Research, Vol. 8 No. 4, pp. 445-67. Quinn, B. (1999), ‘‘Control and support in an international franchise network’’, International Marketing Review, Vol. 16 No. 4/5, pp. 345-62. Quinn, B. and Doherty, A.M. (2000), ‘‘Power and control in international retail franchising: evidence from theory and practice’’, International Marketing Review, Vol. 17 No. 4/5, pp. 354-72. Sanghavi, N. (1991), ‘‘Retail franchising as a growth strategy for the 1990s’’, International Journal of Retail & Distribution Management, Vol. 19 No. 2, pp. 4-9. Sparks, L. (1995), ‘‘Reciprocal retail internationalisation: The Southland Corporation, Ito-Yokado, and 7-Eleven Convenience Stores’’, The Service Industries Journal, Vol. 15 No. 4, pp. 57-96. Whitehead, M. (1991), ‘‘International franchising – Marks & Spencer: a case study’’, International Journal of Retail & Distribution Management, Vol. 19 No. 2, pp. 10-12.

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Introduction

Towards plural forms, franchising/companyowned systems, in the French cosmetics retail industry Ge´rard Cliquet and Jean-Philippe Croizean

The authors Ge´rard Cliquet is Professeur des Universite´s and Jean-Philippe Croizean is Maıˆtre de Conferences, both at Universite´ de Rennes, Rennes, France. Keywords Cosmetics industry, Retailing, France, Franchising Abstract The cosmetics retail industry in France is changing for at least two reasons: first, more and more services are available within cosmetics stores and, second, large groups like LVMH or Marionnaud are themselves looking for retail chains in order to exert greater control over their distribution systems. The findings from an exploratory study of several cosmetics retail companies operating in the French market seem to indicate that developing services is the best way of retaining business independence and resisting predators. Moreover, the development of new services leads these companies to implement plural form organisations. Many managerial and strategic advantages can be drawn from this type of organisation compared to pure franchise or companyowned arrangements. A model is proposed to explain the evolution of organisational forms in cosmetics chains. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0959-0552.htm

International Journal of Retail & Distribution Management Volume 30 . Number 5 . 2002 . pp. 238–250 # MCB UP Limited . ISSN 0959-0552 DOI 10.1108/09590550210426408

Store chains represent an increasing part of retail activity: about 50 per cent in the USA (Bradach, 1998). A more accurate knowledge of store chain management models seems to be a prerequisite in gaining a better understanding of how to run these kinds of firms. A report (Price, 1996) has shown that failures in franchising increased during the 1990s even though the number of failures varies from sector to sector. Over the last 30 years, the franchising literature has focused on choice criteria between franchising and company-owned systems. Based on agency theory (Carney and Gedajlovic, 1991; AllixDesfauteaux, 1998), previous research studies explained why a chain could be developed through franchising. Others, based on resource constraints (Oxenfeldt and Kelly, 1968-1969) or incentives (Mathewson and Winter, 1985; Brickley and Dark, 1987), described when franchising should be selected or not (Lafontaine and Kaufmann, 1994). At present, many retail companies opt for plural form organisations mixing franchised units and company-owned units, as recent research has shown (Bradach, 1997; Cliquet, 2000a). It seems that franchising and company-owned systems are no longer viewed as opposing but rather complementary organisational forms. This amounts to substituting the ‘‘make and buy’’ prescription (Anderson and Weitz, 1986) for the ‘‘make or buy’’ principle stemming from the transaction cost theory (Williamson, 1975). Several explanations have been presented in order to understand the coexistence of franchises and company-owned units within the same retail network. For instance, the concept of portfolio of operating units has been used in order to explain how, in many franchise systems, the franchisor succeeded in buying the most profitable units, while the other units remain in the franchise system (Hunt, 1973; Caves and Murphy, 1976). Rubin (1990) shows that local ownership, franchising, is relatively more desirable for isolated stores, whereas central ownership is more efficient for units located close to the headquarters. Laulajainen et al. (1993, p. 376) noted also that if ‘‘several modes may coexist in a The authors of this article are very grateful to the French Federation of Franchising for its financial support and to the reviewers for their very helpful comments.

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country but one normally dominates’’, at the international level ‘‘it is logical that owned stores should predominate in near and familiar markets, and franchises elsewhere’’. Geography is not the only explanation for the coexistence of franchises and companyowned units, lack of quality has also been highlighted as a reason for owning some outlets because of free-riding behaviour (Manolis et al., 1995). This article is based on exploratory research in line with Bradach’s research (1998) on plural forms. Bradach studied five fast food companies in the USA to develop a model showing the advantages of plural form organisations. In order to find out whether this model can be applicable in other sectors, we have selected the retail cosmetics industry in France. This sector is interesting for the following reasons: . The retail cosmetics industry has been severely restructured in France (Mouton, 2000). For instance, 13 per cent of cosmetics stores closed during the last six years and 264 shops were bought in 1999 by big groups such as Marionnaud, Sephora (which belongs to the LVMH, Louis-Vuitton-Moet-Hennessy group) or Nocibe´. On the one hand, these large multinational groups are aiming for growth through chain acquisitions (Tissier, 1998). On the other hand, it can be observed that franchised chains such as Lazartigues have given up franchising to open concessions in department stores or hypermarkets, while other chains such as The Body Shop are facing difficulties, and a hypermarket chain, Leclerc, has entered this market with a new store concept: ‘‘Une heure pour soi’’[1] (Charrier, 1998). . This retail sector not only sells cosmetic products but offers more and more beauty services involving the acquisition of technical know-how. The question then to ask is whether franchising, a company-owned system, or a mix of the two is more appropriate. . The cosmetics sector has reached maturity in its retail life cycle and one consequence of this is the presence of plural form chains. The specific objective of this research is to examine whether or not plural forms can allow retail chains to compete in a market

where large, multinational companies are undertaking substantial acquisition activity to complete their territory coverage. We will first review the literature relating to plural forms in retail and service chains. Then we will describe the French cosmetics retail industry and examine to what extent the Bradach model can be applied to this sector. Finally, we will propose a managerial evolution model in the cosmetics retail industry.

The plural form concept in store chains This dichotomous view of the firm has given rise to something of a ‘‘make or buy’’ philosophy. Bradach and Eccles (1989) have criticised the dichotomous approach on the grounds of its sharp delineation of markets and hierarchies (Coase, 1937), and because this approach is mutually exclusive. According to this economic approach, the existence of the firm is justified when transaction costs, needed to negotiate prices and contracts, become too high and make an institutional arrangement necessary in order to be more efficient (Williamson, 1975). However, in reality organisations are more complex and market and hierarchy are no longer the only elements involved in the choice of organisational forms. Trust also seems to have a real impact (Bradach and Eccles, 1989), especially on plural forms such as co-operative arrangements, joint ventures, quasi-firms and store and service chains combining franchising and ownership systems. The ‘‘make or buy’’ philosophy tends to be replaced by a ‘‘make and buy’’ arrangement (Anderson and Weitz, 1986). Instead of a mechanistic approach supported by the theory of transaction costs, Bradach and Eccles (1989) make the assumption that a mechanism works whatever the case, and that the choice of mechanism is principally linked to the ‘‘vagaries of circumstances’’. In concrete terms, when a new site is considered questions can be asked about who has the cash (the franchisor or the potential franchisee), whether a qualified manager is available or not, and so on. Conversely, interpreting the choice of control mechanism for a given site as a rational response cannot tell us much about the dynamics at work in such structures. Finally, the proportion of franchised and company-

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owned units is more the result of micro-level decisions (which may be fairly idiosyncratic) and macro-level strategic objectives. These decisions and objectives are at least in part driven by the company managers’ recognition and, therefore, control over these plural forms can only be indirect. This search for optimisation between franchise and ownership in store chains seems to be in fact a long trial and error process. Franchisees can be more motivated by searching for efficient operating procedures which can be used later in company units. In the same way, company units can provide the chain operator with information to help him to negotiate with franchisees and to control them more efficiently. Moreover, the contours of these control mechanisms are fuzzy because the annual franchise turnover rate, which means the rate computed from the number of franchise units turning into company units and conversely, is around 10 per cent in the USA (Walker and Cross, 1988) without taking into account multi-unit franchisees. This way of considering the combination between franchising and ownership should be done, on the one hand, by taking into account the time factor and, on the other hand, by trying to integrate the embedding of both control mechanisms and trust. In terms of the time factor, if we consider incentives, for instance we should not be surprised to notice an actual evolution throughout the life cycle. Lillis et al. (1976) showed some time ago that the advantages of franchising decrease as the franchise system nears the maturity stage in the chain life cycle. The franchising advantages are related to funds availability, risk sharing, market penetration speed and, to a lesser extent, franchisee motivation. Store chain management should therefore take into account, on the one hand, the benefits of ownership and, on the other hand, the managerial effects linked to the franchise system. Beyond vagaries of circumstances and the life cycle, managing a store chain consists of taking up four essential challenges, as recently defined in the fast food industry in the USA (Bradach, 1998). These are: (1) adding new units; (2) maintaining uniformity across units; (3) responding locally when appropriate; and (4) adapting the system as a whole when threats and opportunities arise.

Three factors influence these challenges: (1) the strategy of the chain in terms of development and adaptation; (2) the size of the chain, which is related to the life cycle stage; and (3) the competitive dynamics of the industry. With regard to the four challenges, the first one, unit growth, can be met either in a centralised way through ownership, or in a decentralised way through franchising, or also through two processes in the same chain: (1) An additive process. Bradach believes that plural forms enable faster development, because company-owned units attract new franchisees, as the franchisor shows his know-how but also his personal commitment in the chain, and because a franchisee can create his own units. (2) A socialisation process. The franchisor’s staff can become a source of new franchisees, thus increasing human resource availability. The three last challenges grow according to the maturity of chains, whereas the first challenge (development through the addition of new units) obviously concerns the development stage. The uniformity can be maintained in the chain either through budgeting means, MIS or authority in company systems, or incentives, agreements and persuasion in franchise systems. Conversely, plural forms benefit first of all from a modelling process, because multifranchisees tend to reproduce the franchisor model, but also from a ratcheting process as each organisational form works as a benchmark for the other, and benefits deriving from one type of organisation act as an incentive for the others to surpass it. Local responsiveness is more efficient in a franchise system than in a company system, which is a good incentive for the latter in a plural form chain. Therefore, an actual learning process is implemented in the face of market pressure. Finally, system-wide-adaptation that is closely related to the chain maturity stage needs to generate new ideas that should be tested, selected, and implemented. The mutual learning process developed in plural form chains seems to be more efficient. Bradach’s research transformed the classic vision of the relationship between franchising and company-owned systems. But it is only based on an exploratory study of five US fastfood companies. In order to verify Bradach’s

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conclusions, we will undertake a study adapted to the French retail franchising context.

Methodology The main aim of this study is to assess whether Bradach’s model is valuable in other contexts. It was decided to focus on the French market for this study. The cosmetics retail industry is a very important industry in France with possible international consequences because of the importance of some companies at the international level (French or not). LVMH is the biggest multinational company in luxury products. Nocibe is a Dutch company and is a recent entrant to the French market (they entered this market after this study). Marionnaud is now spreading its chain throughout Europe, with 478 stores in France and 265 in Europe (Galinier, 2001). A key objective of this study is to examine the concepts and variables influencing the choice of a plural form, which is not a very well known organisational form despite its presence in many cases. It was decided to take an exploratory, qualitative approach in this study for three main reasons: (1) In France, the number of chains in each sector is not sufficient for statistical inferences. (2) There is no database on store chains in France similar to the one maintained by the International Franchise Association (IFA). For example, available information on the French market is not as reliable as that on the US market. (3) Plural form organisations have become very common in store chains but, as we indicated earlier in this article, very little has been written on the subject. Therefore, a qualitative approach would appear to be more appropriate to allow for a greater understanding of such a complex and under examined area. Firms were identified for interview purposes. The selection of firms was carried out jointly with the French Federation of Franchising. A total of 16 firms using franchising were identified as suitable for the purposes of this study. These included seven beauty supply chains using franchises and nine beauty care product distribution chains. Hairdressing

salons, accounting for more than 26 trademark chains in the Franchise Directory, were excluded from the sample. The 16 companies were contacted for interview. However, a number of companies refused to be interviewed for this study. This could be attributed in great part to the fact that recent structural change and reorganisation within the French retail cosmetics industry, involving some of the companies contacted for interview, influenced their decision not to participate. Of the 16 firms selected for the study, eight agreed to be interviewed in order to understand better the evolution of their organisational form. Table I indicates sector diversity among the firms studied. The focus of this study was on the smaller players in the French cosmetics market for two main reasons: first, the larger multinational companies did not agree to be interviewed for strategic reasons and, second, the subject of the interview was not of major interest to these companies; large multinational companies seemed to be more interested in the leadership of the cosmetics market than in organisational issues such as plural forms. The key question for most of their smaller counterparts was how to compete with the acquisitive behaviour of the large companies who are looking to increase their territorial coverage. This article will show that plural form is an attractive answer, and many managers have sought to extract the advantages they can get from this organisational form. The main difficulty encountered in this exploratory research was ensuring methodological rigour and result reliability. There was actually no a priori conceptualisation or framework, or the formulation of hypotheses prior to the data collection. A triangulation approach was adopted (Wacheux, 1996), which involves using different methods to secure the information collected. The face-to-face interviews were supported by questionnaires and quantitative data on retail chains. Franchisors were always used as the data source. Interviews were used as the main method of collecting data because the personal involvement of decision makers enables the strategies of the chains to be more easily understood. The face-to-face interviews were carried out using semi-structured questionnaires, by interviewers who were all experimented researchers. Each interview

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lasted about two hours. A structured questionnaire was also sent to these managers prior to the interview in order to facilitate the discussion and to verify a number of points. This cannot, however, be considered as a good basis for a quantitative study because of the small number of people interviewed. Quantitative data provided information on the evolution of the chain, i.e. the number of store openings, and whether the stores were franchised or company-owned every year since the beginning of the chain. The quantitative data allowed the researchers to learn more about the company before the interview, thereby facilitating a stronger interview. For example, the data collected through the structured questionnaire enabled the researchers to gain an exact picture of the location strategies of these chains compared to their organisational forms (Cliquet, 2000b). Two different data analysis methods were implemented: a traditional content analysis (Robert and Bouillaguet, 1997) and the use of statistical software (Neuro-TextTM) devoted to text analysis based on occurrence and cooccurrence accounting, a multiple correspondence analysis and a cluster analysis based on a Kohonen network. The objective of these two methods is to provide a ‘‘simple’’ qualitative analysis (Maroy, 1995) which involves analysing content in the context of existing theories such as the transaction cost theory (Rubin, 1978), the agency theory (Lafontaine, 1992) applied to chain management, the ownership redirection theory (Oxenfeldt and Kelly, 1968-1969) and the plural form theory (Bradach, 1998). An earlier study applied these four theories to three sectors: hotels, fast food restaurants and cosmetics (Cliquet, 2000a). This previous research noted that results stemming from the cosmetics retail industry in France were the most specific, a factor which was instrumental in influencing the choice of the sector for the present study.

The research findings The French cosmetics retail industry Recent merger activity has transformed the French cosmetics retail industry. For instance, Marionnaud has acquired several chains: Mireille Clerc, Kleber, Silver Moon, Votre Beaute´, Rolly, Cloe´, Patchouli, Vialle,

Marie Bernard and Annabelle. Furthermore, Sephora, which bought Marie-Jeanne Godard, and Beaute´rama shops have become part of the LVMH group (Tissier, 1998). The cosmetics retail industry is heterogeneous in terms of product and service offerings. Various activities may be included in this sector: product sales (perfumes, beauty supplies); beauty care products (services); skin care, hair care, nail care products; and hairdressers (service). Each of these activities represents a particular niche market. Product sales and service activities are related to various chain activity types that we have already described: . Product distribution by manufacturing firms: Yves Rocher, Arlor/Norgil, Lazartigues, The Body Shop. . Retail sales: Sephora, Marie-Jeanne Godard, Marionnaud, Mireille Clerc, which do not produce the goods sold in their chains. . Beauty treatment services: Christian Drillien, L’Onglerie, Onglissima, Simone Mahler, Jean-Louis David, Jacques Dessange, Saint Algue, to which the Lazartigues, Yves Rocher and Arlor/ Norgil chains can also be added as they also provide these services. One of the main structural features of the cosmetics industry is the presence of both services and products in the same stores as well as in separate shops, where some of them represent pure service outlets. This sector is strongly influenced by the general economic situation and changes in consumer behaviour. However, the Raffarin Law[2] does not affect these small outlets (generally under 100m2). The initial fees are low since shops and material are relatively inexpensive. However, cosmetics chain operators may have a number of different functions: manufacturers of cosmetic products with the emphasis on volume; sellers of cosmetic products (wholesale-retail sales); and service suppliers, focused on maintaining quality standards in their shops. Chain organisation in this sector is apparently not as important as in other sectors. However, the need for product manufacturers to market their goods as luxury items can encourage them to buy chains to rapidly take advantage of established shops. Cosmetic supplies evolve rapidly due to constant research and development by large

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manufacturers. In addition, there is an undeniable French know-how that helped build the world-wide reputation of some of the firms studied. For example, Yves Rocher has 1,350 points of sale and about half of them are foreign outlets. As can be seen from Table I, there are no pure franchise or pure company-owned outlet chains among the sample of firms in this study. Most of these chains are plural form chains on the basis both of the proportion of franchises to company-owned outlets and of their way of thinking. Company-owned shops are used as pilot stores to train and experiment ideas, and as many pilots are created as new operation sites, as in the case of L’Onglerie, for instance, even though this chain is highly franchise oriented. While no correlation was calculated in this study due to the small sample size, it would appear that the smaller the size of the company’s operations, the more a chain tends to use company-owned outlets. This explains the chain operator’s leaning towards pilot stores. Franchises, on the other hand, are used as growth vectors. Companies operating in the sector employ one of two market strategies: a highly stable market strategy or a calculated market strategy. Yves Rocher, Body Shop and L’Onglerie have a highly stable marketing strategy, in that they maintain the same distribution strategy over time. On the other hand, Lazartigue and Mireille Clerc suddenly abandoned their franchise chains to keep only their company-owned outlets. Mireille Clerc was bought up by Marionnaud, while Lazartigue became a product retailer for beauty supply stands in large scale retail

outlets. These two firms were primarily smallsized product distribution oriented chains. Lazartigue, for instance, sold its own products and was looking for the best outlet. This change in strategy can be explained by the lack of market visibility for small franchisors. A calculated market strategy is very different to such opportunity-oriented strategies. For example, Simone Mahler implemented a carefully controlled market strategy by developing the chain first as company-owned stores, then as franchises, while Drillien and Arlor used a very detailed strategy. Arlor seized an opportunity and a good market situation (the success of its Viviscal product) to buy out its main competitor. The distribution of this type of product is caught in a vice-like grip between large-scale distribution chains, trying to improve their image and therefore interested in the prestige of luxury goods, and well-known, high quality brands seeking to avoid large-scale distribution and looking for other chains. This leads to wide differences in market strategy. Some service oriented chains such as L’Onglerie are attracted to shopping malls where they help bring in steady customers, while chains such as Lazartigue have decided to quit retail sales and use a large scale distribution method instead. Lazartigue acquired l’Institut des Jambes, where it acts as a product advisor, an apparently growing and profitable activity. There is an interesting contrast in the French cosmetics retail industry between Yves Rocher, which is a large French international firm, and Body Shop, a foreign firm trying to break into the French market.

Table I Breakdown of organisational form structure in cosmetics chains

Store chains Christian Drillien Body Shop Mireille Clerca J.-F. Lazartigueb Simone Malher Arlor/Norgil Yves Rocher L’Onglerie

Total number of units

Number of franchised units

% of franchised units

Number of companyowned units

% of companyowned units

5 22 18 105 67 63 568 134

1 8 7 74 50 53 492 130

20 36 39 70 75 84 87 97

4 14 11 31 17 10 76 4

80 64 61 30 25 16 13 3

Notes: a This chain has been bought out by Marionnaud since the date of the interview b Chain undergoing complete restructuring

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Other beauty supply firms are much smaller and regionally focused, and these include: Mireille Clerc in Normandy; Simone Mahler and L’Onglerie in the Southwest; and Arlor in the North. The market would appear to be too difficult to penetrate using the usual financial or commercial techniques. A chain such as L’Onglerie, created in 1983, is primarily present in the Southwest and Paris where it relies on spontaneous applications for openings in these regions. The nail care market is not as competitive in France as it is in Germany, for example, and L’Onglerie faces little competition. This is one of the few sectors where firms complain about not having enough competitors to help market growth. Franchising and company-owned arrangements in the cosmetics retail industry Franchises were started up in this service sector in the 1980s when the franchise system was expanding. These chains grew through franchises due to lack of finance and through word of mouth. New candidates were then recruited in previously tested zones. Untested regions did not attract new franchise candidates as the concept was not well known in these regions, which emphasises the importance of spatial coverage and publicity for chains. Many firms have grown more through opportunities than through careful market strategy. In recent years, more and more small structures have called in marketing and/or financial consultants to help in development orientation (for example Arlor, Simone Mahler and so on). Even Yves Rocher, with its 300 million Francs turnover, is not the market leader one might expect; 70 per cent of the market is controlled by large format retailers. This emphasises the importance of the beauty care services offered in these chains’ shops, which helps to differentiate them from competitors and create customer allegiance. Given the difficulties in this market, franchising seems to be the obvious choice for development. Five out of eight interviewees in this study agreed that a 1:10 ratio between company-owned outlets and franchises represented a good balance. One of the reasons for this choice is the desire to own at least one company-owned outlet per region, where the company-owned store acts as a pilot store. One pilot store per region helps

develop brand image, guarantees high quality service and creates an optimal chain mesh. In general, the role of company-owned outlets is to: . Provide training for store management and style. It can be used as experience for both franchisees and franchisors (for example, Simone Mahler and L’Onglerie). . Test products, designs, concepts and demonstrate the value of changes for franchisees. . Set up new operations at strategic or new locations (shopping malls, Paris, etc.) as franchisees do not have the necessary financial means (for example, Yves Rocher). . Develop brand name image and reputation (for example, Arlor and Yves Rocher). They help the franchisor promote the trademark throughout a territory by demonstrating high product availability and client services. Some franchisors, for example Arlor, Body Shop and Lazartigues, only set up shops in cities with more than 100,000 inhabitants, which limits the number of possible companyowned stores in France. For most chains, the minimal city size is closer to 30,000-40,000 inhabitants. The desire to have at least one company-owned store per region is often hindered by control issues in small structures due to store distance from headquarters. In addition, some franchisors have been able to reduce the number of company-owned stores by increasing field audits and automated management systems reports. This 10 per cent distribution is not yet a reality for many chains (see Table I). Some franchisors, such as Arlor, want to limit the number of company-owned stores, which they perceive as a threat to franchisees. Their goal is very similar to that of franchisees (one big family) and they are cautious about creating new company-owned stores. A comparison between franchising, company systems and plural forms Company-owned units are transformed into managed units to avoid the dual organisation required by having both wholly owned units and franchises and to secure strategic locations. However, managers have the same problems in terms of personnel, stock and so on as franchisees. Wholly owned units are then only used for pilot stores, as they are also

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considered to be less profitable. The problem is that turnover includes both royalties and profit margin on sold goods. Faced with these restructuring problems, it would appear that plural chains should not be reserved merely for mature chains, particularly when chains gradually turn into service chains. Tables II-IV indicate the advantages and disadvantages of plural form chains, predominantly franchise chains and predominantly company-owned systems for

the cosmetics industry. These tables show that the plural form concept is both necessary and difficult to manage. A need for plural forms in the retail cosmetics industry Plural form chains are desirable in this sector as a chain becomes more service-oriented and where distribution franchises often fall victim to large industrial groups looking for new markets. The disadvantages of plural form

Table II Advantages and disadvantages of franchise systems in cosmetics chains Advantages of predominantly franchise systems chains (for operator)

Disadvantages of predominantly franchise systems chains (for operator)

From a financial perspective: Low initial investments for franchisor

From a financial perspective: Limited individual financing capability, thus second string position lower margin, even if manufacturers make up for it through retail sales margin

From an economic perspective: Possibility of moving merchandise (economies of scale) From a strategic perspective: Rapid chain development From a managerial perspective: Franchisee is an entrepreneur, i.e. more dynamic than an employee Generally franchise systems are more dynamic and less bureaucratic Less administrative control From a marketing perspective: Better knowledge of local markets

From a strategic perspective: Risk of former franchisees copying concept and creating a competitive chain From a managerial perspective: Presence of different franchisees in the same city leads to structural problems (Yves Rocher) Pure franchise chains are difficult to renovate Incomplete information available on performances Difficult to control recruitment standards for franchisee employees Higher transaction costs From a marketing perspective: Risk of losing concept control and trademark integrity

Table III Advantages and disadvantages of company-owned systems in cosmetics chains Advantages of predominantly company-owned chains (for operator)

Disadvantages of predominantly company-owned chains (for operator)

From a financial perspective: Better profitability mentioned by service-oriented advocates Financial benefits are not shared with franchisees

From a financial perspective: High development costs Lower profits for product manufacturers (Yves Rocher) as company-owned stores play a role not offered to franchisees

From a strategic perspective: Easier to locate at the best sites Greater chance of being bought up by a larger group From a managerial perspective: No organisational problems due to the strong hierarchic relationship Compensates for the lack of good franchise candidates Easier to control training sessions From a marketing perspective: Total concept control Higher trademark integrity

From a strategic perspective: Slower development From a managerial perspective: Lack of flexibility Standard problems of agency relationships between operator and salaried directors From a marketing perspective: Difficulties in adapting concept locally Less innovation

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Table IV Advantages and disadvantages of plural-form cosmetics chains Advantages of plural-form chains (for operator)

Disadvantages of plural form chains (for operator)

Solves problem of location speed/concept control (adding units/uniformity): Rapid development and territory coverage through complementarity (franchises and company-owned outlets can play complementary roles in different chains) Rapidly cross over critical threshold Consolidation concept control using company-owned outlets Association of flagship stores with standardised franchise stores (Yves Rocher)

Difficulty in reconciling two different management modes: franchises or company-owned stores: Need for dual organisational structure as relationships between franchisor and franchisees or between franchisor and company-owned outlets are not the same: alternate authority/persuasion Risks of demotivating and creating anxiety among franchisees due to presence of company-owners: Locally, when company-owned stores are located nearby System-wide, when proportion of company-owned stores is too high

Greater organisational flexibility (adaptation): Demonstration of franchisor know-how (rather than concept because of the service dimension) through pilot stores located near franchises for training and simulation (showcase effect) Company stores are used as test laboratories for concept development: few company-owned stores are required (10%) Combining franchises and company-owned stores provides complementarity Greater economic efficiency: Lower financial investments due to franchises Increased investment capacity due to partners’ external financial input

chains were barely touched on during the interviews for this study. The interest in plural forms was clearly at the back of the decision makers’ minds, no matter what the chain’s life cycle phase. Nevertheless, the plural form concept in the cosmetics industry is not the same as the one described by Bradach (1998). Here, plural forms are considered to be a way to build a chain so that it systematically covers all the points in a market using pilot stores and strategic points of sales as internal and external showcases. The goal is more strategic than managerial, and even if the managerial aspects are not entirely missing, they are simply more technically oriented, i.e. training and concept testing. Plural forms are used more to structure than to stimulate. This structuring also varies depending on whether the operator is a producer or not. If the operator is a producer, he earns a profit on the product and also on possible royalties for services and must therefore develop formulae (franchise or managership) that help increase turnover and maintain wholly owned outlets as showcase operations. If the operator is not a producer, but a service provider, he earns

profit through royalties. He thus needs to maintain a proportion of company-owned stores to financially balance out his operations and demonstrate his know-how. The cosmetics sector is thus marked by a rather high specificity. Several points should be emphasised: . The pilot plays an essential role and justifies the presence of company-owned outlets in chains, whether at the launch, development or maturity phase. They are laboratories that tend to disprove the theory that innovations stem mainly from franchisees (in this sector). . Training is particularly important in a sector which is heading more and more towards a service industry. . The existence of close-knit chains like Yves Rocher where ‘‘franchisees are often friends’’ and are treated with respect, although new company-owned stores can occasionally create bad feeling. . High feminisation of this chain and its consequences on duration of a franchised store. Again, Yves Rocher is an essential example of the importance of reinforcing

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.

strategic locations and thus using managership. Chain restructuring currently being tested by Yves Rocher is very interesting and could be used as a model for other CEOs in this sector, particularly as Bradach’s (1998) model does not appear to be valid here.

The cosmetics sector uses a wide variety of plural forms according to the Franchise Directory; not only managership at Yves Rocher but also licensed dealerships (for example, L’Artisan Parfumeur, Nectar, L’Occitane, and La Savonnerie), affiliated chains (for example, Beauty Success) and partnerships (for example, Coryse Salome´ and Gise`le Delorme). A distinction is made at the end of this directory in the listings by activity sector between franchises and chains, which appears to us to be both inaccurate and dangerous. A model adapted to this sector is shown in Figure 1. Several differences can be noted between this model and that used for other sectors. The main difference is in the maturity phase where we no longer find Bradach’s (1998) challenges, but an emphasis on maintaining trademark consistency. However, Yves Rocher is the only representative of a mature chain in this sector for the moment. In addition, this sector relies on a production system as Yves Rocher is also a cosmetics manufacturer. However, the interviews and questionnaires addressed to CEOs from other sectors confirmed the interest in plural forms with a large number of franchises (90 per cent) and a few company-owned pilot outlets (Cliquet, 1998). This conception of plural forms does not emphasise the local responsiveness of franchises, i.e. chain dynamic commercial stimulation. Only the addition of new units, concept control (respect for uniformity) and system wide chain adaptation were mentioned by the managers interviewed. For legal reasons, new start-ups in the cosmetics sector generally begin as companyowned outlets. Then the choice is offered to either grow exclusively through franchises, as in the case of L’Onglerie (although other company-owned shops are planned depending on location), or through plural form chains with a low proportion of company-owned outlets (10-15 per cent). It can be seen from Table V that chains which

go beyond this proportion run into trouble. Lazartigue sold its chain and changed its distribution policy. Mireille Clerc was bought out. Body Shop is having difficulty getting a good foothold in France. Simone Mahler remains a regional operator. We will not look at Christian Drillien, which is just starting out. Only Yves Rocher, L’Onglerie and Arlor have been able to make a go of it. Nevertheless, organisational form alone cannot explain a chain’s success or failure, although the coincidence is striking. An overview of the situation in the cosmetics industry firms is shown in Table V.

Conclusion Plural forms seem to be attractive for retail chains in the cosmetics market. But the decisions made in choosing the franchise/ company-owned outlets ratio in the cosmetics retail industry depend primarily on operator position within the chain life cycle in terms of spatial coverage. Chains quickly turn to franchise/company-owned outlet plural form systems. The trouble for chain operators lies in their capacity to combine the number and quality of company-owned outlets in order to maintain chain and concept control without upsetting franchisees, and recruit franchisees who will not lead to major restructuring of strategic locations. Yves Rocher’s use of managership should be taken as an important sign. Service oriented franchisors are in protected competitive niches and service is not currently profitable enough for the biggest retailers as cost per square metre is too high. In addition, using sophisticated technical know-how creates a barrier for new potential market competitors. Growth potential is relatively high in the service provider sector, except for Arlor, which already has extensive territory coverage due to its recent take-over, and Drillien which is trying to exploit the same market as L’Onglerie but with fewer means. Growth perspectives for product retailers through franchises are limited for small structures due to lack of financial means. They prefer either to quit, co-operate with large distribution systems or become service providers. For larger firms, growth in independent conditions means combining service to sell their products and/or grow internationally. Service helps to create steady

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Figure 1 Model of organisational form evolution in cosmetics chains

p

Table V Breakdown of cosmetics chains according to sector’s structural elements Cosmetics chains

Territory coverage

Franchisor size

Retail sales

Services

Growth potential

Yves Rocher Body Shop Lazartigues Mireille Clerc Simone Malher L’Onglerie Christian Drillien Arlor/Norgil

National Low National Local Regional Regional Very low National

Large Large Small Small Small Small Small Small

High High High High Average Low Low Average

Average Low None None High High High High

International + services International + services Large retail formats + services Bought out France France France International

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customers and differentiate a firm from its competitors. Plural forms help companies to implement both control and stimulation within the chain. Personnel training is also a key point. Plural form can help to develop a retail network in a systemic approach with greater interactions between stores than a traditional retail chain. Whatever the size of the franchisor, it seems hard to develop a franchise chain based solely on retail sales of cosmetic products. Large and medium retailers pose too great a threat. Plural forms seem to be a good protection against predators. The results from this research are limited due to the very small sample of firms which agreed to be interviewed. Broadening this work to other retail sectors should help to understand better what plural forms can bring to retail and service chains. Having a specific know-how seems to be the key point for developing a franchise, and a good companyowned unit location policy a good way to manage the system.

Notes 1 Which can be translated as: ‘‘One hour for oneself’’. 2 The Raffarin Law was passed in 1996. It imposes that retail firms ask for a special permit from an urban planning committee before opening any retail store over 300m2.

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The failure of business format franchising in British forecourt retailing: a case study of the rebranding of Shell Retail’s forecourts Emily Boyle The author Emily Boyle is Senior Lecturer and Head of the Graduate School in the Faculty of Business and Management, University of Ulster at Jordanstown, Newtownabbey, Northern Ireland. Keywords Franchising, Brands, Retailing, Case studies Abstract As a result of an increasingly competitive petrol retailing environment and the rise of convenience stores in the food retailing sector, oil companies in Britain in the 1980s began to diversity into food retailing and convert their petrol stations into forecourt convenience stores. Drawing on case study evidence of Shell Retail, the paper examines how the company attempted to build its organisation into a strong brand by rebranding its forecourt outlets and introducing business format franchising to manage them. Utilising franchising, branding and food retailing literatures, the work investigates not only why Shell Retail believed business format franchising was more appropriate than traditional franchising or in-company management for its rebranded forecourts but also the factors that eventually caused the arrangement to fail. In particular, the paper analyses the problems relating to business format franchising that Shell Retail encountered in order to provide guidance for other retailers who may be considering using it as an instrument in the rebranding process. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0959-0552.htm International Journal of Retail & Distribution Management Volume 30 . Number 5 . 2002 . pp. 251–263 # MCB UP Limited . ISSN 0959-0552 DOI 10.1108/09590550210426417

Introduction During the 1980s and 1990s there were two significant developments in retailing in Britain. The first was that a growing number of retailers were organising their geographically dispersed outlets as business format franchise systems. By 1997 it was estimated that no less than 19 per cent of retail sales in Britain were being made through franchised outlets (Clarke, 1997). The second development was that a number of large retail chains including Boots, Sainsbury, IKEA, Body Shop, Next, Benetton, and Tesco were increasingly being recognised as strong brands (Aaker, 1996; Randall, 1997). Brand strength results in added value and therefore increased competitive advantage for the organisations concerned (De Chernatony and McDonald, 1992; Aaker, 1996; Randall, 1997). The simultaneous appearance of these two developments resulted in a number of retailing chains attempting to build their organisations into strong brands by rebranding their outlets and introducing business format franchising arrangements to manage them. Among these was Shell Retail, the business unit of the oil giant Royal Dutch Shell, responsible for managing the distribution and sale of Shell’s motoring fuels in Britain. In 1991 Shell Retail began to rebrand its petrol stations as Shell Select forecourts. These forecourts were to be owner-managed on a business format franchise basis. Many Shell petrol stations were already managed by franchisees. However, their contracts were in the form of traditional franchises which differ significantly from business format franchises. Unfortunately for Shell Retail, the plan to use business format franchising in its rebranding programme proved to be a failure and within four years of its introduction was abandoned, even though its forecourts continued to be rebranded using conventional company managers. This article examines not only why Shell Retail believed that business format franchising was more appropriate than traditional franchising or in-company management for its rebranded forecourts but also the factors that eventually caused the arrangement to fail. In particular, the problems relating to business format franchising that Shell Retail encountered are

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analysed in order to provide guidance for other retailers who may be considering using it as an instrument in the rebranding process. The changing environment in which Shell Retail introduced business format franchising for its forecourts as well as the details of the franchise contracts are identified as significant factors in explaining its eventual failure. First, however, the two predominant forms of franchising – traditional and business format – are compared in order to provide an insight into Shell Retail’s motivation in opting for business format franchising rather than for traditional franchising or in-company management for managing their rebranded outlets.

Traditional and business format franchising Franchising has been defined as a ‘‘type of business arrangement in which one party (the franchiser) grants a license to another individual, partnership or company (the franchisee) which gives the right to trade under the trade mark and business name of the franchiser’’ (Clarke, 1997, p. 21). The arrangement is formalised through a legally binding contract. Within this definition a number of different franchising arrangements have been identified. However the US Department of Commerce classifies franchising arrangements into two broad types – traditional and business format franchising (Lafontaine and Shaw, 1998). Traditional franchising involves using franchisees to distribute a product under a franchiser’s trademark (Hoffman and Prebles, 1993). This form of franchise system is commonly found among oil companies and their petrol retailers. It is also used in selling cars and for bottling soft drinks. Traditional franchising may be regarded essentially as a distribution arrangement through which the manufacturers (the franchiser) ensure that there are sufficient outlets to sell their products over a wide geographical area. In contrast to this business format, franchising has been described as a form of ‘‘business cloning’’ (Hoffman and Prebles, 1993). As Hoffman and Prebles (1993) contend, business format franchisers seek to have franchisees replicate in their local

community an entire business concept, including product or service, trade name and methods of operation. Franchisees are provided with details of the franchiser’s trade secrets, as well as everything else necessary to establish a previously untrained person in their own legally separate business, running it with continuing advice and support on a predetermined basis for a specific period of time (Clarke, 1997). The franchiser’s control over the franchisees’ activities may extend over products sold, price, hours of operation, condition of plant, inventory, insurance, personnel, and accounting and auditing (Rubin, 1978). The franchiser also normally provides the franchisee with information systems, thorough training programmes and a detailed operations manual so that ‘‘each franchise operates within the franchiser’s corporate image, offering customers consistency in product and/or service. Consistency day in, day out from every location in the network is expected’’ (Clarke, 1997, p. 22). One key characteristic of business format franchising that differentiates it from other types of franchising is that existing franchisees are legally permitted to sell on their contract if they wish to. Franchising literature suggests a number of theories to explain the existence of franchising. The three predominant ones are resource constraints theory, transaction costs analysis, and agency theory (Lafontaine and Kaufmann, 1994). The resource constraints theory argues that franchising is adopted when franchisers are keen to expand their businesses into new markets but do not have the resources available to do so. In these circumstances franchising allows the franchiser to achieve rapid and effective market penetration using franchisee capital (Curran and Stanworth, 1983). In contrast to this, transaction costs analysis suggests that franchising may be used as an alternative to full ownership when the administrative costs of the firm, particularly those of monitoring and control, become excessive. This is particularly the case when the firm operates on the basis of a widely dispersed network (Stanworth, 1993). Rubin (1978) has argued that monitoring costs in these firms are increased by shirking and excessive consumption of leisure by employees with no financial interest in the success of the concern. Franchising provides a solution to

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this problem in that franchisees retain all their profits once they have paid their fees. They are therefore motivated not to shirk. Finally, agency theory argues that franchising has become increasingly popular because, if it is properly managed, it is mutually beneficial to both parties. Franchising may be seen as a typical agency relationship. An agency relationship is present whenever a principal (e.g. the franchiser) must depend on the agent (the franchisee) to undertake some action on the principal’s behalf (Dant and Nasr, 1998). In a franchise system franchisers must depend on their franchisees to run their businesses efficiently. In return franchisers not only offer their franchisees support and advice in the form of information systems, training and an operations manual, but they also monitor their activities to ensure that the reputation of the franchise systems is not being damaged in any way by the activities of any one of them (Rubin, 1978). It is, therefore, in the interests of both the franchisers and the franchisees to optimise their efforts to make the franchise a success. Transaction costs analysis and agency theory may be seen as providing a more appropriate theoretical framework than resource constraints theory for understanding Shell Retail’s decision to adopt business format franchising over conventional ownership for managing its rebranded forecourts. However, it does not explain why Shell Retail favoured business format franchising over traditional franchising. The main reason for this was the potential for business format franchising, with its stringent contracts, detailed operations manuals, common management information systems and centralised training, to offer far greater overall consistency of performance than traditional franchising over a geographically dispersed chain of outlets. Shell Retail believed that consistency of image and of operations, as well as of management and employee behaviour, was essential to the success of its rebranding programme. To appreciate why this was the case the nature of brands and the branding and rebranding process need to be analysed. So too do the circumstances in which Shell Retail was operating when it made the decision to initiate the rebranding process.

The nature of brands, branding and rebranding Branding originated not all that many years ago when mass production and wider distribution led manufacturers to identify (or brand) their merchandise in a recognisable way, so as to offer a promise of consistent quality (Cowley, 1991). According to Feldwick (1991, p. 21) ‘‘at its simplest a brand is a recognisable and trustworthy badge of origin, and also a promise of performance’’. Essentially, the ‘‘badge of origin’’ is the symbol, logo or trademark by which an item or brand is recognised. For De Chernatony and McDonald (1992), however, branding is much more than creating a badge, symbol or trademark, contending that branding is not simply ‘‘to do with naming products’’ or ‘‘about getting the right promotion with the name prominently displayed’’ or ‘‘getting the design right’’. Rather, it is concerned with creating an identity for the item concerned. They explain the purpose of branding as facilitating the organisation’s task of getting and maintaining a loyal customer base in a cost effective manner to achieve the highest possible return on investment. Randall (1997) notes that the brand must always deliver value and the value must be defined in consumers’ terms if branding is to be successful. He goes on to explain that if the target customers and consumers of a product or service perceive it to have a unique identity that differentiates it from other similar products (or services), and they can describe it and the unique set of benefits it offers, then it is a brand. De Chernatony and McDonald’s (1992) definition of a successful brand as ‘‘an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant unique added values which match their needs most closely’’ supports this view. It is the perceived uniqueness of a brand that gives it its value. As De Chernatony and McDonald (1992) explain, ‘‘brands are able to sustain a price premium over their commodity form since customers perceive relevant added values . . . The concept of added values is an extremely important aspect of brands, being their raison d’eˆtre’’. The added value of a brand over its commodity form is known as brand equity. According to Aaker (1996, pp. 7-8), ‘‘[b]rand equity is a set of assets (and liabilities) linked to a brand’s

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name and symbol that adds to (or subtracts from) the value provided by a product or service to a firm and/or that firm’s customers’’. Brand equity derives from the image that the public has of the brand. It can be traced back to four sources – brand awareness, brand loyalty, the perceived quality of the brand and the impact of brand association on consumers’ buying patterns. According to Dowling (1993, p. 103), image may be defined as ‘‘the total impression an entity makes on the minds of people’’. The problem for any company wanting to improve its brand equity is that its image is outside the company’s control (Abratt, 1989). As Randall (1997) points out, it is not the manufacturer who decides whether an item is a strong brand or not. He rightly maintains that there have been attempts to create brands that have manifestly not succeeded. However, while a company cannot control the public image of its offerings it can manage their identities. Aaker (1996, p. 68) defines brand identity as ‘‘a unique set of brand associations that the brand strategist aspires to create or maintain. These associations represent what the brand stands for and imply a promise to customers from the organisation members’’. In order to build brand identity management must ensure both that organisation members are aware of what the brand stands for and that they have the resources to fulfil the implied promise. The first stage in any brand identity programme must be to provide some way of identifying the brand clearly and unambiguously, so name, legal protection and design elements are important (Randall, 1997). When, for any reason, the badge or symbol of identification becomes incompatible with the desired brand identity then it is time for the company to rebrand its offerings. This frequently occurs when a business diversifies into an unrelated set of activities with which the existing brand image is not consistent. When a firm diversifies it can adopt one of a number of different approaches to branding its new products/services. These include extending the brand, that is, simply bringing the new items in under the existing brand name; creating a new brand which is in no way identified with the firm’s existing brands; using sub-branding where a sub-brand name serves as a qualifier to the parent brand; or adopting nested branding which is similar to

sub-branding except that it suggests a wider degree of separation of the new product from the parent brand name (Bhat et al., 1998). Brands can take many forms. There are single product brands, line brands, range brands, umbrella or pillar brands and company, family or source brands (Randall, 1997). Services may also become brands, though this is less common because services are intangible, and perishable, delivery and consumption are inseparable and quality is less easily controlled than for products. These characteristics of services make it extremely difficult to create badges and symbols of identity for them unless a way of summarising the brand in a tangible form is found (Randall, 1997). This tangible form may, in fact, be the organisation offering the product or service. In building an organisation as a strong brand the activities of the entire organisation must be addressed. Knox and Macklan (1998) suggest that for organisational branding to be effective firms must offer a ‘‘unique organisation value proposition’’ – shortened to UOVP. They contend that ‘‘the UOVP is conceived as a means of expressing value in an environment where customer value is inextricably linked to the core processes of the organisation that operate end to end serving customer needs’’ (Knox and Macklan, 1998, p. 48). According to Bickerton (2000), a UOVP provides a mechanism for achieving both brand consistency and continuity by reinterpreting brand and customer value across the entire organisation. Organisational branding is effective when customers perceive that an organisation is offering them a unique value proposition. Much of the UOVP derives from the organisation’s reputation and the performance and quality of its products and/ or services. However, when a firm is offering a new product/service or is trying to change its organisational identity it does not have a reputation on which to base its UOVP. In order to build up a reputation the firm must prove that it can offer a consistent quality of product/service both over time and where necessary in a number of different locations. Knox and Macklan (1998) suggest that organisational reputations are affected by such factors as their mission statements, values and ethics, as well as by the quality of

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their products/services. Aaker (1996) reinforces this view by arguing that building a strong organisational brand is based on the premise that it takes an organisation with a particular set of values, culture, people, programs and assets/skills to deliver a (particular) product or service. The role of these factors in enhancing corporate image has also been emphasised in the corporate identity literature in recent years (Stuart, 1999; Bickerton, 2000). However, Aaker (1996) points out that organisational identity is not necessarily the same as corporate identity. In summary, then, it is apparent that when a firm rebrands an organisation because it has diversified it cannot offer customers a UOVP immediately because it has not yet created a reputation for itself. It can, however, begin the process by creating suitable badges, symbols, logos, trademarks or the equivalent by which the business can be identified in the future and by offering a consistent quality of product/service. One area of the service sector in which this aspect of branding/rebranding is more effective than others is retailing. This is because the service provided is normally ‘‘delivered through physical premises’’ so that ‘‘normal design techniques can give the stores . . . concrete characteristics that embody the brand’s value’’ (Randall, 1997, p. 94). Along with establishing the badge of origin and symbols of identity of the rebranded organisation the firm must ensure the quality of the product or service. In retailing quality of product/service is generally seen as synonymous with the level of customer satisfaction (Sivadas and Baker-Prewitt, 2000). Customer satisfaction is determined not only by the variety, quality and price of the products on sale but also by the attitude of the staff and the attributes of the distribution channels – ‘‘the shops, stores, retail outlets or whatever the current jargon is’’ (Olins, 1989). Finally, the firm should work to gain the commitment of the members of the rebranded organisation to the values, culture and ethos that are seen to be critical to its success. This, perhaps, is the most difficult task for the firm to achieve, particularly when the service is offered in a number of different locations, as is the case with many retail chains, including Shell Retail, which in 1991 was responsible for the 2,600 Shell petrol stations operating in Britain (Dwek, 1992).

Shell Retail’s decision to rebrand its forecourts in that year was precipitated both by the significant changes in the petrol retailing environment, but also by the changing nature of forecourt retailing throughout Britain.

Forecourt retailing: historical context The increasingly competitive petrol retailing environment Because of the way in which the oil industry had developed since the early 1950s, major oil companies had paid little attention to their downstream activities. Oil was plentiful and demand for it kept on rising. As Sampson (1975) explained, the oil companies took little trouble to make money out of filling stations which they regarded primarily as outlets for their ‘‘flood of oil’’. By the early 1970s there were 37,000 petrol stations in Britain (The Times, 1980). The majority of these, some 70 per cent, were independently owned and operated through licenses with the major oil companies. The others operated as traditional franchisees of the major oil companies. However, the situation had been dramatically changed by the oil crises of the 1970s which had drastically reduced the world’s output of oil and not only caused its price to quadruple within a few months of October 1973 and to rise by a further 260 per cent in 1979 but also eventually pushed the world economy into recession (Brown, 1992). In the early 1980s world demand for oil eventually began to fall and with it the fortunes of petrol retailers in Britain and elsewhere. At the same time, however, oil output began to rise again, thus creating a glut on the market and reducing the viability of the more marginal petrol stations even further. The number of petrol stations in Britain began a steady decline. By 1980 the number of petrol stations in operation had fallen to 26,500 (The Times, 1980) and by 1997 only 15,000 remained (Dymock, 1994). The plight of petrol retailers in Britain was exacerbated by two factors. First, a number of supermarket chains had begun to sell petrol more cheaply than the traditional filling stations, and second, the government has, since the 1970s, imposed increasingly heavy taxes on petrol.

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In 1974 Tesco began selling cheap petrol in Rochdale, using it as a ‘‘loss leader’’ to attract customers into its store (Cunningham, 1996). Tesco was soon followed by Sainsbury and other supermarket chains. Whilst the share of the petrol market taken by the supermarkets was initially small it gradually increased. By January 1991, 6.8 per cent of British petrol sales were made through supermarkets (Dwek, 1992). However, this increased dramatically during and after the Gulf crisis and war of 1990-1991 as a result of the supermarkets holding their prices steady whilst traditional petrol retailers pushed theirs up. During the Gulf crisis and war the difference between petrol prices at supermarkets and those at filling stations rose to as much as 15 pence per gallon. By early 1992 supermarket sales accounted for 12 per cent of the British petrol market. The supermarkets continued to undercut the prices of traditional petrol stations even after the crisis so that by 1994 they had captured 18 per cent of the market. A year later they were selling a quarter of all the petrol sold in Britain (Dymock, 1994; Patten, 2000). The second factor impacting on the position of traditional petrol retailers was the government’s imposition of increasingly heavy petrol taxes. The government began increasing the duties on motoring fuels in the mid-1970s in order to cushion the nation from the worst effects of the world recession. However, this policy has been maintained ever since as a way of helping the government pay for the nation’s public spending requirement (Brown, 1992). Between 1980 and 1982 the tax on petrol rose by 29 pence per gallon pushing the average price of a gallon of petrol up from less than £1.30 to nearly £1.60 (Davis, 1982). By 1986 the proportion of the total price of petrol sold to the public accounted for by taxes had reached 58 per cent. This rose to over 60 per cent in 1989 (Huxley, 1986; Eason, 1989). Further fuel duty increases imposed between 1997 and 2000 pushed it up a further 21 per cent, so that it accounted for nearly three-quarters of the final price of petrol to the customer (McVerry, 1999; Morgan, 2000). In the light of these developments a number of oil companies had become increasingly concerned about the plight of their petrol retailers and were looking for opportunities to enhance their profit-making potential. These

opportunities became apparent as a result of developments in the food retailing sector. Developments in food retailing Over the past quarter of a century significant social change in Britain has fuelled a radical shift in the structure and pattern of food retailing. First, the rising standard of living has led to more people owning cars, which has facilitated the development of profitable outof-town retailing on US lines (Burke and Shackleton, 1996). Again, increasing numbers of people now own fridges and freezers which has altered food shopping patterns dramatically, with a fourfold increase in consumption per head of frozen foods taking place between 1971 and 1993 (Burke and Shackleton, 1996). Furthermore, as more women take up paid employment so they have less time to spend on shopping. Recent studies suggest that the pressure of time is a major stressor among grocery shoppers (Aylott and Mitchell, 1999; Harvey, 2000). Women also have less time for other domestic chores including cooking. These developments have had two significant consequences. First, ‘‘one stop shopping’’, whereby the shopper goes to one shop and does the bulk of his/her shopping for a given time period, usually a week, a fortnight or a month, thus saving on both time and travel costs, has become increasingly common (Harvey, 2000). Second, demand for convenience foods, such as ‘‘ready to eat’’ meals, has risen dramatically (Burke and Shackleton, 1996). To accommodate these two trends the multiple supermarket chains have increased both the average size of their outlets and the range of products stocked. Major stores now carry between 25,000 and 50,000 products (Harvey, 2000). They have also located their stores out of town though this trend has been tempered in recent years by restrictions on planning permission for new out of town super or hypermarkets (Harvey, 2000). The rise in one stop, out of town shopping created a second phenomenon – that of ‘‘topping up’’. ‘‘Topping up’’ occurs because most people shop in bulk in supermarkets then top up as required (Dymock, 1994). Bread and milk are typical ‘‘top up’’ items (Krasner, 1997). Other categories of items that customers might buy between their major trips to hypermarkets are distress items such as headache tablets, casual items such as

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newspapers and cigarettes, and impulse purchases such as confectionery. ‘‘Topping up’’ has spawned the growth and development of convenience retailing for which convenience stores are typical outlets. A convenience store has been defined as a shop ‘‘with between 500 and 3,000 square foot of selling space, trading for seven days a week, including public holidays, open continuously from 8.00 am to 11.00 pm or for 24 hours a day, located within or close to a local community, for whom it offers a friendly or nearby source of regular daily purchases, top up and emergency items’’ (Keynote Report, 1995). By 1994 convenience retailing had become the most healthy area of food retailing in Britain. The number of convenience stores operating in Britain was estimated to have risen from 403 in 1990 to 1,170 in 1996 (Cull, 1997) and by 1998 onesixth of Britain’s grocery sales were being made through convenience stores (Connon, 1998). It was the development of convenience shopping that provided the beleaguered petrol retailers with an opportunity to revive their fortunes by converting their stations into forecourt convenience stores. Forecourt convenience stores From the early 1980s onwards an increasing number of petrol stations were being transformed into forecourt convenience stores. As the name implies these are convenience stores located on petrol forecourts. A number of the major oil companies were at the forefront of the process. For example, in 1983 BP opened two 900 sq. ft. self-service grocery shops selling fresh food and the full range of prepacked and packaged foods, washing powder and toiletries on petrol station premises (Young, 1984). So successful were these that BP planned to convert a hundred more petrol stations to the same format in the next few years. Each would carry between 1,500 and 2,000 items of stock (The Times, 1985). Texaco, Total, Esso, Jet and Mobil also became involved (Young, 1984; Cunningham, 1996). They gave their forecourt convenience stores new names and adjusted the terms of their traditional franchises in an effort to increase control over the running of their sites (Bracey-Gibbon, 1994). Thus Esso introduced its ‘‘Partnership agreements’’, BP its ‘‘Harmony franchise’’, Texaco its ‘‘Team franchise’’ and Jet its

‘‘Retail charter’’ (Dwek, 1992; BraceyGibbon, 1994). The contracts involved in these arrangements normally lasted for a maximum of five years. However, the franchise contract could not legally be sold on to a new franchisee. Thus they could not be classed as business format franchises. Unlike the other oil companies, Shell was slow to react to the changing environment. It was not until 1991, when the Gulf crisis and war were forcing petrol prices upwards and intensifying the squeeze on the profit margins of petrol retailers, that it became involved and embarked on a nationwide programme to convert its petrol stations into forecourt convenience stores (Dwek, 1992). It was as a result of this belated diversification into convenience retailing that Shell Retail felt the need to rebrand its forecourts, using business format franchising to manage them.

Shell Retail Shell Retail was, in 1991, one of over 260 operating units of Royal Dutch Shell (commonly known as Shell in Britain), which had recently overtaken Exxon as the world’s largest oil company (Knowlton, 1991). Royal Dutch Shell had revenues of over $107 billion and was second only to General Motors on Fortune’s Global 500 list of largest industrial corporations. It was renowned for the autonomy its divisions throughout the world enjoyed and had a reputation for being a very well managed corporation. It was one of the world’s great industrial enterprises, with cashflow generation and balance sheet among the strongest in the world (Knowlton, 1991). Despite this, Shell Retail was struggling. Its share of the British petrol market had fallen to 14 per cent from 19.6 per cent in 1985 (Dwek, 1992). Esso, with 17 per cent of the market, had overtaken Shell as the market leader. The majority of Shell’s forecourts were either Shell or dealer owned, and supplied and managed on the basis of a five year traditional franchise contract. There were also a few that were owned and managed directly by Shell Retail itself, as well as a small number of private dealers to whom Shell Retail simply supplied fuel. Whereas this mixture of ownership and control had allowed Shell Retail to manage its petrol distribution satisfactorily in the past, by the early 1990s, it was rendered ineffective

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because of the major changes that had occurred in the petrol retailing environment. By then, most of the other large oil companies with petrol stations in Britain were already operating a number of forecourt convenience stores. Thus, Shell Retail decided that the only way to regain its competitive position was to convert its petrol stations into the leading brand of forecourt convenience store chain in Britain by rebranding them and by using a system of business format franchising to manage them. Esso, the leading petrol retailer at the time, was totally scathing of Shell’s plan, arguing that ‘‘everything that Shell is doing we did five years ago. We have constantly been ahead in meeting customer needs’’ (cited in Dwek, 1992, p. 23).

The rebranding of Shell’s forecourts With the move into forecourt convenience retailing it became apparent to the oil companies that they needed to differentiate these premises from their traditional petrol stations. Most of them did this by subbranding their forecourt convenience stores by adding a word like ‘‘Shop’’ or ‘‘Mart’’ to their petrol brand name. For example, BP and Esso just added the word ‘‘Shop’’, Mobil added ‘‘Mart’’ and Texaco added the word ‘‘Star’’. However, Jet, the petrol retailing arm of the American oil company, Conoco, adopted a new brand approach, dropping the name of its petrol completely and renaming its forecourts Jiffy Shops (Bracey-Gibbon, 1994). As the number of forecourt convenience stores in operation increased and the industry became more competitive two problems became apparent. First, market research carried out in the early 1990s looking at the public’s impression of petrol stations indicated that customers found them ‘‘not very warm or friendly, associated with grease and heat and not very clean’’ (Binney, 1994). Second, it was acknowledged that petrol retailers were notorious for failing to achieve consistency both over time and across locations (Dwek, 1992). Bearing these issues in mind, Shell Retail set about converting and rebranding its forecourts. One of Shell’s prime concerns in doing this was to claw back its share of the petrol market. It hoped to create Britain’s leading brand of forecourt convenience store

chain into which customers would be enticed not only to buy ‘‘top up’’ and other items but also to fill up their cars with its petrol. Furthermore, Shell Retail anticipated that, as a result of their initial shopping experience at Shell’s stores, customers would deliberately seek out its outlets at which to both ‘‘top up’’ and ‘‘fill up’’ in the future. Shell Retail therefore felt it needed to maintain close brand association between its chain of forecourt convenience stores and its brand of fuel. It also wanted to gain much tighter control of its image by developing a new and much stronger relationship with its dealers and to harness them behind the brand (Dwek, 1992). Shell Retail therefore opted to sub-brand its chain of forecourt convenience stores, retaining both the word ‘‘Shell’’ in its trade name and the parent company’s well established yellow shell logo, but adding the word ‘‘Select’’ to the trade name to indicate that the outlet was not a traditional petrol station. The forecourts were also completely redesigned and refurbished. As Jim Slavin, director and general manager of Shell Retail, explained it was tempting ‘‘to splash on some paint, change the lights and shout ‘Hallelujah’, but we wanted to go behind the fac¸ade, to dig much deeper than our competitors have done’’ (cited in Dwek, 1992, p. 23). Shell sought to make its forecourts ‘‘more friendly, more domesticated, more indoors than outdoors’’ (Binney, 1994). Attention was paid to detail. For example, on the stores the edges of the canopies were made to form a subtle S-curve. They also began to feature a ‘‘portico’’ – ‘‘a clean white frame which makes any scruffy ancilliary building on the site look like a purpose built modern addition’’ (Binney, 1994). These features provided the visual symbols of identity. However, as Balmer and Wilkinson (1991) explain, a visual identity may be seen as only one part of a mosaic which forms the organisational brand. The interiors of the stores were also redesigned to appear ‘‘larger, brighter, undoubtedly cleaner’’ (Dwek, 1992) in order to reduce the negative impact of perceived crowding on customer satisfaction. Cluttered shelves, narrow and irregular aisles and understaffing can all increase the customers’ perception of crowding (Aylott and Mitchell, 1999).

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To build a strong brand of forecourt convenience stores Shell Retail needed to transform a patchwork of widely differing sites into a network of modern retail outlets with high standards of operation, service and management across the country (BraceyGibbon, 1994). It hoped to do this by outperforming its competitors by being the only major oil company to introduce business format franchising for its forecourt owner/ managers.

Shell’s business format franchises Shell Retail anticipated that its new business format franchises would herald a change of corporate culture and contended that their introduction was ‘‘the most radical change in petrol retailing since the first sites were established 100 years ago’’ (Dwek, 1992, p. 23). Franchisees’ contracts were extended to ten years, in contrast to the five year contracts of the other oil companies’ franchisees. Furthermore the contracts could be sold on by the franchisee at any time during that period. Franchisees paid up to £32,000 for the contract on top of a £40,000 start-up fee. They also paid a substantial annual fee. In return for the payments Shell franchisees received intensive training, constant promotional and advertising support, free pump maintenance, regular business forecasts and full insurance. To show its commitment to its franchisees Shell spent some £500,000 refurbishing each forecourt. It also invested ‘‘giant sums of money’’ in staff training to ensure a high quality of service. Gary Anderton, Shell Retail’s franchise manager, believed that business format franchising would ensure that once the standards had been established they would be maintained (cited in Dwek, 1992). Through its business format franchises Shell Retail intended to create a newly motivated breed of dealers, with a much more vested interest in the Shell brand. It was anticipated that a typical Shell forecourt proprietor would be a ‘‘complete businessman, with the responsibility for his success in his own hands’’ (Dwek, 1992). Shell Retail envisaged that its programme would increase both the value of sales through its forecourt stores and their profitability with the result that the value of the dealer’s franchise should rise considerably. Observers

of the petrol retailing industry were more sceptical about the scheme. A spokesman for Esso poured ‘‘scorn on it’’, while Bruce Petter, director of the Petrol Retailing Association, argued that it was a ‘‘false panacea’’ that would ‘‘cripple many dealers’’ (cited in Dwek, 1992). Unfortunately for Shell Retail and its franchisees, Petter and the other sceptics proved right. Although sales of convenience items at Shell forecourts were increasing by up to 20 per cent per year in the early 1990s (Bracey-Gibbon, 1994), by 1992, when just 300 forecourts had been rebranded, it had already become apparent that the franchises were just too expensive (Dwek, 1992). By then 51 of the new style forecourts were already said to be losing money. By 1994 it had become clear that it was not feasible for Shell Retail to continue to use its existing business format franchise contracts as part of the rebranding process. Bracey-Gibbon (1994) reported that the high franchise set up cost, less than projected volumes and high claw-back from shop and fuel sales, all compounded by the recession, have meant that franchisees have experienced acute profitability problems. Shell Retail was forced to buy back any franchises that could not be sold on. In 1993 it closed 200 forecourts as well as turning many franchises over to its own company operation (Bracey-Gibbon, 1994). In 1994 it abandoned its efforts to induce its forecourt owner/managers to become business format franchisees and offered compensation to retailers not wanting to stay in the network. It was clear that Shell Retail’s intention of creating a nationwide chain of business format franchised forecourt convenience stores as part of its rebranding programme had failed. The problems with Shell’s franchises There were two main reasons why Shell Retail’s plan to build a business format franchise system of forecourt convenience stores as part of its rebranding programme proved inoperable. First, there were the extremely high start-up costs both for the franchisees and for Shell Retail itself, and second, although sales grew significantly, the increase in profits that this provided simply did not cover the franchisees’ costs. Essentially both of these problems resulted from a lack of understanding on the part of Shell Retail of the nature of convenience store

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shopping rather than from any weakness in the concept of business format franchising. It has been argued that there are two basic types of shopping. The first is task oriented functional shopping where purchasing is more planned, shopping trips are shorter and are less likely to continue after making a purchase (Aylott and Mitchell, 1999). The second type of shopping – non-task shopping – is recreational. It is a form of leisure activity in which the customer may have little interest in acquiring products or services but is also likely to shop impulsively. The impact of the shopping environment is likely to affect these two groups of shoppers differently. For task oriented shoppers the perceived crowding of a shop is likely to have a more negative impact than for recreational shoppers. However, other facets of the shopping environment are less likely to affect task oriented shoppers. Forecourt convenience stores have become increasingly popular because they fulfil the needs of the public to buy ‘‘top up’’ and distress items both during traditional and antisocial hours, close to home or while travelling. Thus, customers in forecourt convenience stores are usually task oriented. Their main concern is to purchase the specific item required, either in commodity or brand form, as quickly as possible. As long as the item concerned is in stock and they are not required to queue for long at the check out, other aspects of the shopping environment are unlikely to have a significant impact on customers’ level of satisfaction. At the same time, because the shoppers are task oriented they are unlikely to be enticed into spending time browsing over other items or to make high value impulse purchases. Neither do they necessarily fill their cars with the parent brand of petrol. Furthermore, research suggests that there is little evidence that customer satisfaction necessarily translates into loyalty, repeat patronage or repeat purchases (Sivadas and Baker-Prewitt, 2000). To achieve this kind of response from its customers Shell Select stores needed to gain a favourable ‘‘relative attitude’’, that is one which is ‘‘high compared to potential alternatives’’ (Dick and Basu, 1994). However, given the functional and supplementary nature of forecourt convenience store shopping this was difficult to do. As far as grocery shopping in Britain is concerned the public usually restricts repeat

patronage to the stores at which one stop shopping occurs. Thus, for the Shell Select stores to increase their sales more than they did and to be as profitable as Shell Retail had anticipated they really needed to attract customers to do their one stop shopping at their stores. This would have entailed competing directly with the large multiple supermarkets both in product variety and price. Unfortunately Shell Select stores were unable to do this. Over the past quarter of a century British supermarkets have been at the forefront of developments in distribution and supply chain management, which has allowed them to create and fulfil a demand for product differentiation and high added value unmatched in Europe (Harvey, 2000). British supermarkets have, through their innovations, been able to ‘‘cream’’ the top of the quality range across a wide range of produce and sourced from a wide geographical area (Harvey, 2000). Thus the UK supermarket is now widely taken as a model for food retailing across Europe. Some have the capacity to stock no less than 50,000 items compared with the 2,000-3,000 stocked in a typical convenience store. Furthermore, because of the purchasing power of the large multiple food retailers their unit costs can be kept much lower than those of their smaller competitors. These lower costs are usually passed on to the customer as lower prices. Shell Retail, which had only recently entered the food retailing environment, was just not in a position to compete with them. As late as 1996, in common with the other oil companies it still lacked centralised distribution, own label development and sales based ordering (Cunningham, 1996). As one commentator explained at that time, the oil companies generally needed ‘‘much more expertise than they are demonstrating so far to make a good fist of neighbourhood retailing’’ (cited in Cunningham, 1996). In these circumstances, no matter how committed the majority of Shell’s franchisees were to their businesses and to the company, their turnover was simply not big enough to provide them with sufficient funds to cover both their initial start-up costs and their annual franchise fee.

Conclusion As a result of the increasingly turbulent and competitive petrol retailing environment, on

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the one hand, and the rise of convenience stores in the food retailing sector on the other hand, oil companies in Britain had begun, in the 1980s, to diversify into food retailing by converting their petrol stations into forecourt convenience stores. To do this, most of the large oil companies changed the name of their forecourt store chains and tightened up their traditional franchises. However, none of them adopted business format franchising and none of them had the level of start-up costs that Shell Select franchisees had. Nor were the franchisees of the other oil companies expected to pay such high annual fees (Bracey-Gibbon, 1994). As a result they did not suffer from the same profitability and cashflow problems as the Shell franchisees. Shell was one of the last major oil companies in Britain to move into forecourt convenience retailing. It therefore felt that in order to maintain and enhance its competitive position it needed not only to rebrand its forecourts but also to adopt a system of business format franchising for managing them. Shell Retail hoped that by doing this it would offer its customers a unique organisation value proposition, which would result in significantly increased sales of both convenience items and of its petrol. Shell Retail believed that the use of business format franchising in the management of the forecourts would ensure not only consistency of service but also commitment by the franchisees to a common organisational culture and ethos, which in turn would enhance Shell Select stores’ reputation. The thinking behind this was logical – business format franchisees, whose earnings were dependent on the success of their franchises, were more likely to be committed to them than direct employees whose earnings were not affected by the business’s performance. Furthermore, the dispersed nature of the outlets in a forecourt convenience store chain made monitoring of performance by the parent company very expensive. Business format franchising in these circumstances should theoretically have proved more effective than traditional firm ownership. It should also have been more effective than traditional franchising, especially in the area of ensuring consistency of performance across the system. The stringency of the contract, the common operations manual, the intensity of the training and the common management

information system should all have contributed to this. Unfortunately, however, this was not the case. While the traditional franchisees of the other oil companies survived and even prospered from the increasing popularity of forecourt convenience retailing, the majority of Shell Retail’s franchisees just found it too difficult to make their businesses profitable. Within three years it was apparent that the new business format franchises were simply not cost effective. This problem, however, did not arise because of any weakness in the concept of business format franchising. Rather, it arose from Shell Retail’s lack of understanding of the nature of both forecourt convenience retailing and of the forecourt convenience shopping experience. This lack of understanding led Shell Retail to be overoptimistic about the potential of the Shell Select brand to create a UOVP and to build brand equity. It assumed that spending giant sums of money (both its own and franchisees’) on rebranding, redesigning, and refurbishing its outlets and training their staff would inevitably lead to significantly increased profits. When this did not happen, despite rising sales, the franchisees could simply not survive. In 1994 sales through forecourt convenience stores in Britain accounted for just under £2 billion, of which £850 million was spent on food (BraceyGibbon, 1994; Mitchell, 1994). For many petrol retailers non-petrol sales accounted for over 50 per cent of their profits. Indeed sales of ‘‘top-up’’ items through Shell forecourts were rising by up to 20 per cent per annum at that time (Mitchell, 1994). Furthermore, it was predicted that the share of the convenience store market taken by forecourts was likely to rise by a further 7.5 per cent by the end of the 1990s (Keynote Report, 1995). Because of this, despite the failure of its franchise system Shell Retail continued its rebranding process. In 1994 Shell Retail was opening five rebranded sites on average per week, and by 1997 Shell Retail was managing 850 wholly owned Shell Select forecourts throughout Britain (Dymock, 1994; Nelson, 1997). The chain did achieve some success. For example, it became not only the fifth largest newsagency chain in Britain but also the fifth largest seller of sandwiches (Dymock, 1994; Cunningham, 1996). Furthermore, in 1997 Shell Retail also began to rationalise its

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logistics by abandoning 30 of its 50 forecourt suppliers and taking control over every product ordered for its forecourts. Hays, the logistics company, was awarded a £100 million contract to distribute some 90 per cent of Shell Retail’s supplies to its forecourts. Shell also introduced a range of own label products (Nelson, 1997). Despite this, Shell Retail’s rebranding programme never created significantly positive brand equity. Its performance highlights a number of problems that any convenience retailing chain considering rebranding as a way of increasing its competitive advantage should take note of. First, because of the generic nature of convenience stores it is difficult to create a significant amount of differentiation between one brand and another, thus inhibiting the potential for convenience store chains to create a UOVP. Second, because of the task oriented nature of ‘‘top up’’ shopping, consumers are typically more concerned with the accessibility of the shop and the availability of the appropriate items than the brand of the retailing outlet. Finally, the geographically dispersed location of the shops in a convenience store chain makes quality assurance across the brand problematic using traditional internal management systems. It is clear that business format franchising, with its ability to provide self-motivation of personnel and to encourage consistency of operations across all the stores in the chain, offers greater potential for building brand equity and gaining competitive advantage, so long as the start-up and annual fees for the franchises are reasonable. Unfortunately, in the case of the Shell Select franchisees, this was not the case. It is perhaps significant that within eight years of the introduction of the ill-fated business format franchises and the rebranding programme the fortunes of Shell Retail and its parent company, Royal Dutch Shell, collapsed. In February 1999 it announced the worst results in its century long history (Mortished, 1999). As a result of this a corporate review of spending was carried out. Not only were costs slashed but new limits were imposed on capital spending on new projects (Connon, 2000). One can only surmise that if these limits had existed in 1991 Shell Retail might have been more careful in planning and thinking through its rebranding programme and its business format franchise

system might still be operating successfully today.

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Dowling, D.R. (1993), ‘‘Developing your company image into a corporate asset’’, Long Range Planning, Vol. 26 No. 2, pp. 101-10. Dwek, R. (1992), ‘‘Can Shell strike oil as a retailer?’’, Marketing, 2 February, pp. 22-4. Dymock, E. (1994), ‘‘Filling stations shops boom’’, The Sunday Times, 20 November. Eason, K. (1989), ‘‘Pump up the profits’’, The Times, 21 April. Feldwick, P. (1991), ‘‘What is a brand?’’, in Cowley, D. (Ed.), Understanding Brands by Ten People Who Do, Kogan Page, London, pp. 21-4. Harvey, M. (2000), ‘‘Innovation and competition in UK supermarkets’’, Supply Chain Management: An International Journal, Vol. 5 No. 1, pp. 15-21. Hoffman, R.C. and Prebles, J.F. (1993), ‘‘Franchising into the twenty first century’’, Business Horizons, Vol. 36 No. 6, pp. 35-44. Huxley, J. (1986), ‘‘Oil majors strike a nice little earner’’, The Sunday Times, 2 March. Keynote Report (1995), Convenience Retailing, Keynote, London. Knowlton, C. (1991), ‘‘Shell gets rich by beating risk’’, Fortune, pp. 79-81. Knox, S. and Macklan, S. (1998), ‘‘Competing on value: bridging the gap between brand and customer value’’, Financial Times, Pitman Publishing, London. Krasner, H. (1997), ‘‘Pumps out; quids in’’, The Grocer, 27 September. Lafontaine, F. and Kaufmann, P.J. (1994), ‘‘The evolution of ownership patterns in franchise systems’’, Journal of Retailing, Vol. 70 No. 2, pp. 97-114. Lafontaine, F. and Shaw, K. (1998), ‘‘Franchising growth and franchisor entry and exit in the US market: myth and reality’’, Journal of Business Venturing, Vol. 13, pp. 95-113. McVerry, M. (1999), ‘‘New fuel crisis’’, Belfast Telegraph, 12 May. Mitchell, A. (1994), ‘‘Fill the car with five star food please’’, The Times, 26 January.

Morgan, O. (2000), ‘‘West held over a barrel’’, Observer, 18 June. Mortished, C. (1999), ‘‘Worst result for Shell in a century’’, The Times, 12 February. Nelson, F. (1997), ‘‘Shell to shake up its forecourt service’’, The Times, 28 August. Olins, W. (1989), Corporate Identity, Thames and Hudson, London. Patten, S. (2000), ‘‘Supermarkets the catalyst for food retailing revolution’’, The Times, 13 September. Randall, G. (1997), Branding: A Practical Guide to Planning, Organising and Strategy, Kogan Page, London. Rubin, P.H. (1978), ‘‘The theory of the firm and the structure of the franchise contract’’, Journal of Law and Economics, Vol. 21, pp. 223-33. Sampson, A. (1975), The Seven Sisters: The Great Oil Companies and the World They Made, Hodder & Stoughton, London. Sivadas, E. and Baker-Prewitt, J.L. (2000), ‘‘An examination of the relationship between service quality, customer satisfaction and store loyalty’’, International Journal of Retail and Distribution Management, Vol. 28 No. 2, pp. 73-82. Stanworth, J. (1993), ‘‘Review of Alan Felstead ‘The corporate paradox – power and control in the business franchise’’’, International Small Business Journal, Vol. 12 No. 2, pp. 85-7. Stuart, H. (1999), ‘‘Towards a definitive model of the corporate identity management process’’, Corporate Communications: An International Journal, Vol. 4 No. 4, pp. 200-7. (The) Times (1980), ‘‘Country petrol stations to go on closing’’, The Times, 11 January. (The) Times (1985), ‘‘BP may sell canned beer’’, The Times, 10 March. Young, D. (1984), ‘‘BP investigates turning petrol sites into supermarkets’’, The Times, 24 January.

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Introduction

International retail franchising: a conceptual framework Barry Quinn and Nicholas Alexander

The author Barry Quinn is a Lecturer and Nicholas Alexander is a Professor and Head of School, both in the School of Business, Retail and Financial Services, University of Ulster at Coleraine, Northern Ireland. Keywords Franchising, Retailing, Globalization, Development, Strategy Abstract Franchising has become a major driving force in the globalisation of service businesses. Likewise, international retailing has become an important feature of global distribution systems. This has been brought about through changing socio-economic patterns, favourable political and cultural environments, and a shift from manufacturing to service based economies. Both developments have contributed to the globalisation of marketing activity. However, there remain fundamental conceptual inconsistencies in the literatures that explain the development of international retailing and the internationalisation of franchise operations. This paper considers the use of franchising in the internationalisation of retail operations and places the experience of retail operations that use the market entry strategy within the context of other franchising activity. The paper evaluates the literature on the internationalisation of retailing alongside the literature on franchising. It identifies the different perspectives that have emerged within the two literatures and conceptually reconciles the contradictions that exist. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0959-0552.htm International Journal of Retail & Distribution Management Volume 30 . Number 5 . 2002 . pp. 264–276 # MCB UP Limited . ISSN 0959-0552 DOI 10.1108/09590550210426426

International retailing has become an important feature of distribution systems in North America, Europe and the Pacific Rim. The 1980s saw a rapid increase in the number of international retailers moving into new markets as the retailers themselves acquired the ability to move outside their domestic market or were forced to consider international options as their domestic markets offered limited expansion opportunities (CIG, 1991). This expansion into new markets by a growing number of retail operations continued into the 1990s, with some retailers developing significant international operations and a wide geographical spread of operations (CIG, 1994). Within Europe, the single market initiatives contributed to the development of an environment that supported cross-border retail actions while, at that time, the developing markets of East Asia offered attractive, rapidly developing consumer markets in which to grow international retail chains. When retail companies consider international expansion they are faced with a number of options for market entry: that is, acquisitions, organic growth, franchising, joint ventures and in-store concessions. While the strategy of franchising has been traditionally associated with the service sector and, in particular, the fast food restaurant business, in more recent times it has been increasingly adopted across a range of other retail sectors. For niche retailers, for example, Body Shop, Yves Rocher and Benetton, it has become the major international expansion tool, providing them with the opportunity to rapidly build a global operation on a relatively low cost basis. Such retailers fall into Treadgold’s (1988) classification of ‘‘world powers’’, where a global spread of operations is achieved at a relatively low cost. Franchising has also found favour among retailers without the asset of a strong global concept that is a characteristic of the niche retailers. In contrast, these retailers have used franchising as part of a portfolio of entry strategies, rather than as the sole means of international expansion. Such companies include the supermarket and hypermarket operators Casino (France) and GIB (Belgium), and UK mixed merchandise retailers Marks & Spencer and BhS.

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Despite the popularity of franchising as a market entry strategy for international retail companies, the research community has only recently begun to examine international franchising within the context of retailer internationalisation (Sanghavi, 1991; Whitehead, 1991; Manaresi and Uncles, 1995; Sparks, 1995; Quinn, 1998a; Doherty and Quinn, 1999; Quinn and Doherty, 2000). The franchising literature has focused on the activities of US manufacturing and service sector companies, most notably fast food companies, and has not specifically addressed the nature of retail operations. As such, any conceptualisation of international franchising needs to consider the activities of international retail companies more closely. With reference to the existing international retailing and international franchising literatures, this paper aims to provide a framework that conceptualises the adoption of franchising by international retail companies. The particular situation of retail companies employing franchising in tandem with other operating modes poses a number of questions for the study of international retailing which, if addressed properly, can lead to the further refinement of ideas and conceptualisations already developed in the literature on international retailing. It is the authors’ belief that the study of retail internationalisation can be developed by utilising ideas and conceptualisations developed in other areas, in this case the internationalisation and franchise literatures. The paper begins by providing an overview of the growth and development of franchising in the global marketplace. It continues by discussing conceptual development to date within the retail internationalisation and franchising literatures. Following on from this, in the main body of the paper, a conceptual framework is presented to explain the development of international franchising within the particular context of the retail internationalisation process. The paper concludes with a summary and a discussion of the possible directions for future theoretical and empirical research into the area of international retail franchising.

International franchise expansion The term ‘‘franchising’’ may describe a wide variety of business activities, but the

contemporary franchise system commonly in use is known as business format franchising. With business format franchising a unique business relationship is in place. For a financial return, the franchising company, the franchisor, grants a license to its franchisees, entitling them to make use of a complete business package. This includes training, support and the corporate name, thus enabling them to operate their own businesses to exactly the same standards and formats as the other units in the franchised chain (Grant, 1985). The parties to the relationship – the franchisor and franchisee – both have responsibilities they must carry out in order to make the arrangement work. Franchisors have a contractual or at least an implied obligation to maintain their system’s brand image and standing through advertising and promotion, and through the control of other participants in the franchise system. In return the franchisee will be expected to pay a fee for the acquisition of the franchise and the continuing service. He or she will also be expected to maintain the standards of the franchise as outlined by the franchisor in the franchise contract. In real terms, there are obvious benefits from this arrangement for both the franchisee and the franchisor. For the franchisor these typically include the ability to expand the business rapidly and the spreading of costs and risks across the network. For prospective franchisees the attractiveness of opening a franchise system includes primarily the opportunity to purchase a business with a proven method for successful operation. The USA has traditionally been the world’s single largest franchise market. Although the USA remains the ‘‘home’’ of franchising, franchising is now used by US and non-US companies as a strategy for growth in both developed economies and emerging markets. Indeed, recent figures illustrate the widespread use of franchising across Europe (EFF, 1997). Within Europe, the main areas of franchise development to date have been retailing, fast foods, hotels, car hire and servicing plus domestic and industrial service areas. European retail franchise companies with an international presence include Pronuptia, Yves Rocher, and Rodier from France, The Body Shop and Clarks & K from the UK, and Marc O’Polo from Germany. While these companies have developed

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franchise operations in their respective domestic markets, other companies only employ franchising as a strategy in international markets. For British retailers at least, whilst internal growth remains the preferred operating mode in overseas markets, franchising has become a significant alternative over the past 20 years. According to Burt (1995), in the 1980s it accounted for 24 per cent of all UK foreign retail investments, compared with a mere 3 per cent in the 1960s. During the 19911993 period, franchising accounted for 19 out of a total of 35 cross-border moves undertaken by UK retailers. In this period, it was in use by UK retailers to a greater extent than anywhere else (Knee, 1993). By the mid1990s, out of a total of 92 British companies with overseas interests, 35 employed franchising to some degree (CIG, 1996). Master/area franchising, joint venture franchising, direct investment and direct franchising are the major forms of franchising a firm can choose from when it decides to enter a foreign market by the franchising route. In the case of international retailing, master franchising is the dominant form utilised. In master/area franchising agreements, such as those favoured by the Body Shop and the convenience store retailer 7-Eleven, the franchisor grants the master franchisee the right to subfranchise the franchisor’s concept to others within an exclusive territory, creating a tripartite franchise relationship. For the franchisor such arrangements mean that most of the work involved in expanding the operation in the foreign market is carried out by the foreign franchisee, thereby reducing the demands on the franchisor. A further advantage is that the local partner understands the local conditions better than the franchisor and is, therefore, in a better position to handle cultural and language barriers, bureaucratic red tape, political problems and so on. The local partner is viewed therefore not only as a source of revenue for the company but also as a source of information about what aspects of the marketing programme may need to be altered to fit the values of the host country (Christiansen and Walker, 1990). Furthermore, the local partner has an investment in the business and, consequently, is more committed to seeing the business succeed (Chan and Justis, 1992). However, control of the quality of the network’s

operations is crucial and difficult to maintain. In addition, there is the possibility that the large, established, international operator, which adds master franchising to its portfolio of entry methods, may in practice underestimate the social, economic and cultural differences of another country. As a result, this can often necessitate substantial adaptations and modifications to the original product, systems and marketing (Forward and Fulop, 1996).

Literature review Previous conceptualisation of international retail franchising The conceptualisation of international retail activity has in great part been the product of the late 1980s and 1990s. While some older texts such as Hollander’s (1970) remain influential in this area, the majority of research dates from the mid-1980s (see Alexander, 1997). While franchising has been considered within the literature it has primarily been considered as an influencing factor rather than a determining factor. Hence, early interpretations of international retailing that focused on the geographical development of international activity and the management control exercised over international operations (Treadgold, 1988; Salmon and Tordjman, 1989) considered franchising as a qualifying factor. Franchising was a means by which to achieve wide geographic presence or as a means to achieve a common product and service delivery. The literature itself, however, was a reflection of the pre-1985 interest in the direction of expansion of US retailers and the expansion of European retailers into the USA (Seigle and Handy, 1981). Geography, and in great part culture, was considered to be a fundamental determinant of international activity. Thus, there emerged the understanding that retailers were essentially cautious in their approach to international activity and often took a multinational approach whereby they adapted to local circumstances, perhaps through the acquisition of local operations, or took a more aggressive global approach to international activity, maintaining a recognisable brand in a large number of markets which they accessed through the exploitation of ‘‘low control mechanisms’’ (Treadgold, 1988) such as franchising.

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This interest in the geography of international retail development absorbed a considerable amount of research effort in the early period of international retail research, with researchers focusing on the experience of the US market and European retailers’ interest in that market (Kacker, 1985; Hildebrand, 1989; Wrigley, 1989; Hallsworth, 1990; Hamill and Crosbie, 1990; Lane and Hildebrand, 1990). Likewise, European retailers’ expansion into other European markets (Robinson and ClarkeHill, 1990; Pellegrini, 1994; Myers and Alexander, 1996) and Japanese retail expansion in Asia (Davies, 1993; Chen and Sternquist, 1995) has attracted research interest and has shown that retailers appear to pass through phases in their international development that broadly conform to a pattern of reluctant, cautious and ambitious internationalisation (Treadgold, 1990) and hence in this mirror the stages of international activity identified in international business literature (Johanson and Wiedersheim-Paul, 1975; Bilkey and Tesar, 1977; Cavusgil, 1980; Czinkota, 1982). Within this context, however, franchising was considered as another option rather than as a primary influencing factor. This has also been the case in the literature on the motivations which lie behind international activity. Observational research tended to suggest that internationalisation occurred as a result of limited opportunities or saturation in the domestic market (Kacker, 1985; Treadgold, 1988; Salmon and Tordjman, 1989), while later empirical research suggested that internationalisation was in many cases the product of international opportunities rather than a lack of domestic opportunities (Alexander, 1990a, b; Williams, 1992a, b). The earlier literature implicitly emphasised the development of non-franchising organisations, while the later literature, which recognised the proactive nature of international activity, implicitly emphasised the activities of franchise organisations. Thus, the categories which emerged from the literature (Alexander, 1995) began to identify the relationship between motivations and market entry methods. Increasingly, the literature has recognised a conceptual deficiency (Pellegrini, 1994; Sternquist, 1997; Vida and Fairhurst, 1998) but, given the need for further research in this

area, a comprehensive model of the internationalisation of retailing is inevitably some way off. This is due to the fact that in order to more fully understand the internationalisation process itself, a much wider set of methodologies are required before the process can be clearly interpreted (Alexander, 1997; Quinn, 1998a, b). Thus, in recognition of the need to establish a better understanding of the internal factors which facilitate and drive retail change, in the context of a growing literature which has sought to incorporate the wider business and economics literature (Dawson, 1994; Sternquist, 1997; Doherty, 1998) and in the context of innovative methodological approaches (Quinn, 1998b), it has been suggested that this interpretation may be extended in order to address the internal functioning of international retail organisations (Alexander and Myers, 1998). This has raised the issue of the externalisation and internalisation of international retail activity and the role that franchising may play in overcoming the problems some retail organisations face in the international environment. Thus, as international retail studies move toward an integrated interpretative conceptual model of retail internationalisation a better understanding of the questions raised by franchising will contribute to this development. The interpretations of international retailing noted above, such as those provided by Treadgold (1988) and Salmon and Tordjman (1989) that have strongly influenced later thought in this area, explicitly and implicitly emphasised the importance of franchising in the creation of the global format and operation, yet the franchising literature itself has not, until recently (Quinn and Doherty, 2000), contributed to conceptual thinking in this area.

International franchising research Historically, the majority of research into franchising has focused predominantly on domestic franchising activity and it has done this primarily with reference to the US market. This literature has focused principally on the manufacturing sector and, to a lesser extent, on other service sectors, particularly fast food franchising (English and Willems,

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1992), while paying little attention to the special characteristics of retail franchising. Much of the research in this area has adopted economic concepts and theories which offer several explanations of why companies, in general, adopt franchising as a way of conducting business in the domestic market. In summary, two theories dominate this literature, namely resource allocation theory and agency theory (Fulop and Forward, 1997). A substantial body of research in the domestic context is also concerned with the sources and distribution of power in franchise channels and the subsequent impact on retailer or franchisee conflict, satisfaction and performance (see for instance Etgar, 1978; Gaski, 1986). Relative to the domestic context, the attention given to the internationalisation of franchising has been somewhat limited, with much of the literature documenting the growth and scale of international franchising activity. While there has been a paucity of research on the operationalisation of international franchising, empirical research has largely focused on the international franchise process, in terms of the geographical direction of activity, the determinants of, and barriers to, internationalisation, and the problems encountered in the process. Where theoretical explanations exist, they have been drawn primarily from the behavioural exporting and international marketing literature (Welch, 1989, 1990; Eroglu, 1992; McIntyre and Huszagh, 1995), and, to a much lesser extent, from international economics (Huszagh et al., 1992; Karuppur and Sashi, 1992). The empirical literature has suggested that expansion on an international basis will initially take place in markets geographically and culturally close to the home market. For instance, Canada has been the preferred first destination for US franchisors (Walker and Etzel, 1973; Hackett, 1976; Walker and Cross, 1989; Hopkins, 1996). Besides Canada, other advanced countries such as Australia and the UK have been the initial target markets for US franchisors. These countries have been viewed as ‘‘franchising friendly’’, with a developed infrastructure to support newcomers. Expansion activity between European nations (Abell, 1991) and between Japan and its neighbouring Asian countries (Preble and Hoffman, 1995) provide further support for the cultural

proximity thesis. Within the literature, evidence has been found to support the notion that franchising organisations only make international moves after reaching a significant level in their domestic operations (Walker, 1989; Aydin and Kacker, 1990; Welch, 1990). In other words, the domestic establishment of a franchising chain typically precedes any step towards international franchising. Based on this empirical knowledge of the nature of franchise expansion, an important conceptual contribution is made by McIntyre and Huszagh (1995). The authors adapt Cavusgil and Nevin’s (1980) earlier model of international development to outline four stages in the process of franchise internationalisation: domestic franchising; experimental involvement; active involvement; and committed involvement. In this revised model, franchise internationalisation is deemed to follow a pattern whereby companies start out from a domestic base before undertaking preliminary, experimental steps into nearby international markets, followed then by more systematic exploration of international opportunities and a final stage characterised by the consideration of global opportunities and long term commitment to franchising in international markets. International franchisors may move through each of these four stages at varying speeds. This conceptualisation of the international franchise process, moving from a well established domestic base to an international presence, supports Welch’s (1989, 1990) earlier work into the paths companies take when developing foreign franchising operations. An initial domestic presence is viewed as crucial for successful international expansion in two ways. First, it aids the learning process and the development of skills, knowledge and experience that will be useful for later international expansion. Second, it creates a widespread network that, of itself, becomes a very tangible statement to potential franchisees, both local and foreign. Having the network, with all its associated advertising and other public activities, increases the likelihood of an unsolicited enquiry or approach from a foreign party. The opportunities available for expansion in the home market, along with a lack of sufficient expertise and know-how required

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for overseas expansion, may act as barriers or inhibitors to internationalisation (Trankiem, 1979; Aydin and Kacker, 1990; Kedia et al., 1995). While these factors may prevent companies from undertaking international expansion in the first instance, they may also continue to cause problems for companies that have expanded into overseas markets. However, the fundamentally expansionist nature of franchising would suggest that, for some companies at least, foreign markets will be perceived as providing favourable opportunities for growth, regardless of the level of development of the domestic market (Hackett, 1976; Trankiem, 1979; Walker and Cross, 1989; Aydin and Kacker, 1990; Hopkins, 1996).

Conceptual framework The classic assumptions of the franchising literature and the classic assumptions of the retail internationalisation literature may be seen to be complimentary in some respects but also fundamentally contradictory in others. If a proper understanding of the adoption of franchising by retail companies, in all its forms, is to be arrived at, then a reconciliation of these contradictions is required. It is, therefore, necessary to construct an analytical framework that explains the development of international retail franchising. With reference to the two literatures, the framework now presented in this paper considers, first, the background nature of the company’s operations and outlook which shapes the nature of international retail franchising, and, second, the pattern of expansion followed by international retail franchise companies.

to achieve conceptual development and operational understanding. Figure 1 illustrates the positions that could be occupied by international retailers that use franchising. The vertical axis indicates the use of franchising in the domestic market and the horizontal axis the use of franchising in the international market. Thus, in the top right sector of the matrix retailers that use franchising in both the domestic and international environment are identified. These retailers conform to the type of operation generally considered in the franchising literature. Building on their experience of franchising in the domestic market these retailers have sought international development through the same expansion mechanism. In contrast, the bottom left sector is occupied by retailers that have not used franchising in the domestic or international markets. These two sets of retailers conform to expectations. That is, they replicate domestic development methods internationally. The remaining two sectors describe less expected outcomes. In the top left sector would be found retailers that have used franchising in the domestic market but have not done so in international markets. Conversely, retailers in the bottom right sector would not use franchising in the domestic market but would do so in the international environment. Of the positions described in Figure 1, the use of franchising in the domestic market and other operating methods in the international market appears to be as unlikely as the use of Figure 1 Taxonomy of international retail franchise activity

Taxonomy of retail franchise activity As noted above, the franchise literature implicitly assumes that franchising in the international environment is based on experience and continued utilisation of franchising in the domestic environment. However, as has also been noted, the retail literature does not make such assumptions. The mixed entry method is a well-recognised phenomenon in the international literature. However, the implications of this are not directly addressed within the literature. Therefore, it is necessary to identify a taxonomy of retail franchise activity in order 269

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franchising in the international market and other operating methods in the domestic market. That is, both positions indicate a radical change in operational development in unfamiliar international environments. However, in practice retailers have been prepared to make strategic decisions that place them in these two positions. Retailers may use franchising in the domestic market but when they move into an international market they may at least initially use another entry method. For example, when Thorntons moved into the French market, it acquired a French retail operation at the same time as it was using franchising in some locations in its domestic, UK, market. Likewise retailers such as Marks & Spencer used franchising in international markets but not in the domestic market. That is, the path to international retail franchising does not follow that prescribed in the franchise literature. Paths to international retail franchising Retail companies follow a number of paths in adopting franchising as a strategy for entering international markets. In Figure 2, two paths to international retail franchising are described. The first concerns operations that have experience of franchising in the domestic market where internationalisation through a franchise entry method is the logical development. This conforms to the findings of the international franchising literature that suggests that franchise operations in the domestic market may be predisposed to international operations because of the fundamentally expansionist nature of franchising (Hopkins, 1996). Indeed, within the retail environment franchising has become associated with operations which have successfully expanded into a large number of markets globally. These include operations which have utilised franchising in both the domestic and international environment, however, in the retail environment there have also been retailers that have not used franchising in the domestic environment but have used franchising alongside other entry strategies in the international environment. Therefore, as shown in Figure 2, a second path concerns retail operations that have expanded in the domestic market through organic development. This describes the observable experiences of many international retail companies.

Path 1 illustrates the traditional route to employing the franchise technique in international markets. This has been the route followed by such global operators as McDonalds, Body Shop and Benetton. In the franchise literature empirical studies have found that franchisors only go international after reaching a significant level of domestic operations (Walker, 1989; Aydin and Kacker, 1990; Welch, 1990). This assumption that successful domestic expansion should precede international market entry also underpins conceptual thinking on the matter. For instance, Welch’s (1989, 1990) model, while highlighting the various paths available to companies entering foreign franchise operations, concedes that most companies in fact expand from a domestic franchise base. This assumption is again explicit in McIntyre and Huszagh’s (1995) model of international development, as evident in their first stage of international expansion, whereby franchising takes place solely in the home market. The use of franchising in the international environment following the use of franchising in the domestic environment may be considered to be a natural progression based on an understanding of the approach and the refinement of the format and merchandise marketed through franchise operations. In this, franchisors are choosing to replicate an established operation within a wider geographical market on the assumption, sound or otherwise, that the service will be relevant within the wider global environment. This may lead to the franchisor internationalising the operation before the domestic market has been fully exploited, addressing attractive markets internationally because these markets may offer greater opportunities than the locations still available in the domestic market. Such retailers may, therefore, be placed amongst those proactive retailers in Alexander’s (1995) classification of internationalising retailers that seek internationalisation of globally relevant products before saturation has occurred within the domestic market. It is worth noting also that the interest in using franchising on an international basis may be stimulated by interest shown by third parties in the foreign market in question. The literature highlights the importance of foreign interest in stimulating international moves and the enthusiasm on the part of the franchising company to take up suitable opportunities for

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Figure 2 Retailer paths to internationalisation with franchise entry method

international expansion as they arise. Although an approach by a third party often represents an experimental route to internationalisation, the importance of utilising this external approach is such that if the franchisor does not respond there is the risk that other operators may be approached and ultimately the market becomes closed (Welch, 1989). In path 1, the development of the domestic franchisor is essentially proactive in that it is pulled into international markets. Through such factors as an awareness of the product in the market of destination and unsolicited enquiries from potential franchisees, the retailer is aware of the market opportunities that exist in markets outside the domestic market. The retailer is therefore pulled into new markets and utilises the franchise expansion route with which the organisation is familiar. The wider literature on franchising would suggest that this is where franchising operations would be found within a framework describing the motivations that lie behind internationalisation.

A significant group of retailers that use franchising within the international environment would not be found within the proactive group of international retailers nor be experienced in the exploitation of the franchise system within the domestic environment: for example, Arcadia, BhS, Marks & Spencer and Next. This group of companies’ development may be illustrated in path 2. It is evident that some retailers see the franchise system as a solely international alternative. It may be the case that a company is already well established internationally before entering into franchising. A prominent example of this is the case of Marks & Spencer, where the company’s overseas franchise operations grew out of the existing export business. The franchisees were originally importers of the St Michael merchandise and had enjoyed long-term relationships with the company. This gave Marks & Spencer a strategic advantage over other franchise operators, in that the success of those businesses in their domestic markets was already proven (Whitehead, 1991). In

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this case, therefore, franchising was a response to the particular conditions found in the international environment and indeed the internationalisation process itself, where experience of franchising is gained in the international environment and the learning experience is outside the domestic market. It may be suggested that this established retailer is faced with the problem of incorporating franchising into its existing corporate culture; however, with an established infrastructure and depth of market experience and knowledge, the switch to franchising may, in practice, be a relatively small incremental step in internationalisation (Welch, 1990). This incremental development towards international franchise expansion, via several entry modes, is illustrated in path 2a. Although some retail companies have only used franchising during the later stages of their international development, there are, of course, examples of international retail companies utilising franchising in the early stages of building an international presence. For a selection of British retail companies, such as Knickerbox, Paco Holdings, Hobbs, Richer Sounds and Robin Hood Golf, franchising has presented the initial opportunity to expand beyond the domestic market (CIG, 1996). This expansion from a domestic, organic base direct to an international franchise presence is illustrated in path 2b. Franchising in the retail context is not only a logical development of successful franchise operations in the domestic market but as a means to exploit the international market by retailers that have followed other growth strategies in the domestic market and have been unwilling or unable to use domestic development routes in the international environment. With path 2, therefore, franchising may be a response to failure or limited success within the international environment. Consequently, franchising may be a means for reactive retailers that have exploited their domestic market but do not have a globally relevant product to internationalise, or a means for retailers that have exploited the home market to sustain development through franchise operations where the organisational structure of the organisation does not support operational development through methods such as organic growth.

The development of the retailer in path 2, therefore, may not be an essentially proactive development. Indeed, as path 2a suggests, the utilisation of the unfamiliar franchise method may well be the product of an essentially reactive approach to internationalisation and the result of failed attempts to enter nondomestic markets through organic expansion. This path may well be the product of the retailer’s realisation that it does not have the internal capability to manage the challenge of international operations and that the retailer has to externalise this aspect of its international business. Likewise, path 2b franchising may be perceived as an alternative to organic growth in markets which are either too culturally or psychologically distant for the retailer to operate successfully or in markets which are too small to justify setting up additional international operations. While retailers may be willing to adopt franchising in the international environment, retailers that use franchising in the domestic environment are usually reluctant to abandon franchising in the international environment. However, with reference to Figure 1, there are examples of retailers which occupy the top left sector: that is, they use or have used franchising in the domestic market but they have not or do not do so in international markets. Carrefour, during its early development, used franchising in the domestic market. Ahold continues to franchise in the domestic market but does not do so internationally. The majority of Ahold’s Etos, health and beauty stores, are franchise operations in The Netherlands, as are a quarter of their Albert Heijn outlets. Thus, retailers with international franchise operations may be the product of very different motivational factors. Those retailers that have expanded through franchising may enter international markets as a result of predominantly pull rather than push factors, whereas the retailer that has expanded organically in the domestic market may expand through franchising in the international market because of limited opportunities, and hence push factors in the domestic market but limited pull factors in the international market. Expansion patterns The contrasting motivational structures that underpin the various paths towards international retail franchising will lead to

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different expansion patterns. Geographic expansion will be affected so that franchising for retailers following paths 2a and 2b may focus on psychologically distant markets compared to a balanced spread of markets followed through path 1. For those companies following paths 2a and 2b, franchising may be used as a means of entering internationally diverse economies where a major factor in choosing an entry mode is to select the one with least cost/least risk. For instance, UK retailers have entered southern European retail markets through franchising (CIG, 1996), as have international retailers that have entered the retail markets of eastern and central Europe since the termination of the communist regime (CIG, 1992, 1995; McGoldrick and Holden, 1993). British clothing retailers such as BhS, Mothercare, Jaegar, Next and Mulberry, without extensive international operations and operating from a non-franchise domestic base, have employed franchising to enter new markets in Asia Pacific and the Middle East. For international retailers and other service sector companies the movement to diverse markets is made easier to some extent by the use of master franchising arrangements. With this strategy, used by international retail companies such as the Body Shop, 7-Eleven, Marks & Spencer, Knickerbox, Storehouse and Next, the foreign franchisee carries out most of the work involved in expanding the operation into the new market, and also acts as a source of information on the cultural and language barriers, bureaucratic red tape, political problems and so on. Many retail companies therefore skip the stages listed by McIntyre and Huszagh (1995) and others, whereby international franchise expansion takes place first to culturally close markets at a slow and steady pace, followed only then by assessment of global opportunities and movements to markets beyond the traditional, developed economies. Organisations will be at different positions in terms of the international development of their business, and will follow different learning processes along their path of internationalisation. For the traditional international retailer, coming from a nonfranchise domestic market position, an array of entry modes may be employed as the international operations develop.

Conclusions While there is an established body of knowledge on the international franchise activities of service firms in general, little is known about franchising’s role in the international expansion of retail companies. This is somewhat surprising, given the importance of franchising in the creation of the global format and operation and its growing popularity as a market entry strategy for international retail companies. This paper has argued that the activities of international retail companies warrant the extension and development of current conceptualisations of the international franchise process. The paper questioned and attempted to redefine the framework that conceptualises the adoption of franchising by international retail companies. As the discussion and Figure 1 illustrated, there are a number of alternative strategies that may be used. Franchising in the domestic market and international markets is only one option. Given the conceptual limitations of existing frameworks, it was proposed here that retail companies follow one of several paths towards international franchising. Each path towards international franchising is associated with a distinct set of motivational influences. Retail companies with an established domestic franchise base are associated with a globally relevant format and merchandise and the desire to replicate their format in nondomestic markets, as the literature has indicated for some time (Treadgold, 1988; CIG, 1991, 1994, 1996). Such companies may be viewed as inherently proactive in their approach towards internationalisation. For other retail companies, franchising has not been a traditional way of doing business and may only be an option for expansion into certain international markets, where it is more feasible for the company to externalise its operations. In such cases, franchise operations may not be inherently international in outlook but may be fundamentally antipathetic to international development. The background nature of the company’s operations and outlook shapes the pattern of international expansion followed. While traditional franchise companies will attempt to replicate their operations to international markets as opportunities for growth arise, non-traditional franchisors are more likely to

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consider franchising as an option for more psychologically and geographically distant markets. In this, international franchising has the potential to offer opportunities for firms that are not traditional franchisors. That is, as retailers experience the problems of expanding their domestic operation to international markets, or more specifically those markets which are psychologically distant from their domestic operating environment, they may use franchising as a means to retail within international markets by focusing on part of their merchandise range. Therefore, franchising has become an attractive option for international retail companies that have not had domestic experience of franchising and wish to explore the potential of international markets. Given the increasing acceptance of franchising as an organisational form in many countries, there may be good local commercial reasons for exploring that option. While this paper represents an initial attempt to conceptualise the adoption of franchising in the international retail context, further research on the international retail franchise process is now required. Future research needs to explore key aspects of international retail franchising, such as the motives behind internationalisation, the different paths followed by companies and the types of entry agreement used. Research should also examine the operationalisation of international retail franchising and, in particular, the extent of standardisation versus adaptation across international markets and the mechanisms used to control and support the international operations. Given the growing trend for established international retail companies to utilise franchising as a strategy for expansion, it would be beneficial also to examine how and why such firms have become involved in franchising and the implications for existing management structure and culture. In order to understand the retail internationalisation process, a much wider set of methodologies are required. It is certainly the case that new and innovative methodological approaches may provide much needed insights into franchising as an international retailing strategy. Previous research studies into international franchising have largely undertaken a postal survey approach and employed quantitative techniques. However, quantitative

approaches alone, by their very nature, are unable to take account of the depth and complexity of the internationalisation process. More recently, several authors have used qualitative methods such as ethnography (Quinn, 1998b) and the in-depth case study approach (Sparks, 1995). Further studies of this type are more likely to provide the depth of insight into actual company operations which has hitherto been missing from the literature. Finally, the activity of international retail franchising needs to be understood in the context of a wider body of knowledge such as the internationalisation literature, economics based theories such as resource allocation and agency theory, and the large body of knowledge on marketing channel relationships.

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