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OK! theoretical framework. Source: Journal of the Academy of Marketing Science (2023). DOI: 10.1007/s11747-022-00921-3
If you’ve recently stayed at a branded hotel or eaten at a fast food restaurant, chances are you’ve endorsed a franchise business. Franchising is a distribution strategy in which a larger company, the franchisor, licenses the rights to its brand, products, and processes to a smaller company, the franchisee, for an initial fee and an ongoing share of the sales proceeds.
Behind the scenes, stores can change ownership from company-owned to franchised stores through a process called refranchising, and franchised stores can be returned to company hands through buybacks. Because the overall service rarely changes, consumers are typically unaware of franchising decisions.
In the first quarter of 2022, Papa John’s relocated 90 restaurants; other restaurant chains, like Chili’s and Texas Roadhouse, have recently gone down the buyback route. In a recent article for the Journal of the Academy of Marketing Science, Saurabh Mishra, a professor at the George Mason University School of Business, is the first to link refranchising and buyback decisions to stock market outcomes. (The paper was co-authored by Anna Sadonikova of Monmouth University and Manish Kacker of McMaster University.)
The paper analyzes refranchising and buybacks at publicly traded chains and how financial markets reacted to these relevant events. The analysis revealed that the overall stock benefits of the two were almost exactly the same. Refranking and buybacks resulted in average price gains of $8 million and $8.1 million, respectively, on the day of the announcement.
Summarizing his findings, Mishra said, “What’s unique about this paper is what we show that it really doesn’t matter to the stock market whether you do one thing or the other… If the signal the stock market gets, that’s you.” pay attention to your market conditions and change the sales strategy… either strategy can work on its own so you can take advantage of it.”
The shareholder rewards were even greater for companies whose strategic decisions matched their influence in closing deals with franchisees. Companies that could keep licensing fees low and offer high levels of confidence-inspiring trade credit got a bigger boost from refranchising. Those with higher royalty payments and returns on investments, reflecting core business strengths, received above-average buyback gains.
Since there is no one right answer to the question of refranchising or buying back, it’s important to consider the benefits and risks of both methods.
While it’s easy to see buybacks slowing growth to control risk, there are situations where a buyback can be just as beneficial for shareholders and sends the message that the company is working hard to maintain its high-quality brand administer.
“Repurchasing essentially means bringing the channel within your own confines… So that has a positive effect, assuming stock market views take it as a sign that you thought the risks of refranchising were too great to re-franchise yours.” franchisors could trust,” explained Mishra. In some cases, the increased monetary risks associated with the repurchase can be amortized through an increased market value. “When the industries are growing really fast, the buyback is even better,” Mishra said.
Mishra’s research shows us that the processes of refranchising and buybacks are not a one-way street, but management tools that a franchisee can use to maximize growth and shareholder value. A company doesn’t add value by committing to one process, but by finding a healthy mix of refranchising and buybacks.
“You have to balance that mix based on changing market conditions and based on your own market conditions,” Mishra said. “When you do that, it shows you’re agile, your sales strategy is agile, and the stock market is rewarding you for it.”
Speaking of the benefits of franchising in general, Mishra explained, “You can essentially spread your risk a bit with your partners.” Spreading the risk allows a business to grow faster than if it kept its operations in-house. This is one of the reasons why you can find a McDonalds at almost every freeway exit. Franchisees can also provide knowledge of local markets, which allows the individual business to perform better than if the parent company were managing it.
However, franchising has one major disadvantage. “In a way, with franchise business, you’re giving away your brand and other marketing assets to someone who can… give customers a bad experience,” explained Mishra. “It can damage your image and that is a great advantage for you.”
In short, while franchising reduces a company’s risk of losing profits, it introduces a greater risk of debasement of a company’s brand. To reduce the potential risks of franchising, companies should closely monitor their distribution strategies and stay abreast of market changes.
More information:
Anna Sadovnikova et al, Franchising structural changes and shareholder value: Evidence from store buybacks and refranchising, Journal of the Academy of Marketing Science (2023). DOI: 10.1007/s11747-022-00921-3
Journal Information:
Journal of the Academy of Marketing Sciences
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