Franchising in Russia: does an optimal franchise proportion exist?

Abstract

The focus of this study is on the problem of finding the optimal balance between the number of company-owned and franchised outlets. We start with the factors that determine a company's propensity to franchise in the emerging market of Russia. Data on 46 companies of different industrial affiliations for 2010 were examined. It is revealed that the proportion of franchised units is positively correlated with the number of cities a company operates in and is negatively correlated with a company's size. In line with these findings, we also reveal that the hypothesis of a nonlinear relationship between the proportion of franchised outlets and a company's return on assets is also supported in the sample of organizations considered. Therefore, an increase in the proportion of franchised outlets over a certain limit is not appropriate for a firm. This result can be explained in terms of two major risks inherent in the franchising strategy that come into play as the franchise proportion of a company grows: the risk of brand disruption and the risk of losing business.