This is critical analysis towards the first objective of the thesis. It establishes the scale of franchising in the EU and its contribution relative to that it makes in the USA and Australia. Franchising normally stimulates economic activity by improving the distribution of goods and/or the provision of services as they give franchisors the possibility of establishing a uniform network with limited investments, which may assist the entry of new competitors in the markets particularly in the case of SMEs. It allows independent traders to set up outlets more rapidly and with a higher chain of success than if they were to set up without the franchisor’s experience and assistance. Franchisors therefore have a better opportunity to compete with larger distribution undertakings .
Franchising also generally allows consumers and other end users a fair share of the resulting benefits as they combine the advantage of a uniform network with the existence of traders personally interested in the efficient operation of their business. The homogeneity of the network and the constant co-operation between the franchisor and the franchisees ensures the constant quality of the products and services. The favourable effect of franchising on inter brand competition and the fact that consumers are free to deal with any franchisee in the network guarantees that a reasonable part of the resulting benefits will be passed on to consumers.
In pursuing the goals of economic growth, job creation and consumer satisfaction, commercial innovation such as franchising needs to be encouraged. Franchising can contribute to the establishment of a unified European Market. It facilitates cross-frontier development as it is based on the leverage which an established name or idea can give a relatively small investment to enable the product or service involved to spread quickly, far and wide .
Franchising is a commercial phenomenon particularly well suited to the challenges of the single market. The combination of a franchisor’s know-how and a franchisee’s enterprise can boost economic activity and employment, while enlarging the range of goods and services on offer to the public. Franchising makes products and services available to a wide public and does not stop at national frontiers policy making within the EU.
It is suggested that the regulatory environment in the EU should therefore support and re- enforce the economic drivers that attract franchisors and franchisees to franchising and reducing the inherent consequential risks they expose themselves to.
However, given the heterogeneous policy legacies in the EU member states as well as the diverse preferences of national governments and other domestic actors, a one-size-fits-all solution is neither politically feasible nor normatively desirable.
2.2.1 Poor Key Data
The first objective of this thesis is to establish that although franchising is a positive influence in the EU and stimulates economic activity by improving distribution and giving business increased access to other member state markets, it is not fulfilling its full potential to contribute to the realisation of the single market. The following is critical analysis towards proving this objective.
Business format franchising is “a distinct and remarkably effective method of conducting business activities that is particularly appropriate in current economic conditions, due mainly to the advantages to both parties in the contract”103.
It is a significant part of the economy of a number of EU member states. However, the economic data available is poor and incomplete. There is no up to date uniform and complete set of economic data for franchising in all or even the majority of EU member states. This in itself suggests that franchising is not achieving its full potential in the EU.
According to the 2010 NatWest/BFA Franchise Survey, franchising contributed £11.8 billion to the UK’s GDP in 2009, an increase of £400 million from 2008.104 The same publication indicates that despite the economic climate, nine out of ten franchise businesses are profitable. The survey also states that the number of individuals employed in franchising in the last twelve months stands at 465,000 across a total of 34,800 franchised units in the UK. This means that on average each unit employs 13 people.
The European Franchise Federation indicates that the total 2009 turnover of franchising in Germany was €48 billion105. A report in January 2008 by Deutsche Bank stated that the sector has tripled its nominal turnover in the ten preceding years.106 By comparison, Germany’s nominal GDP has only grown by 25% over the same period. As a result, the franchising share
103 The Belgian House of Representatives, 17 March 2004 Doc 51 0924/001
104 UK: Natwest/BFA Survey 2010: http://www.thebfa.org/fpnews/natwestbfasurvey10.asp 105 European Franchise Federation – www.eff-franchise.com (viewed 23/12/2010)
106 Deutsche Bank Research: "Franchising Coming of Age in Germany" (January 2008) http://www.franchiseverband.com/fileadmin/user_upload/MAIN-
of GDP increased by nearly 1% to 1.6% between 1996 and 2006. This figure is likely to be higher now as the industry’s turnover has continued to rise. Indeed, Deutsche Bank expects the sector to grow until 2015 at a rate of 7% per annum to around €70 billion. Deutsche Bank also reported that between 1996 and 2006 the number of people working in the sector nearly doubled. By comparison the total workforce only increased by 4%. In its 2010 report, the European Franchise Federation estimates that 452,000 people are employed in 58,000 units. On average this means that each unit employs 7.8 people107.
According to Guy Gras, Chairman of the French Franchise Federation, the 2008 total turnover of franchising in France was €47.6 billion108. The number of franchise networks in France have doubled over the past ten years, with steady growth of 8-10% over the last four years. In 2009 693,194 people were employed by 51,600 units109 in France. This equates to 8.25 people being employed per franchise unit.
2.2.2 Estimating the Size of Franchising in the EU
Although franchising makes a substantial contribution to the economy of the European Union, in order to measure whether it is as well established as it could be and is making its full potential contribution to the single market, it is necessary to first of all examine how well developed it is in the EU member states and then to bench mark this against its development in the USA and Australia.
This is critical analysis towards achieving the first objective of this thesis.
There is a lack of full and accurate information about the scale of franchising in the whole of the EU. The most recent figures published by the European Franchise Federation are in respect of 2009, but they only deal with 18 member states110 and the information given for them is incomplete111 and in places incorrect112. There are no other recent figures for franchising in the EU.
107 ibid
108 FFF Press Pack for the 2009 Franchise Expo in Paris.
http://lb7.reedexpo.fr/Data/kmreed_franchise/block/F_23316ac8f1472bf8d16e0ce274b508624c124d19ed45 d.pdf the France Franchising Association excludes company owned outlets from this figure and therefore concluded there were only 53,002 franchised outlets in 2009
109 ibid. The French Franchising Association excludes company owned outlets from this figure and therefore concluded there were only 53,002 franchised outlets in 2009.
110 Austria, Belgium, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Netherlands, Portugal, Poland, Slovenia, Spain, Sweden, Turkey and the UK. Turkey is not a member of the EU. However four of these (Belgium, Denmark, Finland and Germany) are estimates and the gross total of 11,731 is arbitrarily discounted by 15% to take into account the fact that brands that exist in several countries may be costed more than once in these statistics. The figure for Turkey is given at 1,640 and so that must be removed. Consequently the estimated figure of 8,330 is deemed to be unreliable. The statistics do not give details of even estimated turnover for franchising. The estimated number of franchised outlets in the ?? is around 405,000 but again this is unreliable as figures for Austria, Belgium, Czech Republic and Portugal are running
The most recent figures for franchising in the whole of the EU are from 2005. “Franchising Europe” estimated that there were 5,000 franchises operating in Europe, that supported 300,000 outlets with an estimated total turnover of US$200 billion113. Unfortunately this figure is not broken down into figures for individual member states, save for the turnover figure for France, which is given at US$51.6 billion (€38.6 billion). The premises made and data used in arriving at the estimated figure are not given. It is therefore not particularly reliable, but it is the only figure available.
In order to establish the turnover of franchising in the EU it is therefore necessary to extrapolate a figure based upon the EFF’s 2009 statistics and the Franchising Europe 2005 statistics. This paucity of current statistics about franchising in the EU of itself suggests that franchising may not be as well established in the single market as a whole, as it is in the larger member states.
In 2009 the European Franchise Federation estimates that there were 9,971 franchises accounting for 405,000 outlets.
The EFF estimates the turnover of franchising in 2009 in Germany, Italy, Spain, Portugal, the Netherlands and the UK114 at US$188.1 billion. Add to that the French Franchise Federation’s figure for France (US$62.3 billion) and it totals US$250.4 billion.
The figures below clearly suggest that franchising in the EU is underperforming when compared to those for the USA and Australia115.
112 The turnover figure for the UK in 2009 is given as €9.42 billion rather than the €11.8 billion given by the BFA
113 Iuliana. S and Mihaela. M, 2009, "The High Impact of Franchising on Economic Affairs in Some of the
EU Members" by Annals of Faculty of Economics, 2009, Vol.1, Issue 1, p. 251-256 (Published by the
University of Oradea, Faculty of Economics)
http://steconomice.uoradea.ro/anale/volume/2009/v1-international-relations-and-european- integration/39.pdf
114 The EFF figure wrongly put the UK’s 2009 turnover at €9.4 billion rather then £11.8 billion (€14 billion or US$18.7 billion) reported by the BFA.
115 See “Price Waterhouse Coopers 2010 Franchise Business Economic Outlook” – The International Franchise Association’s Educational Foundation www.franchise.org (viewed 29/12/2010) and Franchise Council of Australia www.franchise.org (viewed 29/12/2010)
Population GDP116 (US$) Estimated 2009 turnover of franchising in local currency Estimated 2009 turnover of franchising in US dollars (exchange rate as at 23/12/10) The UK 62 million 2.2 trillion £11.8 billion117 US$18.7 billion Germany 81.7 million 3.3 trillion €48 billion118 US$62.9 billion France 64.7 million 2.5 trillion €47.6 billion119 US$62.3 billon Italy 60.4 million 2.1 trillion €21.77 billion US$28.5 billion Spain 45.9 million 1.46 trillion €24.7 billion US$32.4 billion The
Netherlands
16.5 million 0.77 trillion €29.2 billion US$29 billion
Portugal 10.6 million 0.2 trillion €5 billion US$6.6 billion
Total 341.8 million 12.54 trillion - US$250.4 billion
The paucity of current complete and consistent data for all 27 EU member states means that it is impossible to definitely state the turnover of franchising in the EU. Nevertheless, it can be estimated in three ways. All three ways lead to estimates that suggest that franchising in the EU is underperforming compared to the USA and Australia.
Firstly, Franchise Europe’s 2005 figure US$200 billion can be increased by the same percentage as the number of outlets are reported to have increased by the 2009 EFF Survey. Assuming that each new outlet on average has the same turnover as the average outlet in 2005, it is logically justifiable120. Applying this methodology the increase of outlets from 3,000 in 2005 to 4,000 in 2009 represents a 33.3% increase. If the same percentage increase is applied to the turnover of franchising the US$200 billion figure for 2005 would become
116 International Monetary Fund, Ibid 117 BFA/NatWest Survey 2010
118 European Franchise Federation – www.eff-franchise.com (viewed 23/12/10) 119 FFF Press Pack, Ibid
120 However, as explained on pp 46 below this assumption is incorrect due to the differing resale prices in member states.
US$266 billion in 2009121. This methodology produces a figure which wrongly assumes that retail prices are the same in all EU member states and ignores the number of outlets in a number of smaller member states in 2009 but it does produce a working figure.
2005 2009 Percentage increase
Number of outlets 300,000 405,000 33.3%
Turnover US$200 billion US$266 billion 33.3%
The second way of estimating the turnover of franchising in 2009 using 2005 figures involves increasing the total 2005 turnover figures by the same percentage as the turnover for France has increased in the same period. This assumes a uniform level of growth in all EU member states which is logically defensible. The French Franchise Federation’s 2009 turnover figure of €47.6 billion represents an increase of €9 billion on the Franchise Europe 2005 figure of €38.6 billion, which is approximately a 25% increase. If that percentage increase is applied to the US$200 billion figure it suggests that the turnover of franchising in the EU in 2009 should be approximately US$250 billion. That is more or less the same as the figure that EFF’s 2009 survey produces for the UK, Germany, France, Italy, Spain, the Netherlands and Portugal. It can therefore be concluded that it is an underestimate.
2005 2009 Percentage increase
Turnover in France €38.6 billion €47.6 billion c25%
Turnover in EU US$200 billion US$250 billion 25%
The third way of estimating the turnover of franchising in 2009 is to compare the number of outlets in the seven EU member states that have a turnover of US$250.4 billion according to the EFF figures with those in the other 11 member states referred to in the EFF’s 2009 figures. (For some reason no turnover figures are given for these 11 member states).
Six of the member states that account for a turnover of US$250.4 billion account for 283,115 outlets. There are no outlet figures given for Portugal. However, as Portugal’s turnover is approximately 25% of Italy’s, it is reasonable to assume that it may have around 25% of the outlets Italy has. That would mean that the seven EU member states account for approximately 300,000 outlets of the 405,000 – around about 75%. As the remaining eleven member states have approximately one third of the outlets of the seven EU member states which have a turnover of US$250.4 billion, it is reasonable to suggest that they also have a turnover which is roughly equivalent to one third of that figure, that is US$83.2 billion. That
121 This methodology under estimates the increase in the number of outlets in the EU in 2009, as the EFF figures do not include all EU member states – although it does include all those in which franchising is well established.
would mean that the turnover of the 18 EU member states listed by the EFF is estimated at approximately US$333.6 billion.
Percentage of Outlets in the 11 member states
Number of Outlets in 18 EU member states in 2009 according to the EFF
405,000 100%
Less Estimated number of Outlets in the
7 EU member states that had a turnover of US$250.4 billion in 2009122
Approx 300,000 c66.6%
Number of Outlets in other 11 EU member states
105,000 c33.3%
Assuming that on average outlets turnover an equal amount, approximating the number of outlets in the 11 EU member states as being 33.3% of those in the 7 member states accounting for turnover of US$250.4 billion and applying that same percentage to turnover suggests a turnover figure for franchising in 2009 of US$333.6 billion.
33.3% x US$250.4 billion = US$83.2 billion
US$250.4 billion + US$83.2 billion = US$333.6 billion
There is no evidence to suggest that there is any substantial franchising in the remaining 9 member states123 and so for the purpose of this calculation it will be assumed that they account for no significant franchising turnover.
However, the problem with this calculation is that it is unlikely that outlets in the 11 member states for which estimates are being made will be turning over the same amount as those in Germany, the UK and France which have a much higher cost of living124. The most relevant
122 The EFF gives no number of outlets for Portugal. This is calculated by reference to Italy. Italy’s turnover is €21.77 billion. Portugal’s turnover is €5.05 billion i.e. approximately 25% of Italy’s. Italy has 53,300 outlets. If Portugal has 25% of that number, i.e. 13,325
123 Malta, Cyprus, Finland, Norway, Slovakia, Ireland, Lithuania, Latvia and Estonia.
124 The EU Statistics on Income and Living Conditions (EU-SILC) (see http://epp.eurostat.ec.europa.eu) suggest that there is a wide range in the cost of living in the EU member states. (Framework Regulation 1177/2003 of the European Parliament and of the Council of 16 June 2003 concerning community statistics on income and living conditions)
way of testing this is to consider the relative cost of a particular product sold by a franchise network in the EU.
The Big Mac Index125 gives the cost of a Big Mac in a number of different EU member states. In the UK it costs US$3.65, in France US$3.20 and in Germany US$3.96. The cost in the 8 other EU member states that are not included in the 7 that had a turnover of US$250.4 billion are considerably lower.
An analysis of the cost of a Big Mac in these 11 EU member states yields the following data;
Selection of member states included in those which had a turnover of US$250.4 billion in 2009
EU Member State Cost of Big Mac as at 2006 in US$dollar
The UK 3.65
Germany 3.96 France 3.20
Selection of member states included in EFF outlets statistics for which no turnover figure is available
EU Member State Cost of Big Mac as at 2006 in US$dollar
Hungary 2.71 Poland 2.10
Czech Republic 2.67
Slovenia 2.76 Greece 2.40
Selection of member states for which the EFF has no statistics
Latvia 2.47 Lithuania 2.41 Slovakia 2.76
125 The Big Mac index was introduced in the Economist in September 1986 and gave rise to
“Burgernomics” (Daley, J. (2008/9/6) “Burgernomics: Why the price of a Big Mac may hold the key to better investment returns”. The Independent) www.investment.com (viewed 16/1/2011)
These figures suggest that it is unlikely that the outlets in the 11 EU member states included in the 2009 EFF Statistics (but not included in the 7 member states that account for the US$250.4 billion turnover) have a turnover of US$83.2 billion.
The above three methodologies produce a range of the estimated turnover of franchising in the EU in 2009 from US$250 billion to US$333.6 billion. None of the figures can be considered to be totally accurate, but they are all the result of a logical use of the data available.
It is therefore suggested that a figure somewhere in the middle of the range between US$333.6 billion and US$250 billion is a fair and reasonable estimate of the likely turnover of franchising in the EU during 2009. Thus, these methodologies suggest that the turnover of franchising in the EU in 2009 can reasonably be estimated at around US$300 billion or €215 billion126.
Further critical analysis of the figures also suggests that franchising in the EU is heavily concentrated in a minority of member states.
Those EU member states other than the UK, Germany, France, Italy, Spain, the Netherlands and Portugal probably account for a turnover of around US$50 billion (€35 billion) at most. Estimated 2009 turnover of franchising in the EU cUS$300 billion
Less
2009 turnover of 7 EU member states identified US$250.4 billion Estimated 2009 turnover of other 20 EU member states US$49,6 billion
This suggests that franchising is heavily focused in around a quarter of the EU member states which account for US$250.4 billion (€180 billion) out of a total estimated turnover of US$300 billion. In other words 25% of the EU member states account for an estimated 83.5% of franchising’s turnover in the EU.
2.2.3 Comparing the Size of Franchising in the EU with that in the USA and Australia