the franchise model
the franchise model
Before blockchain, fast food made decentralization cool
Today, most organizations are centralized, meaning decision-making happens top-down:
Even the world’s democracies (really, republics) are centralized. People elect leaders, then those leaders tell people what to do. Modern civilizations are big and complex. Some kind of Greek city-state utopia where everyone votes on everything isn’t just unappealing bureaucratic, it’s totally impractical. Instead, most democratic states opted for some system of checks-and-balances to distribute decision-making as much as possible, then called it a day. In America, we cocoon ourselves in our Betsy Ross flags, chant the pledge of allegiance, and insist, with a suspicious level of aggression, that this is as good as democracy can get. Really though, modern democracies are barely more democratic than wolf packs. 99% of the power in this country is held by like 400 people (half of whom aren’t even elected, like the Secretary of Defense or the Kardashians). This is a country of 300 million! That’s a degree of power centralization which seems principally anti-democratic. At least we pretend our government is democratic, though. The corporate world gets no such treatment. Most Americans work for organizations that are completely controlled by an unelected leader. This country has literally executed people for suggesting governmental alternatives to democracies yet the way we organize the other half of our society (businesses) is profoundly undemocratic. Our democratic belief system barely applies to our government and doesn’t apply at all to the rest of our lives.
The previous paragraph felt almost stupid to write because, like, what is the alternative? Of course power is ultimately centralized, there’s no other way to do it. Businesses, governments, and any other organization need some person or people in charge. Democracy is nice in theory, but in reality the entirety of global GDP comes from centralized, undemocratic organizations. Centralized decision-making brought us electric cars, Judge Judy’s courtroom, the Magna Carta, every Taylor Swift album, Osama Bin Laden’s kill shot, Disney Land, Disney World, and all the glorious programming on the Disney Channel. Without centralized decision making we wouldn’t be able to decide who gets the gold medal in diving let alone which national parks the next oil pipeline should cut through.
But even centralized organizations can have decentralized elements. Franchises are a great example of how a balance between decentralized and centralized decision-making can be more effective than one extreme.
The franchise model: decentralization in the 20th century
A franchise business model is a joint venture between two parties: the franchisor (who owns and controls a business’s brand) and the franchisee (who owns and operates a single location of the business). When you hear the word franchise you might think of a McDonalds rest-stop toilet that hasn’t been cleaned since 1998, but the franchise model extends far beyond fast-food:
According to alts.co franchises made up 3.5% of GDP in 2020 and employed 7.5 million Americans! That’s more than the entire transportation industry:
The franchise model has been so successful because it strikes the perfect balance between centralization and decentralization. Look at Domino’s, one of the most successful franchises of all time. Here’s what Domino’s has to do to be successful:
Brand: they need to be top of mind for customers because the restaurant business is competitive and frankly, the food is mediocre.
Price: they need to be cheap as hell because the food is mediocre.
Food: the food can be no worse than mediocre.
Experience: ordering and delivery has to be fast and crisp, that’s how you get away with selling mediocre food.
Now consider how Domino’s franchise model centralizes or decentralizes each of these functions:
Brand is centralized: each Domino’s franchisee sends 5% of revenue to the franchisor (AKA Domino’s HQ). Domino’s HQ pools the money and buys superbowl ads and influencer posts. This makes perfect sense because advertising scales really well. No local food chain can launch a viral national ad:
Price & food are centralized: Insanely cheap food requires mass production. Take a look at McDonald’s chicken nugget manufacturing, it’s as if they are making the Ford Model T:
This kind of work is best done centralized because it requires tight production schedules, militant efficiency, and strict enforcement of procedure. Any deviation from procedure and you inevitably get some couple in Arkansas suing you because they found a severed toe in their order of wings. This is why Willy Wonka ran his factory like a dictatorship. In Domino’s case, the franchisor (Domino’s HQ) mass produces all the food and then resells it to franchisees at cost (as in, they make no profit on the food so as to keep it cheap for customers).
Customer experience is decentralized: Taking pizza orders and getting them delivered in 30 minutes or less requires delegation. Somebody needs to make rapid decisions: what if a customer calls in and changes the address on their order? What if an employee calls out sick? What if a drunk college kid pukes on the counter? It’s impractical to run every Domino’s location from a bunker as if it's a military operation. It makes more sense to put a manager in charge of each location and let that manager run point. The beauty of the franchise model is that the local manager is the franchisee. A franchisee is far better incentivized to optimize experience than a salaried manager because a franchisee keeps all the profit of the location (Domino’s HQ collects 5% of sales for marketing, recoups the cost of food, and collects another fee from franchisees equal to 5% of sales).
The franchise model is a great blend of decentralization and centralization. In the case of American pizza, the four big franchises (Domino’s, Papa John’s, Little Caesars, and Pizza Hut) combine to hold a majority share of the market (according to Domino’s annual report).