Franchising is a business arrangement in which one party (the franchisee) pays another (the franchisor) to use the franchisor’s trade name, and often its products and system of operation. In September, the Census Bureau released data from its first look at franchising across a wide range of industries. Collected as part of the 2007 Economic Census, this data provides interesting insights into an important mode of doing business.
The Census figures confirm what many observers already knew: franchising accounts for a sizeable chunk of economic activity in the industries in which it is used. In 2007, franchise chains were responsible for 10.5 percent of all companies with employees in the nearly 300 industries where the Census Bureau collected data. Moreover, franchise systems accounted for 16.9 percent of sales, 9.6 percent of payroll, and 13.4 percent of employment.
Many franchise chains don’t franchise all of their outlets, but own and operate some of them. While the share of establishments run by franchisees varies greatly across industries and companies, the Census data shows that, on average, more than three-quarters of the establishments in franchise systems are owned and operated by franchisees.
These franchisee-run establishments are a formidable economic force. They generate about $1.1 trillion in sales annually, and employ almost 6.3 million workers, with a payroll of more than $125 billion. That’s 14.3 percent of sales, 7.8 percent of payroll, and 10.7 percent of employees in the industries looked at by Census.
How do franchisee-run establishments compare with independent establishments and those run by franchisors? (The figures below are for industries for which complete data on independent, franchisor-run and franchisee-run establishments are available.) Franchisee-run businesses have more employees (15.7 versus 12.2), but lower payrolls ($229,672 versus $351,166), and consequently lower average employee compensation, than independent businesses. The average franchisee-run business also has lower annual sales than the average independent business ($1,195,868 versus $1,493,433).
These numbers, however, vary substantially across industries with franchisees having higher sales, paying more, having higher payrolls and employing fewer people than independent businesses in some industries, but not others. For instance, independent establishments have higher average sales, payroll and employment in automotive parts and accessories, but in convenience stores, franchisee-owned establishments are higher on all three measures.
The Census data also allows us to compare franchisor and franchisee run outlets. While the average establishment run by both groups has almost the same number of employees (15.8 versus 15.7, respectively), employees in the average franchisor-owned outlet are better paid, with average annual compensation coming in at $14,958 at a franchised outlet and $17,630 at a franchisor owned outlet. The Census data also shows that sales are significantly higher at the average franchisor-run establishment ($279,152 versus $229,282).
Again, the industry differences in these numbers are an important caveat. In some industries, the average franchisee-run establishment has higher sales, payrolls, number of employees, and average salaries than the average franchisor-owned outlet, while in other industries the franchisor-run outlets have the higher numbers. For instance, for poured concrete contractors, the average franchisor-run outlet has higher employment, payroll and sales than the average franchisee-run outlet, but for roofing contractors the opposite is true.
In sum, while the new Census franchising data examines a limited number of dimensions, it provides useful numbers for those seeking to understand the economic importance of franchising, and the sales, employment, and employee compensation at independent and franchised businesses and at franchisor and franchisee owned outlets within franchise chains.