Profits for Mom & Pop

As it opened its sooth store last week, a coast-to-coast chain known as McDonald's Hamburgers was busily changing the neon signs that have long recorded how many million hamburgers it has sold. Now the signs will flash the figures in billions, a success reflecting the bustling U.S. phenomenon of which McDonald is an example: franchising. The number of franchised "Mom and Pop shops"--small businesses that rent their name, product, design and sales methods from big franchisers--has grown to an estimated 100,000, which this year will take in more than $1 billion. Eleven hundred companies now dispense franchises (v. only 200 in 1945) to enterprises that feed people, fix cars, clean clothes, keep books, and collect bills. Among the franchise names that have become a part of the American landscape and language are Midas Muffler, Chicken Delight, Redi-Spuds, Mugs Up and Little Pigs of America Inc.

Critics say that the common standards enforced are apt to be low ones, and blame franchise operations for both the bland sameness of food and service and the repetitive look of the neon-and-chrome shacks and stands that dot the nation's roadsides. The U.S. Justice Department argues that the parceling out of exclusive sales territories by franchisers violates the Sherman Antitrust Act. But franchising won a key legal victory this spring, when the U.S. Supreme Court reversed a lower court's judgment against exclusive franchised territories. The case, which returns to a U.S. district court in Ohio later this year to be tried again on its merits, marks only the beginning of what promises to be an earnest and expensive battle.

Frustration Tolerance. The lure of franchising is that small businessmen, by investing a little money and a lot of time, can savor the big-brotherly benefits of a widely known name, cooperative advertising, "protected" territories and a stream of practical booklets that program the steps to success. To break into business, franchisees put up as little as $2,000 for a doughnut shop to as much as $1,300,000 for a Howard Johnson's motel. Once started, fewer than 10% of them fail.

Chicago-based McDonald's Hamburgers, only eight years old, boasts that not one of its franchisees has ever lost money; it has four planes cruising the country to pick out good sites for them, also sends newcomers to its "Hamburger U.," where they take three-week cram courses in everything from advertising to janitoring. Businessmen who take a franchise promise to meet "standards" set by the franchiser, to buy equipment and supplies from him, and sometimes to hand over a share of the gross.

For their income, most of the small franchisers (and usually their wives) must work at least a ten-hour day, six days a week. Los Angeles' International Industries Inc., which has franchised 68 pancake houses and snack bars in the past five years, confines its franchises to single men under 50 and turns down those who want their weekends free. Personality tests, aimed at measuring "persuasion index" and "frustration tolerance", are used to screen applicants at Chicago's Servicemaster Co., a 650-branch rug cleaner. Western Auto Supply, with 3,906 dealers, screens the wives of owners as closely as their husbands, and frowns on inherited money because it thinks that people who have had to earn their own will know better how to manage a shop.

Loose Standards. Franchiser David Lawson points out the greatest shortcoming of the business: "Quality control is mediocre at best." He is president of Nationwide Safti-Brake Centers, whose inspections of its 51 garages--run mostly by people with small experience in the auto servicing business consist of infrequent, casual drop-in visits. Arthur Murray teaches dancing in a hurry--by mailing film clips of new steps to his 400 franchised studios. The studios have been restrained by the Government from selling lifetime lessons at exorbitant fees to lonely little old ladies.

But for all its loose standards, unfortunate esthetics and troubles with the Government, franchising is likely to continue its headlong expansion simply because the rewards exceed the risks: franchised small businessmen averaged better than a 10% profit. When the Internal Revenue Service recently charged that the holder of a car-accessory franchise in a small Missouri town was way behind in his taxes, he simply dug up a tin can buried in his backyard. He took out $80,000 and paid up.

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