Franchising and Efficiency: a DEA Application to US Networks

The concept of performance has been little explored in the franchising literature (Combs et al., 2004; Watson et al., 2005). In this paper, we explore the franchising network performance, and more specifically the franchising network efficiency, from the franchisor point of view and through a DEA approach (Data Envelopment Analysis). Two main indicators of the franchisor revenues are used: the on-going franchising royalties and the franchising fee. The purpose of this paper is built into an efficiency perspective. Data concern the first 150 franchising networks of the Entrepreneur's 25 Annual Franchise 500® ranking (2004). The findings indicate that most of the networks are under-efficient and one of the main reasons for this stems from scale efficiency. A particular network is also studied in depth. Moreover, four hypotheses are empirically tested. Implications of the study are finally discussed.