Franchising can be a growth mechanism for restaurant companies, but it works best for those that are seeking management talent. On the other hand, selling franchises to gain financing has not been as successful a strategy. Those are two of the conclusions of the featured article from the latest issue of the Cornell Hotel and Restaurant Administration Quarterly (CQ).

The article, `When Does Franchising Help Restaurant-chain Performance?,` examines 92 restaurant franchisors to analyze why companies turn to franchising as a growth mechanism - and the outcomes of those approaches. Considering resource scarcity, authors David Ketchen, Jr., James Combs, and John W. Upson, found one group of companies that they dubbed manager-scarce franchisors, which were seeking additional talent, and another group, money-scarce franchisors, which franchised because they were short on capital. Of those two, the manager-scarce franchisors were more successful.

The study found a third group of companies, franchising minimizers, which avoided franchising, most likely to maintain control of their brands. A fourth group also appeared, surprising the researchers. This fourth group, which the authors called `seasoned veterans`, were long-established companies that made modest use of franchising, but not for reasons of resource scarcity. The performance of franchising minimizers and seasoned veterans exceeded that of the resource-scarce companies, particularly the money-scarce franchisors.

One distinctive point regarding the money-scarce franchisors is that their unit locations were scattered, weakening the impact of their brand. Suggesting that those companies try to expand too quickly, the authors commented: "We believe that restaurant firms that offer franchises in response to resource scarcities underperform their peers because they are not free to find the optimal balance between company-owned and -franchised outlets.

Given that the weakest of the four franchising groups was the money-scarce franchisors, the authors wrote: "Our study highlights the importance of intellectual capital." They further pointed out that the two groups that particularly focused on developing or acquiring human resources strength, namely, seasoned veterans and manager-scarce franchisors, performed well in terms of sales growth, market-to-book ratios, and return on assets.

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