The Effect of Franchising on Store Performance: Evidence from an Ownership Change

Abstract

Although many franchisors choose to own some stores and franchise others, attempts to estimate the effect of franchising on store performance are hampered by an important selection issue: The franchisor may choose to assign the least desirable locations to franchisees. I overcome this issue by using a 2007 corporate sale that resulted in all franchisor-owned Applebee’s stores in Texas being sold to franchisees as a source of exogenous variation. I first find evidence that both observable and unobservable location-level factors were important in Applebee’s decision to own or franchise a store prior to the corporate sale. I next estimate the effect of franchising on store performance and find that franchising an Applebee’s store increases its alcohol revenues by 15%. This paper was accepted by Joshua Gans, business strategy.