A restaurant development deal is completed in a foreign market, and a new international master franchise contract is signed. The U.S. franchisor and its new partner announce the agreement, under which the franchisee commits to building a large number of units. Chances are good that most of those proposed restaurants will never be built.
A study from Cornell's Center for Hospitality Research determined that not only will the individual restaurant units not be constructed, but many of the new ventures will not survive their commitment term. Those that do survive will build only a tiny percentage of the agreed-on units. The study is called 'Biting Off More than They Can Chew: Unfulfilled Development Commitments in International Master Franchising Ventures,' and is written by Cornell Professor Arturs Kalnins.
Kalnins examined 142 ventures announced by 53 U.S. food franchisors in 37 countries. 'The inescapable conclusion,' he writes, 'is that the development commitments in most master franchise agreements are excessively large relative to the number of units actually built by the master franchisee.' A more troublesome finding is that ventures with large development commitments have a lower probability of survival than those with relatively small commitments.
Just 55 of the 142 ventures survived to the end of the commitment period (usually five years). Of those that did survive, the average announced commitment was 34 units. In contrast, the average number of units actually in operation by the end of the commitment period was three.
Kalnins also noticed another peculiar pattern in the data. Although franchisors undoubtedly expected that their new partner would fulfill the development commitment, those commitments were rarely enforced. Franchisees completely fulfilled their development commitment in only six of the 55 surviving ventures.
'The data indicate that an excessively large commitment has the opposite of the intended result,' Kalnins observed. 'Rather than ensure that a restaurant brand will achieve a strong presence in a particular country, an excessive commitment damages the venture by generating unrealistic expectations and encouraging an inappropriate allocation of resources.'
Kalnins suggests that a better approach would be for franchisors to set modest initial development commitments, which would allow newly minted franchisees to allocate resources appropriately. Franchisees that successfully fulfill their initial commitment could then negotiate an additional commitment that covers a larger geographic territory.