Summary Brief The Effects of National Advertising on Unit Sales and Returns to Advertising: The Case of Restaurant Chains

Franchising has become one of the most popular business formats in America today. While franchise formats offer a number of benefits, conflict often arises between the franchise and franchisees. One of the more common sources of conflict in the relationship centers on the fees paid by franchisees for advertising and for the effectiveness of advertising conducted by the franchise on behalf of franchisees. Franchisees often feel that they do not receive an adequate return on their advertising investment. This manuscript reports the results of a study conducted to examine two primary issues related to conflict in the franchise-franchisee relationship: the effectiveness of advertising and the resulting returns to advertising investment. Introduction Most franchise agreements require franchisees to pay an initial, one-time franchise fee and then subsequent monthly fees in the form of royalties that are typically based on monthly sales volume. In addition to monthly royalties, many franchises require franchisees to pay an advertising fee which is used for a variety of purposes including such activities as production of promotional material to be used at the local level as well as local, regional, and national advertising. Advertising fees are typically of two types: fixed-sum or percentage of sales. Conflict in Franchising Systems One source of channel conflict in franchise systems stems from the fees paid by franchisees to the franchise (Michael, 1999; Shivell and Banning, 1996). Porter and Renforth (1978) reports that "sharing advertising costs" is an important and recurring cause of tension and litigation in franchise relationships. One of the biggest issues centers on whether or not the franchisee feels that he or she is getting an adequate return on his or her monthly royalties and fees. Franchisees frequently complain that franchise sponsored ads do not generate results commensurate with the fees paid (Shivell and Banning, 1996). Franchises and franchisees frequently debate how and where advertising dollars should be allocated. Franchisors tend to prefer national advertising whereas franchisees prefer to advertise locally (Sanderson, 1995). Unique Characteristics of Retailers Advertising in national media is warranted if the franchise is truly national in the sense that it operates in all markets. Most restaurant franchises, however, do not operal~7[n every market covered by national media. As a result it can be assumed that some, perhaps much, of national advertising is wasted on geographic regions with no franchise representation. Retail marketing differs somewhat from product marketing along several key points. First and foremost of which is the fact that the trading area for any given retailer is defined in terms of a limited geographic market. Accordingly, much of retail industry advertising is done at the local level. In 1999 , the retail industry as a whole spent approximately $13.4 billion dollars on advertising media 70 percent of which went for local media buys (Advertising Age, September 25, 2000). Research Questions There are two ways of examining the issue of RTA for national chains. One way would be to examine RTA for the entire system of restaurants. Such an analysis would involve examining the relationship between total national advertising and system wide sales. The problem associated with such an analysis is that system-wide sales are heavily influenced by the number of units operated by the chain. Adding more units will produce greater revenues for the chain as a whole while simultaneously increasing advertising finds and expenditures. The end result would be an artificially produced advertising-sales effect. This research addresses two primary questions. First, do advertising fees paid by individual franchisees generate positive RTA? Second, is system-wide RTA greater than RTA at the individual unit level? Formally stated: Hl: National advertising does not provide a positive RTA for many chain units. H2: A larger proportion of chains will exhibit a positive RTA at the system level than at the unit level.