Whither franchising? The case of Avis Europe PLC

Copyright # 2004 John Wiley & Sons, Ltd.

MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 25: 525–535 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/mde.1183

Whither Franchising? The Case of AvisEurope PLC

Lowell R. Jacobsen*

Baker University, Kansas, USA

This case study of Avis Europe PLC examines the diminished role of franchising in the vehicle

leasing firm’s achievement of market dominance in Europe. Market maturity, industry

consolidation, adoption of centralised, efficiency-oriented technologies, and strategic alliancesare the principal factors in accounting for the decline in the reliance on franchisees for local

entrepreneurship and market expansion. Though many theories of franchising find at least

some support in this study, the life cycle or ownership redirection explanation provesparticularly compelling. Copyright # 2004 John Wiley & Sons, Ltd.

INTRODUCTION

This paper offers a case study examining the use offranchising by the vehicle leasing firm, Avis EuropePLC (AVE). AVE has utilised a dual distributionsystem composed of centralised, company-ownedoutlets and decentralised, independently ownedfranchises in expanding its market position, notablyin Europe. By the mid to late 1990s, the role offranchises became less important relative to com-pany-owned outlets in advancing AVE’s dominantposition in Europe and elsewhere. By the late 1990s,Avis in both the United States and Europe boughtback their largest franchisees. Further, Avis pur-chased one of its biggest rivals in recognition ofmarket maturity and adopted centralised, cost-reducing technologies. Hence, the need for (orindeed realisation of) local entrepreneurship asexpected from franchisees receded.

AVE, based in England, is Europe’s largestvehicle leasing company. Its 105-country networkcovering Europe, Africa, the Middle East and Asiais composed of some 1700 company-owned outletsand 1300 franchises. The company had its initial

public offering on the London Stock Exchange in1997. Though it is independently owned, AVEmaintains an active, cooperative relationship withAvis, Inc. in the United States (AVUS) throughshared technology and marketing initiatives. Withthe recent purchase of Budget, Avis worldwide hasbecome the dominant car rental company. ‘We tryharder’ has been more than a slogan.

WHY FRANCHISE?

First, how should ‘franchising’ be understood?Price (1997) comprehensively documents a ‘jungle’of meanings that he attributes to a lack of researchinto franchising. Nevertheless, Klein (1995, p. 10)states franchising ‘permits transactors to achievewhatever benefits large scale may be available in,for example, brand name development and orga-nisational design, while harnessing the profitincentive and retailing effort of local owners’.Similarly, Dnes (1992, p. 3) articulates the essentialfeature of franchising when he states: ‘A franchiseis created when one party, the franchisor, allowsanother, the franchisee, to use his trade name (andpossibly a business format) in operating a satellite(i.e., independently owned) business in return forfees’. Indeed, such a licensing arrangement that isa contractual one with an agent acting on behalf

*Correspondence to: Baker University, P.O. Box 65, Bald-win City, Kansas 66006-0065, USA. E-mail: [email protected]

of a principal is an intended means for companiesto overcome monitoring costs and to rapidlyexpand their geographic presence and grow theirbusiness. Second, franchising has been a significanteconomic phenomenon at least for the past twodecades. According to the International FranchiseAssociation, there are some 1500 companies usingfranchising in 75 businesses worldwide. Giventhe remarkable contribution of franchising toglobal economic growth over the past two decades,economists and others interested in entrepreneur-ship have been attracted to the study of franchis-ing. Spinelli et al. (2004) see franchising as an‘entrepreneurial alliance’ between franchisor andfranchisee who jointly exploit market opportu-nities with a proven business concept. Theyand others have been inspired by the classicwork of Schumpeter (1934), Hayek (1945), andKirzner (1973). Franchising is very much about‘carrying out new combinations’ (including orga-nisational form), ‘time and place’ knowledge, and‘alertness’ in generating residual profits andmarket success.

Further, the new industrial organisation econo-mists, in particular, have been inspired to studyfranchising given the pioneering work of Coase(1937), Williamson (1975), and others regardingthe importance of organisation in explainingeconomic activity.1 Franchising is regarded as ahybrid organisational form that lies on a con-tinuum somewhere between the extremes of themarket and hierarchy making it an especiallyinteresting study. Williamson (2002) continues toprovide compelling arguments for studying theorganisation of firms through the lens of govern-ance structures that recognises the import oftransaction costs (in addition to production costs)and illuminates the boundaries between firms andmarkets. Indeed, Williamson (1994) has argued forthe primacy of the transaction as the ‘fundamentalunit of analysis’. Efficiency-driven practice, oreconomising, is regarded as the primary andrelentless activity of firms according to thetransaction cost approach. Principal factors ofconsideration include bounded rationality, oppor-tunism, and asset specificity.

Perhaps the most important question concernsthe reasons for franchising. The explanations forfranchising include inadequate resources, particu-larly capital and local markets knowledge (Ozanneand Hunt, 1971; Vaughn, 1974; Caves andMurphy, 1976; Mendelsohn, 1985; Martin, 1988;

Minkler, 1992). Such scarce inputs individually orcollectively handicap franchisors’ ability to lever-age economies of scale and extend a brand name.Franchisees are often regarded as initially attrac-tive for their up-front fees they provide thefranchisor in exchange for the use of the brandname and possibly a business format. However,note that Rubin (1978) considers separated capitalraising, using a pool of professional investors aslikely to be cheaper than involving franchiseeswhere the latter are the more risk-averse parties.

Franchisees may be regarded as a self-selectedpool of entrepreneurs willing to invest their capitalin a proven brand name and possibly an estab-lished business format thereby undertaking lessrisk than if they were to invest or maintain theirinvestment in a separately owned and rivalbusiness concern. They may be willing investorsonly if involved closely in local management.Minkler (1992) points out that the franchisee hasvaluable or even superior knowledge of localmarkets that may be tacit in nature. To the extentit is tacit, it is not easily transferable to orappropriated by the franchisor. Hence, it isexpensive. So, effectively, the franchisee agreesex ante to share his profits as they relate to his tacitknowledge. Profit-sharing and discretion are theprimary characteristics of the franchisor. In short,the franchisor is contracted for their capitalprovision and entrepreneurial abilities, particu-larly with regard to local markets.2

Interestingly, the inadequate resources explana-tion naturally leads to an equilibrium possibilitywhereby resources are no longer inadequateor profit-sharing and franchisee discretion areno longer desired. As Minkler (1992) explains,the franchisor over time learns and is able toapply what the franchisee knows. Control ofoperations and profit-stream become the franchi-sor’s goal. Hence, there is a reversion to verticalintegration. Franchise contracts are not renewedand franchises are purchased and replaced bycompany outlets. Franchising is then viewed as ashort-term strategic choice to overcome resourceconstraints and effect rapid market penetration.3

This life cycle or ownership redirection extensionof the inadequate resources explanation has beenadvanced by Oxenfeldt and Kelly (1969), Cavesand Murphy (1976), Minkler (1992), Dant andSchul (1992), Thompson (1994), and others.

Franchising is also explained in accordance withagency theory and transaction costs analysis. The

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Copyright # 2004 John Wiley & Sons, Ltd. Manage. Decis. Econ. 25: 525–535 (2004)

costs of monitoring and control of employees areassumed to be not insignificant as employees maywell shirk their responsibilities and hence con-tribute to the sub-optimal performance of theiremployer. Franchising is viewed as a solutionwhen the costs of the franchise contract, includingthe provision of profit-sharing, are less than thecosts of monitoring company-owned outlets.Franchising is an attempt to more closely alignthe incentives of individuals with those of thecompany. Of course, the franchise contract islikely to be incomplete given the prohibitive costsof trying to anticipate every possible scenario.As Dnes (1992, p. 13), however, notes: ‘Theseincomplete areas will nevertheless be governedby incentive structures set in the agreement’.Posting bonds or taking hostages may be utilisedto obviate opportunism and hold-up, wherebyone party takes advantage of loopholes withinthe explicit contract (Williamson, 1983). Therisks associated with incomplete contracts areparticularly high when there is a greater degreeof asymmetric information and asset specificityinvolved (Klein et al., 1978). It has been arguedthat when a franchisee is involved in multiplebusinesses, it is much more difficult to correctlyidentify the proper amount of time and effortthat should be devoted to each business withinan explicit contract (Milgrom and Roberts,1992). In addition, it has been argued that implicitagreements between the franchisee and franchisormay arise to fill the voids of explicit contracts(Klein, 1980; Klein and Leffler, 1981). It isbasically an issue of balancing risks with incen-tives. The agency and transaction cost perspectiveshave been developed and advanced by significantscholarship (Rubin, 1978; Mathewson and Winter,1985; Brickley and Dark, 1987; Carney andGedajlovic, 1991; Dnes, 1992). Important ante-cedents include Alchian and Demsetz (1972),Williamson (1975), and Jensen and Meckling(1976). Of course, all of this research has its rootsin Coase (1937) and Simon (1945).

COMPANY BACKGROUND

Warren Avis established the car rental businessbearing his name in 1946 in Detroit, Michigan. Itwas the first such business located at an airport. By1953, the company expanded into Europe, Cana-da, and Mexico with franchise operations. Avis

Europe (AVE) had its own corporate headquartersin Britain by 1960 and by 1973 became Europe’slargest car rental firm. Since 1960 it has operatedindependently, yet cooperatively, with Avis Inc. inthe United States (AVUS) despite the severalchanges in ownership over the years. Togetherthey provide ‘seamless’ global coverage of the carrental market with shared technology and market-ing activities.

Today AVUS is a wholly owned subsidiaryof Cendant, a diversified conglomerate composedof related travel businesses including hotels,timeshares, and travel distribution. Cendantbelieves these businesses provide ‘multiple pointsof contact with customers along the travelspectrum’ thereby exploiting scope economiesthrough complimentary resources and knowledge.In 1997, AVE was floated on the LondonStock Exchange. D’Ieteren S.A., Belgium’s leadingcar importer and distributor, is its largestshareholder with nearly 60% of the outstandingshares. The remaining shares are widely held.D’Ieteren was an Avis franchisee starting in 1958.AVE has an exclusive license with Cendant until2036.

AVE rents cars to seven million customersyearly through some 3000 outlets in morethan 100 countries throughout Europe, Asia,Africa, and the Middle East. It operates inEurope’s 75 biggest airports. Revenue sales ofaround 1.2 billion euros were generated in 2002, a5.3% decline from 2001. Revenue segments in2002 include Leisure with a 39% share (with 80%of this derived from Europe alone), Corporatewith 22% of the overall revenue, Replacementaccounting for 20%, and Premium (referringto customers who do not reserve their car hirein advance) with the remaining 19% share.For 2002, the UK, Germany, France, and Italywere responsible for 81% of the total revenue.Profit before tax, goodwill amortisation andexceptional items was 122.3 million euros, down15.2% from 2001. Performance for AVE and theentire travel industry was adversely impacted byheightened geo-political risks as well as thecontinued economic slowdown in the globaleconomy, especially Europe. Nevertheless, AVEmaintained its market leadership in Europe.Further, it was bolstered by the acquisition ofBudget, the third largest car rental firm in theUnited States and accounting for 20% of theEuropean market.

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METHODOLOGY

Masten (2002) recently reminds the importance ofcontinued empirical research on the firm, particu-larly where the choice of organisational form isconcerned. He observes that theory has contrib-uted much to our understanding of possibleexplanations for organisational architecture overthe past two decades. However, it is the empiri-cists’ ‘mundane task’ of collecting data wherebymodels can be tested that needs to keep pace.Klein (1996), Dnes (1996) and others4 concur andspecifically call for more attention to case studiesgiven the detailed and varying nature of organisa-tional structures including firms with franchisingsystems.

This research explores the role of franchising inAVE’s quest for market growth and leadership.The research design is that of the case studywhereby the behaviour of AVE has been observedand analysed over many years, using a range ofsources including both primary and secondary.Utilising a breadth of sources permits a scrutiny ofthe data including cross-checking of informationto insure accuracy and to delineate and appreciatethe various perspectives. Sources included inter-views conducted with company executives, man-agers and franchisees, published companydocuments (including press releases and annualreports), analysts’ reports, previously publishedcase studies, and articles in the business press.Interviews conducted with three outlet managersand three franchisees in Britain took place in 1988and again in 1993. These interviews were con-ducted using the same interview instruments andyielded detailed insights into the nature of thefranchise contract at the peak of AVE’s use offranchising as a strategy to increase its marketgrowth and development.

ANALYSIS

AVE provides a complete business-format fran-chise that includes operating manuals (regardingsales and administrative procedures) as well as acomputerised reservations system linking eachfranchise with the Avis system. The franchiseesemphasised the value of having an internationallyrecognised brand name that reassures the custo-mer that he is buying a credible and durablequality service that features a full international

service in terms of vehicle support and one-wayhires. Direct financial assistance was not typicallyprovided by AVE. However, support in thepreparation of a business plan used to attractfinancial backing was offered by AVE. Further, abespoke lending scheme for franchisees was devel-oped by AVE with National Westminster Bank, amajor British clearing bank. Also, AVE madeavailable preferential leasing arrangements it hadwith automobile manufacturers (e.g., Ford MotorCredit).

The independent ability of potential franchiseesto raise capital to invest in a franchise wasregarded as a significant screening factor forAVE in its selection process. AVE believed theability and sometimes passion required to per-suade financiers or capitalists to advance fundingare reflective of requisite business or even entre-preneurial acumen. Further, the more successfulthe track record of a potential franchisee inborrowing capital, the more likely the franchisorwould regard the question of information asym-metry less problematic. Indeed, financiers contri-bute to the selection process of franchisees in animportant way. Of course, the extent to which thefranchisee is willing and able to invest her capitalinto the franchise (directly or by provision ofsecurity collateral) provides a compelling signal ofcommitment. It also serves as an indicant of thefranchisee’s tacit knowledge, self-confidence, andregard for her local market potential. Often,franchisees have a high proportion of theirpersonal wealth along with their reputation asbusinessmen invested. Not just failure, but a lackof genuine success would seriously jeopardise theirfutures. It was believed that the expected returnscould not be achieved in the capacity of an Avisoutlet manager. Despite profit-sharing rights,managers would not have the same compellingownership stake. As entrepreneurs qua franchisees,it was expected they would leverage their localknowledge and exhibit significant innovativeactivity.

In 1992, a lump sum of between 20 000 and30 000 pounds sterling was paid by the franchiseeupon agreement of the franchise contract. This feewas negotiable depending on the particular localmarket, keenness of AVE to penetrate the market,and exceptional circumstances (e.g., rental sitesuch as a service station already established). Inreturn for the lump sum fee, AVE provided astart-up package that included assistance with

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shop-fitting, uniforms, launch-advertising, station-ery, training, and promotional materials. Inaddition to the paid lump sum, franchiseestypically agreed to a 10% royalty that was leviedon sales turnover.

AVE also offered franchisees purchasingexpertise and bargaining power in regard toinsurance and fleet deals. Nevertheless, leasearrangements tended to be particularly attractiveto manufacturers as they were able to place theircars temporarily into hire fleets. Typically, the carsare leased for 10 000 miles over 3–9 months.The auto manufacturers benefited from the brandpromotion as well as a robust, second-handcar market. However, AVE admitted that thefranchisees are most profitable when they areable to purchase, rather than lease, the carsdirectly from the manufacturers and then sell themfor their own benefit. The manufacturers wererecognised for wanting to generate greater marketshare, cash flow, and profits. AVE did not directlybenefit from the vehicle sales and likely experi-enced a decline in leasing revenue. It appearedthat AVE inadvertently created a malincentiveresulting from the combined incentives of encoura-ging franchisees to operate their own supplyline with the manufacturers and utilising theirmotor trade knowledge to preempt competitionand to exploit entrepreneurial talents using theirlocal knowledge. The incentive for franchiseesto own cars also conflicted with the need to passvehicles around the network and into the careof other branches. The fundamental partof the business is that the franchisee receives therights to operate under the Avis brand name, touse centralised booking arrangements, and toparticipate in a system of one-way car hire.Franchisees could also expect AVE to sustaininternational promotion of the brand name. Inreturn, AVE expected the franchisee to honour theterms of the franchise contract and to maintainservice levels at least equal to those of company-owned outlets.

AVE has a written franchise contract with eachof its franchisees. The contract is intended to beminimal in that AVE does not want to legislate forevery possible scenario. First, it is not economic-ally feasible to do so. Second, AVE wants toprovide the franchisees with the flexibility toexercise their entrepreneurial abilities in order toexploit their local markets. Nevertheless, AVE didspecify marketing and operating support it would

provide, the fees charged for franchise services,and the nature of monitoring activity effected byAVE, particularly concerning quality. More spe-cifically, the franchisee agreed to participate in asystem of one-way vehicle rentals, and to providemonthly reports on rental turnover (including timeand mileage plus collision damage waiver fees). Inaddition, the franchisee agreed to spend a parti-cular per cent (e.g., 2.5%) of his time and mileagecharges on local advertising that could includetelephone directory listings.

The franchisor’s standards must be establishedex ante; negotiating ex post with each franchiseeregarding the costs and benefits of standardswould not be efficient and could compromise theintegrity of the entire system. Universal standardsthat are sustained and respected secure uniformityin products, outlets, and marketing. Indeed, theAvis trademark is sustained and economies ofscale are realised. Of course, changes of asubstantive nature unique to particular franchiseeswere expected to occur from time to time thatmight well alter the mutual understanding andapplication of ex ante standards. At such time,renegotiation may be justified, bearing in mind the‘knock-on’ effects to the franchise system. Pro-vided the emphasis on entrepreneurship is ob-served, such alterations could well be absorbedinto the system without ill-effect. Exploiting thescale economies of system-wide standardisationwhilst encouraging innovation in local marketsdoes present what Price (1997) calls a ‘franchiseparadox’ whereby a balance must continually besought. So, it is informative to specify further theex ante standards and desired practices set forth byAVE in identifying parameters in which thefranchisee is expected and able to act entrepreneu-rially.

First, the new franchisee always agrees upon aninitial vehicle fleet and a plan for its growth. Doingso provides an important mutual signal ofcommitment and expectation. The provision ofvehicles by AVE were not as highly valued by atleast some franchisees as AVE expected. Inparticular, the saving of the franchisee’s searchand negotiation costs were not so significant.Hence, AVE might just provide a fraction of afranchisee’s fleet. Understandably, rental rateswere at the discretion of the franchisee. However,franchisees needed to abide by internal transferprices for vehicles hired on the one-way system.Under such a system vehicles may be left at an



outlet from which they did not originate andsubsequently be used by the receiving station,preferably as a means to make a return journey.The renting company, say the franchisee or AVE,must pay some 60% of time and mileage chargesto the owner. This policy discourages a stationfrom holding onto a one-way vehicle too long. Thefranchisee services vehicles that are in her domainif required to do so by AVE or another franchisee,even if they are not her own. The franchisee isremunerated for such work at agreed rates thatmay alter from time to time.

A franchisee may choose to leave the AVEsystem provided she has given a 6-months noticeof such an intention. AVE may terminate itscontract with a franchisee on the followinggrounds: (1) breach of contract by franchisee; (2)franchisee’s insolvency; and (3) any case of sub-standard operation on the part of the franchisee.Grounds (1) and (3), in particular, could well beregarded as arbitrary or at least open to inter-pretation by AVE. In effect, AVE clearly has theinfluential role, not to be underplayed, in thefranchisee’s behaviour and performance as anentrepreneur that would likely vary from onefranchisee to the next. Of course, AVE couldalways buy out the franchisee’s contract at amutually agreed price.

In addition to the written contract, the franchiserelationship is subject to a number of under-standings that have evolved over time. Thoughimplicit in nature, they do serve to safeguard, ifnot reinforce, the relationship between the fran-chisee and AVE. Since such understandings arenot legally binding, their increasing use may wellreflect greater mutual trust resulting in moreentrepreneurial activity on the part of the fran-chisee and possibly the franchisor. The under-standings are likely to develop over time in thecontexts of an ongoing dialogue between AVE andthe franchisee and changes in the market. Hence,these understandings serve as an additional safe-guard with respect to mitigating potential oppor-tunism on either the part of the franchisee orfranchisor.

First, there is a strong implicit understandingthat AVE will undertake a significant amount ofnational and international advertising. However,since the understanding is not explicitly spelt out,this action is entirely at AVE’s discretion. Cer-tainly, large expenditures on advertising by AVEsignals commitment to the Avis brand and

franchisees. Also, such expenditures are under-stood to be sunk (or irretrievable) costs, whichfurther enhances the franchise relationship.

Second, AVE fully expects the franchisees tooperate vehicles that meet Avis quality standards.This ‘no lemons’ principle refers to the exclusion ofcheap, low-quality, high mileage cars. Whilst themaintenance of standards is emphasised in thefranchise contract, the particulars are not articu-lated. Hence, reliance is placed on an informalunderstanding as a means of preventing shirkingor quality-shading on the part of the franchisee.

Third, it is acceptable for AVE to participate inthe selection of the franchisee’s managing directorand operations manager. Often, at least one of thepositions is held by the franchisee herself. Gen-erally, this selection process will include Avisdistrict managers and/or personnel related to theparticular franchise. AVE would have no expecta-tion to participate in the franchisee’s hiring ofother personnel.

Finally, it is understood that AVE-ownedvehicles may be used by a new franchisee at local(i.e., discretionary) rates until the franchiseebecomes established. However, once the franchiseeis ‘up and running,’ the rental rates would beconsistent with AVE-determined rates, whichwould be in keeping with established franchiseesand AVE outlets. Indeed, ‘established’ can bearbitrary and vary from franchisee to franchiseedepending on the particular circumstances. Fran-chisees did acknowledge that the Avis brand namewas reassuring to the customer that she wasbuying a credible and durable service featuring afull national and indeed international system interms of vehicle support and one-way hires. So,where the local rates might otherwise be lowerthan the AVE-determined rate, the nascent fran-chisees would likely quickly adopt the higher rate.In addition, to the extent car bookings weregenerated by AVE’s central reservations system,it would be likely that the franchisees wouldcharge the AVE-determined rate. Even thoughthe franchisees emphasise the benefits of thebrand name (e.g., ability to charge higher prices),the central reservations system was seen asvaluable, too.

The oversight of the franchise network is fullyintegrated with that of the company outlets.District managers would monitor the daily opera-tions of each AVE outlet as well as franchisee.Even though the franchise agreement only

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specified a monthly performance-reporting re-quirement, copies of each day’s rental agreementswould be sent to the district office. In the case of anew franchisee, copies would be also sent to thehead office during the first 3 months of operations.The prospect of under-reporting of rentals wasfurther deterred by complaints from within theentire system registered to the home office. Ofcourse, AVE would hope that franchisees did nothave to police each other. Such an occurrencewould be ‘disappointing’. Nevertheless, such apossible action could be expected and hencethought to serve as a useful safeguard. AVEbelieved that the monitoring system as describeddoes provide a good idea of what business afranchisee should (at least minimally) generate.

AVE believes that franchisees should not becontinually reminded of the franchise contract tothe letter. If so, then termination of the franchiserelationship might well be inevitable. This wouldbe unlikely provided there existed a sound mutualunderstanding from the franchisee’s inception,increasing use of implicit understandings, and aneffective monitoring system. Nevertheless, AVEdid find it necessary to terminate some earlyfranchise contracts. Often, a lack of requisitebusiness acumen was the primary factor. Forexample, in an attempt to address poor cash flowsfranchisees would sell cars that did not strictlybelong to them.

Hitherto, the analysis is suggestive of AVEmoving away from franchising as a means forexpansion and growth. It is clear that AVEprovided franchisees extensive interaction, supportand indeed oversight. Such monitoring activity iswhat might be expected for managers of company-owned outlets. This is evident in both the explicitcontractual arrangements and the implicit under-standings between franchisor and franchisee. Infact, by 1988 AVE began buying back itsfranchisees including licensees. Recently, TheFinancial Times (2003) stated AVE had assumed‘full control of one of its few (largest) remaininglicensees’. Indeed, this French firm was part ofAVE’s network for over 30 years and wasresponsible for generating a significant 18.5 millioneuros in revenue in 2002 (nearly 2% of totalrevenue). Buy-backs were focused on locationswhere national markets were concerned. Theselocations included airports and inner-city sites.Indeed, airports were increasingly responsible forhalf of AVE’s business. (This would remain true in

post 9/11 and the coinciding global economicslowdown.) In those cases, the dominant char-acteristic was repeat transactions with nationalbusiness accounts. The value of local entrepreneur-ship was relatively limited from AVE’s perspective.Further, it was found difficult to sustain theinterest of franchisees in serving markets char-acterised by much one-way rental business.

The identified manifest problems or disincen-tives associated with provision of autos forfranchisees also served to highlight the movementaway from franchising and toward company-owned outlets. AVE was particularly disappointedthat franchisees tended to purchase their carsdirectly from manufacturers whereby the franchi-sees and not AVE could profit from the resalemarket. In 2000, AVE announced it was entering ajoint venture with Navidec, an e-business compu-ter company, to sell used cars over the Internet,signifying its high regard for the resale market. Itwas mutually agreed the venture would cease in2001 at which time AVE entered into a contractwith Fiat Auto UK and separately launched ajoint venture with Inchcape, an internet-basedcompany, to sell used cars online. Further,franchisees’ preference for purchasing cars directfrom manufacturers at least threatened to reducethe bargaining power AVE had with automobilecompanies. Beginning in the early 1980s AVEpursued a pan-European policy of negotiatingwith eight suppliers on behalf of its overalloperations (rather than country by country)making it the largest private buyer of cars inEurope. Today, AVE purchases around 200 000autos annually from some 30 manufacturers. Withmore franchisees converted into company outlets,AVE could realise even greater efficiencies in boththe purchase and the resale of vehicles for its rentalfleet. Mark McCafferty, the CEO of AVE,emphasised the importance of fleet managementwhen in 2001 he stated: ‘In our business, you getyour short-term cost base right; you make sureparticularly that you take on the right amount offleet... and manage that fleet very effectively’. Theimportance of purchasing and reselling cars isperhaps highlighted by the fact D’Ieteren (aformer franchisee), AVE’s controlling shareholder,is Belgium’s largest car importer.

Further, introductions of centralised technologyas cost drivers for the AVE system served topromote competitive advantage in perhaps a morerobust manner than the entrepreneurial skills of



franchisees as they relate to local markets. Under‘Key Competitive Strengths’ in its website, AVEemphasises that technology ‘delivers service differ-entiators and operational efficiencies’. AVE’swebsite has no mention of franchisees exploitinglocal market knowledge for the benefit of AVE. Inaddition, a greater emphasis is placed on promot-ing and sustaining the Avis brand. When askedabout the source of AVE’s competitive advantagein 2001, McCafferty stressed the importanceof technology and in particular Wizard, ‘theonly large-scale, front-to-back, fully integratedsystem in the industry’. The Wizard system, whichAVE and AVUS have shared for many years,provides low processing costs and outstandingmanagement information for the entire Avis net-work. McCafferty identified the target customer asone who wants a truly global service. ‘Whether weare looking at management information onGermany, Portugal, Croatia or anywhere, we arelooking at the same types of data. From a controlpoint of view, from a management informationpoint of view and from a customer informationpoint of view, it gives us a tremendous advantage.Then the brand is (further) recognised around theworld’.5

In 2003, AVE further increased its cost-reducingstrategy that emphasised network-wide technologyby partnering with Symbol Technologies andTechnological Business Solutions (TBS) to providethe innovative mobile assessment system in orderto quickly and accurately identify minor damageto cars at the time of a rental check-in. When a caris returned, an AVE employee uses the hand-helddevice to quickly scan the car for damage. The costof repair including parts can automatically bedetermined and then at the time the rentalcustomer can agree to assume the final rentalcharge. There should be no need for furtherfollow-up with the customer. AVE’s fleet recordsare then updated with the damage informationbeing downloaded to the Wizard system. Accord-ing to Randal Tarn, Director of Fleet andOperations of AVE: ‘This new system savesconsiderable time, with appraisals being completedin just 2min. It also ensures that crucial customerinformation and signatures are not lost. Symboland TBS really came to us with a completesolution for our need to put the customer servicefirst’.

Also, in 2003, AVE entered into 5-year contractwith Vanco to modernise its communications

network in order to enhance access to data andintegrate with Wizard, its online reservationsystem. The improved network will provide greaterbandwidth and initially consolidate AVE’s net-work at 1755 company outlets in 14 countries. Itmay be later expanded to its 1300 franchises. Thenetwork is expected to provide AVE with a basisto undertake many IT projects with a focus onreducing costs.

It was in 2000 that AVE chose to partner withAspect Communications Corp., the top providerof customer relationship portals. The Aspectsoftware provides AVE with the ability to inte-grate existing data systems with AVE’s customerservice contact centres, one in England and theother in Spain. In particular, AVE will be moreeffective in planning and managing customerrelationships and reacting to changing businessconditions. These call centres are the principalmeans of communication for AVE’s customers.Again, AVE continues to look for cutting-edgetechnology that will improve its overall opera-tional efficiencies and heighten customer servicethereby distinguishing itself in a highly competitivemarket.

CONCLUSION

By the late-1980s, AVE began converting itsfranchisees into company outlets. It is clear fromthe above analysis the expectations for andbehaviour of franchisees were converging withthat of outlet managers. Quite telling was the factthat franchisees were monitored as closely ascompany managers. Further, there was littleevidence of compelling local entrepreneurship onthe pan of franchisees. On the contrary, theemphasis was being placed on one-way rentalhires and national markets. Hence, company-owned airport and inner city sites became increas-ingly important. To the extent franchisees werenotably entrepreneurial, it proved inconsistentwith the interests of AVE. In particular, franchi-sees preferred to purchase their own vehicles frommanufacturers and thereby deny AVE the oppor-tunity to resell the vehicles in addition to capturingthe leasing revenue.

AVE has pursued a parallel strategy to that ofAVUS’s. First, according to McCafferty, AVE’sCEO, AVE and AVUS ‘work together extremely

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closely because we share the same core technologyand the same brand’. He added: ‘As far asthe market is concerned we are one business’.AVE and AVUS simply cater to separategeographic markets. Second, like Europe, theUS market is mature with a few dominant playersin fierce competition. The emphasis is verymuch on enhanced customer service and costreduction, promotion of brand name, andconsolidation. In particular, adoption of net-work-wide technologies, extensive use of alliances(e.g., airlines), as well as consolidation (includingfranchise buy-backs and rival takeovers) have beenthe principal driving forces for Avis. Indeed, thesignificant adoption of technology in recent yearshas coincided with notable consolidation. Budget,a leading competitor, was purchased in 2003. Also,recently, ownership redirection has been high-lighted with notable franchise buy-backs. In 2003,AVE bought its largest franchisee, a French firmthat accounted for nearly 2% of AVE’s totalrevenue in 2002. In 1997, AVUS purchased its twolargest franchisees. In 2001, the largest remainingfranchisee was bought. As a result, its franchiseesaccounted for less than 10% of AVUS’s USrevenues.

Indeed, though many explanations of franchis-ing find support in this case study, the ownershipredirection theory of franchising is especiallyapplicable. Over time as the car rental marketmatured, it is true that the entrepreneurialcontributions of franchisees proved less valuableto AVE, the franchisor. However, it was not somuch because the franchisor learnt what thefranchisee knows in terms of local knowledge asMinkler (1992) for example argues. It was largelybecause of the superior entrepreneurial activity ofthe franchisor. AVE emphasised the adoption ofcost-saving technology with network-wide appli-cation. It did so through strategic alliances,particularly partnerships.

There is much scope for future research. Towhat extent will AVE continue to buy back itsfranchisees? To what extent will the newlyacquired Budget, which has a significant franchisenetwork, undergo ownership redirection? Willthere be further industry consolidation? Is owner-ship redirection an important strategy for rivals incountering AVE’s dominant position in themarket? Will AVE offer franchises in China orwill it concentrate on establishing joint ventures asit expands into this promising market?

NOTES

1. Interestingly, Coase (1937) in his pioneering paperhighlighted the importance of the entrepreneur as the‘entrepreneur–coordinator’ responsible for creatingcontracts and having the ‘authority’ to coordinateresources within the firm. Niman (1991) furtherarticulates the close connection between the entre-preneur and a firm’s organisation structure. Heargues that institutional innovation is as importantas product and process innovation, all tasks attrib-uted to the entrepreneur.

2. Marshall’s (1920) insight is worth consulting. Inparticular, see his analysis of localised industries inBook IV, Chapter X and discussion of businessmanagement with special attention to the‘undertaker’ (i.e., entrepreneur) in Book IV, ChapterXII of his Principles. Indeed, not only did Marshallrecognise the importance of local knowledge but alsoits tacit or particularly personal nature. See Polanyi(1962) for the seminal treatment on tacit knowledge.

3. Minkler applies a mainstream Austrian (indeedKirznerian) approach that embraces the coordinatingefforts and ‘tendency toward equilibrium’ ascribed toentrepreneurial activity.

4. Reid (1987b, p. 34) asserts: ‘It is possible, and indeedpotentially very fruitful, to look at the case study as adistinct method in its own right, rather than as anadjunct to established methodologies....’ Elsewhere,Reid (1987a) reminds economists of the importanceAdam Smith and Alfred Marshall placed on thedirect examination of business reality.

5. In September 2003, McCafferty announced hisleaving AVE for ‘other opportunities’. His departurewould be effective in early 2004 after having served asCEO for the past 5 years. In acknowledgingMcCafferty’s contributions. Sir Bob Reid, AVE’schairman, stated: ‘Mark has taken the companythrough expansion and, more recently, turbulenttimes. By making difficult decisions on organisationand investment expenditure, he has ensured its(AVE’s) continuing leadership’.

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Documents

Whither franchising? The case of Avis Europe PLC