bombshoo said:
I'm hardly an economics genius so would you or someone else elaborate with maybe some sort of scenario as an example?
Okay. For the
first point, lets say I go on a trip to a city I've never been to. I'm tired and hungry when I arrive but I don't want to have a bad meal. So instead of just sitting down at the first eating establishment, which may or may not be good, I look around for something I recognize. It might for arguments sake be a McDonalds which should, within certain tolerances, have a consistent menu, meals, decor and so forth.
A non-chain restaurant doesn't have that kind of broad appeal since it can't advertise its quality in quite the same way. Family restaurants tend to rely on far more intimate word of mouth transactions -- "Hey, have you heard about that great Greek place in town?" -- than bigger chains which can splurge on advertising and the like.
I see the same effect daily here, tourists tend to go to McDonalds, Subway and so forth because they can sure of a meal which has known qualities. It even holds for locals who might not be willing to part with $60 to try out a new family restaurants without first hearing recommendations and even then might not be bothered to try it out. There's alot to be said of having a known brand.
The
second point doesn't deal with conventional consumer preference, instead it looks at prices. McDonalds in this example isn't perfect but I'll give it a go. Here I can buy a large cheeseburger combo with an additional cheeseburger on the side for $10. Now, I could walk across the street and get a superior product for a few dollars more. The problem for the seller is that the McDonald's burger is considerably cheaper to produce, since its parent company does all the purchasing of the raw product on a massive scale which brings with it considerable cost savings. So the potential for higher than normal profits compared to the guy down the road is there already. From experience McDonalds restaurants can be immensely profitable raking in huge sums of money. This compares very favorably to family restaurants which are never going to achieve that same scale.
But the advantages of scale isn't limited to the purchasing of materials it continues into staffing arrangements which tend to be negotiated on the national level. Which tends to be rather advantageous on the whole since the parent entity has considerably more power than the individual restaurants would otherwise have. Legal matters tend to also be handled by the company which brings us into the
next point.
The support that the parent provides. If you could talk to the ultimate beneficial owner of a McDonald's franchise, I think you would find two things (1) they've probably never worked in the services industries and (2) they stumped up large sums of capital but little else to get the franchise license. Ultimately, all that a prospective restaurateur requires in a McDonalds restaurant is the money required to purchase the franchise license. McDonalds does all the planning and scoping for the restaurant, generally provides all the technical assistance required and makes life rather easy. In exchange there are some obligations on the part of the owner with quality etc. being specified in the contract.
I hope that sheds some light on the situation.