00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 00:00:18 Speaker 2: Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway and I'm Joe. 00:00:23 Speaker 3: Isn't Joe? 00:00:24 Speaker 2: I will fully admit I think I have a romanticized view of fast food chains. 00:00:30 Speaker 3: Yeah, you're the only one. Yeah, I know. Literally, I know I like fast food, chairs I don't have a romanticize view of them. 00:00:37 Speaker 2: I blame coming to America, huh, and the restaurant that was in there, and also my overseas upbringing that probably made American fast food seem a lot more exotic and interesting than perhaps actually is. But I was thinking the other day about the franchise model. It is really weird once you start digging down to it, because it's like this and coming to America is you have the small business owner I want to be all entrepreneurial, so they get this franchise, but then everything is basically dictated to them about how to do the business by the actual corporate franchise owner. 00:01:12 Speaker 3: Wait, coming to America, he didn't open to McDonald's. 00:01:16 Speaker 2: No, it was yeah, right. 00:01:18 Speaker 3: But that was the whole thing. 00:01:19 Speaker 4: There was like a legal fight against you know, because they claimed that like he want, but he want what he wanted. 00:01:25 Speaker 3: To do it his own. 00:01:25 Speaker 4: I mean, he really just wanted to commit intellectual property theft. I mean, that's really what was going on. I suppose you could tell an optimistic version he wanted to go his own way and do his own thing, but he was really just committed. 00:01:37 Speaker 3: I love. You know, it's a. 00:01:38 Speaker 2: Perfect summary of why people are interested in the franchise model, which is like, Okay, you're ostensibly supposed to be your own business person I guess independent, but you get a leg up because you get that like built in customer base and the insisting brand and all of that. 00:01:54 Speaker 4: But to your point, like the pitch in many franchise esque relationships, it's like, this is your chance to be an entrepreneur, et cetera. Except when you think about entrepreneurship, you don't think about like so many constraints, like here's the thing, and here's the price, and here's the thing. 00:02:10 Speaker 5: You know. 00:02:11 Speaker 4: And also in a typical entrepreneurial environment, there is quite a bit of like you know, people often go into entrepreneurship for like big like right tail outcomes, you know, so for. 00:02:22 Speaker 3: Example, big payoff. Yeah, and so like for example, I remember you know in the I guess. 00:02:27 Speaker 4: You still hear it, but like the glory days of like uber and stuff like that, or being like an Amazon van driver or something like that, they talk about start your own business, and on some level it was like on paper, it's like there was legally a business. It's not going to be like a high scale, high margin business the way many people hope for when they do quote entrepreneurship unquote the sort of like parameters of the outcome. It's like, Okay, maybe they've taken off some of like the really bad outcomes, yeah, but it's not the sort of like really good right tail outcomes that many people so with like the aspirations of the entrepreneur. 00:03:02 Speaker 2: Well, this is the other thing I'm interested in because certainly in the eighties and nineties you would hear stories about people who became relatively welcome by running like franchise empires. So I'm curious if that still exists. But the other thing that's really interesting to me is like, Okay, you're an independent owner of a franchise. What levers do you actually have to pull to improve the business. 00:03:24 Speaker 4: I know, I always think like sometimes you see those stories again not to keep picking on McDonald's, which we both love, but like you'll see these stories from time to time about like a bad product rollout right, I introduced a new sandwich and nobody likes it or something like that, And I always think, man, it would be so annoying to be a franchise ee. Yeah, you have to be at the whims of some like how much do they have to carry the sandwich? 00:03:46 Speaker 3: Can they change the price? 00:03:48 Speaker 4: Like, you know, you're really putting a lot of faith and money on people who like make big decisions that are or you like, let's say you run a bad ad. Right, let's say you run an ad that McDonald's corporate runs an ad that ournishes the whole brand, which could could theoretically happen. It's like you've just like totally outsourced some of your future outcome. 00:04:07 Speaker 2: The CEO seems reluctant to eat their own meal products. Oh yeah, okay, Well we should talk about I guess the franchise model and the franchise economy because it is really interesting episode. So I am happy to say we have the perfect guest. We're going to be speaking with Brian Colachi. He is the chief economist at the Open Markets Institute and author of the book Chains of Command, The Rise and Cruel Reign of the Franchise Economy. So, Brian, thank you so much for coming on outlaws. 00:04:36 Speaker 5: Yeah, thanks for having me. 00:04:37 Speaker 2: Can you maybe just give us an overview like the actual legal and corporate structure of a franchise What does it look like and how does it differ from I guess either like mcdowells mcdowas. 00:04:50 Speaker 5: Yeah, there we go. 00:04:52 Speaker 6: Yeah, So the legally, it's a very simple structure. It's really an artifact of trademark law. So you know, you've got a brand owner on McDonald's, let's say, and they license, you know, ostensibly we can get into how independent they really are. By an independent business owner to run a McDonald's restaurant and use the McDonald's trademark and in exchange the franchise e both want The operator called the franchise e, kicks a percentage of their sales and royalties usually between six or you know, twenty percent, and so McDonald's takes that revenue stream and in return also the franchise e, this is the key sticking point, agrees to follow all of their instructions and it is quite minute I mean everything from the you know, in many cases even the prices, hours of operation, product mix, and even things like you know, how long does your employee have you know, deserve as a customer to drive through? What words do they use to greet the customer. There's very little left to discretion of the franchise. They're basically a middle manager for a large corporation, but with a little bit more risk and a little more skin in the game. 00:05:48 Speaker 5: Because of that, the way that the structure of it works. 00:05:50 Speaker 3: They even like constrained the equipment you can use to repair ice cream machines. 00:05:55 Speaker 6: That as a famous yeah example of yeah franchise e's as I'm an avid consumer. 00:05:59 Speaker 5: Of I love it. As a consumer, I love it. 00:06:03 Speaker 6: But yeah, that's a joke among a McDonald's fans is their ice cream machines are always broken. 00:06:07 Speaker 4: Do you remember we did that episode a couple of years ago and the guy who we're talking to was bullish on that company, Oh it makes the ice cream gear. But he was very straightforward, which I respect. It is like they have the monopoly. Their equipment breaks a lot, and only they can repair it, and so that's a lot of I mean, that's how investors should be. 00:06:26 Speaker 2: A popular business model, especially in the tech world, where we see companies create problems that only they can solve. Anyway, Okay, so you mentioned skin in the game. There give us the sort of origin story of the franchise model, because my understanding is part of this was about incentives, right, So you tell people, well, you're not just going to be like a person working for us, You're actually going to have ownership in this particular restaurant and the revenue that it's throwing off. You want to incentivize people to I guess work harder for you. 00:07:00 Speaker 6: M yeah, So it solves you know what you know we economists call the principal Asian problem, you know, where you have the local manager more incentivized to exert effort to put in you know, put in work than a salaried employee would because you know, their life savings depend on it. You know, they invested their families money in that restaurant or that other whatever kind. 00:07:16 Speaker 5: Of business it is. 00:07:18 Speaker 6: But the other reason why franchising was so appealing to these franchisors is that the fact that they were a separate business, they were not employees of the chain, meant that they were covered by overtime or minimum wage or if you know, the McDonald's workers wanted to you know, join a union or something like that, they weren't able to do. So they had no rights against McDonald's. All of their rights are only against this franchisee who really doesn't have the money. The money is all, you know, sort of coming to the top, so that access I legal barrier to exclude workers from those rents. And the other aspect I would say again back to those incentives, is that you know, what are these franchises incentivized to do. As I was, you know, researching the book, I met someone I'm from New England, so dunkin Donuts is our big chain, and you know, someone who had worked at a dunkin Donuts said, yeah, my franchise was obsessed with bananas, Like why bananas? And so well because all the other ingredients you know, were controlled by Dunkey Donuts, but bananas you can you could send us around to look at the stopping shop, you know, for the chiefest chief is banana. 00:08:12 Speaker 5: So there was that aspect of it. 00:08:13 Speaker 6: So they yeah, they're highly incentivized because nothing else is under the control pretty much what they do outside of bananas is they they extract effort and push down wages for their franchised employees. So it's it's a high stress, a high if you've ever been to one, you know, very high motivated workforce. You know the phrase that that workers that these restaurants uses. Their managers always tell them, if you can lean, you can clean, you know, you always got to be doing something. 00:08:36 Speaker 4: Yeah, all right, so that explains the sort of corporate logic. 00:08:39 Speaker 3: What is like the history of it. 00:08:41 Speaker 5: Who were the. 00:08:42 Speaker 4: Real like innovators We've just mentioned duncan and McDonald's, But who were like the early players, What did they realize? What were the conditions, et cetera? Tell us about that period. 00:08:50 Speaker 6: Yeah, so you know, the initial legal structure comes out of you like auto dealers and like these new manufacturing companies in the nineteenth and early twentieth century. But the fast food and modern franchise as we know it, where you have that your license is like an entire business package to a small entrepreneur. That really dates to the postwar period nineteen fifties, nineteen sixties, and the innovators who who invented this business model are there. They are fascinating. It was a joy to research the book. Very colorful people. Colonel Sanders was a real guy. 00:09:17 Speaker 5: You know. 00:09:17 Speaker 6: Ray Kropt is a movie about him. It's fantastic with zotobiography is good. 00:09:21 Speaker 5: Yeah, that's also excellent. 00:09:22 Speaker 6: Yeah, a lot of quotes from there in my book, because yeah, he's such a verbose guy. But you know, I'm an economist, and so I just started to look. I just wanted to know a little bit of the background so I could run my regressions, you know. But as I you know, got deep into the history, like I decided I really wanted to write a book about how it was founded. It's very fascinating because you know, these guys had a great idea. But they also they said this openly. There was no secret to on earth. They said pretty clearly, what we're doing isn't really legal. We need to change the laws to make it legal. Let's form an association, a trade association, international franchise association to make this business model legal. And the body of law that actually they're up against it's kind of hard to believe now, but it was antitrust. Anti trust law protected these small business owners from that kind of control. 00:10:04 Speaker 4: So would the issue be that under a prior regime, a McDonald's or a franchise or would be the monopoly seller of McDonald's IP and so forth to all their like, how did this run up against franchise or anti trust law? 00:10:23 Speaker 6: Yeah, so a lot of the a lot of the case law actually comes from the petroleum industry refiners who had branded stations, you know, like a Shell station or a Chevron, and they came up with a way to get around chain store taxes and also anti trust to control the independent dealers make sure they're only selling shell oil and also only selling approved brands of you know, batteries and tires and other accessories. But they also did this to avoid when the Fairly Standards was packed in nineteen thirty eight, and you know Ray Kroc and Colonel Sanders and all these founders of the franchise, Well, we should do that in service industries, not just product distribution. But the anti trust body of law was it's sort of like you know, nineteenth century anti monopoly idea of you know, like there's like meaning to being like owning a business, you know, owning your own farm or you know, employment is like you can't have a democratic society where people are taking commands from someone else. So the anti trust course through the mid nineteen seventies are still enforcing that. Not in every case, but for example, if McDonald's wanted to set the price of a big Mac, that was against the law. If they wanted to, you know, tell a franchisees you know what territories they could operate, that was against the law. 00:11:25 Speaker 5: And so so, for example, is a. 00:11:27 Speaker 6: Great moment that I've now talked about so many times that I've basically memorized. The quote is there's a series of hearings in front of the Senate Anti Trust Committee. There's a bunch of them in nineteen sixty three, and then a more robust set in nineteen sixty five, where you have the chair of the Senate Anti Monopoly Committee, guy named Jerry s Cohen. He's interviewing or questioning the president of the International Franchise Association, a guy named Many Penaldon, and he can't really believe his ears that franchisers are trying to get away with this, you know, he tells him, wait a minute. You know the argument that you're giving us for why we should allow this business model under anti trust is that you know it creates all these opportunities for independent business owners. It allows an independent man and it's it's a very gendered thing here, but an independent man to be independent. But if he's told what products he has to sell, what price he has to charge, what operation he has to operate, and well, he was not really independent, is he. He's part of an integrated franchiser's operation. And franchises themselves say repeatedly throughout this period, we're trying to get vertical integration by other means. We don't want to own the assets, we don't want to employ the workers. Those are risks we'd rather do without. We want the benefits of that control, but we really don't want to be held liable for it. 00:12:32 Speaker 2: So somehow the franchisers are able to successfully argue that they should be I guess treated like single entities when it comes to antitrust law, but at the same time they should be exempt from I guess the obligations and liabilities that would normally come with that. 00:12:48 Speaker 5: Yeah. 00:12:48 Speaker 6: Absolutely, So there's another A few years before the hearing I just mentioned, the Teamsters union was trying to organize gas station attendance and they sent their guy to testify, and he complained about this. You called it double barrel immunity. You know, so you know, when you're going to anti trust courts, you tell them that you are a single entity. 00:13:07 Speaker 5: You know, you're all just one company. 00:13:09 Speaker 6: So it's like logically impossible for you to violate the anti trust laws because that requires a conspiracy, you know, two people have to agree. But at the same time, when we try to organize your workers, you say no, you know, the labor laws don't apply. They are a totally separate company. They have nothing to do with this. And you know that that was the sixties. The same thing happened in franchising is happening and franchising. You know, people remember the fight for fifteen whole thing a few years ago. But they've been able to win this so far. They can just sort of have those two worlds states separate and this. Yeah, it's interestingly they've been able to do that for so long. 00:13:53 Speaker 3: So okay, I see it. 00:13:55 Speaker 4: In one version of it, the parent company or the franchise or has taken a lot of risk off the table. They don't have to make many capital investments, they don't have to worry about their employees going on strike. On the other hand, any franchisee enters into this voluntarily, right, Like, no one has to like open McDonald's. And so they're like, can see the risk rewards the McDonald's will ensure I believe, or the franchise or will ensure that, say, like another one isn't going to open up on the same block, which is a risk if an independent business, Right I open up like my own independent pizza shop, someone opens one of the next door suddenly like they undercut me, et cetera. So it's like I don't have like the risk of like another McDonald's undercutting. 00:14:41 Speaker 2: Don't have a mcdoal's. 00:14:42 Speaker 3: You could have a McDonald's. 00:14:43 Speaker 4: But you know, like since we're talking about brands, like there is McDonald's brand affinity in a way that many independent burger shops have, like you know, either have yet to never achieve. So like at least some of these sort of like classical business risks are taken off the table for the franchise. And also it's my understanding like generally McDonald's franchisees have done very well and they're consistently quite profitable. 00:15:08 Speaker 3: Yeah, is this all is this an all fair characters? 00:15:11 Speaker 5: Yeah, well, a lot of that is fair. 00:15:12 Speaker 6: Yeah, particularly if you got in with McDonald's like at the beginning, if you're on the ground floor with these, I think it's fair to say, yeah, Ray krot he allowed his franchisees to get rich before he did. 00:15:21 Speaker 2: Uh. 00:15:21 Speaker 5: You know, that's a brag that the company does. It's kind of true. 00:15:24 Speaker 6: So that definitely was that there was that dynamic. On the other hand, there are some chains that don't give that protection. For example, Subody's an example of one where they will open one up up across the street from you. Or if there was some litigation in the past with let's say churches chicken mergers with Popeyes, well you know, the contract might protect the churches, but they could put a Popeyes across the street from you. So there there is still some of that risk. But you know, if I have any you know, like more you know Marxist and client listeners. You know, there's this you know, everyone who's a worker, you know, it's someone who doesn't have access to the means of production, so they have to you know, sell their labor, you know, to a capitalist. But you know, franchising has this whole other layer of use. A pe who can afford to open a restaurant. They have some capital, they supply capital as well as labor. They're investors, but they don't have the means of marketing at the scale that they don't have a brand. And so another thing you see in the whole history of franchising is franchise is saying, yeah, you know, I kind of wanted to be an entrepreneur or I used to own like my own donut shop, but you know, one stuck in donuts or at that time, there was another chain called Mister Donut, you know, game to town. I really couldn't compete. I had to sell out, you know, and join their chain. And that brand is very powerful. So there's this is even in the film you know Ray Croc famously, you know, he stole all the well they agreed to sell their whole business basically, the the McDonald brothers, the guys who created McDonald's, to him and he but after he controlled the McDonald's name in the trademark, they thought they could keep operating, you know, and doing. And he just opened the McDonald's right across the street from their original place and put him out of business. And so that's something that you see that that brand is very powerful, but it also gives the franchiser power for the franchisee to do what they say. 00:16:53 Speaker 4: You know, I'm not surprised that McDonald's did this. Probably the only fact that really sticks out at me from Ray crocs autobiography where he's like talking about his personal life and he was like in love with some woman and in like one sentence is like, oh, she was married at the time, and I took her away from her husband or it's like one paragraph. So I was like, oh, I'm very forthright about that. So I can't say I'm surprised that he opened up a McDonald to cross the street from. 00:17:18 Speaker 2: A normal aside, but actually the. 00:17:20 Speaker 3: Goal pursuing individual. 00:17:22 Speaker 2: Yes related to this. One thing I was very surprised to learn from your book is that there are no poaching agreements between McDonalds. So if I'm a worker at a particular McDonald's franchise and I want to go work for another one, I have to get the permission of my current franchise owner in order to do that. 00:17:42 Speaker 6: Yeah, and they may have since dropped those, but they had them, and a lot of chains did for a very long time. And that sort of gets at this weird niche that they've been able to occupy in anti trust and labor law. So this is the I think I would characterize it any think fairly as the absurdity of anti trust law. Whether is this what you know, it's called the vertical horizontal distinction, And what that means is that you know, for to McDonald's, you know, across town, to pick up the phone and say, hey, don't hire any of my workers, I won't hire any of yours. That's a horizontal agreement that is so so illegal you're going to face you might go to jail for doing that. But if McDonald's from above tells them unilaterally don't hire each other's workers, it's not per se illegal. It gets put under what's called the rule of reason, which just means that now you have it keeps people in my profession employed, but you have competing econometric reports. 00:18:27 Speaker 5: You know. 00:18:27 Speaker 6: It's it's very difficult for a plaintiff, for a worker to challenge these kinds of no poach agreements, though they have tried, because it's very difficult to win because that once it's vertical. Now McDonald's can enter evidence it says, yeah, we know, maybe you know it has a bad effect on of wages, but you know, it helps us sell more hamburgers because again we're a single entity, you know, we should have This just makes it more efficient, and in that sense, low wages can be more efficient. 00:18:51 Speaker 4: I think I'm just going to accept it. We're just going to use McDonald's. It's like a stand for franchising. Let's say we're talking about McDonald's. Some do very well, some maybe. Let's so, is there anything that the franchisee actually has discretion on that could either improve or lessen their odds of success. 00:19:10 Speaker 2: Other than bananas at douncan Jos? 00:19:12 Speaker 5: How hard they work? 00:19:13 Speaker 6: And I think the key to that is looking at what are they then incentivized to exert that effort towards. 00:19:18 Speaker 5: And it is because. 00:19:19 Speaker 6: The one thing that McDonald's doesn't directly touch is besides bananas, is their labor cost. 00:19:24 Speaker 5: So how big is your crew? 00:19:25 Speaker 6: Actually the staffing requirements are even required, So how hard are they working, how low are their wages? 00:19:29 Speaker 5: And making sure everyone's you know. 00:19:30 Speaker 4: Or doesn't have any discretion about the staffing levels. 00:19:34 Speaker 6: The staffing levels are mandated in the operations Manual, which is incorporated into the contract and can unilaterally changed but at any time by McDonald's. So it's a very one sided contract, you know, to be fair. The pro argument for that is that you know, again willing consenting buyers and sellers, and it incentivizes those franchises to follow the system into work as hard as they possibly can. 00:19:55 Speaker 2: Sorry, just to make this very clear, the major lever that franchisees have to be a better business to produce more money is to basically squeeze wage costs. 00:20:05 Speaker 6: Yeah wow, and you can see you know, in the and this is something again franchises are very open about. I think there's a quote in the book that's from another book called Franchise Dreams. But you know, a franchise or just look at entrepreneur makes the worst franchisey. You don't want someone who's an independent thinker who has their own business ideas. Similarly, you know, Ray CrOx said, you know, it doesn't take any particular aptitude or intellect to make it in one of our restaurants. You know, it just takes grit in hard work. He wanted workers. As a matter of fact, he sought out people who really needed this. You know, his first investors in McDonald's were his friends from like the country club. Oh yeah, it's a nice investment opportunity, you know, Yeah, I'll put in some money and sure, I'll manage the restaurant in my spare time. It didn't work out. They didn't put in the work, and so he found people who were a little a little more scrappy, you know, yeah, immigrants, you know of Yeah. 00:20:52 Speaker 3: There are constraints or are there not? 00:20:55 Speaker 4: Like let's say I wanted to open a McDonald's, but I didn't want to work hard. 00:20:58 Speaker 3: I just wanted an investment. 00:21:00 Speaker 4: Am I allowed to like front someone else capital to do that? 00:21:05 Speaker 3: How does that work? I don't know. 00:21:06 Speaker 4: You never hear very much about, like say, I don't know PE or finance, like backing like a thousand new franchisees. 00:21:13 Speaker 3: Is that allowed? 00:21:14 Speaker 6: Yes, a lot of the franchise contracts. In my other work outside the book, A lot of this work joint with Marshall Steinbaumer and Sergio Pinto, we actually coded, we read hundreds of franchise contracts. Those guys have since like digitized, and you know they have thousands of contracts and one key contract clause and across most chains is a personal obligation to work, so you are not allowed to be a passive investor, and you also have to Also, there's no corporate shield. If you messed up, they can come for your house, in your car and your savings and all that stuff that said there has you know, I wouldn't I wouldn't want to hide this. There has been a move in recent years to more of a different kind of franchise operator. Some of them are incorporated now, some of them own multiple even hundreds of locations, some of them even own locations across multiple chains. And since then also there's been a migration private equity used to only own the franchise brands, and that's a great business. Like Burger King famously is flipped, you know, through private equity owners. All you got to do is get those royalties. Someone else already built the brand, you know, just all it is is cash. But since then there's prim private equity franchise operators, so it's a very different dynamic. It's no longer obviously a private equity firm is a legal entity, not a person. They can't exert effort. They can hire people that do that. But there is a new breed of franchise e that in some chains that's a little bit different than the old model. 00:22:30 Speaker 2: Again, I hate to bring up AI in every single conversation that we do nowadays, but I think it's kind of unavoidable. We have all this new technology, and Joe and I have done plenty of trucking episodes where we talk about, you know, tech that monitors whether people's eyes are open and things like that. Does that new technology play a role in, I guess, exerting more control over some of these franchises. 00:22:54 Speaker 6: It absolutely does, and it started in the nineteen nineties with broadband internet and is accelerated now with AI for sure. So think about the nineteen sixties, right, you want to have this legal structure where this independent operator is operating the restaurant they kicked me back, or royalty. I try to control everything they do, But how can you wear the control you can? There's fax machines, there's telephones. You can send secret shoppers, but there's only so much you can really do. By the nineteen nineties, particularly with broadb interne connected to the cash registers through point of sale systems, there's a steady data stream now going back to headquarters where they have an intense amount of control. And I think onely interesting things about that technological changes. First of all, in terms of, you know, the motivation for these kinds of outsource industrial structures. It's usually technology is a story. But they started doing this way before the technology. But now the technology exists, it allows just think about like a truly verticallygated corporation like US Steel or General Motors in nineteen fifty, the control they have over all of their plants is less than McDonald's that they own, and they employ you know, those hundreds of thousands of industrial workers. McDonald's now hardly employs anybody, but they have way more control because they're able to get that stream of data. And now the AI has made that surveillance of workers themselves. And by way, you don't have to fire them if they're too slow with the register. You just send a note to the franchise. Hey, so and so. They even know the names of the employees. You know, it's a little too slow. Do something about that, you know, you. 00:24:15 Speaker 4: Know, so wait, can you say, just talking more about like I guess this is theory of the firm type stuff, explain this notion that like a US Steel, it's no intuitive to most people, is like, would be a more distributed type of entity than a McDonald's. Well is that what do you talk when you say that? 00:24:35 Speaker 3: What do you mean? 00:24:35 Speaker 5: Yeah? So I think you know. 00:24:36 Speaker 6: So the theory of the firm, I think you know, no matter your political proclivities, sure, I you know, like for you know, you know, Marx called it the firm the hidden vot of production. What happens there is that there's an entity that owns assets and there's someone who works, and you put them together and it happens inside a firm coast you know. The great Chicago ansertive economist had a similar notion, where what the nature of the firm is is command. 00:24:57 Speaker 1: Uh. 00:24:57 Speaker 6: You know, a workman doesn't go from the department wider department X because of a change of relative prices, but because he's ordered to do so. So that was sort of the reason why. That's the classical economic reason why firms exist. And then there's you know, of course, you know Chandler with his you know, Visible hand Book, which is, you know, the foundation for most business history of this is why do we have these big corporations? And his answer was the economics of high throughput and the efficiencies of you know, if you want to make steel, you can't really rely on the uncertainties of those of those prices. You kind of want to have everything under control and have managers, you know, sort of running it. What they're trying to do with franchising is get sort of that same type of control, but without having the legal risks and liabilities. And I would say just one more thing is that the legal door that franchisers open in the nineteen sixties and the nineteen seventies has since been you know, started as a little loophole. Now it's just a huge, you know, Bay door that you know, an uber or Amazon can walk through. So, you know, Amazon's fascinating because they are very much like a US steal and that they found a need to totally reorganize distribution in the United States. They didn't want to rely on USPS, they didn't rely on UPS or FedEx. They brought it all back in house in economic terms and the fact that they controlled it, but they did not bring it in house in terms of the legal liabilities. 00:26:08 Speaker 5: Because those trucks. 00:26:09 Speaker 6: You know driving around your neighborhood are independent contractors and they are able to control them because of this litigation and legislation battles that franchisors fought in the sixties and seventies to legalize those kinds of controls. 00:26:22 Speaker 2: What exactly is I guess the concrete lineage between the franchise model and the gig economy and the independent contractors. 00:26:29 Speaker 6: Yeah, so franchisors in the nineteen sixties and nineteen seventies, you know, don't like the antitrust jurisprudence that says you can't control independent businesses through I don't know if I've used this term yet about vertical restraints is like the term of our and anti trust for that. So they go about filing cases to you know, a very concerted, very smart, strategic effort to change the law. They ended up having a huge, very important ally in the University of Chicago economics department and law school, who are have the same ideas that you know, we shouldn't be judging what is this, you know, horary old idea of the independent entrepreneur efficiency, that's all we care about. So they won those battles in the courts, and then after that they also were able to head off any you know, after they win those get in this control you start seeing the Department of Labor, the National Relations Board, and litigants say wait a minute, all that control you probably should be responsible, you know, for the underpayment of wages. Or let's say, you know, for example, Domino's, you've got this thirty minute delivery rule. Your driver's speeding to make that delivery hit somebody. That's kind of your fault, you know, that's not the franchise ease fault or even the drivers. 00:27:29 Speaker 5: So they win all these. 00:27:30 Speaker 6: So they are able to say, well, no, that doesn't really apply to us. You know, they're still so they're able to have their cake and idiot too. And so that's just that there's not only there's any explicit coordination, but once you start getting companies that try to do this with, you know, rather than explicit contractual vertical restraints, it's algorithmic. You know, here's the route you're going to drive, here's the price you're going to charge. They're able to do it that way. And that would not have been or that would have raised some judicial eyebrows if they had tried to do uber in the nineteen sixties. So, you know, obviously the technology is highly important. The other story I think is important too, is that the fact that these things are legally permissible is the result of this of a franchise. 00:28:06 Speaker 2: Those efforts. 00:28:23 Speaker 4: Amazon Uber, Do they still use that like be your own boss and start your own business rhetoric when they're trying to look for new drivers or little local carriers. 00:28:32 Speaker 5: Yeah, they do. 00:28:33 Speaker 6: But with the Amazon models even closer to franchise than Uber, because you know Uber and Lyft, it's each driver is you know, treated as sort of like an independent entrepreneur. They own their own business. Yeah yeah, where yeah, be your own boss, and that's about It's a powerful thing, you know, I want to be my own boss. I mean no, no, it is, I gues said American like a very if that's how you you know, get your nest egg and take care of yourself and your family. But the Amazon is called that a delivery service partner or a DSP model is much closer to a franchise than that. Every driver is not an independent entrepreneur. It's the contractor company. 00:29:03 Speaker 4: Right, So they might have like thirty or whatever some yeah, thirty trucks or whatever. 00:29:06 Speaker 5: Yeah, So it's a small it's a relatively small business, you know. 00:29:09 Speaker 6: Amazon, I think even front some of the capital but it's legally a distinct entity, even though it's painted with the Amazon logo, you know, and tightly control. 00:29:16 Speaker 2: Since you're an economist and you mentioned regressions before, do you have any empirical research about the relationship between the growth of the franchise model and wages in the US, Because again, like if we're talking about the primary lever that an independent franchise owner can actually pull to improve the business, it's all wages. 00:29:36 Speaker 6: Yeah, so I don't have that time series of the growth of franchising and the growth of wages, but there are you know, my work and other work. We do know a couple of things about franchising. One is that if you're a wage worker, now there's work from Krueger back in the nineteen nineties. There's David Wile, who's I should have mentioned it before. He's like the economists on this stuff. He wrote a book called The Fishered Workplace, where we do know that if even within the same chain, you want to be get the company owned one, not at the franchised one, because your wages will be higher. 00:30:03 Speaker 5: You'll have a higher tenure. 00:30:05 Speaker 6: Wage profile, meaning you're going to get promoted and your wage is going to go up more over time. And also franchised establishments violate their workers safety and other rights at a much higher rate than ones that are company owned. So we do know that stuff, and then we have my work. We have one we were able to take advantage of a really nice natural experiment where Washington State entered a consent decree with McDonald's and a bunch of other chains to get rid of those no poetry agreements I mentioned earlier, and we found I mean, maybe not surprising, but there's a causal effect. Once they got rid of those no potra agreements, wages went up. And then you know again because it's very hard, you don't want to be careful as an economists, you know, it's hard to get those natural experiments. So we don't have that for like specific contract terms. But in work again with Marshall Steinbaum and Sergio, we found, you know, correlations with lower wages. And then they have a new paper where they look at franchise contracts over time and find that they have gotten more restrictive even over the past twenty years. 00:30:57 Speaker 2: Wait, how do they actually measure that? 00:30:59 Speaker 1: Now? 00:30:59 Speaker 2: I'm really interested because if we're talking about well, I guess I'm interested in how the actual like franchise or communicates a lot of the restrictions to the actual business, Like how did they do that, and then how do you tally that up in an empirical way. 00:31:13 Speaker 6: Yeah, So studying franchising I was very fortunate because these contracts are sort of public records. So there's there's a requirement from a nineteen seventy nine Federal Trade Commission rule that requires franchisors to furnish to a franchisee a what's called a franchise disclosure document, which is sort of plain English, lays out key contract terms, what the royalty is going to be, and basically it's meant to inform the franchise e. The idea being the franchises are getting swindled into, you know, entering these incredibly one sided contracts. They should know what they're getting into. Let's make a lot of disclose that. So that there's this franchise disclosure document and then usually the franchisor will file a as an attachment the entire franchise contract. So we have the contracts and they're not filed with the FDC, but some states require them to be filed, so you just go to Wisconsin or California and wants to do a study on this. You can get the contracts back in When I was doing this ten years ago, I had to read the contracts and hand code them. It took me like eighteen months, but you know, I got through five hundred and thirty contracts, hundreds of contract terms, so we got a pretty good But it's only a cross section about what my colleagues have been able to do since then. Is I mean just you know, a text recognition software and you know text scraping abilities, and you know AI in an afternoon, you know, you could program a computer to scrape thousands of these contracts and you can get them over time, which I wasn't able to do. But yes, these are these are public records, so anyone could do this. 00:32:34 Speaker 4: You mentioned treatment of workers and wages at franchise locate McDonald's franchise locations versus the McDonald's owned and operated locations. What about franchise locations versus just pure independent restaurants, Because it seems like one of these things that people don't want to talk about that much, that when we talk about like wages, when we talk about wage theft and some of these other things. 00:33:03 Speaker 3: We all like to. 00:33:04 Speaker 4: Glorify small businesses, but there's a lot of like these pathologies seem to be fairly prevalent or more prevalent, I think, in small businesses than say, like large corporations. 00:33:14 Speaker 5: Is that is that accurate? 00:33:15 Speaker 6: You know, I haven't looked at that comparison between independent restaurants and between fast food restaurants. Yeah, but yeah, but I think that's a that's a fair case. And I think what franchises are trying to do is capture that small business labor model and then graft it to a large corporation, but make sure that all the rents go up, you know, to the shareholders and the and the top corporation rather and not not be shared with the workers. Where if you're at a Starbucks or Chipotle, which is totally corporate owned, not saying they have great working conditions, but some of those rents do appear to be shared because wages are higher at Chipotlee than Taco Bell, and they're higher at Starbucks than at Duggin Donuts. And also Starbucks workers even they don't have a contract yet, but they were able to at least, you know, vote for a union in a way that has never happened in fast food? 00:33:57 Speaker 4: Can you explain the large either, like why companies aren't all franchises? So first of all, like why would a Chipotle? Why did they not go down the franchise road? But why does McDonald's actually have a pretty significant number of owned and operated restaurants? 00:34:12 Speaker 6: Yeah, you know, so, I think there's a There could be a few reasons for that. You know, one is owning the assets and employing the managers. Is there is a little bit more control that you get there. If then then if it's franchised, and particularly if you're not, if you don't have the McDonald's model or McDonald's and Raycrop talks about this in his book. He really has a hammer over those franchisees in that if they lose that trademark, he can evict them from their own, you know, business, because McDonald's owns the land. But if you're you're starting at chain now, you probably don't have the money to actually own all that real estate. So there is there, there are those those elements of it. But yeah, I think there's and there's also there the the other the Chipotles of the Starbucks, Yeah, are a little bit more high end, you know, like like a few cents more. It's not quite the same quality ingredients. It's just a little little bit of a different model than the you know, churnout high through put as low wages as possible model of a franchised fast food restaurant. 00:35:04 Speaker 2: You mentioned unions just then, and one of the interesting things in your book. I think it's maybe in the preface or something like that, but you talk about like the legal structure of a franchise even if you wanted to unionize or negotiate with the franchise or it's not entirely legally clear that you can do that because of the corporate structure. Is that right? 00:35:26 Speaker 6: Yeah, that's absolutely correct. So yeah, so the and this is something again that the franchisers were They were clear this is what they wanted to achieve with their business model. They didn't want to deal with unions. Up until on the twenty teens. In the five or fifteen, no one really thought that there was a way for workers who wanted to form a union to negotiate with McDonald's. McDonalds could willingly do this at any point, but you know, they choose not to. Something called the taft Heartley Act, which is an anti labor law from nineteen forty seven that makes it illegal for workers. You can't go on strike, you can't pick it, you can't target McDonald's corporation. You can only target your immediate employer. So that creates a normous incentives. You know, franchising not coincidentally takes off after the Taft Hartley Act. But during the Obama administration they enacted something called that Joint Employer Rule, which did make it possible for or made it easier for workers to say, you know, I really can't. You know, you look at the realities of the situation, the economic realities. If I'm to get a raise or I'm going to get better working conditions, we need to bargain with McDonald's because they control the staffing levels, they control the supplies, they control how what hours we operate, and all that stuff. So that have under Obama. Of course, it was overturned during Trump, it flipped back during Biden. Now it's flipped back. So it's just no one really knows their rights are. It's not it's a whole other issue that we could get into. But yeah, so there has been have been attempts to sort of fix that problem, but we have not fixed it. 00:36:42 Speaker 4: Yet from a sort of like broader public policy standpoint. I mean, my doorbell rings a lot or too much because there's a random like grocery deliveries and stuff like that. But like, clearly the Amazon distribution logistics system that they built out, it's clearly more like rapid than the US Postal Service, more flexible, I think than ups. How should we think about the sort of like the public benefit of this model that like has made it You can order all kinds of stuff and frequently have it delivered in an hour, which seems pretty much us. 00:37:18 Speaker 2: We do have McDonald's, which which is. 00:37:19 Speaker 3: Also enjoy which we also love. 00:37:21 Speaker 5: Yeah. 00:37:22 Speaker 6: Yeah, So, first of all, there are benefits to the Amazon distribution model, and I think, yeah, we should acknowledge those for what they are. There are also costs, and you know, we should we should make sure those are counted to you know, whether it's pollution and neighborhood where those distribution centers are or delivery centers I should call them. There's the cost of workers, you know, famously being and bottle stories. 00:37:41 Speaker 4: So can you just quickly say you distinguish between distribution centers and delivery centers. So the distribution centers are owned, those are those our own Amazon, Yes, Amazon, But then they go to a delivery center before they go to your house. They don't, okay, right, And that's where the Yeah, and the delivery center is not owned by Amazon, the center is, but the trucking company they all so they all go. So if you're a driver for these companies, you show up at an Amazon facility, you put on Amazon uniform, you drive an Amazon truck. 00:38:12 Speaker 5: But your employer is one of these contractors. 00:38:14 Speaker 6: So yeah, I think we should have First of all, you got it, we have to account for the cost on workers and other communities and all that kind of stuff. But also, I mean, my proposition for policy here is pretty simple. Is that the problem is not that there's innovation, that there's control. That's what a firm is, That's what a corporation is is. You know, markets shouldn't do everything. Sometimes having a little central planner, you know, a mini central planner, you know, coordinating activity is a great thing for you know, getting more efficient and innovating. 00:38:38 Speaker 5: So we should have that. 00:38:39 Speaker 6: The problem is then you can't avoid the obligations and liabilities and risks that go with owning assets and employeing workers. And we used to have, you know, our whole legal architecture for regulating and holding these companies accountable was based on that like archetype. You know, we pretty much only our wave of regulation. It was like nineteen thirty five, you know, to the mid nineteen sixties, and we know what a company. It's a it has a smoke stack, it employs a bunch of workers, it owns a factory. Like that's what that's what a company is. Now with all of these you know, and partly due to franchises creating this loophole, it's no longer so clear what an employer is. And all I I would propose we do is, well, hey, if you want to direct to control the work of these drivers, well look you're their employer. And if you're not paying them the you know, the legal wages, or if they want to bargain with you for a union, or if you know, because of you, because of your algorithm, they ran a red light and hit someone, that's those are all those things you caused. 00:39:31 Speaker 5: You should be held responsible for those. 00:39:33 Speaker 2: All right, Brian Calacchi, We're going to have to leave it there. Thank you, so much for coming on all thoughts. 00:39:37 Speaker 5: Thank you. 00:39:38 Speaker 2: So I had a great time, so Joe, that was a fascinating conversation, and I'm really glad we ended up doing a franchise model because Brian truly was the perfect guest. But it's so interesting to hear. I mean, it just kind of blows my mind to have your cake and you get two aspect of all of this, right. 00:40:10 Speaker 3: No, totally. 00:40:11 Speaker 4: I mean, look again, no one has to enter that like right like to me, that's like one of the main things I did think it was interesting that it really is literally about the intellectual property. Like that is literally what Coming to America is about is about a guy who you know, commits intellectual property theft by making something that looks like McDonald's. 00:40:32 Speaker 3: But that is the core thing. 00:40:35 Speaker 4: You know, most people aren't going to be able to manufacture that, et cetera. So being able to plug into that No, I thought it was like really interesting. 00:40:42 Speaker 5: The history. 00:40:43 Speaker 4: I am not surprised at all. The Ray Crop book is so good. He's so forth right, he's so unself conscious about everything that he done did in life. It's just like a very like weird and fun read for that purpose alone. 00:40:55 Speaker 2: I'm going to have to read it. 00:40:56 Speaker 3: Yeah, I kind of want to read. 00:40:57 Speaker 2: The Colonel Sounders one. 00:40:59 Speaker 4: It's so funny to hear Colonel Standards and it's like Red Croc and Colonel Sanders, Like, wait, that's it. It still feels like that's just like a made up character. Really, yeah to me, it does. I mean I knew who was real, but it still feels like that's a real person. 00:41:11 Speaker 1: You know about the. 00:41:11 Speaker 2: Whole KFC Christmas thing in Japan. 00:41:15 Speaker 3: I oh, they're really into it. 00:41:17 Speaker 2: But yeah, because I think, but I don't know, Colonel Sanders like kind of looked a little bit like Santa Oh in a lot of the Japanese KFCs, at least when I was there, they used to have like big statues of Colonel Sanders out and it was kind of like, you know, that's great, a very western. 00:41:37 Speaker 4: There's a great avatar of American you know, both cultural and business traditions as Colonel Sanders. 00:41:44 Speaker 3: I do think, like, you know, I. 00:41:47 Speaker 4: Always found it weird when the marketing for being an uber driver or like starting a van line was like either like be your own boss or like start your own business. It's like maybe like the math, look the left tails reduced and the right tail is reduced. So there's maybe you know, clearly people have done well entering franchise, but they do not look anything like what we typically think of as like quote entrepreneurship, business ownership. It's like a very it's clearly a very different thing. 00:42:14 Speaker 2: No, that tension is also remarkable, the idea that like, you're an entrepreneur, you're independent, but also the franchiser is going to dictate basically everything to you. 00:42:24 Speaker 3: I also just think I like that except wage cost. I liked that. Brian brought up like, you know, even the most like U. 00:42:31 Speaker 4: Chicago schooled economists is like, no, it's really good, and there are a lot of efficiency gains when you do a lot of activity under a centrally planned umbrella, such as a large corporation. And the sort of like thing that hardly anyone talks about, which is like, how much of the economy it's literally under central planning. We just don't call it central planning because it's corporate. 00:42:54 Speaker 2: Yeah, I mean yes, there are clearly some benefits to it, both you and I. It sounds I think you use Amazon Prime? 00:43:01 Speaker 3: Do I do? Yeah? 00:43:02 Speaker 2: So do I I'm McDonalds of course. Okay, shall we leave it there? 00:43:05 Speaker 3: Let's leave it there. 00:43:06 Speaker 2: This has been another episode of the Audlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and. 00:43:11 Speaker 4: I'm Jill Wison. Thought you coun follow me at the Stalwart. Follow our guest Brian Calachi, He's at Brian Underscore Colachi. Follow our producers Kerman Rodriguez at Kerman armand desh Ol Bennett at Dashbot, cal Brooks at Kilbrooks and Kevin Lozano at Kevin Lloyd Lozano. And from our odd Laws content, go to Bloomberg dot com slash odd Lots. We have a daily newsletter and all of our episodes. 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