Editor’s Note: This article originally appeared on corridorrail.com in May of 2018.
By Andrew C. Selden, Guest Commentator; February 19, 2021
Thousands of American businesses, some very small, some quite large, have employed a business technique that enables them to leverage their capital and managerial resources to build and maintain networks of retail sites numbering in some cases in the multiple thousands. These networks are far larger than anything the business itself could afford, or manage effectively. When used competently, the technique can deliver amazing returns on the investment. The technique is called franchising.
Franchising has been successfully employed in every imaginable business sector, sometimes for the retail sale of tangible products (e.g., automobiles or ice cream), sometimes for services (e.g., education, fitness, or lodging). Some franchises even involve the conversion of a successful established business into a unit of a larger franchise network (e.g., real estate or travel agencies), or devolution of an existing company-owned dealership into the hands of the former manager, now acting as an entrepreneur.
A “franchise” is the license by a franchisor to a franchisee of the right to use the brand, business format and operating system owned by the franchisor, in exchange for specified fees and the franchisee’s commitment to establish and operate the business in accordance with the system standards set by the franchisor. This is the method that makes all Burger King units look and act more or less identically to each other, but distinctively different from competing chains.
Ownership of the licensed property remains with the franchisor, together with the sole and exclusive authority to set brand standards. Ownership of the franchised business resides with the franchisee. The property licensed is similar to leased equipment used in the franchisee’s business.
The great strength of franchised business networks arises out of the franchisee’s equity in the franchised business. It is the franchisee’s capital that is at risk, just as the potential rewards of a successful business belong to the franchisee. This concentrates forcefully the owner’s attention on the successful operation of the business. Most franchises involve an owner-operator who is a hands-on manager, in daily contact with customers of the business. Even so successful a franchisor as McDonald’s has found that having too many of its restaurants owned by McDonald’s, rather than franchisees, isolates management from the customer, and produces both reduced store-level profitability and damage to the brand’s customer goodwill.
To the franchisor, use of franchising accelerates growth (by leveraging its capital and management resources), leverages its own capital and returns on investment of capital, and facilitates entry into distant or difficult markets that the franchisor might struggle to reach using only its own resources.
What does any of this have to do with Amtrak? First, set aside (as beyond the scope of this commentary) the opportunity value to Amtrak and its customers of franchising train operations in particular routes that Amtrak does not understand or value. Let’s focus, instead, on the opportunity to convert local Amtrak stations into a national network of small individual profit and growth drivers, rather than the obsolete cost centers that Amtrak sees in them. And, let’s assume that Amtrak would retain ownership of the big city stations—Philadelphia, Los Angeles, Chicago—as “company stores” under its direct control.
That leaves more than 500 places across the country where Amtrak trains stop where a station facility could be established, or taken over, by a local franchisee (quite possibly, the existing agent) who would be a licensee of Amtrak’s brand, operating systems and know-how but would also own the resulting business enterprise. The franchisee, as in any other system, would be responsible for investing in a station facility, new or old, that meets Amtrak’s facility standards, and providing station services to customers, using Amtrak’s computer systems, printed materials and operating techniques.
Many if not most of Amtrak’s smaller stations, even those on once-a-day long distance routes, will support such a business provided it is part of another local business operated from the same physical facility. Some established franchisors already follow this model by licensing their business as an adjunct to another existing business (e.g., a pizza stand in a C-store or a college foodcourt). With an Amtrak station, the station’s building might also support a restaurant, car rental agency, florist, or any of a myriad of local businesses. It may be in many cases that the Amtrak agency is merely the add-on and the other business actually pays the rent. That doesn’t matter.
What’s in it for Amtrak? Station agents don’t just sell tickets. Especially in non-commuter markets, they provide a wide range of extremely valuable services to customers. These include checked baggage service; ticket sales; travel counseling to customers who contemplate long, multi-night travel, involving connections, stop-overs, choices of sleeping car accommodations, and special on-board services (almost impossible to explain or individualize using only online tools); information on local connections and transit services; problem solving for missed or late trains, passengers meeting others at a station, and general information services; customer safety on train platforms; community relations for Amtrak, including local sales and marketing activities; information about parking and local businesses; and, sales of Amtrak vacation packages. All of this is lost by the false economy of “un-staffing stations,” but is assured at every franchised station, by contract and through the informed self-interest of the franchisee.
Franchising is a regulated form of business, but the regulations are well-understood and easy to comply with. They entail only modest costs. Only one “director”-level employee at Amtrak, working with a qualified outside experienced franchise consultant or attorney, would be required to manage a station franchise program.
A station franchising program could be in operation in less than six months, at an initial cost of less than $100,000. It would begin to pay dividends immediately in improved sales and revenue, public awareness, and customer satisfaction scores. A well-crafted franchising program could have a payback period of less than two years. It would be a strong “win-win” for both Amtrak and its customers, and the communities that Amtrak serves.
Andrew C. Selden is a former franchise lawyer, who is a past Chair of the American Bar Association’s section on franchise law, called the ABA Forum on Franchising. He has established and supported for clients dozens of franchise networks, small and large. He was a long-serving member and past chair of the regulatory body that writes and administers franchise pre-sale disclosure obligations, and has written and lectured extensively on franchising.