The 1960s saw a wave of tiny bubbles that pulled investors back into the stock market. But the over-indulgence in the franchise mania brought the decade and the stock market to a crashing end.
A franchise is a license that grants you the right to run a business under the name of a recognizable brand. In exchange, you agree to sell their products or services while following their operating procedures. In return, the company collects an upfront licensing fee and a percentage of your sales.
It’s a mutually beneficial way for franchise companies to expand. Outside money funds expansion, allowing the company to focus on training, advertising, and improving its products.
Fast food restaurants like McDonald’s, Taco Bell, and Kentucky Fried Chicken are a perfect example. In fact, each of those companies was started in the 1950s and contributed to the boom in the next decade (the interstate highway system, the migration to the suburbs, and baby boomers hitting their teenage years helped).
The 1960s saw the boom of the franchise model. Changing consumer habits drove the popularity of “eating out.” It began with drive-ins and specialty restaurants.
Post-WWII, roughly a dozen fast-food franchise companies existed. By 1967, the number was over 150. It jumped to almost 250 by 1968. International House of Pancakes, Taco Bell, Arby’s, Blimpie, Denny’s, KFC, McDonald’s, Der Wienerschnitzel (since dropped the “Der”), and Nathan’s Famous are a few still in existence that IPO’d in the 1960s.
So many restaurants popped up serving all manner of food — hamburgers, hot dogs, fried chicken, fish and chips, donuts, pizza, pancakes, popcorn, sandwiches, ice cream…you name it, they tried it.
If it was already being done, it was imitated. The success of KFC and McDonald’s sparked the numerous chicken and burger chains.
And if a company already had a foot in one area, they expanded into another. KFC, for instance, opened Colonel Sanders Roast Beef, bought a fish and chips chain, then started a motel chain.
The franchise boom hit hotels, motels, taxicabs, auto parts stores, gas stations, clothes shops, rental stores, hobby stores, and more. And in at least one case, the franchise company tried doing it all on its own. International Industries, of House of Pancakes fame, started franchises in apparel, arts and crafts, rentals, secretarial colleges, medical and dental assistant schools, and a home-study Institute for University Studies.
By the late 1960s, it was a free for all. Much of it was likely influenced by the conglomerate acquisition spree — buying out anything unrelated to its original business — that began in the middle of the decade.
Major corporations, not wanting to miss out, acquired franchise chains. Pillsbury’s bought Burger King. Consolidated Foods acquired Chicken Delight. And the franchise companies strayed outside their area of expertise. Lum’s, a hot dog chain out of Florida, bought Ceasar’s Palace. Denny’s, after a failed bid for Ceasar’s, scooped up Sierra Development for its Reno and Lake Tahoe casinos, bought the Imperial Hawaii Hotel, and finally merged with Parvin-Dohrmann, another casino operation.
The boom was so big celebrities got in on it (likely starting an unhealthy trend for future bubbles). N.Y. Jets quarterback, Joe Namath, ran a side hustle as Chairman of Broadway Joe’s Inc. It went public in 1969, at a $10 IPO, as a burger franchise with one location.
For the anti-Namath football fan, there’s a firm called Quarterback East (one of several “Quarterback Club” chains), whose “vice president and principal” is arch-rival Johnny Unitas of the Baltimore Colts. For the baseball buff? Dizzy Dean’s Beef & Burger, or alternatively, Mickey Mantle’s Country Cookin’ Restaurants. For really hard-to-please followers of the Toots Shor set, fast-food entrepreneurs from ex-Jockey Eddie Arcaro to a one-time boxer named Rocky Graziano are looking for takers. Not to be overlooked, too, are chains springing up under names like Li’l Abner, Katzenjammer Kids, and Frank ‘N Stein.
And if all that’s not meaty enough, there are Al Hirt’s Sandwich Saloons, Arthur Treacher’s Fish & Chips, James Brown’s Gold Platter Pantries, Tony Bennett Spaghetti Houses (promoted by one Barron Industries Inc.), Bonanza Sirloin Pits (promotion furnished for a fee by television’s “Bonanza” cast), Tennessee Ernie Ford’s Steak’n Biscuits, Johnny’s American Inns (“Here’s Johnny” Carson), Chris McQuire’s Pub (she’s one of the singing McGuire Sisters), Laugh-In (dreamed up by Lum’s Inc. with the comedy team of Rowan and Martin), Mahalia Jackson’s Glori-Fried Chicken System and the latter’s sponsor, the relatively venerable Minnie Pearl’s. You get the idea.
For the celebrities, at least, it was over before it began. Mickey Mantle’s Country Cookin peaked at $18½ before falling below its IPO price to $8½. Minnie Pearl’s Chicken opened at $20, jumped to $70, then crashed $7.
And what about Broadway Joe’s? The shares settled at $7 after topping out at $17 and Joe stepped down as Chairman the next year. The simplest lesson of the franchise boom might be this: when celebrities get in, it’s probably time to get out.
Much of the price inflation early on was due to mistaking franchise sales with operating profits. Eventually, the market figured it out. In many cases, franchise sales were the only profits or revenues for the companies. In a few cases, the footnotes admitted even that was a stretch. Franchise sales were reported as paid in full on the income statement but should have been reported as payments still pending in receivables.
By the summer of 1969, the franchise mania peaked and collapsed with the rest of the market. Even at their 1969 lows, the giants of the industry — McDonald’s and KFC — were still trading at a 30x P/E multiple. The market freefall continued over the next year.
Of course, for every company that succeeded, a handful went on to fail. As is typically the case, when new businesses are created en masse to take advantage of a stock mania, most end in failure.
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