Dual distribution and intangible firm value: Franchising in restaurant chains

Dual distribution systems in which firms use vertical integration and market governance simultaneously are widely used across diverse marketing contexts (e.g., restaurants, retailing, industrial selling). A prominent example of dual distribution includes business format franchising, in which firms (i.e., the franchisors) license the operation of some of their units to franchisees while owning and operating some units themselves. Despite the widespread prevalence of dual distribution, there are few insights into its performance implications. In this article, the author examines the relationship between a firm's dual distribution strategy and its intangible value. Franchising in restaurant chains serves as the empirical context for the study. It is proposed that a firm's dual distribution strategy affects its intangible value both independently and jointly with a set of firm characteristics. The author considers the firm's age, scope of vertical integration, advertising, financial leverage, and financial liquidity as firm characteristics that influence the relationship between dual distribution strategy and intangible value. The author measures the firm's dual distribution strategy by the proportion of its franchised units to its total units and intangible value by its Tobin's q. The author estimates the proposed model using panel data on 55 publicly listed U.S. restaurant chains for the period 1992-2002. Unobserved firm heterogeneity is accommodated using latent class regression analysis. The results support a four-segment model. Dual distribution increases intangible value for some firms but decreases intangible value for others, both independently and in conjunction with other firm characteristics.