Franchising is a long-established model. It unites in a partnership:
• A franchisor who owns a brand, enjoys a global reputation, know-how and offers guidance
• A franchisee who has a local reputation and financial means (business assets) that he brings into the partnership.
It is a “win-win” model. The franchisee relies on the franchisor and develops its turnover and returns part of its revenues to the franchisor.
The expression “local reputation” matters in the model management. Most franchise agreements contain local reputation related clauses:
• Owning a customer basis. The clientele resulting from the franchisee’s activity is the “essential requirement for the existence of business assets”. The clientele remains linked to business assets. Dissolving the partnership does not transfer customers to the franchisor.
• Exclusivity of the franchisee in the catchment area. This is an essential aspect because it limits competition that could be “organised” by the franchisor. The franchisor cannot allow a new franchisee to settle in a geographic area where a franchisee is already settled.
E-Commerce requires substantial informatics resources, including for infrastructures, development resources and system maintenance. Franchisees do not have the resources. However, it is a powerful business development factor that cannot be ignored. Whilst bringing their know-how, franchisors have developed e-Commerce, sometimes disrupting these two notions without realising it:
• Identifying the customers through the various business channels: making the direct marketing operations of a franchisor coherent require customer data to be centralised. It seems difficult and rather irrelevant to give customers or prospects to a franchisee. The notion of owning a customer basis fades because of this centralisation.
• The dematerialisation brought by e-Commerce makes geographical factors irrelevant when approaching customers. The virtual catchment on Internet interferes with the physical catchment in geographical space.
These changes throw franchisees off balance, as some see it as a breach of the partnership, and others as unfair competition.
Franchisors who are aware of risks generated by this perception have adapted their economic models.
Most frequent solutions are:
• A drive: the franchisor manages online retailing but deliveries are made at a specific collection point. The model requires infrastructures that are not at reach for small or medium sized franchisors. This cannot be applied to all products. The model is hardly profitable for mass distribution.
• Online sales at the national level: the brand pays the franchisor depending on its notoriety. This model is disappearing because the payment does not reflect the business: the retailer should not be paid for sales he did not make.
• Online sales with a local delivery: the product is offered by the franchisor and the franchisee ensures a local service that could not be ensured by the franchisor. The franchisor receives fees on service sales. This model is not adapted to every kind of products / services. It works well for B2B.
• Showrooming: when purchasing in a store, the franchisee’s staff assists customers by using the franchisor’s e-Commerce services. Training of the franchisee is extremely important. The model is being implemented and has given positive results. It is well suited for furniture, household appliances, HIFI, etc.
E-Commerce in franchising does not only raises questions about clientele ownership and catchment area: product marketing operations carried out by the franchisor need stocks. Where are these stocks stored? What is the impact of e-Commerce on the functioning of the franchisor’s stock?
The answer to these questions depends on the types of products and services offered (e.g. on-site or brought from a manufacturing centre, etc.) as well as on the franchise economic model.
Beyond the debate, these questions are also related to the allocation of value resulting from new behaviours associated with e-Commerce. Answers, whether they are technical or organisational, must allocate the value fairly between franchisor and franchisees.
E-commerce is transforming franchising, including:
• Its value allocation business model
• Its supply chain model
• Its customer relationship business model
Digital commerce revolution has led to a change in the franchising model. At a time when it can only be noticed that more and more customers ask for Click & Collect options, franchising can benefit greatly from these mutations by adapting itself. The law still needs to translate these changes in to business law. On that matter, the revolution is yet to come…