For almost a decade now, many franchisors have included, or attempted to include, online sales as an additional tool for marketing their products and services to better meet the expectations of their customers.
For many, this was a defensive strategy in the face of a purchasing model whose growing popularity was eroding an ever-increasing portion of their market share.
Across all retail sectors, online sales accounted for approximately 7% to 10% of retail sales at the beginning of the COVID-19 crisis.
It was then predicted that, within approximatively five years, this market share could reach 20%.
In less than three months, the COVID-19 crisis has carried us into the future, since the 20% plateau predicted for 2025 has already been reached, and even exceeded, in several sectors of activity.
While the gradual reopening of brick and mortar outlets may reduce the market share of online sales by a few percentage points, the market share of online sales will remain well above last year's level and, after some foreseeable decline, is likely to resume growth.
A similar situation is occurring in the service sector where many businesses have had to completely redesign their service offerings to include online services in just a few weeks. This has been the case for training and consulting services, real estate brokerage, financial services, medicine, accounting and legal services, among others.
For a franchisor, this important and sudden advance in the sales or service delivery model requires significant changes to its business model.
Like any other business, the first mission of a franchise network is to meet the expectations of its customers. If customers are not satisfied with their experience with the network, they will go elsewhere (which is increasingly easy today with the many online search and online sales tools that know few boundaries).
A franchise network must make maximum use of the tools at its disposal, including online sales of goods and services, to maximize sales.
In this regard, the last few weeks have shown us the adaptability of many franchise networks that have been able to modify, sometimes in just a few days, their business model to adapt to this new reality which, in many cases, represented an actual revolution for them.
However, this did not happen without a struggle. We have witnessed situations where franchisors have decided to keep for themselves unexpected additional profits resulting from an explosion of online sales made from their websites while their franchisees were incurring significant losses caused by the forced closure of their establishments.
Other challenges still await our franchise networks in terms of online sales and online service delivery.
One of the first, and most important, will be to improve the profitability and efficiency of online sales.
In response to the urgent and critical necessity to respond immediately to the needs of their customers while complying with the requirements imposed by our governments, franchise networks have been quick to put in place processes and means of online sales without worrying too much about costs (a bit like the way our governments have responded with their multiple aid programs).
Since profitability is an essential component for the survival of a franchise network, as it is for any other business, the processes, logistics, efficiency, speed and profitability of online sales will have to be analyzed and, often, improved to make it a truly effective sales tool.
The next major issue specific to franchise networks is how to distribute revenues from online sales and online service delivery between the franchisor and its franchisees and, not to be forgotten or underestimated, among the franchisees.
The response to this important and sensitive issue will differ from one franchise network to another.
For each franchise network, it has to be based, among others, on the following factors:
- Who makes the investments (both in money and in human, material and technological resources) required to develop and implement the online sales process in the network's business model?
- Who makes the investments necessary for the management and operation of online sales?
- What is the importance of these investments?
- Who bears the risk (particularly in the event of losses or of a cash shortfall) of online sales?
- To what extent can online sales compete with store-based sales (e.g., pricing, promotions, etc.)?
- To what extent can information obtained from franchisees (including customer information) be used to promote online sales, which raises important questions about both the franchisor's obligations to its franchisees and privacy laws?
- What is the nature and extent of the involvement required of each party (franchisor and franchisees) in the online sales process?
- To what extent do online sales affect the sales and profits of franchised businesses?
- To what extent is it possible to locate each online sale and to establish a reliable correlation between an online sale and the loss of a sale in a brick and mortar location?
This answer must also be based on an analysis of the provisions of the franchise agreements (inter alia, exclusivity and non-competition provisions) and take into account the applicable franchises laws and the case law on franchising, in particular with regard to the franchisors' obligations of good faith, loyalty, disclosure and co-operation.
For some franchisors, this will mean having to make amendments to the franchise agreement to allow online sales and to ensure adequate participation of franchisees in this process.
It will also be necessary to find the best way (both for the franchisor and for its franchisees) to harmonize online sales with the services provided in the franchisees' establishments, such as, among others, pick-up services, after-sales services, store returns, warranty compliance, etc.
For example, in 2015, the large international franchisor Dunkin' Donuts announced that it had signed an agreement with its American franchisees to share, in equal shares, the profits generated by the sale of packaged coffee and coffee K-Cups identified with its trademarks in grocery stores, big-box stores, specialty boutiques and via the Internet.
Closer to us, several major Canadian franchisors have also, in recent years, entered into agreements with their franchisees for online sales, while others are negotiating with their franchisees to find the best way to allocate responsibilities, investments, costs and roles in an effective online sales model.
As we wrote in our recent Bulletin Beyond COVID-19: From Resistance to Change to a Culture of Proactively Seeking Change within Franchise Networks, healthy franchisor-franchisee collaboration is essential today to enable a franchise network to quickly make the changes necessary to overcome the fundamental challenges to its sustainability and, at times, even survival, that are imposed upon it by the COVID-19 crisis.
As in all crises, (i) threats can also hide great opportunities, and (ii) at the end of the crisis, there will be not only losers, but also winners.
A great strength of a franchise network is that it brings together, with a common goal (the growth and profitability of the network), several entrepreneurs and managers (both among the franchisees and within the franchisor) who each possesses skills, competencies, knowledge, experience and information that, when put together, can contribute to a better performance of the network and help it to better take advantage of the opportunities that arise and to better face the threats it faces.
The great challenge for any franchisor is to properly channel all these strengths and energies so that its network emerges from this crisis as one of the winners rather than the losers.
Fasken has all the expertise and resources to help you better manage your franchise network, even in a crisis, to achieve your goals, take advantage of opportunities and avoid potential pitfalls.
Originally published June 3, 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
