Online e-commerce platforms are changing how franchise networks operate in the market and creating tension in the franchise relationship. An online platform is the franchise’s website that consumers can purchase goods or services through and exists alongside the franchisee’s physical shopfront. In some industries, the franchisor’s online platform will inevitably compete with the franchisee’s brick and mortar operation.
Franchisors and franchisees alike need to know how to leverage these platforms for the benefit of the franchise network as a whole. Crucially, franchisors must think carefully about how to keep franchisees in the value chain by either having them fulfil particular orders coming through the website or distributing revenue from online sales in some way.
For franchisees, this means understanding how online platforms will impact your sale. It’s important that you do so before entering into the franchise relationship. Otherwise, you may be surprised by the online arrangements the franchisor has set up after you have already committed to enter the franchise network.
This article will run through some key issues that a franchisee and franchisor should consider when it comes to the use of online platforms in a franchise.
1. Disclosure Requirements
The Franchising Code of Conduct now addresses the rise of online platforms in the franchising sphere. A franchisor must now explain in the disclosure document how they process online sales (in other words, whether the franchisee can sell goods or services online).
The document must also detail the conditions of selling online, such as whether the franchisee can sell through third party websites and whether they can supply goods or services outside their territory. Franchisors must also disclose the details of any profit-sharing arrangements.
You should review these arrangements carefully to know how the franchisor deals with online sales. We also recommend contacting existing franchisees to ensure they are satisfied with how the franchisor processes online sales.
Although not all franchise networks assign exclusive territories, many do rely on a model where a franchisee has a level of exclusivity of operation. As consumers can now easily purchase goods and services online, geographic exclusivity for franchisees is no longer certain and may pose issues.
From a franchisor’s perspective, some common considerations include:
- How will you control online sales (e.g. through a centralised platform)? Will this conflict with pre-existing rights some franchisees may have in their old franchise agreements?
- For franchises that operate online bookings/enquiries, how will you distribute the bookings/enquiries among the franchisees?
- Will you have the ability to override a franchisee’s exclusive territory if the franchise makes a sale online?
- Will the franchisor reserve the rights to service customers who purchase online?
From a franchisee’s perspective, some common considerations include:
- Will you be able to use online platforms to make sales generally?
- If the franchisor controls the franchise’s online platform, will you receive a benefit? Will you receive a commission or receipt of bookings/enquiries?
- What proportion of sales does the franchise make online and is there a risk that this will become the prime method for sales? (This issue is particularly relevant for retail franchises).
Some franchises do not allow franchisees to make the goods or services available online. However, online platforms are becoming increasingly popular for marketing or promoting a franchise (e.g. through Facebook and Twitter).
From the franchisor’s point of view, you must balance consistency with the need to allow franchisees to explore new ways to reach new customers.
Many franchisors end up controlling the entire site and do not permit franchisees to promote their own local pages. If that’s the case, franchisors should take responsibility to ensure content is regularly updated and correct.
From the franchisee’s perspective, you will need to consider the efficacy of the franchisor’s online marketing strategy and whether there are online policies in place which will also allow you to participate in online marketing. For example, this might be by sharing posts on social media, creating private social media pages or purchasing online ads. You should review the website and franchisor’s social media pages before you commit to the system.
4. Financial Benefit
If online sales are permissible, a franchisor and franchisee should consider how they should distribute any financial gains. For example, consider the two scenarios:
- A retail food outlet may allow customers to make orders online. The franchisor can reserve the right to provide the goods to the customer and keep 100% of the online sale.
- A retail food outlet may allow customers to make orders online but will require the franchisees to provide the goods to the customer, allowing the franchisee to keep 100% of the online sale, less the standard franchisee fee.
There are many ways franchise systems can distribute the financial benefits of online sales. Franchisors should carefully consider how to fairly distribute online revenues to ensure franchisees are not disadvantaged with the expansion of new online platforms.
5. Third-party Websites
Franchisors and franchisees should also consider the use of third-party platforms. For example, the franchise might sell their goods or services through websites such as:
- Groupon, or
Here, the main question is whether the franchisor will use third-party websites to promote or sell their goods or services and if not, whether the franchisee can use third-party websites to their advantage. Franchisors should turn their mind to what policy they will create when it comes to the use of third-party websites if they have not yet already done so.
For example, if you operate a gym franchise, can you offer a promotion on Groupon allowing 20% off membership fees? If so, can the franchisor be sure that the franchisee can deliver the promotion without breaching Australian Consumer Law?
It’s important for franchisors to control a franchisee’s desire to use these platforms to grow sales, as they may have a tendency to commit to Groupon-style arrangements without realising the level of commitment required to fulfil the orders that may come in as a result. We strongly recommend franchisors require their franchisees to provide a business plan of such promotional activities.
Many franchises require the franchisee to either:
- spend a minimum amount towards local marketing; or
- pay a certain fee directly to the franchisor for them to take care of marketing for the franchise network as a whole.
If the franchisor collects a marketing fee, this should go towards a marketing fund. From the franchisee’s perspective, they should consider how the franchisor is using the money in the fund and whether it is effective and will benefit their franchise – both for online and offline sales and promotional activities. Talking to existing franchisees will provide you with an insight into the current level of marketing activity, and their level of satisfaction.
In a market where consumers can order food online, scour the web for bargains and request drones deliver their packages, franchisors and franchisees cannot ignore online platforms.
If you have any questions or need further assistance moving your franchise into the digital age, get in touch with our specialist franchise lawyers on 1300 544 755.
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