Franchisees’ Websites and Concept Uniformity:
A New Challenge for Franchisors
Rozenn PERRIGOT[1]
Guy BASSET[2]
Danièle BRIAND-MELEDO[3]
Gérard CLIQUET[4]
1
Franchisees’ Websites and Concept Uniformity:
A New Challenge for Franchisors
Abstract
Online sales and franchising are continuing their parallel development whatever the country: developed markets and transitional ones, and whatever the industry: retailing and services. The development of online selling in the specific context of franchising is not without raising some issues. Adopting a managerial approach with some legal insights, this paper aims to explore the impact of the set up of franchisees’ websites on network uniformity that is a key element of franchising. A case study illustrates the different aspects of franchisees’ websites that can damage the concept uniformity. It deals with Intercaves, a French franchise network in the wine and alcohol sector. Maintaining network uniformity when there are various websites set up and run by franchisees entails challenges that are presented in this paper within a managerial perspective linked to technical and organizational know-how. The legal perspective in link with Intellectual and Industrial Property Law, Competition Law and International Lawis also discussed.
Keywords
Franchising, Internet, Franchisees’ websites, Uniformity, Business and Law approach
1
Introduction
The uncertain legal framework in Europe regarding online selling within retail networks was raised for the first time by the set of guidelines specific to vertical restraints (2000/C291/01), adopted in application of the European Commission ruling no. 2790/1999 issued on December 22nd, 1999 concerning certain categories of vertical agreements. The principle stated in these guidelines was explicit and gave every distributor the right to use Internet to advertise or sell its products, though a number of limited exceptions had been outlined (see Paragraph 51).
The enactment of a rule (no. 330/2010) pronounced by the European Commission on April 20th, 2010along with new guidelines on vertical restraints (2010/C130/01) opened a new era. This regulation that took effect on June 1st, 2010 will remain applicable through 2022. Let’s recall herein that these guidelines, as opposed to the regulation itself, actually stipulate the set of rules to be respected when engaging in online transactions. Despite carrying no legal enforcement, these guidelines help interpret the law and are still invoked by judges and competition regulators to better assess the kinds of situations encountered (Cesarini et al., 2010; Gast, 2011; Vilmart, 2011). In their most recent version, these guidelines recognize on the one hand that the Internet is a very powerful tool to sell products which shouldstay free to be used, and on the other hand, that a supplier may control the quality of websites used by its distributors (see Paragraphs 52 and 54).
In this paper, we focus on a specific case of vertical restraints that is franchising, i.e.,“a contractual agreement between two legally independent firms in which one firm, the franchisee, pays the other firm, the franchisor, for the right to sell the franchisor’s product and/or the right to use its trademarks and business format in a given location for a specified period of time” (Blair and Lafontaine, 2005, p. 3). A more detailed definition of franchising is also given by theEuropean Franchise Federation, “franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.”
Franchise networks, whatever the industry: retailing and services, are present in many countries, developed ones such as Australia(1,000 franchise networks), Canada(1,200 franchise networks), the United Kingdom(842 franchise networks), the United States(2,200 franchise networks), etc., and transitional ones such as Brazil(1,643 franchise networks), China(4,000 franchise networks), India(1,800 franchise networks), Russia(420 franchise networks), etc. In brief, there are more than 21,000 franchisors and 2.5 million franchised stores worldwide (European Franchise Federation, 2011). In Europe, there are more than 10,000 franchisors and 400,000 franchised stores (European Franchise Federation 2010).
Several scholars have focused on E-commerce strategy in franchising, and more specifically on E-commerce strategyof franchisors (e.g. Cedrola and Memmo, 2009; Dixon and Quinn, 2004; Rao and Frazer, 2006; Watson et al., 2002). Some other researchers have explored this particular topic through a legal approach, often focusing on exclusive territories and encroachment (Emerson, 2010; Fontenot et al., 2006). But, none of them have explored the case of a website (transactional or not) set up and runby the franchisees.
This paper therefore aims to explore the impact of the use of Internet by franchisees on the networkuniformity that is a key element of franchising. We mainly adopt a managerial and strategic-based approach even if some legal aspects are mentioned throughout the text. We shed light on the resulting challenges for franchisors to maintain network uniformity when having various websites (transactional or not) run by their franchisees. This study seems to be the only one of this kind, and we must underline its exploratory nature.
This paper is organized as follows. We firstdiscuss the importance of network uniformity in a general context before focusing on the particular context of franchisee-driven online sales and the associated challenges for the franchisors to maintain a uniform network,with the Intercaves case study. The fourth section offers an analysis of the issue from two perspectives, a managerial one and a legal one. The last section is the conclusion.
Franchising and Uniformity
In this section, we highlight the importance of uniformity in franchise networks before focusing on the dilemma: standardization versus adaptation.
Uniformity in Franchise networks
Concept uniformity can be defined as the exact replication of a concept in any store of a network. It is an important notion in franchising for at least three reasons: 1) it brings economies of scales concerning purchasing, marketing and implementation (Cox and Mason, 2007); 2) it strengthens the quality control and cost of monitoring (Bradach, 1998; Kaufmann, 1989), and hence the brand image throughout the network bothvis-à-vis customers (Falbe and Dandrige, 1992; Kaufmann and Eroglu, 1998; Michael, 2002) and franchisees (Kaufmann and Dant, 1999); 3) it ensures the link with franchisees and between franchisees and entails exclusivity arrangements (McAfee and Schwartz, 1994).
As we suggest it in the former paragraph, concept uniformity and brand image are key elements for franchisors and are a priori closely related. When building a new brand, a franchisor strives to maintain a uniform image throughout the network, i.e., in every store wherever it is located, because uniformity across stores has to be respected to preserve brand equity (Caves and Murphy, 1976). Some franchisors choose contract tying in order to increase standardization and reduce monitoring costs, and then strengthen their business strategy especially when specific equipment is required (Michael, 2000). Others prefer strengthening their organization through more centralized procedures (Smith and Nichol,1981). The difficulty of this challenge stands in the fact that franchising requires “a variety of local activities to execute” (Bradach, 1998, p. 23). For instance, managing service quality needs to adapt the service to local demand. Then, problems emerge because maintaining the uniformity of the concept is a real challenge as Bradach (1997) defined it among three other challenges a network should meet. These four challenges are: 1) growth by the addition of new stores; 2) maintenance of the concept uniformity; 3) local responsiveness; 4) system-wide adaptation. In this paper, we deal with the second challenge (maintenance of the concept uniformity) even if it is important to mention that these challenges are all interrelated, and dealing with one of them can have some consequences on the other ones.
Adaptation versusStandardization
Talking about the maintenance of the concept uniformity consists in raising once again the famous dilemma: adaptation versus standardization which is sometimes at the international level transformed into: localization versus globalization. The latter has entailed many debates since the beginning of the 1980s opposing Levitt’s globalization (1983) to those who denounce the myth of globalization (Douglas and Wind, 1987) and prone finally a more localized approach (Rigby and Vishwanath, 2006). Douglas and Wind (1987) examined each marketing-mix variables in order to revisit the globalization concept and concluded that there were always several variables which cannot be defined globally. In domestic markets, the problem can be the same. In franchise networks, the store ownership (franchisor or franchisee) prevents from strictly imposing a real standardization in an authoritarian way. Pricing for instance may not be standardized either for legal reasons to avoid breaking antitrust laws in many countries, or for local strategic considerations (Lafontaine, 1999).
Breaking with this often counterproductive argument, Kaufmann and Eroglu (1998) proposed a decomposition of the problem showing then that the key question is not whether franchisors should standardize their concept or not but to which extent they have to standardize or to adapt to local conditions. Adaptation degree and performance of replication routines is a concern for most franchise networks and most companies in general (Jensen, 2007).
Kaufmann and Eroglu (1998) defined the concept of a franchise network as a “collection of unique elements (product/service deliverables, benefit communicatorsand system identifiers) that build and maintain a distinct image among consumers”. The uniqueness of the concept leads franchisors to maintain its uniformity, and hence protect its image to build the brand which is a very important asset and the raison d’être of the network. These authors made a distinction between core elements of the concept (product/service deliverables, benefit communicatorsand system identifiers) which should stay invariant throughout the network, and peripheral elements which may be adapted to local specificities.
Adaptation can also be seen as a “glocal” strategy according to a term defined by Robertson (1992). Some recent experiences show that the front office, i.e., everything in front of the customer, can be totally localized whereas the back office dealing with logistics and production is more or less integrated and standardized as it is implemented in the U.S. franchise networkGreat Harvest Bread Co. for instance (Streed, 2007; Streed and Cliquet, 2008).
Therefore whatever the market, at the domestic or international level, the issue of uniformity remains of primary importance in franchising. Besides, this issue takes a total new turn when dealing with franchisees than canset up and runtheir own website (transactional or not).
Franchising, Franchisee-Driven Online Salesand Uniformity
In this section, we discuss franchisee-driven online sales before focusing on the associated challenges for franchisors to maintain network uniformity. The case study on Intercaves illustrates our developments.
Franchisee-driven online sales
The principle of allowing the franchisee to sell its products and/or services via Internet has been approved on several occasions, yet a number of exceptions still hinder its effective implementation.
Principle of franchisee-driven online sales
As far as the principle of franchisee-driven online salesis concerned, in its 2000 guidelines regarding vertical restraints, in summary, the European Commissionwas mentioning that:
“every distributor [i.e., every franchisee in our case] must be free to use the Internet to advertise or to sell products [...]. In any case, the supplier [i.e., the franchisor in our case] cannot reserve to itself sales and/or advertising over the Internet” (Paragraph 51).
The 2010 guidelines, regarding vertical restraints, are indicatingnow that:
“[the] Internet is a powerful tool to reach a greater number and variety of customers than by more traditional sales methods” [...]“[In] principle, every distributor [i.e.,every franchisee in our case] must be allowed to use the Internet to sell products”(Paragraph 52).
Concretely, it means that franchisees are allowed to set up and run their own transactional websites whatever the existence or not of a website operated by their franchisor. Nevertheless, some limitations to these practices exist.
Limitations to franchisee-driven online sales
These limitations are linked to exceptional circumstances, requirements of a physical store and the actual type of sales being transacted.
Exceptional circumstances
As far as exceptional circumstances are concerned, the 2000 guidelines on vertical restraints were indicating that:
“an outright ban on Internet (or catalogue) selling is only possible if there is an objective justification” (Paragraph 51).
The 2010 guidelines take into account the new regulation specifying that such an interdiction on Internet sales is limited to exceptional cases, such as involvement in:
“selling dangerous substances to certain customers for reasons of safety or health” (Paragraph 60).
This new formulation tends to support the position adopted by the Competition Authorityin its decision upholding that:
“Internet selling may be banned in principle, except under exceptional circumstances that could, for example, be tied to safety considerations” (Paragraph 94).
Requirements associated with a physical store
Regarding requirements associated with a physical store, on three occasions, within the retail sectors of watches (Decision 06-D-24 of 24 July 2006), stereos and home cinema (Decision 06-D-28 of 5 October 2006) and cosmetics and body care products (Decision 07-D-07 of 8 March 2007), the Competition Authorityvalidated the fact that the manufacturer or supplier, as head of a retail network built from vertical agreements, grants the right to sell online only to network members operating a physical store. As a result, the companies engaged in marketing the network’s products exclusively via the web, also called “pure players”, wind up being separated from the network. This type of requirement should make it possible to block certain practices induced by a phenomenon of parasitism, especially in the case of selective distribution. The 2010 guidelines on vertical agreements support the priorities set forth by the Competition Authority in stating that the supplier (i.e., the franchisor in our case) can:
“demand that its distributors [i.e., its franchisees in our case] have one or more brick and mortar shops or showrooms as a condition for becoming a member of its distribution system” (Paragraph 54).
Consequently, these “pure players” may be excluded from the network by the operator (i.e.,the franchisor in our case) without any objective justification required to carry out this exclusion.
Type of sales transacted (active versus passive sales)
As far as the type of sales transacted (active versus passive sales) is concerned, beyond the divergences already observed between the 2000 and 2010 guidelines on vertical agreements (see Appendix 1), it can be briefly stated that active sales in the case of franchisee-driven online strategy are those thatstem from a designated franchisee,result from a customer prospection effort deployed within a given geographic area outside of the exclusive territory assigned to the specific franchisee, and rely on means such as mass mailing, sending of unsolicited e-mails, cold calls, ad campaigns in the media, including Internet, as well as targeted promotional efforts. It must be pointed out that the 2010 guidelines, in the Paragraph 53, consider as an additional form of active sale:
“territory-based banners on third party websites” as well as the step of paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory”.
Regarding passive sales, they correspond to the fact of having to meet specific demands unsolicited, stemming from individual customers, or triggered by advertisements or general promotional campaigns capable of reaching customers located in the exclusive territories held by other franchisees, yet which still constitute a reasonable means for reaching customers in the given franchisee’s home territory. Both the 2000 guidelines (Paragraph 50) and the 2010 guidelines (Paragraph 51) authorize online passive sales. Within the framework of the vertical agreements signed, it has been found that:
“[the] protection of exclusively-allocated territories or customer groups must however permit passive sales to such territories or customer groups”.
The 2010 guidelines indicate that:
“[In] general, where a distributor uses a website to sell products that is considered a form of passive selling, since it is a reasonable way to allow customers to reach the distributor. The use of a website may have effects that extend beyond the distributor’s own territory and customer group; however, such effects result from the technology allowing easy access from everywhere”.
Passive sales by franchisees are unquestionably accepted on the Internet without the franchisor being able to limit the percentage of sales to be conducted online. The franchisor nonetheless holds the possibility of requiring each franchisee to sell a minimum quantity of products (in either volume or value terms) offline in order to ensure sustainability of the physical store.
Other cases to be considered
In addition to the limitations presented above, other cases have to be considered. For instance, the franchisee cannot be forced to renounce efforts to sell online just because a potential customer’s credit card details reveal an address that lies outside the franchisee’s exclusive territory (2010 guidelines, Paragraph 52). Moreover, if the transactional website is designed for consultation in several languages, then the passive nature of the sale will remain intact. The franchisor cannot prevent potential customers located outside a franchisee’s exclusive territory from consulting the franchisee’s website, nor does the franchisor have the means to automatically redirect these potential customers to its own website or that of other franchisees. Such approaches are referred to as “re-routing” (Gurin, 2011).
Upon review of the developments discussed above, it is clearly apparent that the European Commission, despite being highly favorable to online selling, would still like to avoid certain excesses resulting from network operators or third parties that are capable of destabilizing the network’s physical stores (Perrot et al., 2010). This concern would explain the exclusion of “pure players” as well as the quality requirements placed on distributor websites (i.e., franchisee websites in our case), with the aim of ensuring a level of uniformity within the network that proves desirable, or even necessary. This is particularly this last point, i.e., the challenge for franchisors to maintain network uniformity when their franchisees set up and run their own websites (transactional or not) that we will examine now, illustrated with the case study on Intercaves.