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THE E-COMMERCE
TIPPING POINT FOR FRANCHISING

by Greg Nathan and Zhanna Kremez,
last updated 12/11/2012

June 2012 - Greg Nathan and Zhanna Kremez report on the ways that franchisors are addressing the growing challenges posed by online retailing

For the optimistic person, every challenge contains a hidden opportunity. One challenge facing franchise networks today is the impact of e-commerce on their distribution networks. In the March 2012 issue of Franchise New Zealand, we examined why franchisors needed to embrace online retailing. In this article, we will address how franchisors are addressing the e-commerce challenge or opportunity, depending on their perspective.

Customer buying behaviour is changing rapidly, driven by the increased use of mobile devices such as smart phones and tablets. While the retail sector is currently experiencing its most prolonged period of real sales declines in memory, according to the Commonwealth Bank e-commerce sales in Australia last year grew by 36 percent. In New Zealand, a report by PwC and Frost & Sullivan showed online shopping would increase by 12 percent from 2010 to 2011 and 34 percent of the total would be spent with offshore online retailers.

Because these trends are likely to continue, retail franchise networks that do not have a pro-active e-commerce strategy are likely to find themselves in trouble in the future. With this in mind, the Franchise Relationships Institute organised two initiatives earlier this year to support franchisors with useful information on which to develop suitable e-commerce strategies.

1. A research study interviewing 50 senior franchisor executives to explore their current e-commerce strategies and practices.

2. A full day Bricks and Clicks forum where 70 senior franchisor executives and e-commerce experts exchanged knowledge and experience on how franchise networks can harness the opportunities in this space.

We took these initiatives because we are passionate about helping franchisors and franchisees build more profitable partnerships, and we see the e-commerce issue as potentially destabilising a number of retail franchise systems.

Here’s a summary of what we discovered.

Keep Expectations Realistic

A surprising two thirds of companies in the study did not yet have a fully functioning e-commerce facility. Of this group, 35 percent were in the process of testing their platform and 50 percent were investigating how to proceed. The expectation of this group was their e-commerce platform would generate sales equivalent to between 2 percent and 5 percent of their overall retail sales.

The franchisors that were operating an online store were actually generating average sales equivalent to 2 percent of overall turnover. There was however a wide variation, with some brands reporting their e-commerce site as a ‘dud’ while others were generating up to 30 percent of their revenues through the site.

Subsequent discussion at the Bricks and Clicks Forum revealed that, for a typical retail network, average revenues will be the equivalent of one high-performing store. Interestingly, the costs to establish and maintain the e-commerce site were also reported to be equivalent to setting up and running a high-performing store.

The message is that franchisors need to keep their expectations realistic and modest about what an e-commerce site will deliver. However, this does not mean online is not a viable or important strategy for franchisors. Most revolutions build slowly until a tipping point is reached, which is where things speed up suddenly. We are still in the early stages of this revolution.

It is also worth mentioning that, despite modest online sales figures, franchisors have found their online stores are consistently generating significant leads for in-store sales. Customers are researching product information online and purchasing offline. Where this happens, franchisee satisfaction will grow as their in-store sales grow without additional marketing efforts on their behalf.

Franchisee Involvement

So what happens to the revenues and profits, if there are any?

Almost all franchisors had some sort of revenue sharing model which included:

  • Splitting gross profits with franchisees that had stores in the vicinity of where the customer order was generated.
  • Transferring gross profits to a marketing fund, either the existing fund or a fund established for e-commerce purposes.

While 95% of franchisors said their franchisees had been, or were being, involved in some way with the e-commerce strategy, the degree of this involvement varied between:

  • Forming dedicated committees to guide the strategy.
  • Using existing consultative processes to guide the strategy.
  • Using existing consultative processes to gather franchisee input.
  • Keeping franchisees informed of progress through standard communication channels.

Franchisee Reactions

And how have franchisees responded? While the initial reaction of franchisees is typically one of concern, this soon appears to shift to attitudes ranging from resignation that an e-commerce site is inevitable, to enthusiasm.

When asked how their franchisees felt about the strategy, 75 percent of franchisors in the study reported their franchisees were ‘happy’ or ‘supported’ the decision to sell products online. Another 15 percent said their franchisees were generally unsure or had mixed feelings, while 10 percent reported franchisees were ‘scared’ or ‘concerned’.

Significantly, 65 percent of franchisors who were actively implementing an online strategy believed this had positively impacted on the franchise relationship while 30 percent said it had made no noticeable impact.

What Franchisors Need To Consider

For franchisors implementing an e-commerce strategy, the following seven areas have emerged as deserving consideration.

1. How will we integrate our online offer with our retail offer? One win-win approach emerging from the Forum was to use the online site as a clearance vehicle for stock that stores may have difficulty moving. In this way, customers get the discounts they expect from an online store and franchisees have a way of freeing up financial and physical resources to invest in more up-to-date stock for their bricks and mortar stores.

2. What is the most appropriate pricing and revenue distribution model? It appears that most franchisors underestimate the costs of establishing and maintaining an online store, so it is important any revenue split happens after the costs are calculated.

3. How do we address franchisee concerns and get their buy-in? It is human nature to react to new initiatives with a degree of caution. Franchisees are likely to initially be fearful and sceptical of any strategy likely to impact on their sales. These emotions and concerns need to be thoughtfully managed. Franchisors must not roll out half-baked concepts which could undermine their credibility and raise franchisee fears.

4. How will an e-commerce strategy impact on our existing franchise agreements and legal obligations? Franchisors need to review their agreements and consider the territorial rights of franchisees as well as IP ownership issues over domain names. Also consumer protection laws and legislative obligations over pricing need to be considered so selling and pricing practices do not inadvertently break laws.

5. How will orders be taken and products distributed to customers? This is apparently the biggest oversight by most new online retailers. A crucial decision is where products will be shipped from and what role, if any, franchisees will have in delivering or servicing products bought online. This brings us to the next critical question.

6. How do we ensure the customer experience is consistent between our online store and bricks and mortar stores? This requires ongoing training and education of franchisees and their teams on what customers are being offered online. Remember, customers are dealing with one brand and will expect stores to be aligned and informed about online offers. The values of the brand need to be translated with equal importance whether the customer is interacting with your brand online or face to face.

7. How do we build and maintain the technology so it works reliably and efficiently? Franchisors need to decide whether to engage consultants and, if so, who. Also, which technology platforms to use. Another important decision is whether to manage the site in-house or to outsource it. Because of the growth in this field, there is a shortage of skilled technical staff who understand the psychology as well as the technology of ‘e-tailing’.

In summary, while these findings indicate a modest Return On Investment for franchisors who embark on the e-commerce journey, those companies that invest in a suitable infrastructure and strategy are more likely to maintain their competitive advantage and secure their future for when the tipping point comes –­ and come it will. Is your brand ready?

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