Prepare to meet thy doom?

Does online shopping mean the end for retail? Simon Lord explains why today franchises face particular challenges.
Traditionally, one of the great strengths of franchising has been its ability to combine the branding and buying power of a larger organisation with the commitment and financial investment of local owners. This combination enables franchised outlets to provide better service to their customers while maintaining competitive prices. It’s been a hugely successful business model for more than 60 years – but, in retail at least, is it now broken? Unless retail franchises find ways to harness the power of online shopping, the answer could well be ‘yes.’
According to last year’s Franchising New Zealand survey by Massey University, while non-retail franchises grew from a median of 16 units in 2009 to 24 units in 2012, retail franchises were down from 25 to 18. Some of the decline could be due to sampling differences, but even within the same sample group retail franchises showed no unit growth at all in the 2011-2012 financial years while non-retail grew by 11 percent.
In addition, the study reported that while product sales and customer count had increased over the past 12 months, overall profitability for franchisees had decreased. With retailers facing a double whammy from increasing leasing costs – and online marketers, the pressure is on.
But why should franchises be more vulnerable than other retailers? The answer lies in the shared ownership of a franchise’s distribution channel. While a corporate can easily set up a website trading on its brand and offering direct sales and delivery of its products, it’s not so simple for a franchise where a franchisee has invested in establishing a dedicated outlet. If a franchisee is already servicing customers in an area and the franchise’s website makes a sale direct to a customer in that area, the franchisor could then be seen to be in competition with the franchisee.
From the franchisor’s point of view, they cannot afford to give away market share to existing and new competitors by not offering online sales ­– and they may need to offer better pricing to be competitive online, thereby reducing margins all round. From the franchisees’ point of view, they are now in competition with their own brand, the brand they helped develop, while providing a physical shop window for goods that may be purchased electronically.
As online sales increase, it’s an issue that can’t be ignored – yet many franchisors are doing exactly that. The Franchising New Zealand survey found that 65 percent of all franchisors are not currently selling their products and services online and almost half of these had no plans to do so in the future. The main reasons given for not engaging in this distribution format included: current territorial restrictions and the possibility of encroaching on franchisee sales volumes; difficulties in developing an appropriate product management system and profit distribution mechanism for existing franchisees; inappropriate fit between franchise products and e-distribution; and a lack of customer demand for buying goods and services online.
Clearly, retail franchisors need to find a way to address the first two of these challenges if their franchisees are to survive, and the survey does offer some evidence that many are doing so, if somewhat belatedly – 42 percent of franchises currently selling online had only been doing so for one to three years. Their main challenge has been to find a way of sharing revenue and reduce conflict with franchisees, and they have come up with a variety of solutions. These include:
• Enabling customers to pay franchisees direct (60 percent).
• Paying profits on a commission or full-margin basis to franchisees in a defined territory (20 percent).
• Returning profit margins from the franchisor to the franchisee (16 percent).
• Returning profits derived from online sales to the franchise’s marketing fund (four percent).

The good news is that a strong majority of respondents believed that the introduction of online sales had had a positive effect on their relationship with franchisees (73 percent). Only eight percent felt that it had actually damaged franchisee relations.
In a different survey of 50 franchisors in Australia, the Franchise Relationships Institute estimated that, for a typical franchise network, average revenues from online sales would be the equivalent of one high-performing store. As online shopping continues to increase, that figure will surely rise – and franchises need to have strategies in place to manage and share the resulting opportunities. (You can read more about the FRI’s findings www.franchise.co.nz/article/1562.)
Retail franchises do still have one ace up their sleeves, though, and that is the traditional value of service. Online retailing is all about price, yet there is no substitute for seeing, holding and experiencing a product, or for being able to talk to someone knowledgeable about how it works or how it looks. Even Apple, which has done more to change the market than any other company, knows that, which is why it has invested so heavily in its retail stores. For franchises which can find a way of overcoming the internal competition and putting their franchisees’ expertise and service online as well as in-store, the model need not be broken.

Simon Lord is publisher of Franchise New Zealand magazine and website.
Visit www.franchise.co.nz