follow us on twitter @EliteFranchise find us on facebook connect with us on linkedin 

Franchise Opportunities           

Brave new world

Written by Martin John on Friday, 02 April 2021. Posted in Analysis

In the retail industry, 2021 is likely to be as much a year of change as 2020 as retailers accept, and adapt to, the significant alterations to consumer behaviour; those alterations are unlikely to change much in 2021.

Brave new world

In the retail industry, 2021 is likely to be as much a year of change as 2020 as retailers accept, and adapt to, the significant alterations to consumer behaviour; those alterations are unlikely to change much in 2021. Non-essential retail has suffered forced closure for long periods of time; of necessity, consumers have moved to on-line shopping, many for the first time, during the pandemic.

For some retailers, the situation has been exacerbated by the consequences of Brexit.

However, whilst it is hoped that many consumers will prefer to go back to visiting bricks and mortar shops, they have chosen in 2020 to shop “locally” rather than in the local shopping centres.

The recent announcement by Thorntons, the chocolate maker, that it is to close its 61 stores was not wholly surprising; their plans had been badly hit by the pandemic. The announcement did, however, cause some concern amongst its many franchisees who have invested considerable sums in their retail outlets and intend to open their doors again as soon as regulations permit. 

Thorntons was already achieving substantial sales through supermarkets and on-line; many retail brands advise potential franchisees that they will continue selling through such “non-traditional” channels and reserve to themselves the right to do so in franchise documentation. What the changing retail landscape leading to the Thorntons’ closures has highlighted is the importance of the franchisors and franchisees working together to adapt; it has also underlined how important it is for franchisees to understand the terms of any franchise agreement – protection of a geographical location or “territory” may be perceived of less importance given the prevalence of on-line sales but if there is to be a resurgence of local physical shopping then franchisees must continue to seek some exclusivity to protect their investment. Whilst a franchisor may reserve to itself the right to sell in supermarkets and garages, they should  not bound themselves directly to compete by opening a shop, or granting a franchise, that due to proximity would devalue a franchise business.

Another concern for franchisees is the basis upon which prices are determined – the price at which the franchisee might sell a product and the price at which it is obliged to purchase from the franchisor. In the retail sector, the franchisor will often be (contractually and practically) the sole source of supply of the branded products and will influence both price lists. Not only does the franchisee need to understand how the prices are determined and how they can be changed, a franchisee should seek to insert provisions in the franchise agreement that limit the franchisor’s ability to sell its products to other forms of sales agency at lower prices and permit those outlets themselves to offer the same products for sale more cheaply. 

It is not unknown for a franchisor to find that a product that it sells through its franchise outlet can be purchased for less at a local supermarket; possibly not just for less than the price at which the franchisee is obliged to sell but less than the price at which the franchisee must purchase the same product from the franchisor.

It is important for a dialogue between franchisors and franchisees to recognise that on-line and off-line shopping may be part of a single customer experience; that the customer is likely to move between the two, when permitted, before deciding what to purchase and where to effect that purchase. The investment of the franchisee can be underpinned to an extent where the on-line exposure drives consumers to the franchise outlets, without undermining the ability of the franchisor to protect its own interests through sales via other channels. In part, this is about fairness and a franchisee cannot assume that a provision in any franchise agreement can be challenged on the basis that it is unfair.

It may be considered unfair that a franchise agreement provides for the franchisor to be able to terminate if the agreement is breached by the franchisee, but not vice versa; a franchisee may be able only to terminate in very limited circumstances. The franchisor and franchisee may both benefit from provisions that enable a franchisee to terminate if there is a drastic reduction in franchise revenue for the franchisee enabled the franchisee to terminate; more obviously, the franchisee should be able to determine the relationship with the franchisor if any geographical or other protective provisions in favour of the franchisee are breached, given the adverse impact on franchisee sales.

There are many provisions in a franchise agreement upon which a franchisee should seek advice; commercially, both franchisors and franchisees need to contemplate how to promote sales and the customer experience in any media, and to combine some of the on-line capability with the franchise operations.

About the Author

Martin John

Martin John

Martin is a Corporate Partner at JMW Solicitors.

Martin advises on mergers and acquisitions, as well as development joint ventures, subscription and shareholder agreements and commercial agreements relating to branding, international franchising and cross-border trade and distribution arrangements.

Strategic Media Partners