Franchising Focus

May 2012

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eCommerce and Franchising

Stephen Giles

The biggest current strategic challenge facing many Australian franchise networks is how to be involved in, or address the competitive issues posed by, the on-line channel to market. Many businesses seem to have moved away from their normal strategic planning methodology to a more ad hoc and reactionary approach, often with disastrous results. The text book strategic planning process commences with facts and evidence, which is used to gain proper insight into the challenges and the opportunity. Strategy is formed, tactics developed to implement the strategy, and action taken, with the outcomes carefully monitored and reviewed. 

In my observation many businesses are making decisions in the e-commerce world in a very different way. Anecdote and myth, and a fear of missing out, prompts action before any meaningful collation of facts and evidence. No clear strategy is developed, with the tactics being simply to take some action, any action, and see what happens. Action is followed by review, and all too often remedial action needs to be taken or unnecessary conflict or disputation occurs. Instead of [Ready] > [Aim] > [Fire] it is [Fire] > [Keep Firing Until You Hit Something].   

So the first challenge for franchise systems is simply to adopt the proper decision making processes. There is a lot of hype about the internet and technology, so you need to separate the anecdote and myth from the facts, evidence and insight. There are experts that can be accessed, there is objective evidence and market research can be conducted even if the conclusions may be less certain than normal. Franchisees and customers will have valuable insights that should be tapped.

There is however another fundamental problem for some retail systems. In pure economic theory the most efficient means of distributing goods and services will win. The e-commerce challenge is not just about a new competitor, it is about a better means of distribution. This may not be a strategic challenge, it may be a game changing development like that faced by Encyclopaedia Brittanica from the CD Rom.

Evans and Wurstler, in a book called Blown to Bits – How the new economics of information transforms strategy, postulated that information accounts for the preponderance of competitive advantage, and therefore profitability. They consider that it is information - particularly who has access to certain information - that is the glue that keeps supplier relationships, pricing points, distribution arrangements and customer behaviour in their current form. That glue is melting due to the explosion of connectivity that is enabling the open and almost cost free exchange of a widening universe of information.

Bricks and mortar networks have historically been the most effective means of distribution – they have facilitated “richness and reach”. According to economic theory most businesses had to choose between communicating “richly” to a small group of people – person to person, detailed information, advice as well as product - or communicating more simple messages to “reach” a broad group. Advertisements, catalogues, newspaper advertisements and other promotional activities typically carry a fairly simple message, and are part of the “reach” aspect. Companies set up retail outlets across the country to help them communicate more richly to a broader group of people. Franchising not only helped facilitate this expansion, but motivated owner operators provide better customer service and richness of communications than a network of employees in corporate networks. 

One of the current challenges is that some e-commerce arrangements can be more efficient and offer a superior customer experience when compared to bricks and mortar. For example Amazon.com can deliver products to your door in less than 48 hours, and at a price cheaper than you can get them via retail stores. Logistics, warehousing and delivery is subsidised by global postal arrangements, and only intermediaries that add value are used.

At a strategic level; businesses need to consider:

  • What precisely do consumers want, not just in terms of products but product information, product training, product features, accessories and add-ons and customer experience at retail and ongoing?
  • What is the most efficient supply chain to get the product to the consumer?
  • Which businesses add value to the supply chain, and what remuneration should they receive for their contribution?
  • What are the obstacles to achieving the optimal supply chain?
  • Who will be affected by any changes, and to what extent?
  • What strategies are needed to communicate change and secure engagement by all necessary stakeholders?

We see many Australian businesses making fundamental errors in all areas. The things we see can be summarised as:

  • Companies moving too quickly, and without fundamental strategies in place
  • Uncompetitive e-commerce “solutions” from a customer’s perspective due to:
    • Failure to see and understand what competitors are really doing in terms of retail and ongoing customer experience and supply chain efficiencies
  • Too many compromises to existing stakeholders
  • Insufficient capital and resources being allocated to develop the solution
  • Not enough imagination being applied to develop the solution.

Arrangements that are insufficiently flexible to deal with subsequent e-commerce waves, technological advances and customer requirements.

e-commerce is the biggest strategic challenge facing many Australian franchise and retail networks. As always, the key to finding the right solution is to ask the right questions of the right people as early as possible, and to adopt proper decision making processes to form strategy and guide actions. Then even if you don’t like the answers you won’t have created more problems by acting too hastily.

This article is an edited version of a paper presented by Stephen Giles to a recent CEO Forum hosted by Norton Rose. For more information contact Stephen Giles.

The National Business Name Registration Service – How will this impact your business?

Allison McLeod

Reforms to the current State based business name registration systems, which were originally announced in 2010, appear to be finally coming to fruition with the announcement that the National Business Name Registration Service is due to commence on 28 May 2012. While this date is still subject to the passage of relevant legislation through the respective State and Territory parliaments it does suggest that the new national system is close to becoming a reality. Accordingly, franchisors need to start considering what this will mean for them.

The National Business Name Registration Service will make registering business names considerably easier than the current regime, which requires registration of a business name in each individual State and Territory in which it is used. The new service will allow parties to register a business name with one central, national body. The registration will then apply throughout Australia. This will minimise the administrative burden of juggling multiple registrations and may also be cheaper.

In addition, the Australian Securities and Investments Commission (which will oversee the new service) has indicated that business name owners with more than one registered business name will be able to align the renewal dates for those business names, in order to further reduce the administrative burden of dealing with business names.

While the new service heralds a step forward from an administrative and cost perspective, franchisors need to consider how the new system will impact them. For instance, given that business names will now be dealt with at a national level franchisors should ensure that no two franchisees are permitted to use the same business name. Franchisors should also consider how they intend to deal with the new service, given that the service will predominantly be an online service. While this will expedite registrations, franchisors need to consider whether they will attend to each registration or whether they will permit their franchisees to undertake registrations.

If you would like to discuss the National Business Name Registration Service, or how it will impact on your business, please contact Norton Rose Australia’s franchising team.

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Further changes to foreign investment laws for India’s retail sector

Stephen Giles, Kerry Ryan, Allison McLeod

The Indian Department of Industrial Policy and Promotion has just released its updated Foreign Direct Investment Policy. The Indian Government earlier this year announced changes to the laws affecting foreign investment in the retail sector, paving the way for foreign retailers selling single branded products to move into India without having to partner with an Indian company. The previously announced reforms that would have allowed foreign-owned supermarkets to operate have been shelved, at least for the time being.

Less than a month after suspending the implementation of various reforms relating to direct foreign investment (FDI) in the retail sector,the Indian Government confirmed that it would proceed with its previously announced changes, but only in relation to the FDI laws relating to single brand retailing. Prior to the changes announced on 10 January 2012, foreign investors were permitted to invest in the retail sector in India, provided that they were involved in single brand retail, their equity stake in the relevant investment company was no greater than 51 per cent, and they met various other conditions specified by the Indian Government. The Indian Government revised this position and announced on 10 January 2012 that FDI up to 100 per cent will now be permitted for single brand product retailing. This has now been confirmed, but there are a number of conditions to be satisfied. The updated Foreign Direct Investment Policy sets out these conditions.

A key condition that must be satisfied is that the foreign investor must be the owner of the brand under which its products will be sold in India. Another condition is that if the foreign investor owns more than 51 per cent in the relevant investment company, it must source at least 30 per cent of the value of products sold from Indian “small industries/village and cottage industries, artisans and craftsmen”. The Government has indicated that “small industries” will be industries that have total investment in plant machinery not exceeding US$1 million. This condition has clearly been included to protect the interests of India’s local markets (a major issue of concern was raised when amendments were proposed to the laws affecting multi-brand ownership), however it may have a considerable impact on some potential investors. While some international retailers already source many products from India, others are likely to have issues sourcing products that meet their quality standards or requirements.

The proposed changes to the FDI laws relating to single brand retail are a positive step forward. However foreign retailers considering moving into India without an Indian partner need to carefully consider whether they can meet the various conditions imposed on foreign investors, including the conditions referred to above, and what overall impact this would have on their business. In practice it is often possible to navigate around strict compliance with some of the conditions.

For further information on the most recent changes and taking your retail brand into India please contact Norton Rose Australia.

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Federal law reform to head off State based legislation?

Stephen Giles

It is beyond rational argument that franchising should be exclusively regulated at a Federal level. But the reality is that the franchise sector is faced with new and different State based franchise legislation in South Australia and possibly Western Australia on top of the existing comprehensive Federal regime.

The Federal Government, the Franchise Council of Australia and others are keen to see the franchise sector regulated solely at a Federal level, and harmonisation of laws is a key platform of the Productivity Commission and Coalition of Australian Government’s regulatory harmonisation project. So could Federal law reform head off State based regulation of franchising? If so, what new regulation is likely?

It seems “good faith” is the key term. If the Federal Franchising Code of Conduct could be amended to include explicit reference to good faith it would seem to take a lot of the wind out of the sails of those arguing for State based legislation. Importantly, the franchise sector could live with the introduction of a new provision into the Franchising Code of Conduct that incorporated the existing common law duty of good faith into all franchise agreements. As the FCA has pointed out, the duty is likely to be implied into most franchise agreements anyway. The important thing is that good faith remains as defined under the common law, rather than some new and different defined statutory duty. 

There may need to be some tweaking around the termination of franchise agreements, and perhaps some of the consequences of termination, to reduce fears that franchisors are able to end the franchise relationship too easily. There is also a need to simplify disclosure and help lower the cost to franchisees of obtaining the recommended legal and business advice. However good faith seems to be the main issue, particularly from a political perspective.   

The Franchise Council of Australia has been portrayed as opposing the introduction of a specific reference to good faith in the Federal Code, but that is untrue. The FCA has opposed the introduction of a new and defined statutory duty of good faith, citing the obvious confusion that would arise from having two duties of good faith – one common law, and a differently defined statutory duty. Importantly, the FCA has also pointed out that the definitions of statutory good faith floated by some proponents go far beyond good faith as that term is currently known at law, and indeed seek to cloak end of term compensation and automatic rights of renewal of franchise agreements under “good faith”. They would be a disaster for the franchise sector.

There is an obvious common sense solution. If the Federal Franchising Code of Conduct were amended to provide that the common law duty of good faith is to be implied into every franchise agreement, this would essentially codify the existing law. It would not therefore impact on franchise lending, cause uncertainty, increase disputation or curtail franchisor expansion, as a new statutory duty would do. A codification of the existing common law duty of good faith is consistent with the manner in which the unconscionable conduct provisions were linked to common law unconscionable conduct, and the change to the Federal Code should satisfy those at State level who have claimed that the courts have interpreted too narrowly the unconscionable conduct provisions in the Competition and Consumer Act. 

Former Small Business Ministers Nick Sherry and Craig Emerson were rightly incensed at the behaviour of their South Australian and Western Australian Labor colleagues, with Sherry threatening a constitutional challenge to the State franchise legislation were it introduced into South Australia. However it is probably time to move on. New Minister Brendan O’Connor has no history, and is therefore well placed to put in place the compromise solution outlined above. If he moves quickly he may be able to prevent the drafting and enactment of new State legislation. The South Australian Government could then simply prescribe as its mandatory franchising code of conduct under the Small Business Commissioner Act the existing Federal Franchising Code of Conduct. They can apply their new penalties to the Code, which gives them virtually all they were originally seeking to do. It is not ideal to have one State with different penalties, and South Australian franchisors would have cause for complaint about their Government deliberately placing them at a competitive disadvantage. However at least there would still only be one Federal mandatory code for franchising.

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Australian franchising continues to grow

Stephen Giles

The IBISWorld Industry Report on Franchising in Australia (Report) was released at the end of March 2012. The Report notes that in the last five years the Australian franchising industry has continued to post solid growth, and is expected to continue to do so for the next five years.

Some of the highlights from the 34 page Report include the following observations:

  • “sales are expected to rise from $209.7 billion in the 2012-2013 period to $238.5 billion by 2016-2017.” This will also be helped along by possible “mature US franchise systems seeking opportunities” in Australia, and general economic growth as we reap the benefits from the mining boom and a strong currency.
  • Australia is arguably the most franchised nation in the world, and the Australian market could be approaching saturation point. As a result the franchising industry will see a continued consolidation of franchise systems. The instability in the European and other overseas markets is predicted to make things more difficult for the attempts of smaller franchise systems to entice franchisees into their system.
  • Service-based franchises are expected to grow exponentially and challenge retail trade operators’ domination of the franchising industry. It is predicted that there will be an increase in travel, domestic and industrial cleaning (including laundry services) and gardening services-based franchises as well as increases in franchises catering for the older generation, single-parent families and children’s parties.
  • International expansion continues to be problematic, with franchise systems remaining locally focused, perhaps due to the uncertainty of international markets and the global financial crisis. New Zealand, the United Kingdom, Europe and the United States of America remain priority destinations, with Australian franchise systems less inclined to access prospective markets in South-East Asia and the Middle East. 
  • International franchises looking to invest in Australia are also facing their own problems. While there has been an increase in international franchises entering the Australian franchise industry, the Report predicts most are likely to fail because “operators place too much focus on selling the deal, rather than expanding into the new country”, undertake insufficient preparation and have “little regard for [local] market forces”.
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