Stéphane Teasdale, the national lead of Fraser Milner Casgrain LLP's (FMC) Franchise and Distribution Group, co-authored the "Health, Beauty and Fitness" chapter in International Franchising: A Practitioner's Guide.
1. MARKET OVERVIEW
Despite the obvious distinctions between the sectors discussed in this chapter, franchise systems in the beauty, fitness and health industry have a number of common characteristics. This justifies the following sector-specific overview.
In recent years, consumers have become more and more concerned about their health and fitness. They are often afraid of being overweight or in poor health, or are simply trying to keep fit to cope with everyday life into old age. Similarly, the importance of good physical health, fitness and beauty has become socially more important during the last few decades. It is not surprising, then, that franchises in these industries have become increasingly popular.
Surveys indicate a large growth trend in the number of both franchise units and franchise systems selling units in the health and beauty sector.1 Twelve out of the 55 fastest-growing franchises operate in this sector (eg, the Paul Mitchell Partner School and 123 Fit).2 As a result, the number of people employed in beauty-related businesses increased by 24% from 1999 to 2003.3 Generally, franchisees are not required to have a specific level of education; nor do they need a particular licence. In many cases, they simply need to have general business experience. Some franchisors, especially in the cosmetics retail sector, will work only with candidates who already have a retail background. Others require their potential franchisees to have management experience or marketing skills.
Franchises in the beauty sector are comprised of businesses as varied as hairdressers, barber shops, nail salons, cosmetic products and tanning salons, to name but a few. These businesses often provide the basic services combined with the retail sale of related products. The launch and operation of a business in this sector require specific professional skills and basic professional training in the services offered. The franchise units will usually employ personnel with the same professional qualifications; however, extensive training is not usually required to start a franchise business in this sector.
In the United States, more than one-third of licensed beauty salons and spas are franchised or set up in a franchise-type model.4 The modest start-up fees make this sector very attractive to many people starting their own business. However, capital requirements vary widely. The average cost runs to about $150,000 with royalty fees of around 5% to 6% – similar to other industry sectors in franchising.
One important sector in the booming beauty industry is hairdressing. This sector is estimated to be a $55 billion industry, which is still dominated by family-run shops. However, major franchises such as Great Clips Inc, Fantastic Sams Hair Salons and Regis Corp, with brands such as Supercuts, Cost Cutters and Pro-cuts, are making inroads into this highly fragmented market. They are often situated in malls, Wal-Mart locations or similar sites. Usually, these businesses occupy specific market segments (ie, men or women, children or the elderly), or pursue a low-price strategy.
The spa industry has approximately 15,000 facilities in the United States. According to the International Spa Association, these generate around $10 billion in annual revenue. If one adds other pampering businesses such as massages, the potential revenue is even higher. Only a small number of spa visitors attend for medical reasons. The industry is growing in importance not only in the United States, but throughout the world. Many of the spa facilities are franchised or set up in a franchise-type model, with usual launch costs of $200,000 to $400,000 per unit. Typical examples of franchises in this sector are Elements Therapeutic Massage, Inc, a Hand and Stone Massage and Facial Spa.
Another common type of franchised beauty-related businesses is tanning salons. In the United States, two major franchises – Planet Beach Tanning and Hollywood Tans – control nearly 65% of the market (by number or units). In Europe, the tanning business is flourishing, particularly in France, and seems to be impervious to the negative press associated with excess exposure to ultra-violet rays.
Finally, the retail business of some major cosmetic producers, such as Yves Rocher, Elizabeth Arden, Revlon and Inter Parfums is often organised in the form of franchises although there are variations (eg, licence-type legal structures and even joint ventures). It is impossible to establish the existence of a standard legal structure, but it is safe to say that save for pure licensing, most will revolve around a franchise-type relationship.
Health franchises comprise businesses ranging from medical outlets to medical spas, senior and home healthcare, weight control and loss systems, as well as life-care and child-care services. The sale of natural products devoted to weight loss can also be included in this sector. As has been well documented in the last few decades, problems with obesity are rising significantly among western populations, who are seeing healthcare costs soar as a result. By way of example, in the United States, where two-thirds of all adults are believed to be overweight, there is a strong incentive for health-related businesses and, by way of consequence, franchises to tap into this hugely potentially profitable market. What is more, governments – albeit reluctantly in some western countries – are welcoming private sector initiatives to reduce the costs of healthcare.
Launching a business in this sector requires specific professional experience and qualifications. Depending on the required infrastructure, set-up costs can be considerable.
Health sector-related franchises are among the fastest growing in the franchise industry. An example of an upcoming franchise is Foot Solutions Inc, which provides products and services for people with foot or related problems. Weight Watchers International and Jenny Craig are also examples of leading weight control programmes that operate with a franchise system at the retail level. General Nutrition Centers, the largest global specialty retailer of nutritional products, also distributes its products using a franchise system in the United States and internationally.
Western societies' struggle with obesity, coupled with health clubs' nimble responses to new opportunities, has fuelled the rapid growth of the fitness industry. The US domestic fitness industry boasted 25 million members in early 1999; it has set a goal of 50 million US members by 2010 and 100 million members globally. The strength of the domestic fitness market is apparent: half the opportunities reside in what is probably the most fitness-conscious country in the world, the United States – ironically, a country also plagued with high levels of obesity.
As recently as the early 1990s, health clubs were typically co-ed gyms such as the YMCA or YWCA. They promoted muscle-building exercise on stacked-weight equipment to the under 50s. Today's fitness centres generally cater to special demographic groups such as teens, women, families and seniors, and offer a comprehensive approach to wellness, fitness, nutrition, weight loss, stress reduction and nutrition.
Two of the biggest changes in recent years have been the enormous popularity of 30-minute 'express' workouts and the widespread use of hydraulic exercise equipment, favoured by women. The International Health, Racquet and Sports Club Association estimates that about one-third of the nearly 30,000 US health clubs are 'express' fitness centres.
In 2005, there were more than 41.3 million health club members in the United States. This compares to 17.3 million members in 1987 and represents a compound annual growth rate of just under 5%.
Some of the major franchised fitness centres in the United States and Canada are Anytime Fitness, Jazzercise, Snap Fitness, Gold's Gym and Curves. Kieser Training has units all over Europe. Brunswick Corporation and Nautilus Inc are both manufacturers of health and fitness products. They mainly (although not exclusively) distribute their products via franchised units.
Launching and operating a business in this sector usually requires some sort of professional qualification (eg, in physiotherapy) or experience in the fitness business. However, the degree of professional experience required varies greatly. As an example, launching a Kieser training unit in Europe requires initial capital of approximately €100,000.
2. A BRIEF OVERVIEW OF THE LEGAL ENVIRONMENT ACROSS THE WORLD AS IT APPLIES TO HEALTH, BEAUTY AND FITNESS
Franchising, licensing and distribution have flourished worldwide in the last few decades and legislation governing these types of business model has grown accordingly. Many countries have enacted legislation dealing with disclosure, relationships, a combination of both or some other forms or derivatives thereof. The United States is without a doubt a leader in the field of franchise legislation. US legislation deals with both disclosure and relationships at federal and state levels, followed closely by some Canadian provinces and certain countries in the Asian hemisphere such as China, Japan, South Korea, Vietnam, Australia, Indonesia and Malaysia. Other countries, such as Brazil, Belgium, France and Taiwan, have enacted legislation relating to disclosure obligations, while Venezuela, Estonia, Lithuania, Belarus, Russia, Ukraine, Kazakhstan, Kyrgystan and Saudi Arabia just have relationship laws.
Companies in the beauty, health and fitness sectors, as in other sectors, would therefore be well advised to ensure compliance with local franchise law in those countries where they are considering carrying on business. In addition, some jurisdictions (eg, North America and Europe) may also have specific legislation regulating, for example, the sale of natural products. Consumer protection, antitrust and other similar legislation most often related to franchising, licensing or distribution should also be reviewed in those countries. These types of law may apply to specific industry sectors. Emerging countries in South America or Africa or areas such as the Middle East are likely to provide a relatively legislation-free environment. However, enlisting the assistance of local counsel to ensure compliance with all relevant legislation is strongly recommended.
3. TYPICAL CONTRACTUAL ARRANGEMENTS
Contractual arrangements in the health, beauty and fitness industries will vary widely and depend in large part on the markets and legal environments where companies wish to expand. Some markets, such as Asia or South America, present tremendous opportunities for growth. Others, such as North America and Europe, present significant challenges, if only because these specific industries have been present and growing for decades.
In essence, contractual arrangements will provide for the right to sell products or services under a trademark or banner, sometimes using a marketing formula or concept which must be strictly followed, the whole in consideration of fees that may include an initial fee to obtain the right and an ongoing fee based on sales or a mark-up on products sold for the duration of the contract. Consequently, franchise agreements, licensing, distribution or other similar agreements are normally used depending, generally, on the level of involvement of the franchisor, licensor or distributor in the operations of the franchisee, licensee or distributor. In France in particular, but also in other countries, the franchisor's ability to transfer know-how from one party to the other will largely determine whether a franchise or licensing agreement is used. This kind of transfer involves significant exposure for both sides if these obligations are not met. The franchisor's ability to transfer such know-how and to provide assistance and support will often dictate whether a franchise agreement, rather than a licensing agreement, is used.
In the cosmetics industry, licensing or distribution agreements are often the norm. Aside from allowing a licensee to use a name or trademark and sell products purchased from the licensor or designated suppliers, very limited know-how, if any, is transferred.
In the fitness sector, franchising is often the business model, although certain arrangements do not necessarily qualify as pure franchise agreements. Fitness may include the retail sale of related products such as sports equipment and clothing. Several North American companies use franchise or franchise-type agreements because they can sell their products with a specific concept where the transfer of know-how on the marketing of that concept is key. Health clubs and fitness centres will also often use a concept that goes beyond the sale and distribution of products or services. Recognised systems such as Curves, Nautilus and Kieser provide an all-inclusive concept where specific equipment and services are offered to consumers within a defined space, which is presented in a uniform way and in accordance with well-established norms and standards. As the protection of know-how and knowledge and experience of a technical, business, financial or other nature is difficult legally, franchise agreements in the fitness sector contain specific and detailed control mechanisms, especially in pure service franchises such as health clubs.
In the beauty industry, one also finds varied arrangements including franchise agreements or other forms thereof. Beauty centres that include hair salons, spas, manicure shops and other types of beauty-related establishment offer not only services, but also products marketed in the form of a concept that is usually distinct from their competitors'. Consequently, the transfer of know-how, in addition to trademarks, trade dress and other distinct features, favours the use of a franchise agreement rather than a licensing or distribution agreement.
In addition, franchisors wishing to expand internationally will choose one or other of the following models, depending on the circumstances.
3.1. Unit franchise, licence or distribution
The use of this particular arrangement may depend in large part on the level of significant support that the franchisor, licensor or distributor will wish to provide for the operation and commercialisation of the products or services to be sold. Single unit owners will be granted a limited right to market products and services at a single location for a specific period of time. The single unit model may be used where:
- market development potential is limited;
- support of the franchisor is easily available; and
- cultural or market differences are not significant.
Companies in the fitness, health and beauty sectors use this model only if the criteria set out above are prevalent.
3.2. Multi-unit franchising, licensing or distribution
In certain markets, the multi-unit model will provide an effective means of developing market potential without the drawbacks of a master franchise model. For the same reasons why unit franchising, licensing or distribution may be appropriate, the model will enable the franchisor, licensor or distributor to establish multiple units using one single partner who has the knowledge and resources to develop the market by himself. However, the market-servicing capabilities of the franchisor, licensor or distributor are crucial to the success of this model internationally. Companies in the health and beauty sectors often use this model.
3.3. Master franchise, licence or distribution
In this model, franchisors, licensors or distributors delegate their responsibilities to a master who is charged with developing a market by recruiting a minimum number of franchisees, licensors or distributors within a set period of time. This model is used by US and European companies in the health and beauty sectors expanding abroad, particularly in countries where the law, culture, language and other characteristics are significantly different from their own. They believe that their development is best achieved by having a partner with the knowledge, ability and resources to accomplish their expansion initiative in these countries. In turn, franchisors, licensors or distributors will be compensated by collecting initial fees and an ongoing royalty stream for years to come.
3.4. Joint ventures
Joint ventures are fairly cost-intensive projects that involve both parties sharing the risk and the cost of setting up single or multi-units. They are increasingly being used by North American companies which are expanding internationally. In the fitness industry, companies have often used this model in their international expansion initiatives and have contributed to the investment required to build high-end stores to sell their products. These types of agreement can be characterised as a mix of franchise, licensing and distribution, where the franchisor exercises a significant degree of control over the presentation and marketing of the premises and products without providing much assistance in the operation of the business itself. This model is also used by pure service franchises such as branded health and fitness clubs or spas.
Other forms of joint venture in the cosmetics and personal products industry include arrangements where the franchisor owns the rights to the lease and the fixed assets of a store, but where the franchisee operates the store under a management agreement and owns the inventory. This type of arrangement often requires minimum investment on the part of the franchisee, but allows for some profit from the turnover of inventory.
Other arrangements call for franchisor and franchisee to co-own the franchise via a corporation where each is a shareholder and where the corporation will execute a franchise agreement with the franchisor. The partnership arrangement will often allow the franchisee to gradually acquire the franchise under pre-determined terms.
3.5. Area development
These are less common for international expansion purposes. The area development model does not lend itself well to these particular industries, except perhaps for cosmetics, because franchisors are often looking for single unit operators.
1. "Franchise Time", November–December 2006; see also Darrel Johnson, "Franchising Expansion Fueled by Industry Entrepreneurs", Franchise World, December 2007, p 43.
2. Darrel Johnson, "The Fast 55 – Speed Demons: How 55 Companies Defy the Speed Limit", Franchise Times, March 2008, p 24, www.franchisetimes.com/pdf/2008FranchiseTimesFast55.pdf.
3. Becky Bergman, "The Beauty of It All", Franchise Times, November–December 2007, www.franchisetimes.com/content/story.php?article=00596.
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