UK: The Commercial Challenges To Be Faced When Using Franchising To Create A New Channel To Market For Retail Businesses

Last Updated: 1 May 2012
Article by Mark Abell

Retail businesses which have scope for more rapid domestic or international expansion than their capital and HR resources permit, often turn to franchising as the means to exploit that scope to the full. Although it is not a panacea for all commercial difficulties, if done properly it does allow retail businesses to re-engineer themselves so that they can create new channels to market and the consequential income streams on both a domestic and international stage.

However using franchising to create a new channel to market is not without its challenges for retailers and it requires more than just a franchise agreement. It requires the development of a clear retail format that can be licensed to third parties and an infrastructure that supports it.

What is a Retail Format?

A retail format franchise is not a guarantee of success for franchisees, but is a "blue print" for a retail business which will greatly increase the franchisees' chances of success. It is a distillation of the key elements of that part of the franchisor's retail business which it intends to franchise and comprises a matrix of retailing know-how together with access to the franchisors' brand and supply chain.

The retail format needs to be easily replicable by the franchisees and so it needs to be kept simple and straight forward. The more complex the format is, the more difficult it will be to recruit, train and support Franchisees. It is important to remove as many barriers to the franchisee's success as possible.

The design, décor and layout of outlets must be kept simple and the stock inventory must be relatively narrow. The more extensive it is, the more complex is the task of all who have to deal with it, and the greater the risk of mismanagement.

The overall aim when developing a retail format should be to simplify control, reduce paperwork and make the system as foolproof as possible. It requires meticulous planning and anticipation of logistical, managerial, administrative, marketing and other retailing needs. The value proposition and target market must be carefully defined. The knowhow of the retail concept needs to be collated and incorporated into a tangible and easily accessible form – the so called manual. The brand also needs to be properly protected.

Franchisee Training and Support

Franchisors must provide Franchisees with initial and ongoing training together with a back-up service and information which no independent retailer fighting for market share against highly aggressive, low margin competitors could ever hope or expect to match. The Franchisor therefore needs to establish a systemised initial and ongoing training and support programme.

Financial Modelling

The financial model needs to be adequately developed so that the Franchisee's retail business can provide sufficient profits to generate an acceptable return on capital and a reasonable income for the franchisee, whilst enabling it to pay a fee to the Franchisor for the provision of all the continuing services it provides. Unless the retail business can generate sufficient income to make these payments, it is not capable of being established as a franchise.

The pilot operation

The Franchisor is selling the right to use a package of proven retail know-how under a brand. It follows that the Franchisor must have operated the retail business, developed the retailing know how and established the viability of the retail format in practice.

The retail format must be more than just an idea. A manufacturer can only use franchising as a channel to market if it has first piloted a retail business, developed appropriate retail business processes (which are captured in the manual), and developed detailed job descriptions outlining the specific duties of each member of staff and the manner in which they are to be performed. The specifications of the retail outlets and their branding must also have been developed.

Once a retail concept has been developed, the Franchisor has to remain ahead of the game. It must continually experiment with and further develop the retail concept. It will know that the retail systems it provides to the Franchisee are proved and tested. It is just as important that the continuing developments are proved and tested.

Developing the manual

The manual is these days usually on line rather than in hard copy form and will contain the complete method for conducting the retail business. It forms an essential part of the way in which the Franchisor's retail concept, retailing know-how and trade secrets are protected. It will, therefore, be appreciated that the manual should be extremely comprehensive and cover in detail all aspects of the day-to-day running of the retail business.

The manual should contain some introductory remarks explaining the basic nature of the retail operation and the business philosophy of personal service which underlies it. It should spell out what the Franchisee can expect from the Franchisor, and what the Franchisor will expect from the Franchisee.

There should then follow a detailed description of the retail system which explains how the operation is set up, and how and why the various constituent elements fit in with each other.

In a retail business one would expect the manual to contain details of business critical issues; such as stock requirement in terms of quality, quantities and range, store layout, display and merchandising techniques, including discounting, customer relations and guarantee and customer complaints procedures and so on.

There will usually also be a section devoted to standard forms. These might include contracts of employment, agreements with managers or staff requiring them to keep the Franchisor's trade secrets, methods, etc. secret and not to use or disclose them for any purpose except in the discharge of their responsibilities as employees and contract forms used in the course of the conduct of the franchised business.

It is not sufficient just to create a manual when launching the franchise. Franchisors must be conscious of the need constantly to keep their retail methods under review and to introduce changes and variety so that their operation is at the forefront of the market. Such changes and variations should be reflected in supplements and amendments to the manual.

Documentation

Once the retail format has been created and the retailers know-how and systems committed to written form in a manual – usually in an online, digital format, the franchisor needs to ensure that its brand is properly protected, that it has developed an appropriate infra structure to manage and support the franchise and produce an appropriate franchise agreement drafted by expert franchise lawyers.

The franchisor/franchisee relationship is a complex one which needs to be regulated by an agreement drafted by an expert franchising lawyer who understands not only the subtle names of the franchise relationships but also how a host of complex laws impact upon it. A well drafted agreement will not guarantee that a franchise will be a success, but a poorly drafted one is likely to ensure that it is a failure.

Conclusion

When a retail business uses franchising to create a new channel to market its needs to invent in ensuring that the retail concept is a sound one, that it is appropriately described in the manual and that a franchise agreement drafted by expert franchise lawyers properly regulates the franchisor/franchisee

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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