For several years now, more and more products (including frozen and refrigerated foods, prepared meals, sauces and condiments) are sold in grocery and big box stores under the brand names and trademarks of franchise networks.
This trend appears to have accelerated over the past year as illustrated by several recent announcements of agreements between franchisors and food manufacturers to manufacture and sell a variety of products in grocery stores.
More and more franchisors are integrating, or attempting to integrate, sales in grocery stores or big box stores as an additional marketing tool for their products in order to reach a larger pool of customers and, of course, to obtain a new source of revenue.
However, the addition of such a marketing tool for products sold under the franchisor's identification and brand name raises a few challenges for the franchise network and for the franchisor's relationships with its franchisees.
First and foremost, it is essential that this new activity not be done to the detriment of the network's image (particularly with respect to the quality of its products) or of its franchisees (particularly through a reduction in their sales due to sales in grocery stores or in big-box stores).
Before launching such an initiative, the franchisor, with the help of its expert franchise lawyer, will first have to analyze the clauses of its franchise agreement (especially with respect to exclusivity and non-competition) and also take into account the jurisprudence in franchising, particularly with respect to the franchisor's obligations of good faith, loyalty, disclosure and cooperation.
Fortunately, many franchise agreements already contain clauses specifically authorizing the franchisor to sell products bearing its trademarks through other distribution channels, including grocery stores and big-box stores.
Other franchise agreements do not provide for any exclusivity in favour of the franchisee, while still others limit the exclusivity granted to the franchisee to the operation of establishments, and not to the sale of products.
However, some franchise agreements provide for exclusivity in favour of the franchisee with respect to the sale of products or the use of the franchisor's trademarks. In such a case, before being able to sell products in grocery stores or big-box stores, the franchisor may have to obtain from its franchisees an amendment to their franchise agreements or some other form of waiver, or exception, to this exclusivity.
A second important legal challenge that the franchisor will have to address concerns the network's advertising fund.
This challenge raises two equally important questions:
- Can the franchisor use the network's advertising fund to advertise and promote its grocery or big box stores operations?
- Should the franchisor make a contribution to the network advertising fund based on the amount of its grocery or big box stores sales?
The answers to these questions may differ from one network to another, both because of the provisions of the franchise agreement and the franchisor-franchisee relationship within the network.
A third legal challenge relates to the quality and consistency of products sold in grocery or big box stores when compared to similar products sold in franchised locations within the network.
For example, in the case of food products, are the quality and customer appeal of products sold in grocery or big box stores similar to those offered by franchised locations? Do the products sold in grocery or big box stores provide an experience for the customers who purchase them that may lead them to patronize, or instead avoid, the network locations?
This may seem like a marketing issue only, but in reality, for the franchisor, it is also a legal issue. Indeed, if the sale of products in grocery stores or in big-box stores proves to be harmful to the image or reputation of the network to the point where the franchisees suffer prejudice, the latter could very well have a legal recourse against their franchisor for the damages so caused to them.
Generally speaking, according to case law, a franchisor must seek the best way to harmonize sales in grocery stores or big box stores with sales made by franchised establishments in order to avoid causing prejudice to the franchisees or, at the very least, provide the franchisees with the necessary tools to deal with the competition they may face through the sale of products in grocery stores or big-box stores.
For example, in 2015, the large international franchisor Dunkin' Donuts (now virtually extinct in Canada) announced that it had entered into an agreement with its U.S. franchisees to share equally in the profits generated by the sale of packaged coffee and K-Cups identified with its trademarks in grocery stores, big-box stores, specialty stores and via the Internet.
In some cases, it is possible to structure the overall marketing approach of the network so that sales made in grocery or big box stores are not made at the expense of the franchisees (since they are aimed at a broader clientele, some of whom do not already frequent the network's establishments), but, on the contrary, increase the franchisees' clientele by bringing in new customers attracted by the quality and taste of the products they have purchased in a grocery or big-box store. Franchisees may also be able to generate additional sales by selling products available in grocery or big box stores at their locations.
Also, advertising and promotion of products sold in grocery or big box stores can increase the reputation of the network. Thus, in many cases, selling in grocery or big box stores may be beneficial to both the franchisees and the franchisor.
In any event, as this is a new activity for the franchisor that may raise some questions among its franchisees, the franchisor should plan its launch and implementation as if it were a major change affecting its network. We refer you to our bulletin entitled "How to Better Manage Resistance to Change in Your Franchise Network" for the precautions to be taken before proceeding with such a change.
Fasken has all the experience and resources necessary to help you better manage your franchise network, achieve your objectives, take advantage of opportunities and avoid potential pitfalls.
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.
