Exclusivity has been, and continues to be, an essential element of the business model in many franchise brands. Exclusivity in relation to the geographical areas in which the franchisee can operate, without other franchisees or the franchisor being able to enter them. And exclusivity in relation to the distribution channels that the franchisor expressly reserves for itself and to which the franchisee theoretically cannot access.
With the advent of the Internet and the beginning of ecommerce, many franchisors opted to exclude this sales channel in franchise contracts, reserving active Internet sales exclusively for themselves and leaving in-person sales in physical outlets to the franchisees. It is common to see franchise contracts that limit the franchisee’s sales to those made in the outlets from which they operate, or contracts that, foreseeing the possibility of online sales, establish a prior approval or authorization process by the franchisor.
These types of limitations have historically caused numerous discrepancies and conflicts in franchise brands, but the fact that online sales were residual in the past limited their impact. However, as online sales increased, many franchisees decided to challenge the limitations on online sales imposed in their franchise contracts.
As an example, the resolution of February 6, 2020 issued by the Spanish National Commission on Markets and Competition (CNMC) on a case opened against ADIDAS SPAIN following a complaint filed by one of its franchisees for alleged prohibited conduct under the Spanish Law 15/2007 on the Defense of Competition, consisting, among other things, of the prohibition of online sales and advertising. According to the CNMC, the Internet is a very powerful tool to reach a number and diversity of customers greater than would be reached using more traditional sales methods, which is why certain restrictions on the use of the Internet are analyzed as restrictions on sales. In principle, all distributors should be able to use the Internet to sell products, and having a website is considered a form of passive sales, as it constitutes a reasonable way to allow customers to reach the distributor. Consequently, the existence of clauses in contracts that allow sales exclusively in physical points or that, due to a lack of updating, do not foresee the possibility of making online sales, could constitute a particularly serious competition restriction.
The resolution of the case was achieved with ADIDAS adopting certain commitments: informing its franchisees that they are allowed to make Internet sales, both through their own website and through marketplaces, and that they are also allowed to advertise on the Internet, provided certain conditions are met.
Following the coronavirus crisis and the consequent change in consumer habits, ecommerce has taken a giant leap forward, and the business models of many franchise brands that still rely on principles of exclusivity have become outdated, with franchise contracts that do not comply with legal competition requirements and that pose legal risks for the franchisor that need to be properly assessed.
In the current process of transformation, there is a need to review traditional models and adapt them to the new reality. We are talking about a paradigm shift, in which not only should there be no impediments to the online presence of franchisees, but it can even be very beneficial to integrate franchisees into the centralized management of the brand’s ecommerce.
n example of integration strategy could be the well-known Spanish clothing brand MANGO, which for some time now has included franchised stores in the centralized online sales business. It is a decisive step that allows franchisees to participate in the revenue generated through online sales according to their areas of influence. In this way, the traditional principle of exclusivity is integrated with ecommerce. It reflects the new reality, in which there is no longer a separation between in-person and digital sales; they all form part of the same customer experience, in which the online business clearly benefits from physical stores. Many of the transactions that occur on the ecommerce platform arise from customer visits to physical stores, in addition to the support that physical stores provide to ecommerce with the delivery and return of online orders.
The traditional approach of excluding or limiting the possibilities of Internet sales in franchise contracts and reserving them for the franchisor is now outdated. It is essential to properly regulate online sales in franchise contracts to avoid legal risks and also to enhance brand development, contributing to balanced and sustained growth for both the franchisor and the franchise network in the long term.
Brands, whether product or service franchises, must seek the model that best suits their case, and although each sector is different, it seems that the solution will have to involve the franchisor and franchisees being able to integrate the physical sales channel with the online sales channel and centrally share the costs and benefits of ecommerce. If they can join forces, they will be able to dedicate many more resources to developing a competitive ecommerce platform and managing the brand’s online presence.
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