The saying "the only constant is change" is gaining more
serious meaning. Technology improvements, notably in telecommunications,
computers and the Internet, are having a major influence on franchised
businesses. Certain franchises are able to operate in ways that
would previously have been impossible. Efficiencies have also been
gained and means of communication have improved. In addition, new
markets have been created and, some new franchised opportunities
have even resulted.
Yet technology is only one of a range of factors influencing franchising
currently. In this article we also consider the effect of an aging
population and increasing orientation toward health and wellbeing.
Additionally, we consider the likelihood of increased competition,
and new business relationships involving franchises. The article
concludes by considering some key challenges facing franchisors
in this, the 'Millenium of the Mouse.'
Technology & The Internet
Technological developments generally, and most recently the Internet,
are having a profound effect on franchising. The Internet is still
relatively new, yet it is rapidly altering the business environment,
changing the way we gather information, interact and conduct business.
In doing so, it is providing franchised businesses with a myriad
of new opportunities and threats.
An increasing number of franchised businesses are racing to get
on-line, and to consider an appropriate Internet strategy (often
in that particular order). They are looking to explore and exploit
the opportunities this new technology provides (such as, increased
sales), whilst simultaneously attempting to protect themselves from
a new class of threats (e.g., new, often global competitors) accompanying
The opportunities and the threats this new technology enables are
varied, and provide the impetus for a new of range initiatives involving
franchised businesses. As we proceed, examples of these are subsequently
illustrated, along with some of their more interesting characteristics.
Basic Web Sites
Many franchisors have taken some step toward building their brand
on-line by establishing a web site. Most provide information to
the market for end users of products/services, as well as the market
for franchisees and investors. In addition, some franchisees are
establishing their own sites (more on this later).
An increasing number are also taking an additional step and actually
selling products/services to customers on-line. With rapid growth
in individuals and organizations accessing the Internet, the opportunity
to both attract new customers, and deal with existing customers
in new ways, is increased. Further, many customers expect to buy
on-line. Consequently, a number of franchised businesses are moving
to establish their own sites that sell, in order to build and protect
In one business-to-customer example, Domino's, UK's largest pizza
delivery chain with nearly 200 stores, has established online ordering
via an Internet site and, an interactive TV service (not available
yet in New Zealand). After only six months these initiatives accounted
for 2 percent of UK sales. Those ordering online spent 25-35% more
and over half were new customers. The group expects e-commerce ordering
to account for more than one third of sales in ten years time. Colin
Halpern, Domino's (UK) chairman, said in a recent article:
"The instant success we witnessed at the end of 1999 promises
to be just the start of our e-commerce activities. By embracing
e-commerce at such an early stage we have already earned a reputation
as the primary food delivery brand in the UK both on the internet
and interactive TV."
Closer to home, Dymocks (book retailing) and Harvey Norman (furniture
and computers) have also developed sites that sell to customers.
Interestingly, their experiences so far have been mixed.
Many other big brands are also developing business-to-customer
sites that sell. One, which is taking a different path in the development
process, is The Body Shop. They have formed a joint venture with
Softbank, an Internet investment group, to do it for them. Softbank
is well regarded as an e-commerce specialist, having 150 other such
ventures. The companies have jointly created another, called Body
Shop Digital, with exclusive rights to develop the Body Shop brand
online. In the deal, The Body Shop will own 59%. In return for a
24% stake, Softbank provides US$15 million to cover the first stage
of the project (the balance of equity is held for employee stock
An interesting characteristic of The Body Shop's e-commerce plans,
and an increasing number of new Internet ventures involving franchise
businesses, is the utilisation of collaborative arrangements. In
this case, The Body Shop recognises the specialist and fast-changing
nature of e-commerce. Partnering with Softbank, then obviates the
need to develop the skills and knowledge required internally (which,
of course, are constantly changing), to effectively compete online.
Some franchises are also collaborating with competitors in an effort
to build critical size on-line. In a UK example, Countrywide Assurance
(more than 700 offices) joined forces with Halifax (former building
supplier turned bank), Royal & Sun Alliance (insurance) and
Connell Estate Agents, in an effort to create that country's dominant
property and real estate agency web site. By the end of 2000 they
hope to have 50% of the properties advertised for sale in the UK,
Some franchises are also collaborating with complementary product/service
providers to explore co-marketing and other strategic opportunities.
In February this year, Starbucks (US) entered into an alliance with
US urban Internet delivery company, Kozmo.com. The collaboration
is said to leverage Starbucks bricks-and-mortar assets and retail
strength with Kozmo's web-based delivery of food, entertainment
and convenience items. Kozmo is paying Starbucks US$150 million
for in-store exposure and co-marketing opportunities. The specifics
involve Kozmo locating "drop boxes" for the return of
video and other items in Starbucks stores in areas where Kozmo operates.
Kozmo will also deliver a selection of Starbucks coffee products.
Closer to home, a more permanent relationship between complementary
firms has developed between the New Zealand arm of Video Ezy (video
hire chain) and Ihug, a local Internet service provider (ISP). In
the deal Ihug has purchased a controlling stake in Video Ezy. Plans
are to exploit co-marketing opportunities. Interestingly, this mirrors
a similar move involving global giants AOL (America Online, an Internet
portal) and Blockbuster (Video) in the US.
Clearly, these relationships and alliances pave the way for future
deals involving other types of franchises, and are indicative of
a global trend toward convergence. In a further illustration of
this, Ihug have also confirmed interest in an alliance involving
In yet other types of deals, some franchises are making strategic
investments in complementary Internet developments. Accordingly,
McDonald's was one of a group of investors investing US$80million
in Food.com, an online food takeout and delivery service company.
McDonald's is reportedly using the exercise to explore e-commerce
opportunities for its non-hamburger subsidiaries, such as Donatos
Pizza. Blockbuster, the world's largest video-store chain and franchise,
with 7,100 stores, also invested in the venture. It intends to offer
home delivery of movies and video games through Food.com.
While considerable publicity is given to business-to-customer developments,
many argue business-to-business e-commerce has potential for the
In one startling example, rival US hotel chains, Marriott and Hyatt
have announced they are forming a joint venture to develop an online
business-to-business marketplace that connects buyers with suppliers
in the hospitality industry. The aim is to provide users, such as
hotel owners and operators with a more efficient way of buying and
selling supplies. Both chains claim they currently procure more
than US$5 billion in supplies annually. Key benefits expected include
reduced prices and real-time access to a broad base of suppliers.
Similar developments are underway in a variety of other industries
populated with franchises. Real Estate is one area where growth
in e-commerce ventures is staggering. A recent US study reported
176 real estate-related Internet companies were in operation, up
from 121 the month before.
The development of the Internet is also responsible for a new range
of challenges to the franchise relationship. While the Internet
provides a wonderful opportunity to build sales globally, there
are a number of issues between franchisors and franchisees that
One key question is who can develop what? It appears most franchisors
want to control Internet developments centrally, and do not want
franchisees starting their own web sites. There are exceptions,
however, with others believing multiple sites help build brand awareness.
Another question involves who pays? And critical to this is yet
another - how are profits distributed? These are particularly pertinent
issues given the company's web site may compete for customers in
the franchisees territory. Some franchisors want to keep profits
for themselves, claiming that while the web site may take some sales,
the increased awareness it provides to local franchisees far outweighs
this. Franchisees argue however, that such web sites cannibalize
sales and diminish the value of the franchise.
An acceptable model that enables franchised businesses to realize
the potential of new Internet opportunities, yet recognize the subtleties
embodied in the franchise relationship, is still to be established.
Consequently, until such time acceptable practices are developed,
more wide spread problems are bound to arise.
A recent case involving Dymocks in Australia nicely illustrates
these contentious issues. Breifly, Dymocks's parent company (or
franchisor) wanted full rights to the company's website (Dymocks.com
and Dymocks.com.au). The great majority of Dymocks 90 something
franchisees, in fact, signing away rights to the web site, in exchange
for a minor equity stake in the site. However, three did not, and
pursued the mater in court claiming rights to the online business
since their advertising levies contributed to its development in
the first place. They were also claiming damages due to a loss in
future business, since the site is likely to compete with them in
their respective territories. While the court gave full rights for
the site to the franchisor, the court sided with the franchisees
on the later point. Justice David Hodgson noted there is a "substantial
chance that their business will be damaged through unrestrained
competition from the Dymocks website, including competition through
discounting of books".
Finally, and perhaps the most tangible of trends the Internet has
generated, is the development of a new class of franchised businesses.
New franchises have been established to cater for the variety of
new niches the Internet has created. Quick Internet and World Sites
are two such examples that have made it to New Zealand. Both offer
a broad range of Internet services, ranging from Internet access
to e-commerce solutions. Overseas the number of Internet related
franchises are increasing. Undoubtedly, more from this increasing
stable will arrive here shortly.
Age & Health
One area of evolution receiving some attention is the effect an
aging population base (more specifically, aging Baby Boomers) is
having on businesses. Delving into the buying behavior and habits
of this segment is most informative, and US franchises, in particular,
are increasingly valuing the uniqueness, size, affluence and spending
habits, of this group.
As a consequence, more franchised businesses are developing marketing
campaigns specifically for them. Some have gone further and added
new products and services. In yet a further illustration of the
importance of this segment, whole new franchise concepts are emerging.
One interesting US company that has been developed specifically
for the elderly is Home Instead Senior Care (HISC). HISC is a non-medical
service for those wanting to continue living at home in their old
age. It offers limited assistance, such as light housework, shopping
trips and companionship.
More generally, products and services tipped to appeal to this
group center on health and fitness, travel, financial planning,
eye wear and home services.
In addition to the aged, franchises promoting health, fitness and
well being are also gaining popularity across a broader age range
as both individuals and employers realize the benefits of a healthy
body and mind. Further growth in these areas seems inevitable.
Most New Zealand franchisors I've spoken with claim competition
is very intense, yet it seems certain to intensify. Aside from the
growth of existing New Zealand systems and development of new ones
locally, Internet sales are snowballing, and several strong overseas
systems are announcing more global intentions.
The Internet is building up to become a major threat to retailers.
The numbers of E-commerce sites selling to customers are increasing
exponentially. While many Internet retailers are so far struggling,
and there have been failures (e.g., sportswear retailer, - Boo.com),
they are experiencing increased sales. The single best threat to
retailers, of course, is Amazon.com. Perhaps best know for books,
global giant Amazon.com have also diversified into music, electronics,
tools & hardware, homeware, and a forever-increasing range of
other products. Importantly, the threat of the Internet not confined
to retail. It also exists for many service providers. The Real Estate
sector exemplifies this. For example, one US web site, Realtor.com
already boasts more than 1.3 million property listings and has 90%
of all US agents listed on it.
Also indicative of the potential for increased competition are
the plans of strong overseas franchise systems. Many seek additional
growth and believe their home markets to be nearing saturation.
Further, many in fact need growth, in order to satisfy analysts
following their stock.
Starbucks is a good example of a franchise with big overseas plans.
Howard Shultz (US Company Chairman), who led them from 11 outlets
in 1987 to almost 3, 000 gourmet coffee shops, announced wanting
more than 20, 000. Not suprisingly, he doesn't expect the US to
support this many alone. Instead, he believes more than half will
reside outside North America. Restaurant Brands, who have the rights
to develop Starbucks, along with KFC & Pizza Hutt in New Zealand,
have plans of their own. Starbucks comprises 10, but the aim is
for 50 (which include a number of micro stores developed to sit
in the likes of supermarkets & book stores). Pizza Hutt just
gobbled Eagle Boys to increase size, and 15 further KFC restaurants
could be added within five years. Others also have big New Zealand
plans. Harvey Norman, the computer, electrical, and furniture retailer,
wants 15 more stores here within two to five years. This is part
of its global plan to double their current size of 107 stores by
Mergers, Acquisitions & Alliances
Mergers and acquisitions involving franchises happen on a regular
basis in the US. In fact, some describe it as at epidemic proportions.
Here at home, they appear on the rise. Already this year, three
high profile acquisitions have taken place. Fletcher Challenge purchased
Hire-A-Hubby, presumably to grow and protect their client base and
explore co-marketing opportunities. Ihug purchased a controlling
stake in Video Ezy with co-marketing opportunities in mind. Most
recently, Restaurant Brands' Pizza Hut has taken over Eagle Boys
to facilitate expansion and assist their transition from restaurants
to delivery. Acquisitions have also played a key role in the growth
strategies in Real Estate. Large well-known systems have often purchased
both individual and groups of offices, in areas they aren't represented
to build market coverage more quickly, then franchised them later.
The reasons for these mergers and acquisitions are varied. As illustrated,
these can be used to nurture and protect distribution channels,
expand, and to cement co-marketing opportunities. Strong opportunities
also exits for shared services and efficiencies in purchasing and
marketing. As the New Zealand franchise market matures, and good
systems gain size and strength, the potential for this type of activity
can only increase. Similarly, as time moves on, other equity and
non-equity based alliances involving franchises are likely to feature
more widely here in New Zealand.
The Mouse and Beyond
To conclude, the future trends involving franchised businesses are
varied. Considering them is informative, and point to the likelihood
local franchising can expect a colorful future. On the one hand
franchisors and franchisees have some exciting possibilities to
pursue, while on the other, there are a range of new threats to
contend with. In my view, the future brings increased complexity
to the role of franchise system management. Franchise strategists
will have more options and to consider and at least some of these
will require specialists skills to evaluate. The requirement for
adaptation will also increase, and in certain sectors some quite
radical reinvention may be necessary. This provides particular challenge
to franchise system managers since the franchise concept, for all
its virtues, compared to some alternative organizational forms,
is not well suited to making fundamental changes quickly.
This article first appeared in Franchise
New Zealand Magazine.