In 2015, major international franchisor Dunkin’ Donuts announced that it had signed a profit-sharing agreement with its US franchises to evenly split the profits from sales of its house brand packaged coffee and K-cups in grocery stores, big-box stores, specialty boutiques and online (click here to read the announcement).
This agreement and announcement illustrate one of the ways a franchisor can benefit from opportunities to sell merchandise online or through distribution channels outside its franchise network, while maintaining the quality of its relationship with its franchisees and the relevance of its franchise network.
Although they haven’t announced it publicly, several major Canadian franchisors have also signed agreements with their franchisees in recent years regarding the sale of products online or through other distribution channels (including major retailers).
An increasing number of franchisors are dealing with significant issues of a delicate nature due to the phenomenal, sustained growth of sales online and through various channels (for example, restaurant chain products in grocery stores).
The first is often the following: How can a franchisor benefit from opportunities to sell products online or through distribution channels outside its franchise network without breaching its obligations to franchisees and endangering its relationship with them?
A second slightly harder question to answer then arises: Is the franchisor legally entitled to set up and operate a transactional site to sell directly to network clients or to sell franchise products through channels outside its franchise network (which implies a certain form of competition with franchisees and a risk of cannibalizing franchisee sales)?
The answer to this second question will depend on a careful review of the agreements between the franchisor and its franchisees, which should be done by an experienced franchise lawyer.
Do these agreements include provisions preventing or limiting the franchisor from operating a transactional site or selling products through channels outside its franchise network?
Such review should focus on, but not be limited to, territorial exclusivity clauses (if any). Several other clauses can affect, one way or another, the franchisor’s right to operate a transactional site or to sell products through channels outside its franchise network.
The legal review should also consider any case law on franchising, particularly concerning the franchisor’s obligations of good faith, loyalty, disclosure and cooperation.
The comments made by the Court of Appeal of Québec in the landmark Provigo (1998, R.J.Q. 47) are especially relevant here because the judgment specifically discusses the obligations of a franchisor who decides to compete with franchisees where there is no clause on territorial exclusivity in their favour.
The third question is even more delicate: How to incorporate a transactional site or product sales through other channels into the franchise network structure without breaching the franchisor’s legal and business obligations to franchisees while making the most of such opportunities?
There are several ways to incorporate a transactional website or non-network product sales into the specific context of a franchise network so that all network members can benefit and so that sales made this way do not adversely affect franchisees alone.
The franchisor’s success in setting up, introducing and operating a transactional website, as well as in selling products online or through channels outside the franchise network, depends largely on designing and executing an effective marketing strategy that is clear to everyone and fair.
SOME PRACTICAL ADVICE:
- The agreement should include clear and specific clauses regarding the rights and obligations of the franchisor and the franchisee in relation with their web and social media presence (including the franchisor and franchisee’s right to operate a website, transactional or otherwise) and product sales through channels outside the franchise network.
Where the franchisor eventually plans to set-up a transactional website or sell products through channels outside its franchise network, this should be mentioned in the agreement, as early and as clearly as possible.
- The franchisor’s web strategy and strategy on selling products outside its franchise network should be both clear and inclusive.
The franchisor’s strategies and rules on web and social media matters and non-network product sales should be clear and properly communicated to franchisees.
It is always best that franchisees understand the franchisor’s approach and strategies on these issues and, as much as possible, are stakeholders.
- The franchisor should share or reinvest profits from sales made through a transactional site or channels outside the franchise network.
The best way to prevent difficulties with franchisees over a transactional site or non-network sales is to share the benefits with them, one way or another.
Problems might eventually arise, even where the franchisor is clearly entitled to operate a transactional site or make these sales, especially where sales made through the transactional site or other channels increase while those of the franchisees stagnate or decrease.
An excellent way of preventing difficulties with network franchisees is to allow them to benefit from any advantages resulting from the sale of network products or services online or through channels outside the franchise network. Alternatively, they could reinvest part of the profits from such sales in improving tools, resources and services that the franchisor provides to franchisees.