One of
the tenets of franchising is the exclusivity of territory awarded to the franchisee –
often, the bigger or more lucrative the area, the more the franchisee pays for the
privilege.
Most people would agree that a franchisor cannot compete with
a franchisee's territory by flooding local mail boxes with mail order catalogues. To
market competitively in this way, or "encroach" on the franchisee's territory
would constitute a breach of contract, right? So when is encroachment not encroachment? Apparently in cyberspace. Then,
according to one franchisor, it only amounts to "friendly intrusion". This
euphemism undermines the potentially disastrous effect increasing internet sales can have
on a franchisee's exclusive territory in the same way as "friendly fire" belies
injuries suffered as a result.
The Australian franchising media has recently brought the issue to the fore in
this part of the world. Franchising magazine summarises the competing philosophies:
"The central or driving idea behind traditional franchise arrangements is
to increase market penetration, attract self investors and decentralise the
franchisor's business. On the other hand, the driving idea behind ecommerce is to
have a centralised point of sale, storage and distribution to reduce overheads."
E-commerce provides such ease of access to goods and services that location is
often irrelevant. If a consumer can get home delivery of products via the internet, why
would they approach the nearest franchisee's outlet?The internet's lack of respect for traditional territorial rights means
that if a franchisor sets up a virtual store, the franchisee's "territory"
is potentially worth little more than the paper it is printed on.Trends emerging from the US (the country that first bought us the golden arches
model of franchising) strike blows for the embattled franchisee on this issue.
In September last year a preliminary injunction was granted against a
pharmaceutical franchisor, prohibiting it from conducting sales over the internet to
customers located within franchisees' exclusive territories.In the precedent setting arbitration decision, the panel soundly rejected the
contentions that (a) the franchisees' territorial exclusivity applied only to "bricks
and mortar" franchises and did not extend to virtual stores, and (b) the internet
site should be deemed an "alternative distribution method" allowable under the
particular form of franchise agreement.Obviously, the New Zealand franchising industry is not immune to this problem.
The solution, is to identify and address the issue at the outset. Parties have every right
to agree that internet sales are not subject to exclusive sales territories but this needs
to be documented. Most existing franchise agreements fail to address the issue or do so
inadequately. A suggestion is to include a mutually satisfactory mechanism for sharing the
benefits from internet sales. This can be achieved by tracking the address of each
internet customer and allocating a percentage back to the franchisee whose territory they
fall into. Another option might be to agree that all internet profits are invested in the
marketing of the franchise system, for the benefit of all franchisees and the franchisor.
It is observed that power appears to be swinging away from the franchisor to the
franchisee in this country. There is increasing competition in New Zealand for the
franchisee's investment dollar. It is in both parties' best interests that
franchisors adopt a more flexible approach to their agreements (including clauses
acknowledging and dealing with the internet issue) than has been the case to date. |
