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How to Implement Franchising Solutions: Two Aspects of A Multi-faceted Issue.

Many franchise companies are discovering the value of the Internet as an effective tool for promoting their systems, communicating efficiently with their franchisees and suppliers, and capitalizing on the opportunities presented by "e-commerce"--the selling of goods and services on the Internet. To fully exploit the immense possibilities of the Internet, a franchisor must first assess its goals and then decide what model for conducting Web site activity and e-commerce activities will best suit its objectives and system operations. This article examines two aspects of this multi-faceted issue: developing a coordinated approach to the Web site, and then implementing a coordinated approach to e-commerce.

While each franchise network has unique or defining characteristics that will affect its Internet policies, certain issues and goals should be common to all participants.

First is creating and maintaining a uniform "look and feel" for all Web sites. Inconsistencies in the "look and feel" of a network's Web sites may damage the public's general perception of the network's uniformity, which is a hallmark of any franchise network.

Second, any network will benefit from using a model that allows for easy updating of the information circulated to the public via the Internet (such as seasonal promotions, product changes or franchisee information).

Third, coordination of domain names is also critical, as this process protects the entire network against both the stockpiling of valuable domain names by a rogue party as well as legal attacks upon the franchisor's trademarks by unlicensed users.

Fourth, coordination of Business-to-Customer ("B2C") e-commerce, both with respect to the offering of products and services and the fulfillment of customer orders, will likely be essential to the success of any e-commerce program and the long-term health of the franchise network in general. Failure to properly and promptly fulfill orders is one of the leading reasons that e-commerce businesses have failed, as well as having faced action by the Federal Trade Commission for violation of the FTC Mail Order Rule.

Fifth, franchise companies should structure Web sites and webpages so that potential customers will obtain readily useable search results when searching the Internet for their franchise network or outlets. Participants should remember that, while the Internet offers rapid access to a wealth of information, their mere presence on the Internet will not prove worthwhile unless their Web sites can be easily found.

Sixth, franchisors and franchisees alike should focus on delivering to the customer the best possible online presence that is consistent with the goal of presenting the best possible in-store (or in-person) experience and/or products. This goal is difficult, at best, to achieve unless the franchise company implements comprehensive web policies.

Models for Operating a Web site

In general, the following four models for operating Web sites have served as the basis for most franchise networks.

* The "Wild Wild Web," under which a franchisor allows its franchisees to establish their own Web sites and domain names, essentially placing no restrictions on the franchisees' use of the Internet.

* The "Luddite Option" in which a franchisor prohibits its franchisees from using the Internet or Web sites in any manner relating to the franchised business or the franchisor's trademarks.

* The "Same Old - Same Old" treats franchisee use of the Internet and Web sites as advertising, thus allowing franchisees to use the web and create Web sites, provided that the sites and materials are submitted to the franchisor for review in the same way as with submission of traditional advertising, such as proposed newspaper advertisements.

* The "Full Monty," under which a franchisor establishes one network-wide Web site and provides all franchisees with a webpage on that Web site.

By and large, the "Wild Wild Web" and "Luddite" options are unattractive models for franchisors and franchisees alike. Unrestricted use of the Internet will almost certainly lead to inconsistency in the "look and feel" of the Web sites, thus damaging the public's perception of the network's uniformity. Also of primary concern are the risks of legal attacks on the franchisor's trademarks for failure to exercise control over the trademarks, claims of franchisee encroachment, and network-wide unrest. On the opposite extreme, a blanket prohibition on franchisees' use of the Web is unrealistic.

At first glance, the "Same Old - Same Old" appears to be a good model, especially from an initial cost perspective because each participant bears it's own costs. This model, however, contains many flaws, including difficulty in maintaining uniformity and in effectively updating the various Web sites and coordinating domain names, and the potential for display of inappropriate materials. Moreover, leaving franchisees to independently develop their own Web sites means that they might inadvertently fail to comply with the various legal requirements, an unpleasant result at best.

While the "Full Monty" approach may be initially more expensive, it protects against the risks associated with the other models, and affords greater ability to respond quickly to changes in the markets. As to cost issues, the overall expenditures required for the "Full Monty" may not be very high when compared to the collective (and arguably wasted) expenditures of the franchisees as each "redesigns the wheel" when developing individual sites. Additionally, depending on the terms of the franchise agreements, the networkwide advertising fund may be able to cover some or all of the Web site development costs.

Models for Conducting Businessto-Customer E-Commerce

Out of franchise companies' efforts to establish B2C e-commerce alongside or within a franchise network, the following four models have developed:

1. A franchisor conducts all B2C e-commerce on its own, without any franchisee participation, and retains the revenues generated.

2. A franchisor conducts all B2C e-commerce, but gives its franchisees a share in the revenues generated (perhaps as a reverse royalty).

3. A franchisor conducts B2C e-commerce with the participation of franchisees in the order fulfillment process (and, therefore, share in the revenue received from order fulfillment).

4. A franchisor permits its franchisees to conduct B2C e-commerce on their own, without the franchisor's involvement other than to receive royalty payments on the franchisees' e-commerce revenues.

Each approach has certain benefits and pitfalls of both legal and practical nature. Certain franchisors may elect to "go it alone," as noted in Model 1 above, for a variety of reasons. For example, a franchisor may already have established adequate channels of distribution outside the franchise context; or the products sold through e-commerce differ from those in the franchise network (e.g., ready-to-eat versus ready-to-cook products). The "go-it-alone" approach should be taken with caution, however, as franchisees may feel alienated or pursue legal claims for unfair competition and encroachment.

Many franchisors may elect to follow Model 2 above, particularly if it would be difficult or impossible for its franchisees to secure the resources needed to adequately service the e-commerce. For example, individual product sales are too small to justify asking or requiring franchisees to fulfill orders, or the products are too complex to efficiently fill orders through multiple or decentralized locations. In these cases, franchisees will benefit from the franchisor's capacities for B2C e-commerce, without incurring the related cost (namely, entering into another business, order fulfillment, which can, if poorly executed, tarnish the name and reputation).

Similarly, if a franchisor concludes that its franchisees are capable of participating in the e-commerce program, it may wish to utilize its Web site as a centralized order center, with franchisees responsible for fulfillment. The network and customers will benefit from availability of the franchisee outlets to handle customer complaints and product returns.

Allowing franchisees to conduct e-commerce on their own poses many concerns, ranging from lack of uniformity to issues on pricing and cut-throat competition among franchisees. Additionally, it disfavors smaller or less financially robust franchisees, and creates the risk that a rogue franchisee may take actions to disadvantage other franchisees, as was the problem in California Closet Co. v. Space Organizational Sys., Inc., Bus. Franchise Guide (CCH) [paragraph] 11,150 (E.D. Wis. 1997) (see box).

Benefits of the combined Full Monty approach and allowing franchisees to share in B2C E-Commerce.

The combined "Full Monty" approach to Web sites, and the approach outlined in Models 2 or 3 to B2C e-commerce, requires careful and thorough planning and analysis. This combined approach offers franchisors and franchisees alike the greatest protections and potential for success. Under these models, a franchisor can ensure that a uniform look and feel is presented to the public on the Web site. Franchisees can find confidence in that every franchise will have a webpage, each with equal prominence. Also, as illustrated above, potential customers will enjoy better search results, which increases the likelihood of actual unique Web site visitors, and, hopefully, business growth.

Moreover, of real significance to all participants, these models will prevent a rogue franchisee from abusing the network, the franchisor, and other franchisees. The long term health of the franchise network will be protected by eliminating turf battles likely to erupt if franchisees conducted sales outside of their territories and protecting the public perception of the network. If B2C e-commerce is developed under these models, franchisees will benefit from centralized B2C e-commerce that may reach levels that any single franchisee could never attain on its own. The entire network will also benefit from a centralized and professional order fulfillment operation, which might be too expensive for any particular franchisee to properly implement.

In short, each franchise company must analyze its short-term and longterm goals for Internet use and develop a plan that best suits its specific issues. The models and policies will likely vary for each network.

Same Search, Different Results

When a potential customer is looking for local franchises of Washington's Cookies, a proverbial 750-unit network, she will likely type in Washington's Cookies as a search request. Under the "Full Monty" model, which is described below, one search result appears and provides the browser with a fast and easy link to the franchisor's Web site, which, in turn carries links to a directory for local outlets. Contrast this result to the same search made when the franchise system has adopted the "Wild Wild Web" or "Same Old Same Old" models, which will produce numerous hits (perhaps dozens or even hundreds), leaving the potential customer to wade through many screens to find the desired site. For example, if a potential customer wants the webpage showing the address for Washington's Cookies in Tampa, Florida, and she searches under either Tampa or Florida, she will have to read through numerous franchisees' hits (if not many screens) before the "F" screen (for Florida), the "L" screen (for the franchisor's Web site), or the "T" screen (for Tampa) appears.

California Closet was the first case involving unauthorized e-commerce and domain name use involving a franchise system. In this case, the defendant-franchisee registered the domain name carlforniacloset. com and took "leads" over its Web site. The defendant-franchisee offered to sell these leads to its fellow franchisees, and warned that if the franchisees did not buy the leads, the leads would be sold to competitors or the defendant-franchisee would service the leads directly. The franchisor sued, and obtained an injunction forcing the defendant-franchisee to stop this practice.

Lee J. Plave, Partner, and Regina B. Amolsch, are members of the Piper Marbury Rudnick & Wolfe law firm.
COPYRIGHT 2000 International Franchise Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Article Details
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Title Annotation:web sites and electronic commerce
Author:Plave, Lee J.; Amolsch, Regina B.
Publication:Franchising World
Geographic Code:1USA
Date:Sep 1, 2000
Previous Article:Are You Using Or Abusing Your Online Recruitment?
Next Article:The Electronic Franchise Agreement Becomes Reality October 1.

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