Franchise 2017: Trends & Conclusions

Franchising has become an incredibly useful device. Companies around the world are drawn to the franchising model as an effective way to expand their presence in the domestic and international marketplace, without the need for large amounts of capital. It is a key tool for individuals to become successful in small business, aided by an existing business model and an established brand. Despite the advantages of structuring a business using a franchise network, practitioners interviewed during our research highlighted challenges presented by market forces such as political uncertainty and new technology. They also noted other factors, such as the increasing role of private equity companies, which is having a considerable impact on the way in which companies are treated and traded. These factors are requiring franchise concepts to adapt in order to grow and maintain market share.  

Technology

New technologies such as automated ordering and delivery systems, 3D printing and intermediation are causing fundamental changes to the way customers purchase goods and hire services. This, according to interviewees, is having a “profound impact on all aspects of the economy”. The growth of the internet and mobile apps have had a significant impact on the behaviour of consumers, who have become better educated about the products they buy and have access to a greater range of goods and services. This is a phenomenon that franchisors have been keen to take advantage of and lawyers have reported busy advisory practices in this area. For bricks-and-mortar franchise models predating the explosion of e-commerce, adaptions have had to be made and agreements amended in response to changes brought about by technology.

Cyber-liability is an increasing concern – one that businesses are keen to address proactively. Practitioners have reported an increasing volume of lawsuits relating to the use of technology in franchising models. This includes cases relating to web access and e-commerce.

Internationalisation of Brands

Interviewees around the world reported a growing desire among franchisors to expand their networks abroad. The political uncertainty following Brexit and the US election has caused some “headwinds”, say commentators, but overall “the international expansion of brands around the world continues to be extremely robust”.

Fluctuations in currency valuations have also had an impact on international franchising. Sources have noted an increase in the number of US brands entering the UK market over the last 12 months as the favourable exchange rate enables them to “get more for their money”. US practitioners have also reported “a fairly sturdy” uptick in brands entering the US within this time frame as well as an increase in M&A activity, possibly due to the improved economic climate. However, the increasing divergence in approach between US state courts makes it increasingly difficult for franchisors to use a “one size fits all” franchise agreement to establish operations across multiple states. 

The western hemisphere is “almost saturated with brands”, say interviewees, and franchisors are showing increasing interest in emerging markets, which show “tremendous potential for business growth”. The Middle East remains a popular target market among European and US brands, while China, India and Africa are “hot markets” for many franchisors, due to demographic shifts towards a larger middle class with more disposable income. According to one practitioner, Africa has been the “lost continent” that franchisors would not seek to enter in the past – but this is seemingly changing, and numerous interviewees reported involvement in large deals across several African jurisdictions.

Meanwhile, South East Asia is a prosperous and relatively untapped market, and practitioners have seen a “huge uptick” in franchise projects over the last 12 months, particularly those relating to consumer products, restaurants and educational services. Notably, Singapore is used as a “test market” for franchise systems entering the region and is a popular destination among international brands. Lawyers also report an increased appetite among local players who are keen to expand outwards, particularly in the food and beverage sector.

US brands have demonstrated significant interest in South American states such as Chile, Columbia and Peru due to the projected economy. Argentina is regarded as “one to watch” as the new government continues to relax investment laws in order to attract foreign investment.

Joint Employer Liability

In the US, joint employer liability remains an important issue and there is a great deal of discussion surrounding the issue of how much control franchisors can exercise over franchisees without being considered joint or de facto employers. According to reports, clients are extremely anxious about this.

This issue reached a head near the end of the Obama administration, as the National Labour Relations Board (NLRB) adopted a pro-labour union approach. In a lawsuit filed against McDonalds, the NLRB considered whether McDonalds exercises sufficient control over its franchisees to be held jointly liable for their conduct towards employees who participated in strikes to campaign for a higher wage. “Joint employer liability is a political issue as much as a legal issue,” one interviewee told us, as it is “all part of the trend towards higher minimum wage and attempt to reduce the disparity in wealth in America”.

According to one source, holding franchisors jointly liable “could have been the end of franchising” as the franchise model is typically very different to a joint-employer model and holding franchisors jointly liable would impact the entire franchise system structure.

The franchise community is therefore pleased with the Trump administration’s seemingly pro-franchisor approach to joint-employer liability and sources are of the view that there will not be a major resurgence of this issue, at least at the federal level, during Trump’s term as president. Despite the administration’s position, as one source put it, “the political winds blow back and forth, and the risk still remains”. Consequently, lawyers are busy advising clients on how to structure franchise agreements and relationships to avoid the appearance of control over franchisee systems. Legal work in this area focuses on assessing and minimising risk. According to one practitioner, “The only way to counter the possibility of vicarious liability is to ensure operational excellence within the franchise system.”

Once source described the US as “the leader and bellwether in franchising”, and the potential for joint-employer liability is incipient around the globe. Businesses around the world are “keen to explore all possible options for structuring agreements to avoid franchising relationships”, said a lawyer in Spain, in order to avoid such commercial risks and regulations governing franchise relationships.

EU Ethical Rules

The Code of Ethics adopted by the European Franchise Federation (EFF), which governs the relationship between franchisors and individual franchisees, was amended this year. Member franchising associations subscribe to this code and companies are seeking advice about whether amendments to their franchising agreements are required in order to bring them in line with the revised ethical rules.

In the context of disputes, the code stipulates that before taking a dispute to a court or arbitral tribunal, the parties should attempt to settle the dispute through mediation. This is a new concept for many franchising chains but, as mediation is often a more effective and cost-efficient way to resolve a dispute, sources are positive about this development. The trend towards an increased use of mediation is mirrored in the US, where practitioners have reported an uptick in its use to resolve disputes prior to litigation.

Effective dispute resolution is incredibly important, as sources around the world report this becoming an increasingly litigious area of law. In Europe, sources are witnessing franchisees’ growing willingness to defend their interests against franchisors, as has been the approach taken by many UK and US brands in the past.

Legal Market Analysis

Franchise work is highly specialised in nature, and the top end of the legal market is extremely sophisticated as a result. The consensus among interviewees is that there are relatively few “true international franchise practitioners”, yet competition among these experts remains strong.

Cost is therefore a key driver in the market. In the US, franchise regulation and disclosure work has become commoditised, and there are a large number of firms actively operating at the lower level in this space. Interviewees also note that large brands employ in-house counsel to deal with their day-to-day issues and that expertise is therefore a key distinguishing factor for complex matters.

***

As with any business, franchise systems are subject to a “myriad of factors and forces” forcing them to evolve and adapt to changes international marketplace caused by economic, political and demographic changes, as well as innovations in the technology sphere. According to one lawyer, “The challenge is to strike a balance between staying on the leading edge of change in order to maintain and grow market share, but doing it in a way that minimises disruption to the franchise system.”

Technology is developing at an accelerated rate, has a significant influence on consumer behaviour and purchasing habits, and presents a vast array of opportunities and challenges for companies and lawyers to address. The desire to increase their presence in the international market place has given franchisors a strong appetite to expand abroad, and interviewees have observed a huge interest in emerging markets across Asia, Africa, South America and the Middle East. Without doubt, the continuing development and evolution of franchising will be fascinating to watch in the coming years. 

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