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PUBLISHED : BRW 15 Mar 2012 05:03:41 | Jessica Gardner

Consultants to the $128 billion franchising industry say that many franchisors are failing in their attempts to take advantage of e-commerce.

“Many franchisors, yes they have a website, but they haven’t got an e-commerce strategy,” the executive director of DC Strategy, Rod Young says. “Whether they like it or not, e-commerce must be a distribution channel that will sit in parallel with their current bricks and mortar [retail] or service-based models.”

It’s an important equation to get right. Online retail is growing at an annual yearly rate of 29 per cent, according to research from the National Australia Bank, so to ignore e-commerce or to stumble in execution is an expensive option. The franchisees that have the biggest challenge are those that sell goods, which are a natural fit for online retail. However, service-based franchises and fast food restaurants should ignore e-commerce at their peril, the consultants say.

Many franchisors are struggling with how to operate online in a way that doesn’t upset their franchisees, a partner at law firm Hall & Wilcox, Bruce McFarlane, says. In most cases, the bone of contention is who gets the revenue. “If you set up your own online store and if you receive all of the income, in effect you’re competing with your franchisees,” McFarlane says.

“Franchisors have to look at models where the franchisee can share in the proceeds.”

Furniture and electronics retail chain Harvey Norman established an online store in November 2011. Customer orders from the online store are passed on to the local franchisee to fulfil, with all proceeds going to the franchisee rather than head office. Some goods are delivered, while others can be picked up in store. Director at consultancy 10 Thousand Feet, Ian Krawitz says this type of model relies on a good quality logistics system but the positive outcome is that customers will still visit physical stores. “The franchisee … has the ability to sell other supplementary products,” he said.

Digital marketing and web design and development agency Balance Internet gets more than 50 per cent of its business from franchise clients, director James Horne says. Of his decision to focus on this market, Horne says: “Because of Australia’s traditional tyranny of distance, I think the old school supply chain … model survived here for a lot longer than it has in other countries. We could see there were a great number of traditional retailers and franchise systems needing guidance.

“Franchise systems needs to look after their franchisees,” Horne says. “Their franchisees are a critical part of their value chain and the challenge for the franchisor is to set up an online marketing model that I suppose brings the franchisee into play and keeps them onside.”

Horne says there are three basic models for how revenue from online operations can be shared to franchisees. First, the revenue can be put in a marketing fund to benefit all franchisees. Second, the revenue can be allocated back to franchisees based on territories. For example, a customer would input their home postcode when making a purchase online and the franchisee in that territory would be allocated the purchase. Third, Horne suggests that a model based on proportional revenue sharing within territories could work. That is, revenue is shared with particular territories based on how much they usually turn over.

He notes that given online retail is still a small part of total retail sales (4.9 per cent, according to the most recent NAB Online Retail Sales Index) it’s a shame that there’s so much focus on whether or not online stores compete with franchisees.

“E-commerce is about enabling commerce,” he says. “A huge outcome of a good e-commerce strategy is about driving customers back into stores.”

Franchisors have to ensure that any online strategy is communicated effectively to franchisees to avoid conflict. Franchisors should also ensure franchisees understand the company’s online strategy, Horne says, “so they can talk the customer through the website”.

Service-based franchises should think about their time-poor consumers when considering an online strategy, DC Strategy’s Young says. He points to his client waxing chain Brazilian Butterfly, which has an online booking function. “The client can go, login, book their wax and pay for it online without having to talk to anyone,” Young says. “The opening times of a normal business are only potentially eight hours of a 24 hour day but consumers have a 24 hour lifestyle.”

Quick service food franchises are not out of the woods either. Hall & Wilcox’s McFarlane, mentions his client Boost Juice. “You don’t buy juice online but they invest a lot of time into their website,” he says. “Whether or not it’s through Facebook or Twitter, or running competitions online, you need to think about your demographic and if your demographic, like Boost Juice, is young, you need to connect with them online.”

Bakery chain Pie Face gets about 10 per cent of its revenue from catering orders placed on its website, chief marketing officer Ben Macpherson says. He says he feels lucky that the company does not have to deal with the channel conflict experienced by goods retailers such as Harvey Norman. “In the short term, we’re lucky but we’re already starting to see an element [of conflict] in our catering orders,” he says.

“I’d hate to be a chain that’s fully franchised that needs an e-commerce solution. But once they crack the code it’s better for the overall business.”

For catering orders, customers have to choose a store near them and the revenue goes to that franchisee. However, Macpherson says there are plans to tweak this model. “Right now you have to select the store,” he says. “Ultimately we’ll do away with that step though and we will make it the nearest store in walking distance that has a high franchisor rating. We rate the stores internally and if [a store has] a high rating, they’ll get the business.”

The chain is active on social media and is also considering a smartphone application for customers to pre-order their coffee and jump the queue when they arrive at the store.

The Cupcake Bakery also takes catering orders online. Chief executive Alex Perry says that at the moment, the distribution channel is still emerging and revenue goes to head office but he realises that this has the potential to upset franchisees. “We’re looking at having an online platform for each store but it’s still in the early stages,” he says.

It’s promising for The Cupcake Bakery that Perry understands this is an area to get right. Many other franchisors have simply ignored, or as their consultants say, are failing to take advantage of the growth in e-commerce.

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