E-Commerce - The Strategic and Legal Challenges for Franchise Systems

Stephen Giles, Chairman, Franchise Council of Australia

How to be involved in, or address the competitive issues posed by the online channel to market, is probably the biggest strategic challenge facing Australian franchise networks.

In pure economic theory the most efficient means of distributing goods and services will win. Evans and Wurstler, in a book called Blown to Bits – How the New Economics of Information Transforms Strategy, postulated that information accounts for the preponderance of competitive advantage, and therefore profitability. They consider that it is information - particularly who has access to certain information - that is the glue that keeps supplier relationships, pricing points, distribution arrangements and customer behaviour in their current form. That glue is melting due to the explosion of connectivity that is enabling the open and almost cost free exchange of a widening universe of information.

Bricks and mortar networks have been the most effective means of distribution – they have facilitated ‘richness and reach’. According to economic theory most businesses had to choose between communicating ‘richly’ to a small group of people – person to person, detailed information, advice as well as product - or communicating more simple messages to ‘reach’ a broad group. Advertisements, catalogues, newspaper advertisements and other promotional activities typically carry a fairly simple message, and are part of the ‘reach’ aspect.

Companies set up retail outlets across the country to help them communicate more richly to a broader group of people.
Franchising not only helped facilitate this expansion, but motivated owner operators to provide better customer service and richness of communications than a network of employees in corporate networks.

One of the current challenges is that some e-commerce arrangements can be more efficient and offer a superior customer
experience when compared to bricks and mortar. For example Amazon.com can deliver products to your door in less than
48 hours, and at a price cheaper than you can get them via retail stores. Logistics, warehousing and delivery is subsidised
by global postal arrangements, and only intermediaries that add value are used.

At a strategic level; businesses need to consider:-

• What precisely do consumers want, not just in terms of products but product information, product training, product features, accessories and add-ons and customer experience at retail and ongoing?
• What is the most efficient supply chain to get the product to the consumer?
• Which businesses add value to the supply chain, and what remuneration should they receive for their contribution?
• What are the obstacles to achieving the optimal supply chain?
• Who will be affected by any changes, and to what extent?
• What strategies are needed to communicate change and secure engagement by all necessary stakeholders?

We see many Australian businesses making fundamental errors in all areas, notably:-

• Companies moving too quickly, and without fundamental strategies in place;
• Uncompetitive e-commerce ‘solutions’ from a customer’s perspective due to failure to see and understand what competitors are really doing in terms of retail and ongoing customer experience and supply chain efficiencies, too many compromises to existing stakeholders; insufficient capital and resources being allocated to develop the solution; and not enough imagination being applied to develop the solution;
• Arrangements insufficiently flexible to deal with subsequent e-commerce waves, technological advances and customer