Franchising: What do retailers need to know?

Why are we talking about it?

Retail Week revealed last week that Mothercare is considering franchising UK stores. The babycare specialist has enjoyed strong success in India and the Middle East using the same model, and is looking for a solution to problems with its UK estate. The option may provide a way for the retailer to remove some of the risk associated with store ownership, including property obligations.

Who does it?

In the UK, The Body Shop has used franchise partners extensively – it had as many as 156 franchise stores in 2001, although it is now less than 14. Fashion retailers are the most prevalent users of the franchise model overseas. Topshop, Supergroup and Karen Millen all have franchised stores abroad, while Asda has signed a deal with the Lebanon-based Azadea Group to open George franchise stores in the Middle East.

What are the advantages?

Franchising allows retailers to make the most of their branded product, while minimising the challenges associated with running a chain. Internationally, franchising is a low cost way of expanding into unfamiliar territories, and the local knowledge a franchise partner can provide becomes critical in some less well-trodden territories. The model is particularly favoured in the Middle East where ownership structures could otherwise be a barrier to entry.

And the disadvantages?

A lack of control is one of the biggest deterrents. Finding a local partner that has the same vision for expansion and is in tune with the brand’s values can prove difficult. Retailers that use quality service as a point of difference, for example, risk putting their reputation on the line, something that Mothercare would have to look at carefully with young mothers often seeking advice.

Questions have also been raised over how well a franchise model works alongside online services co-ordinated from head office such as click-and-collect.

Also, partners only want to work in profitable locations, so franchising out existing UK stores is not a panacea for ailing retailers.

Can you mix and match franchise and company-owned stores?

Very much so. SuperGroup operates a dual model of franchised stores to enter territories in Asia, while operating company-owned stores in other regions. WHSmith and Topshop are also expanding overseas via a mixture of wholly owned and franchise stores. However, using a two-pronged approach within the same market can throw up problems. A brand can end up competing with itself for the same stores.