What is the right approach to multi-channel retail in international franchise markets?
In recent years, many retailers have focused on using the franchise model for international growth benefiting from the relative low risk, low effort and profitable yields. This has often developed somewhat opportunistically, offering an inferior level of support to franchise partners whilst the central organisation has focused on domestic growth.
At the same time, international expansion via ecommerce has become a more viable option. Typically, retailers have selected ecommerce to spearhead international expansion in sufficiently mature online retail markets such as western Europe, the US and Australia where a franchise approach is less common. The advantages are clear – it offers brands a relatively low cost opportunity to test the market and optimise their local proposition.
However, now that ecommerce penetration is reaching critical mass in developing markets where franchise store arrangements are common, how do retailers develop a fully-fledged multi-channel retail model which is mutually attractive to both brand owner and international franchise partners?
The most common strategy employed to date has seen retailers leverage centrally-based expertise and existing domestic infrastructure. This is the result of many retailers working with a large number of small, unsophisticated franchisees limiting the appetite from either side to consider a more locally managed solution for online sales. Despite this there is general acceptance amongst retailers (and some franchisees) of the missed opportunities and franchise conflicts created by centrally-led global ecommerce strategies.
Moving forward, retailers need to work closely with franchisees (who are, in effect, their best customers), on developing a multi-channel retail model which leverages central ecommerce expertise but also local knowledge, infrastructure and stores. This more collaborative approach must be central to any future strategy to accommodate local market intricacies, share best practices and give franchise markets the same privileges as the domestic business. Retailers also need to accept that, just as with physical stores, there isn’t a one-size-fits-all model and to maximise the opportunity in each market a range of models should to be considered.
Multi-channel retail model selection
Principally the multi-channel retail model must be mutually attractive for both the brand owner and franchisee over a prolonged period. This needs to be reflected in the division of responsibilities across the operating model (e.g. trading, marketing, fulfilment, multi-channel initiatives) and in the commercial arrangement (share of investments, operating costs and profits). However, before considering the new commercial structure required with franchisees, the focus must be on developing a strategy which maximises total profits in each market. Only in this way can a model be created where both parties can clearly benefit.
To determine the optimal strategy there are five key questions to consider:
1 Is the market attractive for a multi-channel retail approach? Which markets should be prioritised?
- Does the addressable ecommerce market size and maturity present a sufficiently large opportunity?
- Is the brand well established in the local market (# stores, market share, site traffic)?
These questions help establish an initial market prioritisation but it’s also worthwhile to consider:
- Is there a strong and successful partner which justifies raising a market’s prioritisation for multi-channel retail development?
- Are there a selection of markets where a customer-facing website does not present an attractive opportunity but enabling store colleagues to save the sale or access an extended range via a localised interface is a valuable first step?
2 Is the local franchisee capable and willing to trade online?
- Key to understand franchisees motivations to trade online: is it proactive or purely reactive to central ownership?
- Does the franchisee have experience trading online?
- Do they understand the level of investment and resource required to lead and support ecommerce?
3 Are there strong local requirements?
- How important will it be to leverage franchise knowledge and experience?
- Are there substantial ecommerce localisation requirements?
- Is there a significant local range and trading cycle requirements?
4 Are there barriers to foreign fulfilment?
- Are there high import duties, inefficient cross-border processing, high returns rates?
- This limits the possible operating models, placing greater emphasis on the franchisee
5 Are there alternative channel opportunities?
- Are there other routes to international growth which will drive faster return and may be prioritised by retailers’ e.g. online marketplaces, wholesale, more franchised stores?
When addressing these questions the biggest challenges tend to be the following:
(1) Note this may generate a short term drop in sales if a price advantage is eliminated
Many of these challenges are considerable and it will take time to work towards the optimal solution. The supply chain in particular will require a phased approach, which initially will be limited to leveraging existing assets (e.g. domestic hub or ship from store in countries where high foreign fulfilment barriers exist). Longer term, growing a network of international distribution hubs will enable retailers to replenish franchise stores more efficiently but also process ecommerce orders and returns within region rather than from their home base.
For retailers implementing such strategies it’s important to anticipate that the multi-channel retail proposition which has been successful in domestic markets may take time to yield the desired results in franchise markets due to local market conditions and different consumer behaviours. Indeed in the short to medium term multi-channel initiatives may yield a lower return than simply localising the ecommerce offer.
In the future we expect more retailers to trial some of the concepts above in key markets. First they need to focus on developing a compelling business case for the multi-channel retail franchise model in priority markets as well as building the foundations of a collaborative relationship with partners such as strong lines of communication and greater transparency. Ultimately, this approach should deliver a much more consistent experience for customers as the international, multi-channel franchise business develops – yielding greater returns for retailer and franchisee alike.