Digital transformation: special challenges for franchise systems

Remaining competitive is subject to the franchisor actively managing the digital transformation of the franchise system.

The subject of “digital transformation” is nothing new, we all have been right in the middle of this transformation for many years: as customers, readers, information gatherers, information providers, service providers, users of entertainment media and means of communication, attorneys – and as franchise systems. In comparison to traditionally organized companies a franchise system faces unique challenges.

1. The franchisee as “third dimension”

The particular challenge for franchisors is the integration of the “third dimension”, in other words, the business operations of the franchisees.

Classically organized companies “only” have to address the issue of digitalization with respect to two dimensions: internally, for example corporate communications, working and intercompany processes, and on the other hand in external relations, such as the procurement and the distribution of goods and services, customer service and marketing.

Franchisors must also be able to optimize the processes and the operations of their franchisees – but they have no right to actively taking influence on the same.

The need for action for franchise systems becomes most apparent by taking a closer look at the following:

a) Territorial protection and exclusivity

Franchise contracts often include exclusivity for a certain territory for the protection of the franchisee. But the Internet knows no (geographical) limits. Prior to the establishment of an online store, franchisors must therefore check the specific form of territorial protection in the existing franchise agreements. In order not to commit a breach of contract, it must be ensured that the setting up of an online store does not constitute an infringement upon a non-competition clause due to territorial protection. Amendments may need to be agreed on with franchisees.

b) Illegal cannibalism by online sales

Franchisees often fear that they will suffer sales losses when an online store gets set up by the franchisor. The franchisor is required to develop solutions as to how to handle sales that came through the newly established online store from customers residing in the contract territory of a franchisee. The objection of impermissible cannibalism can be obviated by providing for the franchisees’ participation in sales generated through the franchisor’s online shop or by regulations for allocation according to the contractually agreed area of responsibility.

c) Joint marketing activities

In particular when advertising products or services online the marketing departments consider extensive disclaimers and text-intensive explanations as “toxic”: keeping a customer’s attention is difficult enough without.

However, if franchisors advertise products in an online store in a certain way (for example, including prices) which are sold in their own stores as well as in the ones of (some of) their franchisees, a violation of competition law provisions prohibiting (de facto) fixed prices may occur. Further, such joint advertisement must be entirely clear and transparent as to which products may be purchased in which store at which price, in order to avoid the violation of statutory laws prohibiting the confusion of consumers and misleading advertisements.

Depending on the individual design of the promotion, it even may be necessary to identify all participating enterprises, with full name and address in order to meet the statutory information obligations. It must be clearly traceable to any visitor of the online store (the consumer) in any case who is responsible for the content of the website and the products offered there. Otherwise costly warnings by competitors or consumer protection associations may ensue.

d) Social media

Facebook, Twitter, Instagram, and other social media platforms have become indispensable marketing tools to secure customer loyalty. Franchisors cannot prohibit their franchisees from setting up their own Facebook page or establishing their own online store. Naturally, this somehow contradicts the principle of consistency and uniformity generally applicable in franchising. This is why franchisors are well advised to issue specific guidelines regarding the use of social media platforms and services whenever the name and trademarks of the franchise concept are concerned and product related statements and advertisements are published.

e) Data privacy

Numerous and complex legal issues arise from the acquisition, processing, and transfer of customer data within a franchise system. Not all customer information generated by a franchisee with the customer’s consent may be communicated lawfully to a franchisor or may be requested lawfully by the franchisor. Binding guidelines help to clarify what is allowed and what is not.

2. There is no way back

In the future, franchisees and customers alike will be interested only in those franchise systems and products that actively partake in the process of digital transformation.

Many franchise systems have recognized this trend already years ago. They not only facilitated communications within their system by optimizing internal processes, but contributed to the increase of customer loyalty and customer acquisition by opening up additional sales channels and developing new marketing tools.

You are the experts for developing ideas how to enhance customer loyalty and how to safeguard the competitiveness of your franchise concepts for existing and for future franchisees.

We as your legal advisers offer pragmatic solutions ensuring that the process of digital transformation at all times complies with legal requirements.


* This “insight” is a short version of an article published first in the September 2016 issue of the Newsletter of the International Franchising Committee of the International Bar Association (

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Tags: #Data Privacy, #Digitalization, #Digital transformation, #Franchise system, #Franchising, #Franchisor, #Information obligations, #Marketing, #Online store, #Social Media, #Territorial protection


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