Comment: Approaching multichannel 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 more common, retailers face the challenge of how to develop a fully-fledged multichannel model which is mutually attractive to both brand owner and franchise partners.

Current situation

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 multichannel 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.

Multichannel model selection

Principally the multichannel 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, multichannel 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 approach? Which markets should be prioritised?

These questions help establish an initial market prioritisation but it's also worthwhile to consider:

2.) Is the local franchisee capable and willing to trade online?

3.) Are there strong local requirements?

4.) Are there barriers to foreign fulfilment?

5.) Are there alternative channel opportunities?

When addressing these questions the biggest challenges tend to be the following:

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 multichannel 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 multichannel 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 multichannel 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, multichannel franchise business develops – yielding greater returns for retailer and franchisee alike.

Alice Cowley, associate director in the Strategy practice at Javelin Group, a specialist omnichannel retail consultancy and systems integration firm.

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Javelin Group