A Rose by any other Name

Franchising is a strategic financing decision made by a company as a form of business expansion. Franchising entails the “licensing” by the creator of the concept (i.e., the franchisor) to a third person (i.e., the franchisee) who purchases one (or more) units to operate within a system. The expectation is that in return for the payment of money, typically an upfront franchising fee and ongoing royalties on the unit sales, franchisees will get proven methods of doing business and the right to use the brand’s associated trade-marks. Very often, franchisors limit their licensing activities to that of the trademark under the franchise agreement, failing to recognize other important and parallel models for business expansion, namely, consumer products licensing and cross-licensing (also known as “strategic partnerships”), on the one hand, and alternative distribution, on the other hand. Both of these growth models seek to exploit other potentially valuable opportunities for generating market share, consumer loyalty and, consequently, revenue from a brand.

The purpose of this article is to get franchisors thinking about exploiting their franchise brand to its fullest profit-earning power, either through the distribution and sale of (a) their own franchise products through alternative distribution channels, (b) “licensed” branded, co-branded and/or co-packaged consumer products (eg. through the third party manufacture and sale of products bearing the franchise brand logo that fall outside the system’s wares), (c) through cross-licensing marketing and promotional opportunities, or (d) any combination, or all, of the above. This can happen either within the franchised retail network itself, or outside of the franchise network - through such alternative third party retailers as supermarkets, pharmaceutical chains, big box stores (such as Costco, Wal-Mart, Réno-Dépot and Canadian Tire), department stores or specialty distributors - or both. The retail choice will depend, amongst other considerations, on the nature and price of the licensed products as well as their target market.

The “business” of licensing is just that – a business, much in the same way that franchising is a business. In fact, licensing is quite similar to franchising in many ways. For instance, licensing requires a supporting infrastructure, much in the same way that franchising does. While licensing is not for every franchisor, the leap into licensing is not so great for an established franchisor (as opposed to an entry-level franchisor or even an entry-level non-franchisor), since much of the necessary marketing, revenue collection, and brand watch-dog functions have already been created for the franchise system. Assuming the franchisor has both a suitable potential licensee or strategic “partner” (meaning, the manufacturer, distributor or, in some cases, the retailer itself, of the product to be licensed), and a green-light within its franchise legal framework to proceed (more on that later), the licensing process, from the franchisor’s point of view, can be broken down into three key steps: First, the franchisor must conduct a due diligence on the prospective licensee to satisfy itself that the prospect is reputable and can meet all of its obligations under a suitable licensing arrangement, such as payment commitments to the franchisor, and timely fulfillment of approved products to the distributor, amongst other things. Second, confidentiality and license agreements must be prepared to reflect the legal framework and business terms agreed to between the franchisor-cum-licensor and licensee. Third, as soon as the license agreement is firmly in place, the franchisor can easily allocate resources from its existing franchise infrastructure to (a) implement the approvals required of any licensee before the latter can use the franchisor’s trademark in connection with the licensed consumer products; and (b) collect royalties arising from the licensee’s sales of the branded merchandise.

Examples of cross-licensing/co-branding/strategic partnerships abound in the fast and quick-casual food franchise segment. The ‘give-away’ of a Disney-licensed toy with a McDonald’s Happy Meal is often the result of a strategic partnership. So, too, is the guest appearance of a favorite television character mascot at a dine-in family restaurant. Line drawings/connect-the-dot drawings/crossword puzzles of well-known characters on placemats are another example of promotional methods used by a restaurant operator for creating customer goodwill amongst the junior market, which exerts tremendous persuasive pressure on family food and restaurant choices.

Direct revenue-generating opportunities are available to food service franchise brands, which need not limit themselves to promotional “premiums” such as described above. Those franchises with a central commissary often consider alternative direct-to-retail distribution for certain of their signature food lines. The sale of Ben & Jerry’s popular ice cream, and Van Houtte coffee products through large grocers and supermarkets clearly illustrate this point. However, before embarking on this form of retail expansion, a franchisor must have appropriate packaging and labeling, not only to preserve freshness, but also to align with overall brand image.

In addition to alternative distribution of a system’s own products, franchisors may choose to explicitly co-brand with another company, or partner with another brand on a private-label basis, in a related category or segment. Starbucks, for example, has entered into joint venture and distribution agreements with a number of leading companies in their market on such food products as liqueurs (to produce Starbucks Liqueurs) and ice cream products (to produce Starbucks ice cream). It has also joined forces with beverage and packaged food giant Pepsico for the distribution of Ethos water, a Starbucks sub-brand.

Co-branding may even occur between two distinct brands operating within a different product category or industry. This type of strategic partnership often works best when both brands cater to the same actual or desired target market. Starbucks, for example, has formed a partnership with Random House publishers for the exclusive release at Starbucks locations of certain musical audio book titles. Starbucks has proved that when carefully planned, cross-licensing even between different segments (Starbucks: coffee; Random House: print- and audio-publishing) can also be successful, provided there is some emotional and logical connection (in this example, coffee, music/music-listening and books/reading) in the minds of the target consumers.

Food service brands are not the only candidates for licensing. Design-driven franchise brands that contain signature decorative and graphic elements may also be poised to cross-over their unique designs into other products. Home décor and accessories are certainly growing industries, and a subset of manufacturers in these fields develop entire product lines around well-known or easily recognizable licensed brands, icons and graphics. Ralph Lauren home fashions is a prime example of an apparel brand that has successfully crossed over into a distinct segment, in this case home décor. It is the level of brand awareness and the amenability of that brand to collateral products that matters, regardless of whether that brand springs from a franchise or not.

Other brands with licensing potential abound. Well-known travel franchises, for example, may license a luggage manufacturer to develop a line of franchise-branded luggage, luggage tags, luggage- and document organizers to be sold within the franchise network as well as through regular retail channels. In fact, Air Canada and Swiss Army, though not franchises, have done exactly this.

Health and beauty services franchises may turn to a favorite supplier to develop a line of private-label health and beauty products. Similarly, successful sports supply franchises could license a preferred supplier to develop a private label brand of sports bags, water bottles and other sports supplies, equipment, apparel and accessories. The list is endless and bounded only by imagination and undue conservatism.

What reaction might a franchisor expect from its community of franchisees to a decision to develop sales outside of the franchise network? Part of the response lies in the terms of the franchise agreement itself. When a franchise agreement (template) is prepared and negotiated, the ability of a franchisor to go outside the system should be expressly permitted or, at least, not expressly prohibited. Strategically, a franchisor should contractually provide for a certain mechanism for revenue-sharing with its franchisees from sales of franchise-branded licensed products within the territory, but outside of the franchised unit. There are many ways to do this and each is dependant on the nature of the channel used and the system itself. A franchisor could also implement many interesting marketing mechanisms in conjunction with outside sales of licensed products, to help drive business back to the franchise units. Preserving the franchisor-franchisee relationship is of utmost importance to the longevity and success of the system. Franchisees are more likely to “buy into” third party licensing and/or outside sales of franchise or licensed products if they, too, participate in the “gain”. Franchisors should not selectively ignore the contribution to brand growth made by the franchisees. It is a wise franchisor who can create a win-win scenario for all, and thereby increase the visibility, profitability and value of the franchise across the entire franchise system.

In closing it is safe to say that licensing and alternative distribution are a valuable and lucrative rock left unturned for most franchisors out there today. A system with the infrastructure already in place to handle it, can look to exponentially increase its revenues and brand awareness at the same time through licensing and alternative distribution. Done properly and strategically, licensing and alternative distribution are fabulous compliments to any franchise system looking for real and continued sources of growth.

Cheri Bell, B.C.L./LL.B, B. Com, is a member of the Quebec and New York Bars. She is a franchise/licensing consultant and Vice-President, Development with Lori Karpman & Associates Ltd., www.lorikarpman.com. She can be reached at cheri@lorikarpman.com or direct at (514) 743-9431.