Webshops in franchise relationships

According to data published by the Central Bureau of Statistics in January 2016, pure web shops had almost 17 percent more turnover in the first 11 months of 2015 than in the same period of 2014. For companies that have both a physical store and online sales, also known as multi-channelers or omni-channelers, turnover increased by almost a quarter. By contrast, the total retail sector grew by less than 1% over the same period. This data shows that internet sales offer opportunities for increasing sales. Partly for this reason, this is also a topical subject in franchise relationships. How can franchisors and franchisees deal with sales via webshops?

The growth in turnover achieved by web shops shows the importance of internet sales. For franchisors and franchisees, especially retail organizations, online sales are an opportunity for increased sales. The figures from Statistics Netherlands show that both pure web shops and multi-channelers can take advantage of this opportunity.    
  
An additional advantage of internet sales is that costs can be kept relatively low. After all, savings can be made on typical retail costs, such as renting retail space, purchasing a large stock and personnel costs.”

The phenomenon of internet sales has become noticeably more important for franchising in recent years. More and more franchisees realize that opening a webshop does not have to be complicated and can provide an additional source of income. Roughly speaking, it is only necessary that a webshop is built, a storage space is rented if necessary, stock is purchased and products are shipped to the customer on time.

Although internet sales offer opportunities for franchisors and franchisees, it is also important to make agreements about internet sales in order to create clarity for both parties. A franchisor may see internet sales as an option to create more awareness and ease of purchase among the public via a central web shop. Some franchisors may also see Internet sales as an opportunity to generate additional income. On the other hand, a franchisee might want to open his own webshop to generate more turnover. The franchisor and franchisees would thus be able to compete with each other over the Internet instead of cooperating.

Particularly in cases where the franchisee has been assigned an exclusive territory, also known as a territory, in the franchise contract, a central web shop can provide fodder for discussion. It is quite conceivable that a franchisee does not agree that a franchisor sells products via internet sales to customers in the franchisee’s district, as a result of which the customers no longer buy the products in the franchisee’s store. Case law on internet sales via a central website is scarce. Court decisions may vary on this subject due to different contractual provisions and different interests in different lawsuits. In 2013, the Court of Appeal in The Hague rejected a franchisee’s objections to a central website of the franchisor. It may therefore be important for franchisees to agree with the franchisor on a possible central web shop that meets the interests of the franchisee.

A solution could be that the franchisee receives compensation for products sold via the central web shop in the franchisee’s district. Based on the customer’s place of residence or postal code, it could be determined which franchisee is entitled to a fee. Another variant is that the proceeds of internet sales are divided equally among all franchisees. This solution is fairer if there is a big difference between the number of inhabitants per district.        

To meet the franchisor’s interest in creating brand awareness and ease of purchase for customers, the option could also be considered that customers are referred to a franchisee’s web shop, which is mandatory for franchisees, based on their place of residence or postal code. In such a case, requirements may be set for the webshop of and sales via the internet by the franchisee, such as with regard to the layout, the payment system and the method and speed of shipment of ordered products. When the franchise fee is made dependent on turnover, the franchisor can indirectly obtain additional income through internet sales via web shops of its franchisees.

The webshop operated by a franchisee was also discussed. A franchisee may want to set up a webshop of his own accord. In principle, a franchisee may also put his own website online and start his own web shop. Sales via a webshop are so-called passive sales. This means that customers approach the franchisee themselves. In that case, the franchisee does not actively recruit customers outside its exclusive territory. The starting point is that passive sales via a web shop by a franchisee are permitted.

With regard to a webshop to be operated by the franchisee, a franchisor can prohibit active sales (thus actively approaching customers outside the exclusive territory). A franchisor can also set requirements regarding the quality, layout, domain name and payment system of the web shop, as well as the method and speed of shipment of ordered products.
The conclusion is that sales via the internet offer opportunities that many franchise organisations, especially in the retail sector, cannot ignore, partly in view of the competition with other retail organisations. Both franchisors and franchisees have an interest in a regulation on sales via the franchisor’s central webshop and the franchisees’ webshops. This article lists options for such a scheme.

mr. J. van de Peppel – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.
Do you want to respond? Go to vandepeppel@ludwigvandam.nl