Strategic Alliances – How to Make Them Work for You

September 15, 2014

Strategic alliances may be worth the investment to increase brand coverage in today’s competitive environment.

By Max Schott II, CFE

The world of franchising is full of strategic alliances — relationships involving a sharing that is meant to benefit all participating parties. This article focuses on strategic alliances that allow a franchisor or its franchisees to sell branded products and services from locations that they would not otherwise be able to access.

Using Strategic Alliances to Increase Brand Coverage

If a franchisor who has expanded only through traditional locations and arrangements were to map out brand coverage, it would no doubt notice a number of areas where the brand is not present. Upon further review, the franchisor would likely discover that many of these areas involve locations considered to be “non-traditional” or “special.” While these locations may represent untapped markets for the franchisor’s products or services, access to them is often restricted or limited because of who owns them, how they are operated, the purposes they serve and how they are regulated. Under most circumstances, however, these restrictions and limitations can be overcome by utilizing the right strategic alliance. In some cases, the owner of the “host” location will serve as the franchisee. Other times, the host location owner will enter into an agreement with the franchisor or one of its franchisees, or both, to allow for the operation of the branded business, or to permit the sale of the franchisor’s branded product or service.

What Options are Available?

The following is a list of some of the commonly recognized non-traditional locations or arrangements, and a summary of the typical strategic alliances related to them.

Universities and Colleges. These institutions can provide on-campus access to their students and staff. It is not uncommon, however, for these institutions to have in place existing agreements with management companies. If that is the case, the franchisor likely will need to enter into a franchise relationship with that company. Otherwise, a franchisor will sign a franchise agreement directly with the university or college or with a franchisee who is able to lease space from the institution.
Airports and Other Transportation Terminals. Airports provide an excellent opportunity for a franchisor to sell its products and services to a captive audience. Getting the franchisor’s concept into an airport, however, can be complicated. Airport authorities typically award “concessions” to one or a small number of concessionaires, such as HMSHOST, after conducting a lengthy and detailed request for proposal process. A franchisor can seek to become one of these concessionaires on its own or collectively with other operators. As a more common alternative, the franchisor can attempt to enter into a direct franchise relationship with an existing concessionaire to allow the concessionaire to operate a concession, or the franchisor or one of its franchisees can attempt to enter into an arrangement with an existing concessionaire to allow the franchisor or its franchisee to operate a concession. Other transportation terminals, such as those for trains, buses and ferries, may present similar opportunities.
Sports Venues. Stadiums, arenas and other sports venues may provide opportunities for additional sales and brand marketing. Much like an airport, a franchisor may deal directly with the venue owner or with concessionaires, like Aramark, that have negotiated an arrangement with the venue owner.
Military Bases. As one would expect, partnering with the U.S. government to offer a franchisor’s products and services to military personnel and their families on military bases involves a detailed approval process and compliance with a multitude of laws and regulations. Many franchisors, however, have successfully navigated the process and found the arrangement to be beneficial from both a sales and brand image perspective.

Under most circumstances, a franchisor wishing to expand to a military base will participate in an RFP process with the applicable governmental entity tasked with facilitating the operation of an exchange for that branch of the military and providing services to those stationed on the base. For example, the Army and Air Force Exchange Service is the entity that has the authority to grant to a franchisor or one of its franchisees the right to operate a franchise as a concessionaire on a particular army or air force base. Some of these entities, including the AAFES, also may seek to enter into a direct franchise relationship with the franchisor and operate the franchise business on the base itself.

Tribal Lands. A franchisor interested in locating a franchise on tribal lands will typically enter into an agreement with the tribe. It is important that a franchisor carefully review the entity with which it is contracting and to address the issue of sovereign immunity and whether the tribe is willing to waive it.
Hotels and Resorts. Hotels and resorts offer a number of potential opportunities for a franchisor and its franchisees to form strategic alliances. It may be as simple as a branded cookie display case in the lobby, or as involved as a branded restaurant or service provider on the premises. In each case, the franchisor will need to determine whether the owner of a particular facility will serve as the franchisee and directly or indirectly operate the franchise, or will lease space to the franchisor or its franchisee to allow it to operate the franchise business.
Co-branding. Although certain types of co-branding appear to be on the decline, there still may be opportunities (in addition to those described above) for a franchisor to co-brand with a related or an unrelated franchisor or another company. For example, a restaurant franchisor may be able to co-brand with a franchise or non-franchise gas station/convenience store owner, or with a large department store or grocery store chain.
Alternative and “Outside-the-Box” Distribution. Alternative channels of distribution also may be available to allow a franchisor to connect with more customers. These may include the sale of branded products from grocery stores and other retail locations, the use of kiosks, carts and temporary retails shops in malls, and the implementation of food trucks. In addition, there are countless other “outside-the-box” alliances available to franchisors (and franchisees) to allow them to expand the reach of their brand if they only think creatively. Finding synergies is the key. For example, a cupcake or bakery franchisor could form an alliance with event planners or other businesses to promote the sale of cupcakes; a provider of music or art lessons could partner with a musical instrument or art supply retailer or with public or private schools to provide lessons; or a seasonal home services company (lawn care) could form an alliance with a non-seasonal home care business (pest control or plumbing) to cross-promote the brands.

Key Considerations

Authority. Before entering into a particular strategic alliance, the franchisor must ensure that its existing franchise agreements reserve to it the rights necessary to take advantage of the alliance.
Impact on Existing Franchisees. Even if the franchisor has the right to enter into a particular strategic alliance, before doing so, it should analyze whether the alliance will negatively impact sales at its existing franchisees’ businesses.
Changes to System. The franchisor must determine which changes to its system it will allow to accommodate a particular strategic alliance.
Non-Standard Agreements. Some of the strategic alliances will likely require the franchisor to either modify its form franchise agreement or enter into agreements provided to it by its alliance partner(s). The franchisor will need to determine whether it is comfortable signing these agreements. In addition, the franchisor will need to analyze whether the use of these modified or additional forms of agreement create any disclosure or registration issues and, if so, whether any exemptions are available.
Brand Enhancement. Bottom line: the franchisor must assess whether a proposed strategic alliance will enhance the value of the brand.

Despite the extra work and analysis involved, the use of strategic alliances may be well worth the investment and offer franchisors the means of increasing their brand coverage in today’s competitive environment.

Max Schott II, CFE, is a principal in the Minneapolis office of law firm Gray Plant Mooty. Find him at fransocial.franchise.org.