Managing Your International Franchise Network in the Time of the Coronavirus Pandemic

Wednesday, April 1st, 2020; 2:15pm-3:15pm

Managing Your International Franchise Network in the Time of the Coronavirus Pandemic

Panelists: Bill Edwards / Tao Xu

Webinar Summary –

Both the business operations and legal perspectives of franchising internationally were discussed in this webinar. Panelists discussed the current situation for franchise businesses in different countries as they confront COVID-19-related disruption, and its impact on different sectors. They also discussed the various ways that franchisors are providing support to licensees and franchisees, and provided specific cases of how businesses are responding, both internally and customer-facing. Finally, the panelists touched on government assistance programs available in different jurisdictions.

Key Bullets –

• International franchisees are at the forefront of this situation and battle against declining business due to COVID-19; franchisors must be ready to step in, show leadership, and communicate solutions to franchisees given the circumstances
• Financial as well as legal support – provide guidance to franchisees grappling with business closure, declining sales, and government mandates in a transparent centralized way
• Use this time to streamline operations, plan for the future, and map out opportunities
• Consider universal versus regional and country specific market plans and approaches. What works for some may not work for all given the advance and scope of disease and re-opening in different markets
• Be sure to communicate with franchisees the range of government loan and business relief options available; communicate openly the risk spreading operation inherent in franchising

Full Bullets –

Spreading risk works if franchisors are willing to step up and show leadership, helping their international franchisees who are at the forefront of this battle. This sometimes requires setting aside certain aspects of the franchise agreement to lead through challenging times. Legal issues are not the only, nor the most important, considerations in these times.

• Current Situation
  • No similar international disruption like this before
  • Franchisors have put into place “no over water” travel policies, and int’l travel is at a standstill
  • Expos postponed until late 2020
  • Restaurant, retail, and fitness franchisors have seen their units shut down worldwide, resulting in lower sales and royalties
  • Massive reduction in retail footfalls; travel and flying
• Regional Situation
  • Asia Pacific: much of it is shut down; China, Japan, Korea have partially re-opened, but unsure how long that will last. China and Japan are partially re-closing
  • Europe: France, Germany, Italy, Spain, Poland, UK
  • Latin America: Beginning to close; case by case
  • Middle & Near East: India and Saudi Arabia closed
  • North America: Closed by region of the country, Canada/US
• Common Int’l issues franchisors are dealing with
  • Communication – frequent, centralized, consistent
  • Operations – remote operations
  • Supply chain – manage inventory, simplifying
  • Marketing – managing changes, reductions
  • Development & Fees – Market by market discussions
  • Remote support – monitoring is remote, not face to face
• Int’l legal issues
  • Financial support – trying to preserve sales and keep expenses down; some considering large layoffs, furloughs
    • Marketing contribution suspension or relief
    • Royalty fee deferral/reduction (or waiver)
      • Typically based on percentage of sales
      • These can help with temporary cash flow problems
      • Commitments are made with intention to revisit in a few months
    • Suspend minimum fee payment
      • For most, cash flow is largest challenge
  • Non-financial support
    • Cleaning, personal hygiene, operations, closures
    • Allowance of deferred maintenance
    • Provide information on government policies and available resources
    • Share information on what other companies in the same industry are doing
    • Support negotiation with landlords for rent relief
    • Force Majeure discussions are being avoided for the moment – most franchisors and franchisees are working together and not resorting to these dicsussions
    • Concerns about joint-employment liability? View is that these directives do not create material joint employment risk, but check with different jurisdictions
• Specific franchisor issues and solutions
  • Restaurant sector à support off-premises channels; turning restaurants into community pantries, selling own inventory of perishables to consumers and proceeds go back to business
  • Retail à repurchase of inventory by franchisor, to the extent that zor has capacity to buy back; encouraging more engagement with customers online and online to offline models (O2O), to have brick and mortar to serve as delivery/pick-up points
  • Hotel à Allowing use of hotels for quarantine or by healthcare workers

Example: Cartridge World

• Communication – increased frequency of webinars, online meetings
• Home Delivery – going online and home delivery
• Tailored response – not all Masters or regions are affected or are reacting the same, no cookie-cutter solution

Example: CKE

• Tele-conferencing depending on capabilities of franchisee – not all countries have access to same tech
• Daily updates from the field to leadership on operating/supply chain challenges
• Regular “Town Hall” video
• Regional GMs set up WhatsApp groups to facilitate regular communication
• All public announcements are not directly handled by franchisees, but are centrally executed
• Closure and conversion to delivery/take-out
• Sharing of safe practices and shared system wide – two-way communication
• Cleanliness and sanitation standards
• Non-contact drive-thru and to-go procedures designed to remove all direct contact

Example: Dairy Queen

• Communications
  • Centralized, specific, consistent
  • 3 buckets – ADQ Staff / ADQ Franchisees / DQ Consumers
• Country-by-country strategy
• Fluid and changing as things evolve
• Operations
  • Focus on current units and current business / staff / consumer health
  • Payment plans and royalty deferments if required – market by market basis

Example: Denny’s

• Country-by-country
• Communicate with candor to int’l franchisees
• Social media to communicate customers
• Postpone noncapital spending

Example: Home Instead Senior Care

• Constant communication, optimally by video
• Sharing operational challenges and solutions
• Sharing resources – social media messages, samples, practical ways to keep clients/caregivers safe
• Using technology to keep seniors connected – isolation can lead to depression

Example: SNAP Fitness

• Gyms are closed – no customer and face-to-face revenue
• Following guiding principles and distribute them quickly to franchisees
• Townhalls, financial support
• Virtual workouts, free to everyone (worldwide) – making their product widely distributed, and setting up the brand for future success

Example: United Franchise Group

• Personal phone calls to each of the Master License partners
• Personal video messages
• Offering discounts on royalties

Using this time to fine-tune menus, designs, operations, to innovate for when the crisis passes. Think long-term viability versus short-term physical deficit. Plan for new opportunities. Better real estate rates, discounts, and hiring new people

Legal Perspectives:

• Communication is key
• Universal approach vs. regional differences
  • Timing, severity means franchisors must adapt and consider these differences
• Operational changes – adapt to the changed market and regulatory environment on the fly
  • Viable to remain open for some, but not all
• Provide information to franchisees
• Share best practices

Legal issues:

• Unilateral announcement vs. contract amendment
• Franchise disclosure issues
• Force Majeure clauses
  • Whether it excuses certain obligations under the agreement remains to be seen. Force Majeure clauses are interpreted narrowly and strictly. Inability to pay does not create an impossibility
• At the end of the day, this is a risk spreading operation

• Government Programs
  • Australia – low interest loans with interest free period; grant programs
  • New Zealand – Wage subsidy scheme; delaying taxes, mortgage holidays
  • UK – tax payments deferred; job retention scheme (80% percent of wage costs); grant of $3000 per month per company
  • South Korea - $9.8 billion stimulus package to help small and medium sized businesses pay their workers
  • France - $49 billion aid package, includes fund to help shopkeepers and self-employed; guaranteed bank loans of $327 billion
  • Japan - $4.6 billion package in Feb, $15 billion in March; new program of 0% loans to increase lending
• Going forward: “Keep Calm and Carry on”