UK: International Franchising In The Fashion Industry - Top Five Tips For Growing Overseas

There are many issues for fashion houses considering franchising as their route to international expansion - here are our top five tips.

In the evolution of any fashion brand, growing the business through online and retail stores is a key strategic issue. Following initial launch and consolidation, it is inevitable that, in each fashion brand's life cycle, it will consider international expansion. Then, how to grow will be as important as where to grow.

There are many routes to access new markets, such as through increased online presence, development of flagship stores and joint ventures with partners or licensing. Increasingly, many brands across a spectrum as varied as Tommy Hilfiger¹, Benetton² and Ermenegildo Zegna³ have discovered that franchising can be the premier strategy as it has the right balance between maintaining control of the brand and managing the capital at risk. In short, it can be the easy route to new markets and the expertise of local players can be leveraged, which will help entry into the new country.

There are many issues for fashion houses considering franchising as their route to international expansion so as to minimise loss of control or damage to the reputation of the brand but maximise the potential of the franchise and its revenue streams. In this article, we share our five top tips for fashion brands that are considering expanding internationally through franchising.

1. Understand and protect your brand and other intellectual property

In fashion, brand is king. The manifestation of your brand personality in your products, stores and online presence is what is currently attracting your customers and what will also attract potential franchisees. Franchisees will also be attracted by their perception of your know-how – that you know how to tap into your target customer and to manage a fashion business. You therefore need to understand how your brand, products, know-how and other valuable intellectual property will travel globally to other markets and be packaged for a franchise network.

The prime consideration for every fashion brand will be securing protection for its intellectual property. Successful brands inevitably spawn imitators. Trade marks, know-how, designs, copyright and trade secrets are protected by intellectual property laws in the country that is the target for expansion. Some IP can be registered in the new country whilst some cannot. The main strategic IP issues are:

• how the IP protection overseas will differ from what you have domestically;
• what steps are needed to ensure you, as franchisor, will have the necessary protection in the new target market; and
• how, in addition to securing registrations and other protection through contractual arrangements, you plan to manage your digital strategy (which is a cross-border issue) and online presence as you grow internationally.

IP is a specialist field and it is critical to act early and get the right legal advice. Consider auditing your IP and brand portfolio so that you understand what you have already and what you will need going forward. There are or may be long lead times in many countries to obtain registrations for your trade marks, designs and, in some cases, copyright and you may need to gather evidence of your ownership and use. Prospective franchisees will be reluctant to deal with or invest in your brand if you do not have evidence that you have in place the appropriate rights and that they are protected. These issues need to be considered well ahead of your market entry. Fundamentally, you need to decide which investments you will make and when.

You should also recognise that your know-how, customer database, supplier databases and other IP (copyrights, designs, domain name registrations etc.) may be crucial to the success of a franchise operation. Certain of your know-how should be enshrined in an operations manual and brand guidelines which are suitable for providing to franchisees. It is likely that your manual for how you run your company stores will be a starting point only – usually these documents are not suitable for giving to franchisees without some customisation for a franchised operation. This investment represents another upfront cost which it will be necessary to incur to build a franchise business and you should also be aware of the lead times needed to create such items.

Think about what IP is to be included in the value proposition for franchisees and how you can package it and obtain value and a revenue stream for it – franchisees often value, and you may be able to extract fees for, copyright in advertising and marketing materials, training programmes, domain names and website materials, customer databases, supplier databases and other IP.

2. Effectively plan territories and network: regional versus national rights

When planning your overseas expansion, consider how you will grant rights to a franchisee. Which countries or regions? Exclusive or non-exclusive or a sole franchise? Area development or a master franchise?

You should recognise that almost every prospective franchisee will seek to expand its territory, or want options to take additional territories. You need to consider whether you want to grant rights on a country-by-country basis or on a regional basis, and how much the franchisee should pay for each territory. The broader the scope of rights granted (territory, duration or exclusivity) to a franchisee, the greater the power of that franchisee and your reliance on that franchisee.

Grants of large territories may be good strategy in a region where established networks with a few key players will unlock doors and give access to the prime real estate. It may not be an appropriate strategy in mature markets where there is a large choice of franchisees and structuring options. Longer terms may be appropriate if there is a significant investment to be made by the franchisee which must be recouped.

You should be aware that different countries have different laws for franchising and other forms of commercial agency. Specialist advice will be needed to ensure that you do not make rookie mistakes and agree to a commercial deal which is outside market norms for that territory.

3. Appropriately structure the franchise

How ready your fashion brand is for franchising also needs thought. How is your brand scalable or to be scaled for expansion? Do you intend to source and re-sell products to franchisees and so take a margin on those? If yes, will you have the supply chain infrastructure in place in order to do so? Or do you intend to permit franchisees to source their products locally? If the answer to this is yes, then you will need resources and processes in place for quality control and sourcing support.

Monitoring systems (whether through third party outsourced mystery shopper programmes or in-house) are critical to your success. These assist you in maintaining the validity of your trade mark registrations and ensuring your fashion brand is consistent - irrespective of whether it is the franchisee or you directly who is presenting your product to customers.

You need to understand the foreign ownership, commercial agency and foreign currency laws in other jurisdictions. Some of these laws can prevent you investing directly, or terminating the franchise relationship if it is not right, or even prevent you getting your money paid by the franchisee. Do not proceed with marketing the franchise before you have obtained the appropriate advice from a lawyer with experience in international expansion and who has a global network.

4. Prepare your offer and consider how this may attract franchisees

Another initial step is deciding how you will sell your new franchise proposition. Will you need to engage an agency to find you franchisees? Would that sales strategy impact your brand and speed to market? Would it make more sense commercially and strategically, for example, to tap into existing networks? These could include your accountants, lawyers, professional advisers or other credible sources who have trusted contacts who are successful franchisees looking to expand their brand portfolios.

Necessary preparation for international franchising includes developing a franchisee pack of information for you to provide to prospective franchisees which explains how your brand will be grown internationally. A credible pack will demonstrate your serious determination to grow your brand. The pack should include your concepts for the brand, stores, product range and online presence and provide sufficient information to enable a prospective franchisee to consider whether to take the next step to enter into commercial discussions with you. Some financial information will be required – such as the headline terms for the range of royalty and other services payments, order lead times, your franchisee criteria (such as minimum investment required), any application fees etc. Remember that this is your pitch. It is not your franchise contract or a substitute for a disclosure document or other pre-disclosure obligations with which you may be required to comply. All information must be accurate. No marketing information should misrepresent what your franchise offer is to be.

However, you should not include in your pack any confidential information and you should never include your franchise operations manual. In any event, you should never disclose your valuable confidential information to any third party without having in place an executed non-disclosure agreement. Your know-how is also part of your valuable IP portfolio and must be protected.

It is at this stage that you will need to consider what will be your proposed commercial legal terms and also whether you are legally required to provide pre-contract disclosure to your prospective franchisee. Different countries have different requirements and there are severe consequences if you breach your legal obligations. The risks can include the franchise contract being held to be void and your having to pay the franchisee damages or pay fines or other civil penalties.

5. Get the right commercial terms in place

The right commercial terms between you and a franchisee will ensure that you both have the appropriate allocation of risk and the obligations and responsibilities are clear. Franchises, more than other forms of commercial arrangement, are about relationships and interdependencies. There needs to be an appropriate balance of risk allocation in the contract.

You need to know your power position when negotiating with the prospective franchisee so that you know the areas that you could possibly concede and those that are sacrosanct to the commercial deal or to manage your legal risks. A good adviser will let you know what is "market" and what is not. If your brand is the latest, hottest thing and you have a queue of prospective franchisees who desire a commercial relationship with you, then a firmer contract which favours you will be more appropriate. If this is not the case, and yet you continue to press for unrealistic commercial terms, then you will ultimately have a complex, protracted negotiation with your prospective franchisee, which will result in delay and increased legal costs. Worse, you may attract the wrong type of franchisee who is too willing to do a deal with you on the wrong commercial terms, while the smart franchisees may be less willing.

Some important strategic issues for you to consider in developing your franchise contract are:

• What will be each party's obligations and when? Are your development targets too ambitious? What if they are not met?
• Is the franchise opportunity an area development or a master franchise? Will you allow your franchise partner to sub-franchise and sell sub-territories to third parties? Sub-franchising may entail more risk and loss of control but could be a strategy which achieves faster penetration of a market. Should you adjust the remuneration and royalty streams for the different types of structure?
• Your contract needs to plan for the relationship finishing – will you want to buy back the franchise or sell it on? Will you need rights to step into leases? What are the appropriate non-competes to put into place?
• Consider what security you may need for claims against the franchisee or for payments made by the franchisee.
• Dealing internationally will necessarily involve making decisions about which laws will govern the contracts and how the parties will resolve any disputes. Will arbitration be a sensible option? Are foreign arbitral awards recognised and enforced in the territory?

The right legal terms can take time to develop. Usually the onus on the franchisor is to produce the proposed form of agreement so you need to act early to develop your franchise contracts.

In conclusion, many fashion brands are growing internationally through franchising. By following our top tips, you can be sure you are ready to take that next step. If you are thinking of international expansion, planning and implementing the right strategy is key. Dentons is able to help you grow your business. With offices in over 50 countries around the world, we are ideally placed to make sure you get the right advice and the right commercial terms in place.

Footnotes

1. Tommy Hilfiger's website notes that Tommy Hilfiger and its franchise partners operate over 350 stores worldwide

2. Franchise Direct's director of franchisors lists Benetton as 21st in its list of European franchisors – with 6,200 units.

3. The Financial Times reported that, at the end of 2008, Zegna had 291 directly operated stores and 256 franchise outlets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.