WHY FRANCHISE ? HISTORICAL TREND
Why would a luxury European fashion brand decide to find a franchising partner for certain key markets as opposed to opting to open directly operated boutiques in any given market?
The historical trend has been to open company-owned boutiques throughout strategic cities throughout Western Europe and the U.S. such as Paris, London, Milan, New York, Beverly Hills as brands had a great understanding of these markets in terms of customer profile, needs and understanding. The proximity to these cities gave the brand a strong knowledge of the clientele and made it easy to closely monitor the response, the visual presentation and facilitated the logistical preparation for trainings and planning in-store events.
The markets which were given to franchisee partners were essentially Eastern and Central Europe, the Middle East and Asia. Often due to lack of CAPEX and knowledge of these emerging markets, it was determined that a local partner would better understand it’s clientele in terms of lifestyle and shopping trends (i.e. upscale shopping malls in the Middle East are busy in the evenings).
Ideally, franchising partners in key markets such as Dubai and Moscow consist of larger and more established luxury groups such as Al Tayer, Chaloub, Mercury among others, which also represent other brands within the same group (Al Tayer representing Kering brands and Chaloub, LVMH brands). These groups run very professional operations and have a solid experience with European luxury products. Some franchisee groups such as Al Tayer and Mercury, own franchised or local department stores in the same market. In the case of Al Tayer in Dubai, Bloomingdale’s and Harvey Nichols and in the case of Mercury, the local department store Tsum. It is often the case that a brand having one or a few franchised boutiques in those particular markets also have a corner bearing the brand’s boutique concept within the department store which gives double-exposure to the brand. It could be the case that slow-sellers within the freestanding franchise boutique may turn out to be strong sellers within the brand’s corner within the department store. The merchandise selection may be more adapted to the department store corner giving the freestanding franchised boutiques exclusivities to drive traffic into the store. As an example, usually very expensive eveningwear is featured only within the franchised boutiques.
Upon selecting a competent and experienced franchisee partner, the brand communicates information about the collection including price points so that the prospective partner can submit a multi-year business plan broken down by product categories. All information concerning the build-out, CAPEX /m2 is relayed and of course, the boutique size and location must also be determined at this point. Also, the breakdown between women and menswear needs to be analyzed according to the various markets as well as considering if they should be in the same or separate boutiques.
The franchising contract between the two parties is quite extensive and while a main consideration is protecting and respecting the brand’s image, it also covers everything including royalties, communications expenditures (contribution to global and local advertising), monthly, quarterly and annual reporting on sales, purchases, remaining seasonal inventory statements, length, terms of renewal, payment conditions and exclusivity in a specific territory, or not. Usually, exclusivity is given to a particular partner with the exception of Travel Retailers.
Once the parties come to an agreement and sign, the franchisee works with the brand’s architect to design the store and a retro-planning of the store build-out is submitted to the brand which is monitored closely throughout the entire process and will require a couple of visits by the brand’s own architect.
HOW TO MANAGE FASHION FRANCHISE TO ENSURE ITS’ SUCCESS
What are the key elements to achieving success and profitability in a luxury franchised boutique?
Obviously, boutique location is of vital importance. Years ago, most luxury boutiques in the Middle East and Asia were located off the lobby of five-star hotels making it easy access to tourists and safe and discreet places to shop for local clientele. Today, with the surgence of upscale and innovative shopping malls, often the franchising partner selects a specific mall or location and then deals directly with the local landlord in securing spaces for their franchised brands, then directly negotiating specific locations and square footage with the brands. The local partners tend to have a better vision on which mall or street will attract a well-heeled clientele. Be it a shopping mall or street location, brand adjacency and visibility are key factors in assuring the boutique’s success as is the case globally.
A vital challenge in achieving success is how to give the feeling to the client that they are shopping in a company-owned boutique as opposed to a franchised boutique. It is imperative that the brand’s boutique concept found in the DOS boutiques, be implemented. In addition, the most successful franchised boutiques work with their local partners on buy plans, merchandise assortment striking a balance between both editorial and commercial looks, window displays, merchandising and customer relationship management (CRM) are the same as the brand’s flagship boutiques throughout Europe and the U.S.
There is notably a local pricing difference which takes into account import duties and shipping. The boutique should have a wide-range and complete assortment of all product categories in order for the customer to buy locally and not be tempted to travel to markets which have directly operated boutiques and find the same merchandise for less.
The franchised boutique managers were given detailed personalized extensive training each season on the collection itself so that they would be able to impart this information to their sales force. This includes the major trends of the collection, as well as, specific details on certain manufacturing techniques for both ready-to-wear and shoes and accessories. In the internet and Instagram age, it is vital for the local sales teams to have at least if not more information about the brand they were selling than the customer buying it. In some cases, a trip to the factory which produced the brand’s handbags, shoes or ready-to-wear, would be organized for the franchised boutique managers so that they had a first-hand view and understanding of all that went into making a luxury goods product. Best practices from the brand’s retail division is also passed down to the franchisee. Extensive monthly and annual reporting is required of the local partner so that the brand would have a good understanding of the local market’s needs and could monitor sales.
The franchisee is also expected to buy a certain percentage of seasonal versus carryover styles. The brand should advise the styles which will be featured in the seasonal ad campaign, styles which are requested for shootings in the major international magazines and publications and best-selling styles during the showroom campaign. The franchisee can decide to pick up certain styles to adapt to their local market exigencies in terms of fabric, color and even price point when placing the order. The goal is that there be a balance between ensuring that the brand’s DNA is apparent while also covering commercial needs. The brand should also include franchise boutique locations on their website to give it further credibility. The breakdown of product categories, however, is usually negotiated in the initial five-year buy plan. Usually, the accessories and shoe categories are more prominent that ready-to-wear which often mirrors the company’s own retail network breakdown.
IDENTIFIABLE RISKS IN FRANCHSING
As the stocks are bought and owned by the franchisee, there is inevitably the dilemma of what to do with the previous season’s unsold stock. The fear is this merchandise, and in some cases, carryover styles will find its’ way to the parallel market. This is a major concern for the brand and this concern should be addressed during initial contract negotiations. Usually, the brand does not take back unsold merchandise and transfers back to the brand’s warehouse in order to transfer these slow-sellers to other stores which have achieved good sell-throughs with these items is often complicated once the merchandise is out of the Euro zone. The ideal solution is if the franchisee has planned for a sales outlet.
TODAY’S TREND IN FRANCHISING
More and more, luxury brands are deciding to opt for a directly operated boutique presence in certain markets, notably China, or converting their franchised partnerships into Joint Venture which is a temporary partnership.
The reasons for opting for a J.V. today are many including the response to globalization, change in technology due to which the environment is now more complex and competitive, risk limitation and bilateral management. A J.V. usually combines the stability of an established brand with the novel offerings of a company to a new market. Partners in a J.V. have a higher level of self-determination than franchise owners, there is a pooling of resources and an optimization of resources.
Franchise agreements can last indefinitely but a Joint Venture typically lasts for a specific time period. The partners then decide if they want to continue or the brand decides to integrate the boutiques run by the J.V.
In zones where there can be several franchising boutiques, such as the Middle East, Moscow and China, for example, a J.V. is a viable option for developing and optimizing a brand’s presence. In other markets such as Central Europe or Southeast Asia where there may be only a single boutique in a given city and limited prospects for expansion, it is probably best to continue with a local franchisee partner.
WILL FRANCHISED BOUTIQUES EVENTUALLY DISAPPEAR?
Not in the short-term. The same reasons for having opened franchised boutiques in the 90’s remain valid today, but there are also new emerging markets (Africa, South America, etc..). In addition, this gives the option for many small to mid-size brands who cannot afford the investment into developing a network of directly operated boutiques due to heavy investment required, this option is viable assuming the partner is professional, financially solid and has experience with luxury goods.
With technology at the fore-front, more and more the challenge will be for the brand and its’ franchisee to be able to track and analyze its’ customers shopping patterns and behavior. There will a growing convergence of the physical and digital shopping experience and for brand to incorporate their franchisee partners to optimize customer loyalty.
Terri Cohen is the Founder & President of Terri Cohen Fashion & Luxury Advisors
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