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Insight

Covid-19 - how franchise and distribution networks can respond

19/03/2020

Locations

United Kingdom

The spread of Covid-19 has created arguably the biggest global health crisis since the Spanish flu pandemic in 1918. In the last few weeks, the virus has spread into the global economy, and societies around the world are now facing social and economic upheaval and disruption on an unprecedented scale. 
 

We are all navigating uncharted waters as business and society faces up to the impact of COVID-19.  We very much hope you and your loved ones remain in good health. 

 Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs.  Do get in touch with us if you would like to chat anything through.


The sense of disbelief and the feeling of being overwhelmed is similar to 2008. However, this time the root cause is very different, as is the speed, severity and uncertainty caused by this crisis. We are all living through a mass experiment, and only time will tell whether the right calls were made at the right time.  

Consumer-facing businesses, particularly those in the travel, retail, leisure and hospitality sectors are facing existential risks. Yesterday, in the UK, the chancellor Rishi Sunak pointed a fiscal bazooka at the symptoms of the virus, and whilst it is a positive step in the right direction, it is likely that much more will be needed. In the short term, operational access to grants and funding is not clear and sadly, time is a commodity which many businesses do not have right now.

In these unprecedented times, there is no oven ready blueprint for how businesses can respond. However, we have put together some high level thoughts, which we hope will help businesses respond to the challenges ahead and hopefully even emerge on s stronger footing because of them.

These thoughts focus on businesses, which are primarily consumer-focussed and use franchise and distribution networks to sell their products and services. Over the coming weeks and months, we will do our upmost to serve our clients and help them through this difficult period. If this is a useful guidance tool, we would welcome any feedback you may have to expand or strengthen these points.

1.    Crisis management and developing a business continuity planning

Clearly any businesses, regardless of whether they use a franchise or distribution system, will need to bring together stakeholders across their organisation and form a crisis management team and develop a business continuity plan (BCP) to deal with the crisis.

The purpose of the BCP should be to identify risks and scenarios, model the financial impact of those risks and scenarios and then forecast the liquidity of the business. 

BCPs for consumer-facing businesses typically fall into three vertical categories:

(a)    Front office – customer engagement across the various channels, understanding their needs and expectations in this crisis and maintaining strong communication.
(b)    Middle office – operational support, logistics, warehousing, inventory planning, supplier relationships.
(c)    Back office – call centres, tech, warehouse facilities etc.

The BCP should then consider how the following horizontal areas cut across all three of these vertical categories:

(a)    Supply chain and operations
(b)    Workforce (which will need to factor in franchisees and distributors)
(c)    Finance and external factors in the wider economy
(d)    Business impacts

The BCP should be kept under constant review. Depending on the significance of the franchise or distribution network to the business as a whole (and for this article we assume it is substantial), franchisors and suppliers should consider making the BCP or relevant parts of its available to their networks. Most franchisees and distributors will be looking for leadership and guidance on how they should organise themselves and respond to the crisis, and having the network rally around and follow the same BCP seems like an efficient and practical step to take.  

2.    Communicate and collaborate with your network

Although they are independent businesses, franchisors and suppliers should consider consulting with their franchisees and distributors (or a representative body) in the formulation and evolution of the BCP. Not in an attempt to reach consensus on each issue, but to help bring the network along with them as they respond to an ever-changing situation. There may be some innovative ideas, which flow up the chain of command, as opposed to down.

Establishing an association of franchisees or distributors as a formal conduit of information between a franchisor or supplier and their network seems sensible, and indeed a number of large networks already have this infrastructure in place.

Cascading useful external information across the network is going to be very useful in the coming days and weeks. Franchisors and suppliers and their network all have a mutual interest in making sure they make the most of the new financial measures which the Government is introducing. In the UK, https://www.british-business-bank.co.uk/ is a good source of information for SME's regarding the Coronavirus Business Interruption Loan Scheme.

3.    Temporary (or possibly permanent) changes to the system

As consumers face disruption in their daily buying habits, there is an inevitable increase in online activity. Franchisors and suppliers should consider how franchisees can participate in the online strategy, if they do not already do so. 

A number of franchise and distribution networks have been hesitant about ceding control over the online channel to their franchisees and distributors, but it does not have to be a zero-sum game and now is as good a time as any to start thinking innovatively and collaboratively and to create a genuinely multi-channel network.

It may be necessary to change or limit the level of service or product offering available to customers for a period, and so making changes to the brand standards, supply chain and inventory management and operational manual will be necessary. 

Depending on how the supply chain is disrupted by the crisis, franchisors and suppliers may need to consider relaxing any exclusive supply obligations.

These changes should be documented and communicated effectively.

4.    Contractual waivers

Franchisors and suppliers should consider waiving performance targets (such as turnover targets or opening targets). Taking proactive steps now will undoubtedly generate goodwill in the relationship with the network going forward.

Equally, the network still needs to be managed as before, so whether a franchisor or supplier intends to waive a breach or take action, it needs to be documented properly and communicated through the appropriate channels.

5.    Understanding the applicability of Force Majeure and other impacts of the crisis on key commercial contracts

Depending on the circumstances, a franchisor or supplier may wish to invoke a force majeure, or deny its applicability to a supplier, franchisee or distributor who is seeking to rely on it. A franchisor or supplier should also review the various obligations that apply to them under the relevant franchise, distribution or supply contract, and carry out a risk assessment and consider mitigating steps.

Some key points to consider:

(a)    If there is a force majeure clause, do the express words cover a global health crisis such as this? What does relief look like – a right to terminate or a suspension? Is relief contingent on anything, such as a party having exercised their business continuity plans? Does the wording require a causal link between the event and the party’s delay or failure to perform the contract? Are there any other requirements, such as written notices or a duty to mitigate?
(b)    If there is not a force majeure clause, the concept will not be implied (under English law), so then what? The common law doctrine of frustration may be available, but this is a high hurdle. Another possibility is illegality, if performance would be contrary to legally binding government restrictions. Otherwise, the a party will have to look at other express terms in the contract, such as an adverse change in law, or a termination clause.
(c)    Exercising contractual rights in this situation comes with risks. If the party that seeks to rely on a right to terminate a contract gets it wrong, this could give the other party grounds for a claim for damages and loss of profit.
(d)    Look at mitigations and alternative supply where possible to reduce the impact. 
(e)    The shortage of component materials may have an impact on pricing now and in future months, the scarcity of such parts may well drive prices upwards if demand remains stable. Contracts should be reviewed to ensure that protection against price rises is included or whether they otherwise need to agree new terms or 'flex' other parts of their supply chains to ensure adequate provision of stock at commercially sensible prices.
(f)    We are already seeing increased volatility in the currency markets so check your cross-border contracts to understand where FX risk lies. Consider ways to hedge this risk.

6.    The darkest hour is right before the dawn

The world did not seize the opportunity to make fundamental changes to the economic system following the last financial crisis. Governments of the time simply applied some sticking tape and the recovery has been anaemic as a result. In its wake, we have seen a populist backlash, which has bred distrust and polarisation in our societies, as well wage stagnation and depressed living standards.

This crisis presents a fresh opportunity to bring about fundamental, lasting and positive changes to the way we do business and live our lives.

If every business is a microcosm of the wider economy, then as a business ramps down over the short term, it should also be looking ahead to how it can ramp back up once the worst of this crisis is behind us. That should involve taking a long and hard look at the lessons, which can be learned from this crisis, and using some of the temporary measures on a permanent basis.

Businesses should be aiming to emerge from this crisis with a more flexible and disaggregated supply chain, better and more collaborative relationships with their networks and suppliers, a larger and/or more loyal customer base, and a more agile, tech-savvy and sustainable platform on which to grow as they look towards the return of better days ahead. 

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