Conversion franchising in Slovenia

Definitional issues relating to franchising are important as far as emerging markets are concerned since these countries are in the process of legitimizing the sector. The legitimization of the sector is vital for its establishment, growth and long-term viability. This was also the case in the 1960s in the United States, when there was a need to differentiate between real "franchise systems" and those that market themselves under the franchising umbrella but in actuality are "pyramid sales organizations" or plain distributorships. Franchising regulations, court decisions, and industry associations have helped legitimize the franchising sector. In Slovenia, there are two reasons to reflect upon the definition of franchising. The first one is heuristic, demanding validity of classifying our case as a prospective franchise system. The second one relates to the "wouldbe franchise system" as a potential member of the national franchise association. When will a given operation fulfil the requirements implied in the definition of franchising? Stanworth and Hoy (2003) have adapted a widely accepted definition of franchising containing most of the recognisable, relevant elements apparent in many self-defined franchise systems in the EU. "Franchising is a business form essentially consisting of an organisation (the franchisor) with a market-tested business package centred on a product or service, entering into a continuing contractual relationship with franchisees, typically self-financed and independently owner-managed small firms, operating under the franchisor's trade name to produce and/or market goods or services according to a format specified by the franchisor." (Curran and Stanworth, 1983) The definition is suitable to Slovenia as a member state of the EU. It implies, but does not specify, the contents of the contractual relationship in terms of "know-how"-its transfer from the franchisor to franchisee, as well as the amount of continuous services extended from franchisor to franchisee that have become the most critical subject of the commercial relationship between the franchisor and franchisee of a business-format franchise system. The definition of franchising in the European Code of Ethics for Franchising contains more detail (EFF, 2003): "Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor's concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor's trade name, and/or trademark and/or service mark, know-how\business and technical methods, procedural system, and other industrial and/or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose."^ The above definition in the Code as a self-regulatory act of the European franchise industry contains some additional provisions regarding the marketing background of franchising, intellectual property rights, definition of know-how and continuing provision of commercial and technical assistance, which cannot be established without a careful consideration of the franchise agreement of a system. On the basis of the additional details contained in the definition, a franchise system may or may not be accessed into the regular membership of a national franchise association in the 17 European countries where such associations exist, depending on meeting criteria such as • The established legal separation of the two firms (franchisor and franchisee); • The quality of business packages (membership is not possible if operational manuals do not exist); • The minimum number of units that have been functioning for a defined period. (This requirement recognizes both the time needed for a network to become viable as well as proof of its viability through a number of the existing franchise units on top of pilot units and the piloting period.) From a research perspective, the validity of the empirical research is strongly conditioned with the ability of researchers to establish correspondence between a pre-defined phenomenon of franchising and the selection of networks that can meet the minimum standards of this definition. Validity can be confirmed by checking franchise agreements and establishing their match with a definition-^which in most cases is not a very easy job, given the confidential nature of franchise contracts. Simple checks of the agreements and operational manuals constitute just one step of their verification; it would be more difficult to establish the matching of an agreement with its practical implementation. In the absence of such possibilities, researchers could qualify a network as a franchise system on the basis of the following criteria: • A network defines or calls itself a "franchise network"; • There is a legal verification of each contract at the court or by another national authority (mostly in cases of specific franchise legislation); • The system is a member of the national fi-anchise association. This is especially important in Europe. In our case study, the difference between the requirements of the definition and the existing structural and functional set up of a "would-be" franchise system has heuristic implications. The conditions for franchising in Europe may differ especially from the US (Bezemer, 2001), due to the smaller size of markets served as well as to a multitude of cultural and legal differences. The nature of "partnership" or "networking" may even disqualify such systems from being recognized as franchise systems. By just assuming the existence of a proper franchise system (e.g. on the basis of the EFF definition of a franchise system), one may fail to realize the following situations: • There is no clear legal/factual separation of the two sides in a "franchise relationship". There is no factual sell-purchase of goods between franchisor and franchisee that is provided by the franchisor or his suppliers. Franchisee sells goods on the account of fi-anchisor, although the franchisee may have an independent legal identity otherwise, or transfers revenues, keeping "provision" or "commission" for his services. The nature of this relationship resembles agency. • There is little or practically no know-how that franchisors would transfer to franchisee, although there is a clear separation in terms of the wholesaling-retailing role in addition to sell-purchase contracts. In such cases there would not exist even a systematic operational manual, but rather ad hoc directions by the franchisor. The nature of the relationship would resemble a simple distribution system. • One of the traders forms a voluntary chain to benefit from the economies of scale in purchasing and selling goods. The chain will evolve into a "cooperative franchise system", which could gradually be transformed into a real franchise system. Although users may define the system as a franchise system, there is a way to go before it is, in fact, a "franchise system." In EU countries in general-and in smaller, transitional economies of the contemporary EU in particular-examples can be found of all three of the above-stated situations. In Slovenia, the transitional conditions-such as lack of business experience of the existing and would-be franchisees, lack of capital with franchisees and lack of favourable financing schemes for franchising, unsettled prices of real estate, shortcomings related to the enforcement of law, and others transitional elements-^have contributed to the development of quasi-franchise systems (Pavlin, 2001). It is our contention that for a developing country, standards for the establishment of a "franchise" need to accepted and enforced for the purpose of collecting data, monitoring the sector, and ensuring its development. Nevertheless, contingencies may need to be developed to accommodate the needs of transitioning countries that may not follow the model of developed markets in the establishment of a franchise system. The case of BHS discussed later in the chapter is an example of such development.