Franchising and the Internet Part one of a two-part series on using the Web to further your franchise business

Q: I am a retail franchisor and have had a Web site for several years focused primarily on recruiting new franchisees. Several of my franchisees have set up their own Web sites to attract customers to their locations. Some have even begun to sell merchandise on the Web. With all the news lately about the collapse of the dotcoms, is e-commerce a passing fancy? Should I start to offer products on the Web? Do I need to establish any policies for my franchisees on setting up a Web site for their locations? If I do, what are the best methods to control the content on their sites?

A: Your questions are very timely, as many franchisors today are asking themselves the very same questions. In-order to answer them properly, in this month's article we will look generally at e-commerce and its potential benefits and risks to brick-and-mortar companies. In next month's article, we will examine how franchisors are protecting their brands and creating benefits for their franchise system through the use of the Internet.

We're less than a decade into the Internet Revolution. While recent news has focused on failures and layoffs, the reality is that we've only begun to make use of the Internet. Most of the dotcom failures had more to do with the business models employed and the amount of money spent than with the actual Internet technology. We seemingly fell into a belief that "burn rates" were an acceptable alternative to "profits." Burn rates only allowed us to measure how long a company could stay in business given the amount of cash it had left to "burn." Profits are really the only way to judge whether a company is going to survive and prosper.

Despite all that's been written about the use of the Internet, no one is really certain of the size of the marketplace, except that it's growing. According to the U.S. Department of Commerce, e-commerce sales grew more than 49 percent from 1999 to 2000. Some independent research companies have put the growth rate at nearly double that amount. To get a sense of the potential of the Internet, you really only need to focus on two statistics:

• According to research firm Greenfield Online, 60 percent of U.S. online consumers made at least one purchase on the Web for the last 10 consecutive quarters.
• Gartnersays more than 60 percent of all online transactions are never completed.

These two statistics mean:

• A majority of consumers who have access to the Internet are using it to make purchases.
• People are still only browsing and using the Internet to get information about merchandise and services that are available.

Once all the issues (both real and perceived) related to e-commerce-i.e., privacy (how credit card and other personal data is protected), speed and accuracy of order fulfillment, and reverse fulfillment (returning something)-are resolved, the real potential for the Internet will be upon us. For franchisors, then, it's more important than ever to develop, control and support their brands on the Internet. One of the key lessons we've learned about e-commerce is that getting online first never really mattered. With few exceptions, those latecomers to e-commerce-the companies that had brick-and-mortar retail locations in place and added consumer Web sites-are doing far better that those that only had electronic offerings.

According to Jupiter Media Metrix, 59 percent of buyers would like to pick up their online purchases at offline locations, and 83 percent of online buyers would like to be able to return their purchases to offline locations. There is a significant benefit, then, for brands that can effectively link their online presence with their offline locations. The key word is effectively-if your online customer service isn't up to par, for instance, that could deter shoppers from making purchases at your brick-and-mortar location.

For franchisors, the message is clear:

• If you want to stay competitive or even viable, you must have a Web presence that meets your customer's needs.
• Without a retail Web offering, both franchised and nonfranchised competitors that have retail Web sites will strip you of market share.
• You must control how your Web site functions, and that means quickly putting policies in place for how your franchisees can make use of the Web site.
• Because the success of your e-commerce business will rest, to a great extent, on the support of your brick-and-mortar locations, and many of those locations are owned by franchisees, your e-commerce strategy needs to benefit your franchisees.

There are some limitations and potential pitfalls for franchisors in establishing a Web site for their franchise systems, such as whether a franchisor's existing agreements with its franchisees allow the franchisor to enter into e-commerce and, once established, how the Web site will benefit not only the franchisor, but its franchisees. We will look at these issues in next month's article.

Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the bookFranchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee.

Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.