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When Franchisors Compete Against their Franchisees

franchisee screwed blockbuster dots ice creamWhat happens when your franchisor sells in alternative sales channels that chip away at a franchisee’s sales? You’re screwed.

For example:

A Blockbuster franchisee filed suit in federal court claiming that because Blockbuster now allows customers to buy and rent videos online, the group’s local franchise agreement has been undercut. This was on top of the “no late fee” promo Blockbuster was running. What’s a franchisee to do? Well, there is not much you can do. Most franchisors expressly provide in the Franchise Agreement that they are authorized to sell their products online and in other venues that encroach on your territory.

Another example – The Dippin’ Dots franchisors reserve an exclusive rights to sell their goods online, at special events and venues no matter where a franchisee is located.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.


  1. You’re screwed alright. How can you compete when your franchise sells a novelty that can be sold online? A revenue share seems fair under these circumstances so the franchisee has a vested interest in customers buying online as well as in the store.

    Take The UPS Store for example. Even though customers can print the labels and pay online, UPS still pays a small (not enough) payment to franchisees for accepting the package. At least they receive something and get traffic!

  2. Wonder if they are required to receive the movies back in the store? That may be a way of the franchisess joining together to push back against the franchisor by turning customers away when they try to return there. Although, this would not be a very good move from a customer service/retention perspective. Especially with Netflix now offering downloads.

    Almost a No Win Situation

  3. Hi Brian. I’m not sure if the stores can opt of videos being returned to the store. I do know that subscribers to Blockbuster DVD-by-mail service can exchange their videos in the local store. But, I’m confident that the franchisee is allocated less than $1 for the ‘exchange rental’, so the margins are very low unless they can sell some popcorn or candy. Thanks for the comment, Brian. You have an interesting blog.

  4. I think this is a real problem in many cases, though not all. Dippin’ Dots, I believe, reserves the theme park business because they have corporate contracts with Six Flags, etc. and it is not feasible to include franchisees. I can’t imagine the Internet demand for Dippin’ Dots is that significant, as its an impulse treat. If you’re in a mall and they open another Dippin’ Dots at the other end, your sales will probably go up, believe it or not.

    There’s a real potential for problem in areas like, say, Ham stores with a strong mail order business. Honeybaked Ham sends out a million catalogs a year. They have a commission program that credits franchisees for catalog and Internet customers that originate from their store. I beleive that franchisees should have a revenue-share of Internet and mail-order sales in their territories not only for fairness, but for effectiveness.

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