Market Study Report on the Development of The

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Market Study Report on the Development of The MARKET STUDY REPORT ON THE DEVELOPMENT OF THE FRANCHISING INDUSTRY AND RECOMMENDATIONS FOR REGULATION IN NAMIBIA September 2017 The Director: Economics and Sector Research Namibian Competition Commission BPI House, Mezzanine Floor 269 Independence Avenue Tel: + 264 61 224622 Website: www.nacc.com.na Acknowledgements This report was commissioned by the Ministry of Industrialisation, Trade and SME Development. The Namibian Competition Commission carried out the research over a period of one year from May 2016 to June 2017. The report was approved for publication and implementation by the Board of Commissioners in 2017. We acknowledge the data collection, validation and initial report developed by Adams and Adams Consultancy CC, the input from the franchising industry who participated actively in the data collection and validation exercises by providing information, advice and feedback throughout the research period, see Adams & Adams project team in Annexure “I”. The implementation framework was developed by the Namibian Competition Commission with inputs from the franchising industry through a validation workshop hosted in 2017. The present report was compiled by Lovisa Shilongo, a Researcher in the Division, Economics and Sector Research. The report was reviewed and edited for publication by Bridget Dundee, the Director for Economics and Sector Research at the Namibian Competition Commission. ________________________ ________________________ Bridget Dundee Vitalis Ndalikokule Director: Economics and Sector Research Chief Executive Officer Namibian Competition Commission Namibian Competition Commission TABLE OF CONTENTS EXECUTIVE SUMMARY II Introduction vii Recommendations for Namibia viii The proposed platform to implement regulation ix Considering future membership of the World Franchise Council x Creating the necessary legal and regulatory framework x Implementation framework xii Definitions v CHAPTER 1 1 1. OVERVIEW OF THE FRANCHISE INDUSTRY AND PRACTISES OF REGULATION 1 1.1 Background 1 1.2 Franchising in Namibia 4 1. 3 Overview of franchising development in other countries 8 1.4 Findings emanating from the Franchise Survey 12 CHAPTER TWO 19 2. METHODOLOGY OF THE STUDY 19 2.1 Background 19 2.2 Problem statement and justification of the study 21 2.3 Objectives of the study 22 2.4 Scope of the Study 23 2.5 Data Collection Methods 23 2.6 Analysis methodology of the study 25 2.7 Conclusion 26 CHAPTER THREE 27 3. CONCEPTUAL FRAMEWORK OF THE FRANCHISING MODEL 27 3.1 The concept of franchising 27 3.2 A brief history of franchising 28 3.3 Definition of franchising 29 3.4 Statutory versus Self Regulation 29 3.5 Franchise types and formats 33 3.6 Legitimate variants of a business format franchise 35 3.7 Legitimate expectations of the parties 36 i 3.8 Expectations of the franchisor 37 3.9 Developing a comprehensive operations manual 39 3.10 Broadest possible operational support 40 3.11 Aggressive marketing and brand building 40 3.12 Communication channels 40 3.13 A climate that fosters constructive criticism 40 3.14 Providing input 41 3.15 Formal representation 41 3.16 Peer interaction 41 3.17 Practical considerations 41 3.18 Commonly used franchise agreement structures 46 3.19 Conclusion 48 CHAPTER FOUR 49 4. FRANCHISING IN SOUTH AFRICA 49 4.1 Introduction 49 4.2 History and current activities 49 4.3 Evaluation on franchising of foreign brands 52 4.4 Food sector dominance in franchising 53 4.5 The size of South Africa’s franchise sector 54 4.6 The lure of international markets 54 4.7 Franchise related laws and legislation 55 4.8 The role of the Franchise Association of South Africa 55 4.9 FASA’s history 57 4.10 Franchisees as consumers 59 4.11 Industry Ombud Schemes in terms of section 82 of the CPA 64 4.12 Consumer Goods and Services Code of Conduct 64 4.13 Franchise Industry Code of Conduct 64 4.14 The Competition Act 65 4.15 Initiatives designed to promote franchising 67 4.16 Conclusion 73 CHAPTER FIVE 74 5. FRANCHISE ACTIVITY IN SELECTED COUNTRIES AROUND THE WORLD 74 5.1 Countries with statutory franchising regulations 74 5.2 The business aspects of franchising 80 5.3 Franchising in selected countries with a self-regulation approach and/or reliance on generic legislation 98 5.4 African countries using sundry provisions to regulate franchising 119 ii 5.5 Observations pertaining to other countries 128 5.6 The International Franchise Association 131 CHAPTER 6 135 6. FRANCHISING IN NAMIBIA 135 6.1 Introduction 135 6.2 The legal and regulatory framework 135 6.3 Related laws, enacted by the Legislature, are as follows: 136 6.4 Trade Mark Legislation 136 6.5 Copyright Legislation 138 6.6 Patent Law 139 6.7 Design Law 139 6.8 Industrial Property Act 140 6.9 The role and importance of BIPA 141 6.10 Competition legislation relating to franchise arrangements 142 6.11 Franchising and Intellectual Property 148 6.12 Intellectual Property and the application thereof for commerce 150 6.13 Conclusion 151 iii FIGURES Figure 1 Flow diagram of the report structure Figure 2 Franchises on offer in South Africa 1978 Figure 3 Business sectors offering franchises in South Africa 2016 Figure 4 FASA’s membership criteria Figure 5 The status of franchising in selected countries worldwide Figure 6 An analysis of the Brazilian Franchise Sector Figure 7 USA: Franchise Outlook 2017 Figure 8 The German Franchise Sector at a Glance Figure 9 Challenges faced by NZ-based franchisors Figure 10 Key facts about franchising in the UK: 2015 Figure 11 Key facts about franchising in India: 2015/16 Figure 12 Key facts about franchising in Egypt: 2015 ANNEXURES: ANNEXURE “A” Terms of Reference ANNEXURE “B” List of Possible Franchises in Namibia ANNEXURE “C” Letter to franchises in Namibia and Franchise Questionnaire ANNEXURE “D” Formal Introduction and Letter from NACC ANNEXURE “E” FASA Code of Ethics and Business Practice Guidelines ANNEXURE “F” South African Competition Commission Franchising Notice ANNEXURE “G” Regulations 2 and 3 of the Consumer Protection Act ANNEXURE “H” Draft Franchise Industry Code ANNEXURE “I” Adams & Adams Project Team ANNEXURE “J” Article: Understanding Important Legal Aspects of Franchising ANNEXURE “K” Stakeholder Consultation Workshop on the Franchising Study iv Definitions (a) "concerted practice” means deliberate conjoint conduct between undertakings achieved through direct or indirect contact that replaces their independent actions. (b) “franchise” means a form of business operated as a result of an agreement or license between two parties which gives one party the right to market a product or service using the trade marks and business knowledge and system of the other party, subject to royalties or other consideration paid by the party being granted the right to operate the business. (c) “franchisee” means the party who acquires the rights from the franchisor to operate a business under the franchisor’s trade mark and business model. (d) “franchisor” means the party who grants the rights to the franchisee to operate the franchised business under the franchisor’s trade mark and business model. (e) “horizontal relationship” means a relationship between competitors or franchisees. (f) “Intra-brand competition” refers to competition by firms that compete to perform the same function, e.g. distribution in respect to the same brand, and hence “intra-brand”. (g) “Inter- brand” refers to competition between brands. (h) “IP” means Intellectual Property. (i) “master franchisee” means a franchisee that is granted the right to appoint sub-franchisees for a specific territory to develop and manage a franchise network in that territory. (j) “monopoly” means a company or group having exclusive control over a commodity or service.1 (k) “NACC” means the Namibian Competition Commission and the Ministry of Industrialisation, Trade and SME Development. (l) “operations manual” means the manual provided by the franchisor to the franchisee consisting of practical guidelines and instructions on the business system to be adopted by the franchisee in operating the franchised business. (m) “prohibited practice” means “any conduct which appreciably restrains trade states”.2 1 Oxford University Press The Oxford English Dictionary 3ed (2010) at p145. 2 BM Wood Franchise Review: Franchising in Africa at p 140. Available at www.dentons.com/~/media/PDFs/Insights/2014/May/Franchise_Review_All.pdf v (n) “resale price maintenance” means a vertical price agreement where an agreement is reached that a distributor will resell products sold to him by a supplier, at a particular price. (o) “royalty” means a once-off or recurring fee that is paid by the franchisee to the franchisor for the rights granted to carry on the franchised business. (p) “undertaking” means any business carried on for gain or reward by an individual, a body corporate, an unincorporated body of persons or a trust in the production, supply or distribution of goods or the provision of any service. vi EXECUTIVE SUMMARY Introduction The world over, franchising is seen as a vehicle for the establishment of sustainable development and job creation. Although there are many businesses in Namibia that shows potential for growth, the potential of the concept is underutilised. The Namibian Competition Commission (NACC) undertook a study in the franchising industry in Namibia. The focus of the study was to assess competitive and developmental issues in the franchising business model in Namibia as well as to benchmark how franchising is regulated in comparable jurisdictions. It further aims to identify anti- competitive practices in the franchising business model as well as to propose corrective measures and appropriate recommendations to the Government3, refer to Annexure “A” for the Terms of Reference. The study was conducted in three phases, with phase one comprising of desktop review, phase two consisted of consultation with relevant stakeholders and the last phase culminated in this report. This report is the completion of phase one and phase two of the study wherein the findings of the study is captured.
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