Coronavirus (COVID-19) and its impact on retail franchising in the UAE

By Melissa Murray, Eddie Chiu

04-2020

COVID-19 and the subsequent government responses to the pandemic are having a significant impact on retail franchising globally.  The UAE has also been impacted with (as the date of this article) mandatory closures of shopping malls and dine-in facilities at restaurants.  It remains unclear how long the pandemic will last or the severity and its underlying impact to the economy. 

This article discusses ways franchisors can support their franchisees, customers and staff during the pandemic, as well how franchisors can deal with other stakeholders integral to their business.

Franchisees

  1. Franchisees may seek concessions from their obligations under the franchise agreement. Ensure all concessions are properly documented in an amendment agreement and cover the following issues:

    • Contain confidentiality obligations on the parties to keep the negotiations and any outcomes confidential;
    • Have a timeframe for when the concessions will cease.Due to the uncertainty and fluidity of the pandemic, it may be preferable to include timeframes where the parties will revisit the concessions so that they reflect the improvement (or deterioration) of the situation;
    • If financial concessions are agreed, the franchisor should be clear whether they are deferring the obligation to pay until a later date, or is expensing (i.e. writing off) the indebtedness;
    • If the concession is for the deferral of an obligation (such as pushing back refurbishment works or new store openings), the franchisor should be clear when, at a later date that obligation to perform arises; and
    • Any concession is predicated on the franchisee’s continued performance of all other obligations under the franchise agreement.

  2. It is likely that franchisees will request the franchisor agree to a suspension of its obligations during the pandemic. Where the outlet can continue to trade (albeit in a limited capacity), common concessions franchisees are likely to seek include: suspension or deferral of all royalty relief; deferral of development quota or capital expenditure obligations; delaying new store openings or development schedules; and suspending minimum performance obligations etc.

  3. Mandatory store closures means few (if any) sales are being generated, resulting in a corresponding reduction in royalties fees.Therefore, franchisors should look for other ways to help their franchisees – for example, mall closures mean many restaurants can only trade via deliveries.For multi-store franchisees obliged to keep each outlet open and trading, another type of concession could be permitting them to fully close all except one outlet to reduce overheads and to consolidate all take away orders to that one outlet.

  4. Franchisees may need to alter the day-to-day operation of the outlets which would ordinarily conflict with the franchisor’s usual brand standards.If so, this would require the temporary suspension of some of these brand guidelines so that the franchisee is not in breach of the franchise agreement. For example here in the UAE, government regulations currently limit occupancy at grocery stores to 30% of the stores’ standard capacity.We anticipate similar capacity constraints to apply for restaurants once dine-in trade is permitted to resume.

  5. As governments’ responses to the pandemic continue to evolve on a daily basis, franchisors need to be aware of the latest directives and be agile enough to adapt accordingly.Local advice should be sought to determine how these directives will impact on the brand system.For instance, some recent directives include:

    • Categorising a business to be ‘non-essential’, meaning the business is not permitted to trade;
    • For those businesses deemed ‘essential’ and permitted to trade, time limits have been imposed, such as 30 minute caps seen in other countries for hairdressers / beauty salons;
    • Lock out periods for restricted movement of people between the hours of 8pm to 6am causing some ‘essential’ services to close during these hours;
    • Complete lock downs of certain buildings for two week periods where confirmed ‘clusters’ of Covid-19 cases are being discovered; or
    • Imposing capacity limits, which may require businesses to implement a booking system to ensure compliance with these limits.

  6. Be cautious about granting concessions involving marketing levies.Advertising fund monies are pooled from all other franchisees for their mutual benefit.There may be fairness issues if some franchisees receive the benefits from marketing paid for by their peers.Also once consumer demand recovers, franchisors will need a big marketing push to encourage visitation and drive sales.Brands that are more responsive than their competitors at capturing the recovering demand will gain an advantage over their competitors.

  7. Most franchise agreements will contain a force majeure clause.Franchisees may look to rely on the pandemic and or government restrictions as a trigger for a force majeure event, which depending on the drafting of the clause, would suspend (in full or in part) obligations under the franchise agreement.Franchisors should review the force majeure clause to look for the following:

    • What are the list of events under the clause and whether government restrictions have reached the threshold required to demonstrate a party is unable to render performance;
    • Whether the clause contemplates termination of the franchise agreement if the force majeure event extends beyond the specified timeframe; and
    • What is the governing law and dispute resolution process under the franchise agreement which may impact the consideration of the force majeure clause.

    Note that under UAE law, the Civil Code contains a mandatory rule which permits a party to an agreement to rely upon force majeure, even if not expressly set out in the agreement.  A party looking to rely on the force majeure article under the UAE Civil Code must however exercise caution because it can be a high hurdle to demonstrate that the pandemic or the government restrictions were unavoidable and has made performance of its obligations impossible and not merely more difficult or expensive.

  8. Whilst the full effects of the pandemic and subsequent government response continues to play out, it may be premature to exercise rights (or accept the exercise of rights) under the force majeure provisions, pending clarity on the extent and severity of the government’s responses, and the impact on specific obligations.

Customers and staff

  1. Whilst there is an absence of tourists due to the travel restrictions within the UAE, the decrease in consumer demand attributed to tourists is in some way mitigated by the sizable portion of resident expats who have remained in the UAE and are generating domestic consumer demand.

  2. Look at alternative ways to sell and new distribution channels.For instance, the closure of cinemas has not stopped one cinema chain continuing to sell movie snacks to customers via home delivery.Likewise, the closure of shopping malls has seen Dubai Mall set up a virtual online presence featuring merchandise from retailers in the mall.Efforts like these can help the business mitigate some of the losses incurred.

  3. Ensure high levels of hygiene and customer safety.Retailers who are able to remain trading can provide customers with hand sanitizer, wipes and gloves etc.Signage reinforcing social distancing can also be helpful, which as mentioned above, would require the franchisor to relax its brand standards to permit displaying such signs.

  4. Whilst major promotional campaigns and limited time offerings may be delayed in the interim, franchisors should continue promoting and remaining front of mind with their customers, particularly on social media platforms - who have announced significant increase in user engagement and ‘time spent’ during this period.

  5. Any marketing being undertaken now should focus on the following:

    • Steps taken to ensure customer and staff safety (e.g. OH&S and sanitary conditions, supporting local business etc.);
    • Be deal focused (e.g. BOGOF, stay-at-home promotions, free delivery); and
    • It is important to be mindful that any communications are not perceived to be profiting or scaremongering from the current situation.

  6. For full time staff (UAE does not have a high casualisation of workforce), look at options to reutilise staff for other roles – e.g. as deliveries increase and dine-in demand drops, customer focused roles such as servers can be reutilised for BOH work, such as in the kitchen or deliveries.Anecdotally, we have heard from some clients that delivery demand has increased due to more customers ordering take away but also because more businesses have joined the various food aggregator platforms.This has resulted in a shortage of delivery drivers and led to extended waiting times for customer orders.Reutilising existing staff for deliveries may assist in this regard.

  7. Ensure adequate PPE available for staff – hand sanitizer, hairnet, face masks etc. and consider additional protective measures for front line staff, such as Perspex barriers.Staff appearance at this time will impact on brand reputation and customer’s perception of the brand in terms of quality, safety and cleanliness.

  8. Government directives and franchisor requirements may dictate staffing training requirements (such as brand adherence guidelines, OH&S etc.).Due to the reduced demand, it may be useful to undertake required staff training to meet these government and franchisor requirements.Alternatively, under-utilised staff can be upskilled and redeployed to perform other essential duties.

Other stakeholders – landlords, suppliers etc.

  1. Be aware of local support and initiatives from governments and landlords.

  2. Governments in many of the Emirates (and some of the UAE free zones) have implemented policies to support businesses, such as halting rental property evictions and granting concessions in terms of visa fees and municipality fees.Overseas, governments are proposing additional incentives, stimulus and tax breaks for small business investment (such as purchasing new equipment or for shop fit-outs).Governments both here and abroad have also issued new regulations concerning employment which are designed to support both staff and small business owners.For guidance for UAE based employers, please refer to an article prepared by our Bird & Bird colleagues.

  3. Here in the UAE, some of the larger institutional landlords have established rent ‘relief funds’ to support retailers within their shopping malls.Franchisees should be regularly communicating with their franchisors before discussing with landlords such concessions.

  4. Many leases will contain force majeure clauses which may allow the suspension (and subsequent termination) of the lease and its obligations on the occurrence of a force majeure event.Franchisors should review these lease documents as part of scenario planning and familiarise themselves with these clauses so that they are ready to assist franchisees and react as soon as performance of the tenant’s obligations meets the impossibility threshold.

  5.  Franchisors, regardless of their buying power, should contact their top vendors and ask for support.Common requests include: extended trading terms; deferring repayments into instalments; discounting to clear the vendor’s receivables, reducing freight charges or waiving minimum order quantities.Suppliers may be able to suggest other options and offers of support which the franchisor may not have even thought of.

  6. As mentioned above, ensure all concessions from landlords or suppliers are properly documented in an amendment agreement.

  7. The drop in consumer demand is being felt right across the whole economy, meaning that equipment vendors and shop-fit out firms are also witnessing a decline in demand and a corresponding decline in purchasing and installation costs.Reinvesting in the franchise business through capital expenditure may make sense in some situations (particularly so if coupled with government incentives, stimulus or tax breaks).This may make it cheaper to source new equipment or undertake a shop fit-out now as opposed to later when the recovery is in full swing.

  8. Use the downtime to drive sales towards emerging channels for distribution and sales.For restaurants, the growth of delivery services is likely to see customers continue to drift away from dine-in, which has been reflected in the growing popularity of the various food aggregator platforms.Franchisors should investigate ways to compete and be cost effective in these new channels. For example:
  • Investment in dark kitchens or central manufacturing facilities means that take away consumers can be serviced more efficiently from locations outside the traditional shopping malls; and

  • Whether an ‘in-house’ delivery system or third party aggregator platform is more appropriate for the brand system.If a third party aggregator platform is preferable, franchisors should negotiate with the aggregator platform on behalf of its franchisees and deliver a consistent approach.This helps establish a framework and minimises disputes between franchisees for territory encroachment and avoid potential IP issues.

Conclusion

It is clear that franchisors have a lot to consider in light of the pandemic and its evolving situation.  The above information is for general guidance only and each situation is unique, it is important for franchisors to seek advice to ensure they are aware of the regulations and directives which differ depending on the type of business and location etc.

Should you have any questions relating to the above, please contact the authors.