Daphne’s “De-franchising”: Merciless Strategy
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A dozen of franchisers of daphne from the third- and fourth-tier cities of China came to Shanghai together, planning to ask Daphne why it gave up the franchising business and prevented them from earning profits after they successfully expanded its market.
Hwang Ying-che, PR director of Daphne Group denied the saying of “de-franchising”. He said that Daphne would handle well the existing franchisers and will not abandon all of them. “We will continue to cooperate with qualified franchisers having a good operating pattern.”
“Daphne’s action is understandable regarding the adjustment of its brand strategy,” said Prof. Zhang Guoyuan from East China University of Politics and Law. “But the franchisers have contracts with Daphne so it could not cancel them without negotiations.”
Leave Franchisers in the Lurch
“If I knew this earlier, how could I join it as a franchiser,” said Mr. Chen from Zaozhuang, Hubei. He was one of the franchisers that came to Shanghai to question Daphne’s actions.
Three years ago, Mr. Chen signed a 3-year contract with Daphne. He spent 20 thousand yuan as the franchising fee and 90 thousand yuan as the store decoration cost in becoming a franchiser of Daphne.
“In the past three years we invested 500-600 thousand yuan, but by now we have only got 300 thousand yuan back,” Mr. Chen said. “We do not expect to get all our investment back in 5-8 years and now we are in great debts.”
Mr. Chen considers the franchise store of Daphne as his business. At the beginning, Daphne did not bring him with benefits. With the limited brand awareness, the delivery of advertisements and the property rent, Mr. Chen’s business was accompanied with losses till the boom found him one year later.
However, when he just began to see the profits, he was suddenly informed of the termination of his cooperation with Daphne. “It’s just we just brought up his child when he wanted him back,”Mr. Chen said.
According to him, Daphne has four classes for ordering goods and gives different discounts to franchisers based on the level. His franchise store has already upgraded to the third level and every year he could complete the stipulated business index. “I do not know why Daphne wanted to stop cooperating with me.”
What frustrated franchisers more is that Daphne is now trying every means to force franchisers to end the contract. As Mr. Chen said, from last year, franchisers had to buy a pair of shoes at 99 yuan but were only allowed to sell the shoes at 79 yuan. In addition to the salary of employees, a franchiser had to endure the loss of 50-60 yuan for a selling a pair of shoes.
“This event is not related with big franchisers. It only touched a small part of franchisers, who might misunderstand some of the terms regarding the end of contract. We have set up special units to deal with this case based on the real situation of different people,” said Hwang Ying-che.
He also said: “We do not want to be misunderstood by others. Maybe we are not going to increase the number of franchisers, but the existing franchising stores will go as the company’s plans.”
“Both the franchisee and franchiser should carry out the contract based on the contractual spirit. We can guarantee that Daphne is strictly following the contract, but some of the franchisers indeed put forward some requirements that might not be in accordance with the contract terms,”Hwang Ying-che said.
Another insider of Daphne said that only a dozen of franchisers out of the large number of its dealers had the problems. “Most of franchisers have no problems and we will continue the cooperation.”
The Pain of Transformation
In a Daphne store in Shanghai, a huge square poster on the show window has the redpainted “99 yuan” written against yellow background. Another store of Daphne in Shiquan Road has already decreased the price of a pair of sandals to 49 yuan.
Daphne, which is engaged in the design, production and sale of shoes for women, has kept its leading place in the Chinese market for long with its low price strategy. Even in the current time of economic slowdown and depressed domestic demand, Daphne’s core brand business still has a 33.4% increase in the Chinese market.
But the increase in business cannot conceal the problems. The profit margin of Daphne’s core brand saw a slight drop of 0.5% and the average inventory turnover increased from 149 days to 202 days.
In truth, obvious changes have occurred to the distribution channels of Daphne. Its halfyear report showed that Daphne owned 4598 self-owned stores and 1010 franchising stores by June 30. In the first half of this year, this Hong Kong company opened 411 new self-owned stores but shut down 45 franchising stores, increasing the proportion of self-owned stores from 81% in 2011 to 83%.
An official announcement of Daphne has made it clear that “the company attaches great importance to the expansion of the quantity of stores, which is very important for the sustainable development of the company”. “So we adopt the strategic plan of opening stores focusing on the development of self-built distribution channels… The self-owned channels are the main orientation of future development and at present we will stop receiving the application of being a franchiser.”
For this, analysts said that it was indeed a trend among the shoemaking enterprises to have the sales channels under their own control because it is good for reducing the cost in distribution.
But an analyst named Zhang Guoyuan said that Daphne’s adjustment this time was unrea- sonable because its franchisers completely followed the company’s requirements in management, delivery and operation. The franchisers are attracted by the “anticipated profits” based on the brand awareness and value of the chain store of Daphne and thus spent a lot of money becoming its franchisers. Ending the franchising contract will affect those investors’ interest and violated relevant laws.
Early in last year, some franchisers of Daphne in Hunan had conflicts with this company due to the contract problems. In late August, Daphne laid off many employees in its ecommerce department, showing that Daphne needs to improve the control of its sales channels during the process of transformation.
Mr. Chen said that every franchiser that came to Shanghai still has the inventory of 3000-4000 pairs of shoes. Now he did not close his store, but without the protection of the contract, he did not know what he would encounter in the future.
“We hope to extend our contracts. We want Daphne to stabilize the price of goods supplied to us and guarantee the complete and abundant supply of goods,” he said. “Otherwise, we will appeal to the legal procedures.”