Necessity of a franchising law in Namibia

Windhoek: The Namibian Competition Commission, like most other established competition authorities, anticipates problems in dealing with franchise agreements under its competition legislation. This is particularly so in dealing with applications that are anti-competitive in restricting franchising activities for those with licenses and inherently keeping out those that would want to partake in franchising to sell a product, service or activity.

Franchising is an arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade name as well as certain business systems and processes, to produce and market a product or service according to certain specifications.

The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains through the franchising contract (1) an immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of products. The franchiser gains rapid expansion of business and earnings at minimum capital outlay.

The acceptable worldwide definition defines franchising as a special type of relationship between two firms usually referred to as the ‘franchisor’ and ‘franchisee’.The two firms generally establish a contractual relationship where the franchisor sells a proven product, trademark or business method and ancillary services to the individual franchisee in return for a stream of royalties and other payments.

The contractual relationship may cover such matters as product prices, advertising, location, type of distribution outlets, geographic area, etc. In Namibia the well known examples are Kentucky Fried Chicken (KFC), Nandos, Wimpy, Mercedes Benz dealership and Virgin gym.

The Commission recognises the role and contribution of franchising to the Namibian economy. The Commission is similarly cognizant of the benefits of franchising agreements with respect to employment creation, participation of historically disadvantaged persons in the mainstream economy and other benefits that accrue to parties to the agreement, such as facilitating entry of new firms and/or products, and other efficiency enhancing benefits.

Franchising may however also be anti-competitive in that they can restrict competition. Such agreements therefore fall under the purview of competition law under provisions dealing with agreements between undertakings, decisions by associations of undertakings or concerted practices by undertakings, and are usually considered using the ‘rule of reason’ approach, i.e., “where an attempt is made to evaluate the pro-competitive features of a restrictive business practice against its anti-competitive effects in order to decide whether or not the practice should be prohibited”.

It has come to the attention of the Commission that there are franchisors in Namibia who are restricting other Namibians from partaking in franchising activities. Such conducts are viewed with concern by the Commission as it restricts facilitation of new firms, companies or businesses for products and services that should be available as a wider choice for consumers, which is good for economic development – especially for small businesses to partake widely in the mainstream of the economy.

The fact therefore remains that franchise agreements can have anti-competitive effects, some of which are of a very serious nature. One serous drawback is that franchisors are not required by law to register as approval their licenses to the Ministry of Trade and Industry, thus creating an anomaly where master license franchisors from the headquarter businesses are in control to grant licenses to others within a geographical area such as Namibia. This restricts others getting licenses as the master license franchisor is a competitor to those wanting to enter the similar market to sell a competing product or service.

It is also empirically proven that the master franchisor often has the incentive to decrease the level of price and product competition among franchised locations because decreasing competition allows them to extract greater fees from the franchisees. Hence this deprives consumers from enjoying greater product or service choice and competitive pricing on such products and services within a geographical area.Franchising agreements are as such not necessarily anti-competitive.