Franchising in the metaverse: opportunities, tips and predictions – Commentary

In 2022, boutique fitness brand TRIB3 announced its partnership with OliveX, a fitness metaverse company. The partnership will offer TRIB3 classes and workouts in its virtual gym and enable users to enter into virtual challenges. TRIB3 operates a franchise model in the United Kingdom, Spain and Finland, but its move into the virtual world allows for far greater expansion through the ability to directly engage with greater numbers of consumers across the globe. The move continues a trend that started during the covid-19 pandemic, as fitness brands had to move online to stay engaged with customers.

Some fashion retail brands have developed software in the metaverse that enables consumers to try on clothes and accessories remotely to improve the customer experience. Food and beverage brands have made plans to offer consumers the choice to purchase products in the virtual world, which would then be delivered in the real world. For example, McDonald’s filed a patent in the United States in 2022 to cover the provision of new metaverse services of “operating a virtual restaurant featuring home delivery”.

Additionally, certain brands have created NFTs featuring their branded products and are interacting with customers by enabling them to obtain reward points as they trade the NFTs, which can be redeemed for in-store experiences. Brands such as Fortnite have hosted in-game concerts with A-list acts and this environment provides opportunities for brands to promote and sell their products and services, as they might at a real-world concert.

In a franchising context, brands will need to consider carefully how their franchisees can participate in these types of activities. In the food and beverage example, a franchisee store close to the customer could fulfil the order that was taken in the metaverse, but this raises a number of questions:

• Which entity will make the sale to the virtual customer?
• Who controls the brand experience and pursues opportunities in the metaverse?
• If it is the franchisor, does it dictate the sales price and take receipt of payment? In which case, this type of sale is different from a “typical” in-store sale in most franchise networks. If the franchisor is controlling the brand experience, are franchisees contributing to the research and development and ongoing costs?
• How does a franchisor decide which franchisee gets to fulfil the order in densely populated areas with multiple franchised sites and no contractual exclusivity?
• Does this type of activity fall within existing marketing budgets?

In addition to different product offerings, the metaverse offers further opportunity for collaboration and information sharing between franchisors and franchisees. Training sessions may be delivered online, which could be particularly useful for international networks and help eliminate support costs. Franchisors may also use the metaverse to deliver networking events for their franchisees or to entice others to join the network by hosting virtual conferences.

Lastly, the metaverse allows for even more advertising space. Where franchisors have traditionally charged an advertising levy, brands may wish to specify what proportions of the fee will be spent on physical advertising as opposed to within the metaverse. This is particularly the case where franchisors want to keep control of advertising for consistency across the network. Some franchisees will want to know that brands are thinking of future opportunities before signing up to the network.

The opportunities in the metaverse are unlimited, but brands will need to act fast and with a creative mind if they want to be considered a frontrunner.

A wealth of franchised brands have already made applications to register trademarks for their brands in the digital space specification. In 2022, McDonald’s registered 10 trademarks for virtual goods and many brands have followed suit. The race to register trademarks for virtual goods and services is happening quickly. In many jurisdictions, there is a race to be the first registrant of the rights to gain protection from a registered trademark.

For networks with larger operator franchisees or master franchisees, franchisors will want to ensure that they register the trademark and not the franchisee – any attempt by a franchisee to acquire registered rights in the brand should be quickly shut down (and should be prohibited under a franchise agreement). Forward thinking franchisors may therefore wish to make applications to register trademarks for virtual goods and services in the key markets they operate or wish to operate in the medium to long term.

A well-functioning franchise network will see a franchisor continuously seeking to update and improve the system as new opportunities arise, working in consultation with franchisees. While an operating manual provides an easy route for documenting operational updates, there is a blurred line between when an update actually requires a variation of the franchise agreement. Franchisors should use this as an opportunity to consider the interplay between the operating manual and the franchise agreement, and how changes can be made to both with minimal disruption in this rapidly changing digital environment.

There may be a distinction between franchisees operating in the real world and separate franchisees operating in the metaverse (but with due regard to competition and antitrust laws, which are generally opposed to barriers between markets, virtual or real), or franchisees being granted the rights to operate in both under one agreement. In either option, the grant of rights should be clearly defined under the franchise agreement to avoid inadvertently granting or excluding rights where it is not the intention. The traditional franchise model is likely to evolve further, with franchisees also performing the role of a service provider or agent in certain sales contexts.

Franchisors will also need to consider how they receive royalties under franchise agreements. For networks operating in the metaverse, careful consideration must be made in drafting how the royalty will be calculated, particularly where franchisees will receive revenue for the business in different currencies, including digital currencies such as cryptocurrency.

It remains to be seen how franchising will intertwine with the metaverse. However, it is certain that brands which are aware of the risks and have strategies in place will put themselves in the best position to expand their network both effectively and sustainably.