Franchise Territory Selection
Franchise territory selection has a direct impact on the viability of a franchised business and the franchise system.
Identifying the Territory
Use of a geographic plan which shows territory area or use of postcodes are common ways to identify a territory. Although this may not always be the best approach.
Too large a territory may result in the territory being under-serviced.
Too small a territory may cause the franchised business to become unviable.
A range of tools should ideally be utilised to assist with territory selection, for example:
Demographic data to assess:
Geographic Data, such as:
post code data
foot traffic / transport
Exclusive or non-exclusive territories
The general purpose of having an exclusive or protected territory is to limit competition from other franchisees and the franchisor within that specified territory.
If the territory granted is too large this potentially causes the problem that the franchisee becomes either unwilling or unable to develop the customer base within that territory, perhaps because the franchisee is satisfied with the customer base it has already achieved.
This can then impact on market penetration of the franchisor’s brand, product or service. Franchisor’s maybe able to counter this by setting minimum performance criteria.
As a general rule, the franchisor has no restriction on granting other franchisees or itself an opportunity to operate a franchised business within a non-exclusive territory.
The difficulty with a non-exclusive territory is how to manage encroachment and cannibalisation within that particular territory. If managed poorly, it could lead to a failure to maximise sales and profits from each franchise unit in that territory.
One method of reducing the risk of cannibalism is to ensure the non-exclusive territory is large enough to accommodate other franchise units also selling the same products or services in that territory.
Exclusivity may not in all circumstances eliminate encroachment either, especially if some franchisees within a system flout the provisions of their Franchise Agreement by seeking customers from within another franchisee’s territory. They may get away with this for a time until the franchisor or affected franchisee become aware of the encroachment.
Can the Franchisor alter the size of the territory
Franchise agreements do sometimes include provisions allowing the franchisor to alter the territory, eg. to allow for population growth within the territory.
Introduction of other Franchisees or the Franchisor into the territory
Generally, there will be no restriction on other franchisees or the franchisor operating within a non-exclusive territory.
Even where the territory is exclusive, there may still be provisions in the franchise agreement allowing other franchisees or the franchisor to operate within the territory. Eg:
where the franchisee has breached the Franchise Agreement;
the Nominated Representative or franchisee has become sick and unable to carry out its obligations;
the franchisor is permitted to sell its products/services on line;
the franchisee is not otherwise meeting certain performance criteria.
Striking a Balance
Whether an exclusive or non – exclusive territory strategy is the right one for a particular franchise system will depend on the specific circumstances of that system.
Ultimately, franchisors should be seeking to achieve the highest possible market share and gross revenue, while balancing this against assisting individual franchisee units to achieve profitability at a level high enough to sustain their businesses and want to
stay in the franchise system.
For further franchise assistance, contact Greyson Legal | Franchise Lawyers.