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:
income levels
population
age
gender
migration
occupation
Geographic Data, such as:
census
post code data
foot traffic / transport
Sales revenue forecasts
Market surveys
Consultants
The use of data-based evaluation is preferrable to using nothing at all. By incorporating a territory selection process that involves scientific and/or statistical analysis, franchisors then have a record of steps they have taken, if there is ever a question regarding the process used to select Territories.
We suggest you consider obtaining advice from consultants with expertise in demographics and related data analysis whom can assist in Territory Selection. There are a number of consultants in this field of expertise, so you shop around if you decide to use such a consultant. We can provide you with further details upon request.
Exclusive or non-exclusive territories
Exclusive
The general purpose of having an exclusive or protected territory is to provide the franchisee a level of security in the knowledge that the exclusivity limits competition from other franchisees and the franchisor within that franchisee's specified territory. The exclusivity usually also extends to prohibiting a franchisee from operating in another franchisee’s territory.
When adopting an exclusive territory strategy it is important to:
be clear on the delineation of the franchise territories;
set out each franchisee’s rights and obligations in respect of their territory; and
detail the franchisor’s rights and obligations.
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 (MPCs).
Non-Exclusive
As a general rule, with this model the franchisor has no restriction on granting other franchisees or itself an opportunity to operate a franchised business within a non-exclusive territory.
An example of how a non-exclusive territory might function is set out below. In a non-exclusive territory model, when allocating a specified territory to a franchisee, the franchisor may include provisions in the Franchise Agreement to the effect:
if a potential customer located within a franchisee’s territory contacts the franchisor’s call centre, the franchisor gives that franchisee a right of first refusal to perform the work for that customer. However, if the franchisee is unavailable or too busy or otherwise disqualified from performing the work for the customer within the franchisee’s territory, the franchisor is then permitted to allocate that work to another franchisee within the network;
in addition, if a customer forms a good relationship with a particular franchisee, and then that customer moves their residence outside that franchisee's territory, the customer may still request that the same franchisee carry out work. The Franchise Agreement may allow the original franchisee to undertake the customer's work even though the customer is located in another franchisee's territory.
In short, where a franchisee is granted a non-exclusive territory they will:
typically be permitted to work outside the territory, subject to certain rules and guidelines contained in the Franchise Agreement and Procedures Manual;
usually not be restricted in performing work in areas which are not yet the subject of existing franchises.
However, 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 the applicable territories;
anger and discontent within the network system;
dispute between franchisees (and the franchisor).
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.
Altering the Territory | Introducing other Franchisees or the Franchisor into the Territory
The Franchise Agreement can include provisions:
permitting the franchisor the right to change the territory or alternatively start up a new franchise within the territory should specified circumstances be triggered;
giving the franchisee a first right of refusal to purchase any new franchise operation within the territory.
Triggering events may include:
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 online.
The Franchise Agreement may also contain clauses which permit the franchisor to sell a new franchise into a franchisee’s territory where the franchisee is under performing or failing to meet Minimum Performance Criteria (MPCs).
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.
Keeping in mind, although the choice between adopting an exclusive or non-exclusive is important, ultimately the success of any particular franchisee is not solely down to the type of territory. Success of a particular Franchised Business is influenced by other factors as well, such as:- the franchisee’s business acumen, ability, attitude, marketing efforts, etc. So, this needs to be kept in mind.
Franchising is not just about creating new territories or opening new outlets. It is important for the reputation of the franchise brand and stability of the franchise network that franchisors also allocate time and resources to assist existing franchisees so that they can trade profitability.
Each franchise system is different and deciding whether to adopt an exclusive or non-exclusive territory will be subject to various factors.
For further franchise assistance, contact Greyson Legal | Franchise Lawyers.
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