Franchise Territories... Do they make sense

Published in Business Franchise AU and NZ May/June 2017

Territory Planning is an area extremely important to you as a franchisee, but does the franchise system and the franchisor of the system give it the importance you need it to have to ensure your future?

A couple of large clients we work with have started their working relationship with us by showing us a series of paper based maps, and saying they have all their territories worked out, and just need a few ‘minor’ issues sorted out, and all will be fine! In these cases our first week(s) of work is to copy all the individual territory maps into our GIS – Geographic Information System or mapping system, to see what we are dealing with.

The first problem inevitably is overlaps, where some areas are in more than one territory, and the second problem is small slivers of land that are in no one’s territory. What level of confidence does this give the franchisees when not only are they competing in the market to grow their business with their competitors, but fighting with their neighbouring franchisees and the franchisor just to understand their territory?

These problems arise over time as the franchisor’s staff (who have probably changed over time), do their best to represent the current geographies, and map out territories. What many do not realise is:

1. Postcode boundaries can be moved by Australia Post to suit the market.
2. New postcodes can be added (normally new developing areas), and whole postcodes can be removed or combined (normally in some country areas).
3. Unless you have a very good overall recording system, such as an electronic mapping system (or someone who is keeping track of all this), these post code changes will escape you.
4. In many franchise systems, it simply is not given the importance or horsepower to be kept up to date.
5. The potential problems it may cause in franchisee confidence and potential legal issues in the future.
6. The inconsistency in the business potential of different territories – why some work really well, and why some franchisees may be starving for business.

 
What should be used to make up territories?

We are at a GREAT time for a franchisor to fix their territory issues at present. Once every five years we have the full release of the Census, giving us reasonably fresh information to work with.

The 2016 Census of Population and Housing cost us (the taxpayer) around $470 million according to the Australian Bureau of Statistics (ABS) – and we should be using it!

The Census data allows us - once we have mapped a system’s territories into a GIS (refer above) - to then measure each territory in many ways. We can count the number of people, number of households, cars, computers and many other things you told the ABS you had in your house, and then we can understand the internal components of the households in each area in terms of average income, ethnicity, language spoken at home, employment and many other factors.

Australia’s base geography (2011) is now 54,805 Standard Area 1’s or SA1’s, each with a population of between 200 and 800 people. SA1’s then fit into 2,214 SA2’s, each with a population of between 3,000 and 25,000 persons (fairly similar to postcodes in size), then 351 SA3’s and finally 106 SA4’s.

What is important is that nearly every territory that has been drawn manually can be electronically copied, and unless the franchisor has used minor streets and lanes as the boundaries, most main roads serve as the boundaries between SA1’s. Once drawn accordingly, all the Census factors can be measured.

If the franchise system is more a Business to Business (B2B) type of operation, then there is similar data available through the ABS to count the number of businesses and business types in any specific area.

For a Home Based or Mobile franchise, it is very important that you start off by knowing these basic parameters, and then you think in terms of what is good or poor for your business concept, and make adjustments to the territory accordingly. The aim is never to make every territory equal in its base number of households or population, but to make each territory similar in the amount of potential business it should offer each franchisee.

Reality check
If going into a franchise system, stand back and understand the long term numbers. There are a couple of numbers I want to quote to you for this section:

1. Australia has a population 24,357,000 (according to the population clock on the ABS website on the evening of 9/2/17).
2. Australia has around 2,171,532 businesses (2016 ABS Business Data).
3. Australia has around 852,629 businesses that actually employ someone (2016 ABS Business Data).

 
If a franchisor says they want to give each territory 10,000 persons, then you are looking at over 2,000 territories Australia wide. For a point of reference, Jim’s Mowing is reported to have around 1,600 territories, and probably the most of any service business in Australia. By comparison most of the lending institutions such as Mortgage Choice and ANZ Mobile Lending have around the 100 – 200 territories.

Similarly, if a franchisor says all you need is 1,000 businesses in an area to be successful, then theoretically you could have 2,200 franchisees! Maybe their long term strategy is to only have 200 or 300 franchises, but then why cut the areas to be so small, and what happens if your area has one of the ‘Big 4’ accounting firm’s offices, so there are thousands of shelf companies registered there. Probably not much profitable business will ever be done with such companies, unless you are a liquidating franchise!

The point is apply a reality check to understand what the Franchisor ‘could’ do if they were ever to fill all their territories, and what that could do to you, and the long term business.

Summary
If you are looking at taking on a mobile or home based franchise, ask the franchisor what research they have done, and more important, what assumptions they are making when working out your territory, and whether it has a reasonable chance of sustaining the business. Also look at it in terms of what could happen in 10 – 20 years if they were to fill all their territories, and what could be the impact on your business? If the answer is cloudy or blank, I suggest you look at another franchise system.

Select well Grasshopper.