Should a franchise that operates out of a “bricks and mortar” store give territories or not? That is one of the biggest questions in Franchising today.
There are many opinions, and companies do it differently depending on their size, brand awareness, level of investment required by the Franchisee and basically, the view of the CEO or his franchise advisors.
The Franchisor’s views are normally around the line of let’s keep it to a minimum as it gives us more flexibility for the future. The Franchisees view is normally around thinking of it as an exclusion zone and therefore a guarantee that the Franchisor (or his successor) cannot introduce another store into the area.
Many large multi-national chains and some large home grown systems normally have the market power simply to not give a territory, unless it may be a Master Franchise situation. Working for an oil company (in my past life), we never had territories, nor do I believe the likes of KFC, McDonalds or Gloria Jeans give territories. Some systems like Nandos and Brumby’s are progressively looking at moving away from territories as they undertake renewals over time. Basically, very large franchise systems try to keep their flexibility alive as best they can.
What is a Franchisee’s view?
Many Franchisees are asked for a long term financial commitment often around the $1M mark over the length of the Franchise Agreement. This may be made of long term lease commitments, a large upfront fit out cost, and all the other costs associated with starting a business.
The other issue for a Franchisee is financing his new business opportunity, and it is generally felt that banks and other finance companies are more receptive to Franchise Systems who offer a Territory (exclusivity for the area), rather than one that does not address the issue.
The Franchisor’s position
If you have market power and a very strong brand, you can basically refuse to offer territories and still attract good Franchisees to your system. Look at McDonalds! Large companies normally have a consistent ethos to consider existing stores in the decision process to approve a new store. Unfortunately in the view of many Franchisees, the Franchisors underestimate the effect and this becomes the cause of much dispute.
Many Franchisors also like to take the “no territory” position early in the life of the Franchise System as they simply want to keep all options open for the future. We like to try and suggest a reality check, especially when we hear of “another chicken franchise” thinking they will be larger than KFC! In many cases this leads to some hard thinking in terms of strategic network planning, to have a vision of what they dream of being in say 10 years.
Attracting new Franchisees
Geoff McDonnell of Business Essentials also believes that in looking at Franchisee selection for their customers, having a territory is a big advantage in the sales process. Geoff says “This give us something more concrete to sell, and instils more confidence in the Franchisee for their long term investment”.
In many of the businesses he represents, he advises that by having the territory mapped and a demographic report outlining the contents of the territory available, the Franchise System becomes easier to attract high quality Franchisees.
If the business is what we call a B2B business, the Business Demographics can describe the Territory in terms of how many businesses are in the area, and the approximate number of employees. This is very important if you are representing a printing / copying business, or sell sushi at lunchtime. Many Franchise Systems are B2B rather than the B2C model, and therefore the territory needs to reflect this in the territory building process
Territories – to be or not to be: is the question that Franchisors and Franchisees must address. How do we weigh up the future flexibility of the Franchisor versus the attractiveness of buying into the Franchise System to the Franchisee?
Peter Buckingham is the Managing Director of Spectrum Analysis Australia. He is a certified Management Consultant, and a Fellow of the FCA and IMC.