The success of a franchise business, as well as that of its franchisees, depends to a large extent on choosing the best franchise territories or outlet locations. Getting the decision wrong can be disastrous for your business’s expansion plans, leading to a number of common problems for your business and your franchisees.
Consequences of establishing poor franchise territories
Inaccurate pricing structure: Where the territory’s business potential does not reflect the franchise fee. This means either that the franchisee will struggle to make a return on their investment, or that the territories are sold too cheaply, resulting in the business missing out on revenue.
Overcrowded franchise territories: This can result in franchisee attrition as there are just not enough customers for the competing businesses and, even worse if territories are non-exclusive – they are driven out of business by other franchisees from within the same company.
Poor market potential: The territory is not a receptive market for the franchise. This is frequently the outcome of insufficient market research before the allocation of territories.
Saturated marketplace: The territory is already oversaturated with too many similar competing businesses, making it difficult for franchisees to obtain a foothold in their market. This again is commonly the result of poor market research e.g. when a new printing franchise is opened on a high street that already has four established print shops.
Damage to brand reputation: Poorly thought out franchise territories tend to perform badly. This leads to failed franchise businesses and loss of revenue for the central organisation. It also damages your franchise’s reputation, as bad news travels fast and it is a greater challenge to recruit decent franchisees for a poorly performing brand.
With this in mind, what elements should you consider when selecting new franchise territories?
Understand your business
A firm understanding of your business in relation to the area in question will allow you to make a decision as to whether or not you create a countrywide network of territories from the outset or are better off dipping a toe in the water with a pilot territory or two.
Some of these location factors will be specific to the nature of your business. For instance, a retail franchise will need to make sure there is sufficient parking in the selected area, and who the franchisee’s retail neighbours are likely to be. For a financial services or will writing franchise, on the other hand, this will be less important, but we will need to think about the franchisee’s access to residential areas, local networking associations, business office space, motorway access etc.
Is your product unique in which case location can be less important as people will be prepared to travel further to visit you. Whereas if you’re a phone repair business for example, you are much more reliant on passing trade so it may be advantageous to be positioned en route to a station or transport hub.
Attractors and Detractors
What attracts your ideal customers to an area or what could put people off visiting. For example, an up-market hairdressers would do better sited near a John Lewis or House of Fraser, you might want to site your takeaway near competitors. A high crime area would obviously put people off and out of town shopping parks would pull people away from a city centre.
Marketing – consider the level of marketing needed within each territory. Are you expecting franchisees to do their own marketing or will it be controlled centrally? It’s vital to be clear about this from the beginning; at Tech4T we have seen good territories fail because the incumbent has been unable or unwilling to do the necessary amount of sales and marketing activity.
Pricing – will the population in your territory pay the price for your product? Are you confident the income potential for the franchisee is realistic?
Carry out an analysis of your direct competitors in the proposed territory and the surrounding areas. Remember that some of your competitors will have an automatic advantage over your franchisees by not being limited to a geographical area. Some competition cannot be avoided, and indeed can be a sign of market demand, but try to avoid placing new franchisees in an area where there is stiff competition from established national brands.
Carry out market research to establish a clear demand for your product or service in the proposed territory. In doing this, the presence of some competing businesses can be demand generators. For fast food franchises for instance, the presence of a Subway, McDonald’s and an independent sandwich shop are signs that the area already attracts your kind of customer, and there are enough customers to support multiple businesses of this nature.
Before any territory network is settled on, it makes sense to carry out a thorough analysis of your customers, your current trading area and your competitors to ensure your territories are the right size to suit your business and you can substantiate the asking price.
At Tech 4T we provide a range of services and software to help you optimise your franchise territories and site locations so that they bring great returns for both your franchisees and your overall business. For more information, please download a free copy of our ‘Franchise Territory Optimisation Guide’ directly from our website.