Territories: To be or not to be… That is the question!

Peter Buckingham, Managing Director, Spectrum Analysis Australia


This article appears in the Jan/Feb 2015 issue of Business Franchise Australia & New Zealand

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.

Some types of franchise systems have a fairly easy solution, as it becomes relatively ‘Black or White’. If you are a service related business such as a Jim’s franchise, a Financial Services franchise (Mortgage Choice, ANZ mobile lending) or a Test and Tag business, then a territory is almost a certainty as it is required for job allocation. Basically any businesses that have a call centre or leads coming in through the internet must have a fair way of distributing these, which leads to a geographic territory.

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, McDonald’s 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 Franchise Shop’s Managing Director, Grant Garraway says, “Many potential franchisees want a territory as a form of security. Whether it is a territory or an ‘exclusion zone’, what they want is a guarantee that the franchisor cannot open another store in the agreed area.”

Grant has had years of dealing with this issue and tells me it makes a significant amount of difference to be selling a franchise system with a well thought out long term plan and territories already formulated. He feels this gives the franchisee a sense of security, so that even if the franchisor or the CEO moves on, the security of the territory system gives confidence that cannibalisation should not occur.

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 McDonald’s! 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.

We have worked for many franchisors where we have plotted all the customers for a specific store (a dot on the map for every customer). The view is to see how far out you need to go to cover 60 per cent and then 80 per cent of the customers, and come to a conclusion where you feel a reasonable ‘Primary Trade area’ comes to. The view is that stores should probably be a minimum of two times the radius of the Primary Trade area apart, eg. if you feel the Primary Trade area shows at around three kilometres radius, then two stores should be a minimum of six kilometres apart. The main exception to this is if one of the sites is in a shopping centre / mall, which really means the customer drawing power is governed by the generator power of the shopping centre, not so much the individual store.

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 ten years.

Attracting new franchisees

Geoff McDonnell of Business Essentials also believes that when 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

Summary

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 Pty Ltd, the leading Geodemographic and Sales Prediction Modelling Company in Australia. He is also a Director of the Institute of Management Consultants.

E: peterb@spectrumanalysis.com.au
W: www.spectrumanalysis.com.au