Where should I go, and how do I know my territory is sufficient to support me?
The great expansion in franchising appears to be in the service industries, and when you are considering a franchise, the questions about territories normally arise. Within service franchises, there are the indoor ones such as house cleaning, ironing, oven cleaning and many more. If you like the outdoors… sun, rain, wind as well as occasional days spent in the beautiful outdoors, maybe one of these is for you?
- Pool Cleaning
- Dog walking and washing
- Building and renovating – whole houses if required.
- Antennas
- Roofing
- Paving
- Kerbing
- Gardening and landscaping
- And many more.
The master of Service Franchises has been the Jim’s Group, who now have around 3,200 individual franchisees operating in areas from mowing (the traditional start for Jim Penman), thru to cleaning, Test and Tag, fencing, tree lopping and many more.
The Demand curve
The demand for these types of services correlates very closely to high economic areas. We look at this in terms of SEIFA (Socio Economic Index For Areas), which is an Australian Bureau of Statistics product, and tells us a score for every area in Australia, centering around an average score of 1,000. I like to describe it as a line from Affluent to Effluent, and everywhere in Australia sits somewhere on that line!
High SEIFA areas are typically ones where the housing price is high; most people are in employment, and in most cases in Professional or other well paid jobs. Typically of this are areas such as the northern suburbs of Sydney, Melbourne’s inner east and Perth around the Swan River. Lower SEIFA areas would be both Melbourne and Sydney’s western suburbs in general. The demand for household services is definitely stronger in higher Socio Economic areas.
To show this, we can use the Household Expenditure Survey (HES) which was conducted with around 9,000 persons asked to fill in how they spent their money some years back. The HES allows you to break down what people spent their money on, and when we look at the map for Sydney for example, we would visualize that this correlates similar to the higher and lower economic areas.
These maps confirm the relationship the HES show us to spending on Household Services, as compared to higher / lower economic areas.
Territory Design
Smart franchise systems try and adapt the size of the territory so that each territory gives the similar amount of opportunity for a Franchisee. As you would imagine, if we simply split up a market into territories each of 40,000 households, you would much prefer to have the Service franchise for pool cleaning, gardening, or dog washing around Camberwell, Toorak, Double Bay, Hunters Hill or Claremont (WA), than around St Marys, Cabramatta, Hampton Park or Broadmeadows. Some franchise systems wonder why some of their franchises are keenly sought after, whilst others seem to have no interest at all. Inevitably they have split their territories very poorly. Good Franchisors move away from what we call the “Beer and Pizza” map to a proper, statistical based system so we can give each franchisee similar opportunity within their territory. The “Beer and Pizza” map has traditionally been done with a black texta on a large map, strongly influenced by some early entry, self centered franchisees drinking beer (or red wine) and eating Pizza at the Franchisor’s expense. The down side of the Beer and Pizza map is that no data has been used, just a keen eye, and normally as self fulfilling design.
The way we recommend is to firstly understand what makes for a good customer of this service franchise ie. Who is going to be our customer? This can be done by creating a picture of who the ideal customer is, or if the business already exists, plot the customers, and look for areas (post codes ideally) of high concentration (penetration, or customers / 1,000 households) of customers. By then comparing to the demographics of the post codes of high penetration, we can see if our service franchise works best in high vs. low income, areas of older vs. younger people, areas high with families, or whether ethnicity may have some effect on the business.
Once we know which Drivers are good for the business, we can calculate a score for each post code. For example if 1 household was likely to spend $20 on your service on average, then a household in a high demographic area may be considered to spend $30 per household, and a household in a lower demographic area may spend $10 per household If each post code was equivalent in the number of households, say 10,000, then the higher area would offer you $300,000 of potential sales, whilst the lower socio economic area would only offer you $100,000 of potential sales.
Therefore if we decide to do this across the total market such as all of Melbourne, we may conclude the total market offers us 1,400,000 households at an average of $20 per household = $28,000,000. Being a good franchise system, we may have concluded we want 40 franchises across Melbourne, so we want each franchise to have $700,000 of potential. To balance the potential so each territory is similar, in a high socio economic area, when we add the post codes together to come up with $700,000 of potential, it may take 29,000 households, and in a lower socio economic area, we may need 50,000 households to give the same amount of opportunity for the franchisee.
This type of calculation can be done for any market, and rather than trying to adjust the franchise fee for a higher potential area, compared to a lower potential area, we believe it is better to keep the franchise fee constant, and adjust the area’s size, so each franchise area is considered to offer similar opportunity.
Summary
Our experience is that outdoor service businesses definitely have more opportunity in higher socio economic areas than lower ones; however a good Franchisor will balance the territories they create so that each area gives a similar amount of opportunity for the Franchisee. If your potential future Franchisor cannot properly explain how they have cut the territories, I suggest you look for another franchise system. The wet finger in the air approach is NOT what you want to hear, or be part of.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, a Melbourne based mapping, demographic and statistical consultancy. Peter is a CFE and Certified Management Consultant. Spectrum specializes in assisting clients with decisions relating to store location and territory planning, using various scientific and statistical techniques.
To contact Peter email peterb@spectrumanalysis.com.au or call on (03) 98300077 or 0411 604921.