Stronger growth for brands that limit encroachment

The Simpsons almost go bankrupt when Marge opens a franchised sandwich shop only to lose customers to an “express” version of the same franchise across the street. But such sales cannibalization is far from funny for franchisees who face it.

In fact, FranchiseGrade.com, a leading analyst of the franchising industry, found that:

  • Established systems that protect franchisees’ territory are more likely to experience growth. Among the top quarter of all franchise systems ranked by unit count, systems that had positive growth over the last five years were significantly more likely than their shrinking counterparts to offer franchisees defined territory.
  • Startup systems that grant territory protections are also more likely to grow. Of franchise systems that disclosed their first unit openings in 2011, those that grew over the last five years were more likely to provide territory rights to their franchisees than systems that did not.
  • Fast food is the sector least likely to grant territory protections. Only 35 percent of all Quick Service Restaurant franchisors – just over one third – offer some kind of encroachment protection. McDonald’s is among the QSR chains that does not; Item 12 of its FDD states “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.” By comparison, over 60 percent of retail products and services companies offer some level of protection from encroachment.

Have you experienced lost sales because of competition from units of your own brand? Did your franchisor make promises about protected territory that did not pan out? Share your story.

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Staff