Why Franchise Territories Matter

When people are considering the purchase of a franchise the general expectation is that they have a dedicated area to service. This gives the franchisee the opportunity to focus on competition from other companies, and establish a strong community presence for their own growth, the growth of the brand as a whole, and enhance brand reputation.

In most industries that use franchising as a way to grow their brand the establishment of specific territories is standard. Companies recognize that in order to uphold service level standards, and allow for the success of their franchisees, they need to provide a dedicated service area to those who invest in their brand through the purchase of the franchise. Territorial boundaries can be defined by a variety of factors, the most common are population and the available market opportunity for growth. Boundaries are often delinitated by neighbourhood, postal code, or in the case of regional franchises often entire cities or provinces.

One of the key measures of success for any franchise organization is the number of franchise locations that a brand has. If you look at the food services industry as an example; companies like Subway grew through aggressive franchise sales and achieved a brand footprint that was unlike almost any other company. On the surface this looked like a sound growth strategy, but as the company continued to grow it faced serious challenges with quality control, and the ability of its franchisees to flourish. It is one thing for a franchisee to compete against rival brands, but to have the added competition from other franchisees of the same brand became highly prohibitive. The result was a large number of locations being unable to sustain a margin of profitability. If a franchisee is not able to sustain their profitability, they are likely to cut corners on staffing and the quality of products or services. That directly impacts the ability of the brand to sustain a high reputation ranking with potential franchise candidates, and more importantly the consumer.

Having a lot of franchise locations on the surface makes sense because it demonstrates the strength of the brand and in theory increases the production of the brand nationally. To achieve this franchise organizations will have a heavy focus on initial franchise sales. In the mortgage industry in Canada franchisors will establish highly aggressive targets for their sales force. While it is true that an organization that is not selling is not growing, the challenge presented is where that growth is occurring as discussed in the previous paragraph.

In the Canadian mortgage marketplace there are a number of successful franchise and hybrid brands. All are strongly focused on the recruitment of franchisees and their sales forces have become very aggressive due to the significant goals each brand has set for new franchise sales. As a result there are countless examples of same brand locations being within blocks of each other as the overarching target is to recruit high producing locations that drive royalty revenue to the franchisor. If there is a franchise location that is producing at a reasonable level, but also an opportunity to sell to a potentially much higher producing candidate, that candidates volumes often over shadow the existing franchisee. It might seem reasonable to bring in a high producing recruit, but as is often the case, this can also mean that an existing high volume franchisee is sacrificed in the name of growth.

As a result of this common ideology in the industry it is apparent that for the franchisor it is easier to improve profitability through aggressive franchise sales than it is to work with existing franchisees to increase their market share. This disconnect between the franchisee's goals for tangible growth and community presence and the franchisors drive for location growth can often lead to conflict, and a lower franchisee satisfaction rating. Another result of this aggressive stance towards franchise sales growth can also mean that it is more difficult for the franchisor to deliver on service level commitments to their franchisees. The focus becomes primarily on sales and the recruitment of high volume producers, thus leaving a struggling franchise with less available resources to improve and grow their business.

At some point the franchisor will have exceeded the optimum location count, and as clearly seen in the case of Subway, this can cause deep seeded doubt in the ability of the company to function. New franchise candidates are far more wary of the brand, and the failure of existing franchisees damages the consumers perception of the company.

A franchisor that is focused on consistent, sustainable growth is well served by looking at established territories for their franchisees. This allows them to better focus marketing initiatives and the opportunity to foster a closer working relationship with their franchise owners. While it is more challenging to drive the consumer to a brand, if the service levels are not consistent across the company nationally, and the franchisees are not provided with a tangible opportunity to succeed, the result can be devastating to everyone involved.

The failure of a franchisee has a direct impact on consumer perception of a brand whereas the opposite is also true. A franchisee that has consistent support, and the opportunity for growth, will excel in delivering excellence to the consumer thus enhancing the brands reputation and consumer confidence levels.

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