Michael Seid

In FranchiseChat Michael H. Seid, Managing Director, Michael H. Seid & Associates, writes that there are few issues more contentious in franchising today than the conflict between a franchisor’s macro desire – the establishment of sufficient number of locations required to achieve a competitive market penetration and a franchisees micro desire – the protection of the territory around their location

The debate in franchising has primarily been framed by the legal profession, state regulators and conflicting court decisions. Has the franchisor breached a franchisee’s contractual rights or is there some higher standard, outside of the contract, to which a franchisee should be entitled?

For many older franchise systems and even many newer “packaged” franchised programs, when territorial rights were provided to the franchisees, they were often defined as a radius around individual locations. The reason radius often was used was because it gave franchisees the territorial protection required for them to purchase the franchise, was easy for the franchise attorney to define in the franchise agreements and setting an arbitrary radius took little effort on the part of franchisor. Rarely though did a radius provide a proper market development position for either the franchisor or franchisee. Consumers simply do not shop within an arbitrary circle. Neighborhoods, roads, bridges, natural barriers, driving patterns, brand identification, marketing methods and competition, are just a few of the variables that affect traffic to any location. System’s that developed using a radius approach often find their ability to maximize market share truncated by conflicting obligations.

Other systems, which granted territorial protection used customer based measurements such as population, businesses, or other market measurements that, seemed adequate at the time they were developed. Franchisors then granted territories of sufficient size to provided an adequate quantity of the projected customer base. However, as time passed and the dynamic in the market changed often so did the underlying validity of the measurements used. Modifications of these measurements were difficult to implement with existing franchisees. Other franchisors simply did not provide for any market exclusivity at all.

The issue of encroachment, whether in a legal or business impact sense, is further complicated because of the alternative distribution strategies and dual branding opportunities many companies are pursuing today. What impact, if any, on same store sales will an alternative site have? Does the increased brand awareness achieved through alternative sites provide other benefits to the impacted location?

Read more at: Franchise Chat