The Concept Of A Franchise Territory

Most (if not all) franchisors grant rights for territorial exclusivity to their franchisees for the main purpose of assuring franchisees that they have their own business area to operate and market in. This means no other entity under the same franchise brand can enroach the territory, not even the franchisor themselves. In other words, the franchisor is saying, “Your customers are your customers”.

Related: Choosing The Right Location For Your Franchise Business

franchise-territory

Some of the most common methods to geographically segregate a territory include demarking by street, postal code or a specified radial distance originating from the franchise unit location. Regardless of which method is adopted, the key is to minimize the potential for a scenario where internal competition or conflict between two or more franchisees where they are competing for an overlapping group or even the same set of consumers.

However, when the franchise system continues to expand, franchisors will inevitably look to maximize the density of franchisees in a particular market, especially if it proves to be lucrative, as this will directly result in higher profits from franchise sales and royalties. But this is also where problems could start to arise from an over-supply of the same goods or services from the same brand.

Franchisees whose territories are placed too close to one other could also start to feel threatened by each other, hardly what one should be feeling when they are supposed to be on the same team. What could happen next is the newer franchise unit eats into the profits of the existing one. When the dust settles, the end will often result in at least one party failing to make it out of the ring. In other words, at least one of the franchisees closes shop because their territory can no longer generate sufficient customers to sustain the business, much less make a profit.

So the next time you ask a franchisor about territorial exclusivity and they answer, “this will be your franchise territory”, the only way that you should interpret it as is “this area has enough customers for you to build a profitable business”.

As no two locations are the same, every market has its own rate of population density, business diversity and racial/cultural aspects, etc. From this perspective, it will be next to impossible to implement a one-size-fits-all plan for demarking franchise territories, especially in unfamiliar overseas markets where lots of data gathering will need to be carried out to understand how things work. So don’t just take the franchisor’s word for it, ask them how these territories were decided upon on their drawing board. 

But if the franchisor can’t provide any logic behind how territorial rights were segregated, it is likely that they just picked and chose something of out anything, without any thought behind the decision. Still sounding like a good idea when it's your hard earned money on the line?


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