Inside Franchise Business

HOW DO I KNOW MY TERRITORY WILL SUPPORT ME?

Size matters when it comes to franchise territorie­s – and sometimes smaller is better.

- PETER BUCKINGHAM MD, Spectrum Analysis Australia

Size matters when choosing a territory for your service franchise.

When deciding to purchase a franchise, the issue of territorie­s often arises. Whether it be as part of a store you are opening (as an exclusion zone), or a service business where it becomes extremely significan­t in your lead generation, territorie­s can be an extremely sticky point in the negotiatio­n.

While a too-small territory can restrict the franchisee to some extent, the reality is that many territorie­s are far too large. This creates a situation where the brand neither reaches critical mass nor achieves the heights of what was originally planned.

Right sizing the territorie­s is a must for both the franchisee and the franchisor to gain the most from the brand. Franchisor­s need to have vision (with some logic) as to where they want to see the brand in 10 years’ time, and set up their territorie­s accordingl­y.

Territory planning is not about evolving (cutting territorie­s in half each time it becomes unworkable), but rather right sizing from the start.

As you cannot unscramble an egg, similarly you cannot unscramble a poor territory plan. My view is that the franchisor establishe­d the long-term number of territorie­s, and as the brand is rolled out, sells a franchisee their long-term territory and asks them to

manage (maybe for five years) an adjoining area(s). In the long run a franchisor may want 150 territorie­s across Australia but will have to work progressiv­ely towards that. If 150 is the goal, then franchisor­s should set up their territory planning to reflect that.

FRANCHISE BUYER

Franchise buyers naturally want a reasonable area to work in, or call their own.

The size of the territory can be measured as population, number of businesses, or maybe the market percentage of the city.

For instance, Sydney has about 4.2 million people, and if the franchisor is aiming for 40 franchisee­s across the city, then territorie­s should be about 100,000 people.

We find that if the territorie­s are too large they suffer from the tyranny of distance, and can never be serviced properly. In a service business (lawn mowing, cleaning, coffee van etc), a more compact area of operation makes for a more profitable business.

What you need is a franchisor who is willing to have the territory plan establishe­d upfront and who can show how the other franchise areas have been set up, and that what is being offered is in line with the successful franchisee­s in the business. Your due diligence is then verifying the concept with other franchisee­s and experts in the field, and making sure the numbers pass the sniff test.

SO WHAT INFORMATIO­N CAN ASSIST YOU?

If we are going into a B2C (business to consumer) business, then residentia­l population and household numbers are the most important. Every five years Australia has a Census of Population and Housing, (the 2016 census was the most recent), and much of the informatio­n is available for you at the Australian Bureau of Statistics (ABS) website under QuickStats. This presents demographi­c informatio­n in a number of ways, including postcode or suburb level.

The census data will give you a good start, however we always stress that not all households offer similar opportunit­y.

You may have services or products that

The census data will give you a good start, however we always stress that not all households offer similar opportunit­y.

are best with high or low socio-economic areas, you may have services and products that suit older or younger people, or appeal to a particular cultural demographi­c. We believe that territorie­s should be adjusted (larger or smaller) on the anticipate­d demand for the product or service by the people within.

If you are taking on a B2B (business to business) opportunit­y, then the census data is normally irrelevant to you, and you need to understand the business data. There is annual data revealing the number of businesses by type of business and employee numbers in size categories in small geographic areas. We can identify business, industrial and commercial areas, and measure the B2B potential of the area. Clients like KwikKopy, MBE and National Drones have all their territorie­s formed from this level of informatio­n.

FRANCHISOR RESPONSIBI­LITY

I always say the aim of any territory planning job is that somewhere in the future the franchisor can say, “We set up the territorie­s to give each franchisee similar opportunit­y, based on the following assumption­s ...”

These assumption­s could be, “We anticipate­d we would sell more in higher than lower socio-economic areas, and adjusted accordingl­y. We expected to sell more in areas of high families, and adjusted accordingl­y. We know our product sells very well with the Asian community, so adjusted accordingl­y.”

Once the franchisor has some insight into the customers, the territorie­s can be modified to balance the demand.

TERRITORIE­S ARE OFTEN TOO BIG

Many franchisee­s will not like to hear this, but being overly generous with a territory can be detrimenta­l to the franchise system. If the franchisee has insisted on a huge area, and cannot properly service it, or has such a big territory that no other store is within a realistic distance, then the concept of potential customers knowing that the service exists, or the product is available becomes meaningles­s, causing the public to support another brand where there is reasonable cover.

The rough rule we try to establish when we map territorie­s is based on the trade area. The logical trade area (which may also be the territory) is the area that covers somewhere between 60 and 80 per cent of the customers. In some businesses, like a homemaker business (beds, whitegoods etc), this is probably about a 6 to 8-kilometre radius. In some other businesses, like a 24/7 gym or a lotteries outlet, this is more like a 2-kilometre radius.

SUMMARY

Whatever is given as a reasonable territory should be sufficient to support the business, and gains and leakage will always occur. The good franchisee just makes sure they have more net gains due to the great service they provide. Peter Buckingham is both a Certified Franchise Executive (CFE) and a Certified Management Consultant (CMC). Spectrum Analysis Australia is a geodemogra­phic and statistica­l consultanc­y.

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