A franchise system has an obligation to provide you with a business operation that is, in their best view, viable.
“That includes using logic and science to establish a territory or marketing area which provides an opportunity for you to make a profit,” says Peter Buckingham, managing director of Spectrum Analysis Australia.
Territory or marketing area?
A territory can normally be defined precisely on a map with definite boundaries.
“This works best for a service business not based in a retail shop,” Buckingham says. “Any leads generated within the territory are then passed on for you to service. The area is yours to promote and work.”
Retailers, who have no control over where customers live, might think in terms of a marketing area.
“This gives you the right to promote your store within a certain area,” Buckingham says. “Your franchisor should also agree not to locate any more stores in this area, at least for a certain period of time.”
What information should your franchisor share?
Franchisors should be able to explain the logic behind how the territories or marketing areas have been created.
“They should have an overall map of the whole market and be able to provide you with a relevant map of your territory,” Buckingham says. “Many good franchisors will also provide the residential or business demographics of your area depending on your target market.”
The science of demographics
The days of guesswork and random allocation are long gone.
“Franchisors can access detailed information on everything from businesses based in a particular area to prevalent age groups, socio-economics and how people move around and through the area,” Buckingham says. “A potential franchisee needs to know what data has been used to create the territories or marketing areas and where it came from.”
Things to consider
Drivers can differ widely depending on the business. Buckingham has identified six that most commonly apply.
- Traffic passing the site
When you own a service station with a convenience store, a fast food outlet or a tyre shop, heavy passing traffic will generally translate into higher sales. The same is true for foot traffic if you’re selling, for example, takeaway food and relying on impulse buys.
If the franchise is a destination such as a swimming centre or dine-in restaurant, parking is more important than a high volume of passing traffic.
- Suitable demographics
The cost of your product should align with the socio-economic demographics of the area. You can evaluate any area in Australia by visiting the Australian Bureau of Statistics and its QuickStats site.
- The value of shopping centres
Large shopping centres, particularly those with two or more supermarkets, charge higher rent because they attract a lot of people. The Property Council of Australia reports on key facts and statistics.
- Shopping strips
Shopping strips can vary from a few small outlets to 800-plus shops. The amount of trade they attract also varies – it’s important to establish the details.
Many business owners think that a nearby competitor will halve their business. However, data shows the opposite can be true if they help attract customers for specific types of product. This explains the success of, for example, groups of electrical stores in homemaker centres and food outlets in food courts or shopping strips.
Exclusive versus non-exclusive territories
If you’re granted the right to an exclusive territory, neither the franchisor nor any other franchisee can operate within the agreed limits. A non-exclusive territory comes with no such restrictions.
The pros and cons of a shopping centre
- A controlled and consistent traffic flow
- Ample parking
- The opportunity to leverage other tenants and their successes
- In some cases, as part of the initial deal, the landlord will contribute to the fit out and marketing contribution to help attract visitors to the centre.
- Larger landlords will drive rents very hard, which can make it difficult to maintain a profitable business
- The mix of tenants changes
- Poor centre managers can have a negative impact that is out of your control.
Red flag moment
Don’t underestimate the value of doing your own research. Visiting a site on different days of the week and at different times of day will give you a good idea of visitor numbers and traffic flow.