Double Vision

Exclusive Territories

Franchisor says: "We have to keep expanding to grow this territory. Even though I put a location three blocks away from your franchise, it won't compete with you because it's a different type of location. And if I put a unit in an airport, a football stadium or a mall, people will see the company name, so it will help all franchisees."

Franchisee says: "You're taking away my market. I don't want to have to compete with my own franchisor."

Solution: This conflict is worsened when the franchisor opens a company-owned store rather than selling a franchise to an existing or new franchisee--it gives the appearance the franchisor is directly competing with the franchisee and arouses a sense of betrayal. When possible, franchisors should try to expand using existing franchisees. "The [franchisees] know the area and have built a local reputation," says Kushell. "It just makes more sense."

Franchisors can also ease franchisees' worries by hiring outside firms to do impact studies before opening a location. These studies show the impact a new location will have on an existing store. If nearby franchisees' revenues will drop by a certain percentage, say 10 percent or 15 percent, the franchisor is well advised not to open the location.

In the case of alternative locations, such as airports, franchisors can enlist existing franchisees either to operate the store or to deliver products there. "The bottom line is that, yes, franchisors should expand as much as is reasonable, but they should also not be greedy or expand arbitrarily," says Kushell. "A franchisee shouldn't wake up one morning and see a new unit two blocks away. [Both sides] need to communicate upfront."

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This article was originally published in the May 1997 print edition of Entrepreneur with the headline: Double Vision.

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