Franchise territories: is exclusivity always best?

One of the complexities that comes with franchising a business is the drawing up of territories for prospective franchisees. Budding franchisors can expect many a headache when trying to identify the geographical areas that will deliver strong financial returns. However, these headaches are generally only faced by franchisors that include exclusivity clauses in their franchise agreements. Such clauses grant franchisees an exclusive territory in which they can operate and market their business. Meanwhile, the franchisor is prevented from selling another franchise for that territory.

Clearly there are sound reasons for offering exclusive territories to franchisees. “It all goes back to the reason a franchisee wants to invest in you in the first place,” says Suzie McCafferty, managing director of Platinum Wave, the franchise consultancy. “They are buying into a proven business model, an established brand and your expert training and support. If you are pitting them against another franchisee in the same territory, then none of those things are exclusive.”

On the flipside, going down the exclusivity route means a franchisor is heavily dependent on each franchisee maximising the potential of their territory. While recruiting good franchisees can go a long way to ensuring this, it’s easy to understand why some franchisors might shy away from signing franchisees up to exclusive territories. “Some of the best known coffee or burger franchises can easily support multiple units within a given territory,” says McCafferty. “There’s no reason to assume they can’t be owned in relative harmony by two or more competing franchisees.” She adds that a franchisor might also limit exclusivity until a franchisee has proven themselves capable of delivering the best possible returns from an area.

Given the strong arguments in favour of exclusivity and non-exclusivity, it’s little wonder the industry comprises franchises on both sides of the fence.”

Exclusive

With franchisees running their own territories, a franchisor can maintain a certain level of control over the growth of its network. That’s why Swimkidz, the swimming-school franchise, opted to include an exclusivity clause in its franchise agreements when it started franchising in 2011. “We have invested in mapping the UK into areas that offer each franchisee an equal opportunity to grow and become a profitable business,” explains Trish Hare, founder of Swimkidz. “Franchisees enjoy the opportunity of providing lessons in their own area and we know the expected rate of growth.”

It also helps build familiarity between customers and franchisees, which Hare says is crucial to the success of a franchise like Swimkidz. “Unlike some other franchised businesses, Swimkidz customers have their lessons in one area at regular times,” she says. “Offering exclusivity to our franchisees provides continuity of teachers and ensures that quality is maintained for our customers.”

However, to truly reap the rewards of exclusivity, it’s essential that a franchisor settles on an optimum territory size. “The challenge is getting the size of area correct for both parties,” explains Sue Reid, founder and sales director of Trophy Pet Foods, the pet-food franchise. “[It has to be] large enough for the franchisee to achieve their maximum market share within that area and small enough for us to have the right amount of franchisees operating within the UK.”

The last thing any franchisor wants is to carve up their territories further down the line, so it pays to do some serious legwork at the start. “By ensuring that our launch, support and marketing programmes are all aligned for maximum product sales, each franchisee and the area they cover can reach their full potential without [us] having to redefine the boundaries,” says Reid.”

Another challenge that crops up now and again is cross-territory sales. If a franchisee picks up a new customer from a territory that is subsequently sold – or receives an enquiry from a customer in another franchisee’s territory – it’s important that a system is put in place to manage such occurrences. “If a franchisee has strayed into a virgin territory, it is made very clear from the outset that it has to give those customers up to the new franchisee,” says Hare. “Our franchisees are very clear about the area they are responsible for.””

After all, a successful franchise is one where franchisees work with, not against, each other. “We are fortunate to have an excellent network of franchisees who support each other and want everyone to succeed in their business,” says Hare.”

In light of the fact that franchisees aren’t confined to selling in a defined area, it means a company can reach a wider customer base from the outset. This has certainly proven beneficial for Auditel, the cost-management franchise. “Without exclusive areas, the company has been able to cast its net across the whole of the UK,” says Norman Grossman, PR officer for Auditel. “Franchisees are free to work beyond a limited market place and can operate as joint ventures or teams.”

Some argue that franchises run the risk of over-saturation – or ‘cannibalisation’ – by not offering exclusivity. It’s something that Christelow admits some of his franchisees had concerns about at first. “My first coach in Yorkshire, Andrew Cusson, lived in Harrogate. The second, Chris Fordy, did too,” he says. “Andrew was initially horrified that another Action Coach would be joining in his area.” However, Cusson and Hardy soon realised they could both benefit by working in collaboration. “They got on well and within a couple of months they were running events together,” says Christelow. “Interestingly, both have referred prospective franchise owners who live in Harrogate and Chris has now taken on his first employee coach who also lives in Harrogate.”

And to ensure a region isn’t over-subscribed, ActionCOACH gives its franchisees a vote on whether it should stop recruiting in that part of the country. Christelow explains that the initial goal in each territory is 1% market penetration and, once this target is reached, franchisees will be asked the question. “We need 57 coaches in Yorkshire & Lincolnshire to service 1% of our target market in that territory,” says Christelow. “Once we have 57 coaches, we will survey the market and, if 29 of the 57 coaches vote to cease recruitment, we will cease.”

Ultimately there’s no right or wrong way to tackle territories. But it’s worth taking the time to establish the best approach for your franchise.