Take the average Joe Soap who is thinking about starting a franchise. Choosing a location for a franchise can be one of the most crucial elements of his success. Location could very likely affect his profitability: if he is not accessible to his customers and he doesn’t understand their needs then he will not be able to sell his product or service. He will need to locate his business so that it is easily accessible to its customers (depending on the franchise) and so that it is not competing directly with other franchises of the same brand. We will look at the main variables involved in choosing a franchise location
• Customer demographics
• Franchise territories
• The type of franchise
• Legalities of the location
When you start customer demographic research you have to consider some basic factors first like:
• Who are your target customers?
• Where do they live?
• How do they use your product?
• Do you go to them or do they come to you?
You aim is to establish the profile of your customer and then conduct market research and compile a demographic breakdown of the geographical area you want to franchise in. You also have to research your competitors and know who they are, their strengths and weaknesses and their products.
You have to address the issue of location before you buy the franchise. The best is to have an ‘exclusive’ territory in the franchise agreement based on mapping or population density.
What is a franchise territory?
A franchise territory is the area that the franchisee will be given to operate in. The rationale behind having a specific area for the franchise is so there won’t be undue competition for the franchisee when another franchise of the same brand opens in the same city or region.
In the franchise agreement you will be given a territory but you must remember to do your own research into this and talk about it with the franchisor – it is not their responsibility. There are two reasons for this: the first one is so that you are aware of the positives and negatives of each potential location, and the second that it will ensure that the franchisor is not liable if the franchisee fails with the business. Thus, most franchisors require the franchisees to make their own site selection and they act as the final ‘approving’ authority.
You should know your exclusive territory rights or ‘exclusivity’ and market before you sign the Franchise Agreement with the franchisor and must know what constitutes encroachment on your territory. If the franchisor does not offer exclusivity then you need to speak with current franchisees to determine how the lack of exclusivity has impacted their franchise sales and profitability.
So now you have a geographical area in which to operate we will provide some guidelines for choosing a business location. Tech4T provide us with a useful case study that demonstrates how important choosing the right territory is.
How to measure up for franchise territories
When franchisors are preparing to roll out a new business or expand an existing model, a common – and very costly – mistake is to rely on incomplete data when creating a territory infrastructure.
Whilst a franchisor needs to understand the types of people most likely to buy their product or service and the size of the ‘prospect pool’ required to generate sufficient sales for each franchisee to make a good living, this on its own is not sufficient to ensure territories or sites will hold sufficient sales potential for each franchisee.
Tech4T provides us with this informative case study:
One Tech4T client, a home improvements company, had rolled out their franchise two years earlier with low cost mapping software and the basic rule that each territory must contain a population of 100,000. However, within a year it became painfully evident that 100,000 people in Birmingham are not the same as 100,000 in Somerset. Interests and buying habits are different, incomes are different, ethnicity is different, average household sizes and type of housing are different.
Tech4T’s analysis and research determined that the franchise had mistakenly identified their target market by population instead of household size. They had also failed to recognise that their ideal high value target was family homes, not apartment blocks and shared accommodation. We identified the concentrations of family homes across the country and found a huge variation in numbers between territories. In addition, profiling of existing customers showed that household income in excess of £30,000 was a key driver in sales. Extrapolating these figures across all territories in the country showed dramatically different sales potential between territories and explained vast differences in sales performance.
Tech4T realigned all territories to offer similar market potential and in the process created an additional three territories yielding £75,000 in franchise fee potential plus an extra 20% in annual royalty fees. Existing franchisees were happier and new franchises were much easier to sell as the sales potential in each was now easy to explain and substantiate. Market targeting was also much improved – marketing materials could now reflect the aspirations of the ideal high value customer and be distributed in the geographic areas likely to yield the best response rate.
Locations for different types of franchise
There are so many different types of franchises that the location of your franchise will depend on what you sell or what service you offer. For example you need to consider the ‘product lifecycle’. If your product is a one-off purchase then your territory will need to allow for a constant flow of clients. When an individual buys often, the prospect pool can be smaller.
In terms of a physical site for your franchise you must consider:
• Accessibility – is it easy to find and access?
• Traffic – is there a continual flow of pedestrians nearby? Are the streets laid out for easy automobile access to the site? Is it convenient to public transportation?
• Visibility – can the site be easily seen and from how far away?
• Community – is this an up-and-coming neighbourhood, or one in decay?
• Local competition – how many other similar businesses are in the neighbourhood?
• Size and layout – does it meet the operational requirements of your business? This is where franchisor approval of the site is critical.
• Condition and construction – how much remodelling will be required, and what will it cost?
Restaurant and Retail – With this type of franchise the level of ‘passing trade’ (the amount of pedestrians walking past) is crucial. This is why a restaurant needs to be located in a shopping centre or pedestrian area where it is visible to people. This is the franchise where location is the most important.
Home based – With this franchise you will quite literally be working from home and if it is internet-based location is not really important at all as you may be working with markets some distance away from your location or even nationwide.
Consultancy – A consultancy franchise means that you need to travel out of your home to go and consult with the people and also have the capacity to accommodate them in your home office.
Van based – this is truly a ‘mobile’ type business, where you go to your business, and therefore the location of the franchise is more related to proximity to your target market.
Legalities of the choosing a location
As a business owner you are subject to many legalities relating to your business location. You need to have planning permission that allows the location to be used for your type of business and comply with health and safety, fire and building safety regulations. Find more information here about the legalities of the location.
This article should give you some good insight into the intricacies of choosing a franchise location.