Pointers for franchise expansion

Expansion always puts franchisors under pressure from existing franchisees that think they are going to lose business. As the number of stores increases in a network, the word ‘cannibalisation’ starts being heard more and more, until one day you arrive at a franchisee meeting and everyone is suddenly mentioning the ‘C’ word. As one of our clients says: “If I open a store in Alice Springs, someone in Sydney will claim it is taking business away from them!”

The best way to handle the issue is to understand where customers are coming from and to alleviate franchisee fears by using facts and data.

Penetration rates

The first thing to do is look at a sample of your current stores and plot customer origins. Addresses can be found by customer account details, delivery details or, if all else fails, by conducting an ‘exit survey’ to ask them where they live and their itinerary before and after their visit. We do this on a regular basis for a major fast food chain as a way of understanding each store’s market.

When you have a sample you think is representative of the customer base, the data is run through ‘geo coding’ software to place each address as a dot on a map.

Effectively, the address of every customer is attributed coordinates that mapping software such as MapInfo recognises. Analysis can then be conducted to determine penetration rates (customers per 1000 persons) either by postcode, radius from the store, or whatever geographic unit you use.

In many cases we find you can look at the penetration of your customers in concentric circles such as zero-to-one kilometres, one-to-two kilometres, two-to-three kilometres, and so on. Businesses that have been effectively marketing in their local area normally have a very high penetration rate closer in, then declining as you go further away. Our experience has also been that businesses where the franchisee is ‘tired’ or has not been actively marketing tend to have a flatter graph, as they are waiting for customers to come to them.

Customer penetration relative to population is strongest within one kilometre of the business location, tailing off as a function of distance. However, the population within one kilometre is smaller than that within the one-to-two kilometre band, the two-to-three kilometre band, and so on. Consequently, most customers come from the areas between three and five kilometres of the business location.

Residential or transient customers?

Depending on the type of service your business provides, there will be a different balance of local and ‘transient’ customers. Local customers patronise a particular store or business based on its proximity to their home. For example, a gym or ladies’ health clinic probably attracts most customers from among local residents.

Franchisee and franchisors would benefit from reading about Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.