Rigby Cooke on why location is crucial to the success of a franchise

According to Rigby Cooke , franchisees who choose an inappropriate location for their businesses often struggle to survive and invariably fail to achieve the turnover and profit figures they initially believed possible.

Choosing the right site is particularly critical for those franchisees who are selling to the public. For those who are starting a business for the first time, the decision can be daunting and sometimes overwhelming. Contrary to popular belief, it is not always safe for franchisees to assume that all the hard work associated with site selection has been done for them by the franchisor. The truth of this was highlighted in the recent case, Baker Family Trust v Lenard’s.

The court found that the master franchisor, Lenard’s, did not take into account a number of different matters in determining whether the site it offered its franchisee was adequate. It also found that Lenard’s had presented the franchisee with financial and other comparisons from its other sites when there were good reasons to be cautious about doing so.

The factors Lenard’s failed to consider included:

1. Size of the shop and its catchment area

2. Socio-economic nature of the catchment area’s population

3. Newness of the shopping centre in which the new store was located

4. Volume and loyalty of the patronage enjoyed by nearby shopping centres

5. Size of the shopping centre in which the Lenard’s store was located.

This case underlines the necessity of prospective franchisees conducting their own independent research.

Some of the factors that need to be taken into account before deciding whether or not to open a store in a given location include:

• Whether particular planning permits or other approvals are required

• An analysis of the projected turnover of the business

• Site-related expenses including rent, rates and taxes

• What effect the existence of similar shops nearby might have on likely profit and sales

• The demographic characteristics of potential clients and shoppers

• Whether you will have an exclusive right to sell your products in a particular centre or area.

Checklist for franchisees

A good starting point before investigating sites is to know and understand what your operational requirements are going to be. Asking yourself some or all of the following ‘business analysis’ questions will help you choose an appropriate site:

1. To whom will my product or service appeal?

2. What is the price of the product or service I am selling?

3. What are the demographic characteristics of my potential customers?

4. What income bracket will my customers be in?

5. Will my customers make a special trip to come to my business?

6. Will my business depend on other businesses in the vicinity to attract customers?

7. What size premises do I need so I can operate? Generally, the larger the area, the greater the rent.

8. The Franchising Code of Conduct requires a franchisor to provide a franchisee with a disclosure statement. Part II of Annexure 1 of the Code requires disclosure about the franchisor’s policy for site and territory allocation. As a franchisee, you need to ensure that your intended premises accord with the franchisor’s site selection policy as well as with your own assessment criteria.

9. How much car parking will my customers require? Are enough spaces available in the vicinity of my premises? Will my customers require short or long-term parking? Will they be prepared to pay for parking?

10. Would my business be better conducted in a retail shopping centre or a strip shopping centre?

11. Will the zoning of the property allow me to use the premises for my business? Check with the local council.

12. Will I need to obtain a planning permit from the local council to use the premises? If so, how long will it take to obtain a permit?

13. What is the projected turnover of my business?

14. How much will my anticipated business expenses be as a percentage of likely turnover?

15. What overheads will my business incur (eg. rent, council rates, water rates, land tax, common area expenses)?

16. How much will my premises cost as a percentage of likely turnover?

17. If my business is located within a shopping centre/strip shopping centre, is it situated in an appropriate position within that centre or strip?

• Is it near similar type shops?

• Is this good or bad?

• Will it attract more customers to the location?

• Will other shops create too much competition and reduce my sales? One shopping centre, for example, is unlikely to sustain the successful and profitable operation of five ice-cream shops within close proximity of each other, but one shopping centre with five clothing retail outlets may attract more customers to the location.

• If the business is a retail food business, are the premises large enough to include a customer seating area? Alternatively, is there a seating area provided by a shopping centre nearby, can my customers use the food court’s common seating area, or will the landlord license part of the common area so I can have a customer seating area outside my premises? What will it cost me to have access to a seating area?

A business such as an ice-cream shop is generally regarded to be impulse purchase-based, and therefore its location needs to be in a prominent site with good line of sight so customers can see it. A good location for an ice-cream shop within a shopping centre may be near a supermarket entrance, at the front of the food court, or a mid mall kiosk.

18. If my business is in a shopping centre, will it have any rights of exclusivity of use within the centre? If not, you may have to compete with similar businesses, some of which may also be better positioned than you are.

19. What locations best suit the product/service I am selling? If you are an owner/operator, you are more likely to choose a site reasonably close to your home so that you can avoid lengthy travel times. However, you need to make sure that doing so does not disadvantage your business.

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