How close is going to be too close? This is a question that needs to be addressed by franchisors.

The effect of competitors is normally not a great problem, and in fact in the case of homemaker centres and certain types of shopping centres or shopping strips show it can actually be an advantage. This is what we call “clustering”. Name a reasonably sized homemaker centre/precinct, and count the bed stores, furniture stores and electrical stores. Experience has proved that they actually work best together, as the combined drawing power of the homemaker centre far outweighs the advantage of being out on their own.

In many businesses – including quick service restaurants and direct factory outlets – being with others makes for a precinct, and therefore is an advantage (friend). Being out on your own makes everyone else a foe.

That is great for competitors, but what about your own network? Franchisees obviously want minimal competition from within your brand that will negate any brand advantage they may have over the opposition.

In the fuel industry, it is an accepted assumption that 75 percent of the sales for a new site will come from other sites in a 3km radius – the balance being the transient volume that moves just because they need fuel at the time.

In businesses like Lottery sales, the 75 percent of business came from sales within 2kms, and when you look at the concentration of Lottery agencies, you see that they compete with each other on a very regular basis.

Many franchised businesses we see are more like beds, furniture and other homemaker retailers, and the relevant travel distance is far larger than those mentioned above.

So how can we deduce what is fair and reasonable?

The problem is trying to match the needs of a potential franchisee who wants half of Australia as a preferred marketing area (PMA), with the franchisor‘s rationale to make an appropriate PMA which will allow a reasonable number of stores within each market.

So how do we use data and analysis to find an answer?

Customer mapping

The first thing we suggest when the issue is raised is to map the customer database. Once we have this mapped, our analysis involves looking at what radius we need to go out from the store to enclose 60 percent and 80 percent of the customers. Our view is a reasonable measure of the PMA is somewhere in between.

In many cases we are asked to map the customer database of 10 or 20 stores, and come to a realistic conclusion as to what is a reasonable PMA in:

1. High density areas – normally  > 100,000 persons in a 3 km radius. eg Bondi, Mosman/Neutral Bay (Sydney), Elwood, South Yarra, Richmond (Vic)
2. Middle Suburbia – normally a population density of about 60,000 to 80,000 persons in a 3km radius: the middle suburbs of Melbourne and Sydney, anywhere in Adelaide/Perth, and most of Brisbane
3. Outer Metro areas – normally population < 40,000 person in 3kms – outer metro growth areas – Cranbourne, Doreen, Kellyville, Albion Park, Helensvale etc.

Often this type of process for many brands may look like:

So if we think of two adjoining sites, we normally accept the two suggested PMAs can overlap somewhat. In the inner area, we would probably be looking at separating sites about 5-7kms away from each other, sites in middle areas should be about 8-10kms apart, and outer metro locations at a distance of about 12-14kms.

As you think in terms of a large market like Sydney (Newcastle to Wollongong), this will probably generate about 40 locations, for Melbourne/Geelong close to 32, and Brisbane/Sunshine and Gold Coasts around 20.

Franchisor analysis

Franchisors can undertake some analysis themselves or use an external consultancy. Consider these different approaches to the issue:

• Map a few sets of customer address data from different types of stores, possibly in different markets
• See what radius you need to get 60 percent and 80 percent of the customers in.
• Deduce what is a reasonable PMA, and how far approx. should you allow the sites to be apart?

The other approach is the cannibalisation approach, where you undertake analysis of what is the real effect of your recently opened stores on other stores in the network. The best way of considering this is to:

• Identify a group of new to industry stores you have opened in the last couple of years.
• Group like with like – think in terms of the areas outlined above: Inner, Middle and Outer.
• Look at each new store in terms of:

a. What were the sales of the surrounding stores in the three months before opening

b. Leave a few months (three) and then measure the new stores sales over a three month period and look at any decrease in sales of the surrounding stores.

c. Evaluate this in terms of percentage sales loss as a factor of distance from the store (commonly known as Huff’s Gravity model).

Again, you may need statistical assistance to undertake this analysis properly.

The net effect is that a franchisor should be able to answer the common questions of a franchisee in terms of “What is a reasonable distance for the stores to be apart without being too close?”