One of the hottest issues in franchising today is territorial conflicts. In the United States, in particular, this issue has been the cause of so much litigation between franchisers and franchisees. Although it has not gotten to that level in the Philippines, numerous complaints involving territorial questions have been filed against franchisers by franchisees here.
Due to the increasing incidence of this problem, various terms have come into use to refer to it. Franchisers call it "system expansion." Franchisees, being usually the aggrieved party, tend to be more colorful by calling it "encroachment" or "cannibalization." The hotel sector calls it "impact." And one major global franchiser, McDonald's, has coined a word for it: "impaction."
UNDERSTANDING FRANCHISING REALITIES
Franchising is being aggressively used by entrepreneurs to expand their business, and more and more entrepreneurs are choosing to invest in franchises as a faster way of going into business. And as in any type of business, this growth in franchising has its own share of concerns and issues--with territorial issues predominant among them.
What happens when the opportunity comes up to open another branch near an existing franchised branch? The franchiser obviously will look at it as a chance to make a stronger market presence; thus, we would normally hear franchisers say: "If we do not open, the competitor will." However, the franchisee will naturally look at this as a threat that can result in a decline in sales. Indeed, franchisees have often accused franchisers of appointing new franchisees simply to earn more in franchise fees, or of opening new company-owned outlets to make more profits to the detriment of the affected franchisees.
Our understanding of these so-called network expansion conflicts or territorial issues will greatly be enhanced if we first go back to the basics of franchising. It is a given in franchising that part of the problems in the relationship between franchiser and franchisee is a difference in perspective.
The franchiser will always look at decisions from a macro point of view; in other words, the franchiser will consider the whole system and the brand. It is not only the locations that franchisers consider; they also seek to develop all types of growth opportunities and fully explore varying channels of market penetration. Examples of these would be Internet sales, delivery, and product presence in supermarkets, groceries, and other retail outlets.
In fact, a franchisee should be wary of franchisers that will not move forward and seek to establish the brand when the opportunities are there. Today, the lifeblood of franchise systems is expansion and swift market penetration. This is in keeping with the franchise agreement, which provides that one of the most important responsibilities of the franchiser is to develop the brand--a responsibility that can be accomplished by putting up more branches. Indeed, franchisers can be considered remiss in their obligations if they do not explore all of such market opportunities.
In addition, no franchiser benefits from disgruntled and bankrupt franchisees. In whatever way, the franchise system suffers when there are complaining and unhappy franchisees. Thus, most franchisers obviously will want their franchisees to be successful.
In contrast, franchisees often see the decisions of franchisers in terms of their effect on their franchised outlets. This is particularly the case when the new location is within the market area from where the franchisees draw their customers. They will then contend that while they were the ones who established the brand in the area, another branch will now be benefiting from their efforts. As a result, some franchisees end up frustrated and spread their frustration to other franchisees and to family and friends; others may get so disappointed that they eventually close down their branches.
The demographics and consumer trends in the Philippines are also major contributory factors to this network
expansion challenge. We have such large numbers of consumers conglomerating in malls that the Philippines has even given the world a new word: "malling". Indeed, due to the huge volumes of people trooping
to the malls particularly on weekends, it is impossible to have just one franchised branch serving a particular mall. Some food retailers even put up as many as three or more branches within the same mall.
Another factor is the very high concentration of offices in certain districts of Metro Manila. Makati City alone has a population of about 5 million during office hours--a population that goes down to 1 million after office hours and on weekends. On the other hand, the Ortigas Center in Pasig City is a district that figuratively does not sleep because of its more than 138 call centers that have a combined work force of about 30,000.
Such high concentrations of location-specific consumers make it impracticable for a franchiser to grant exclusive territories to just one franchisee.
MEETING THE NETWORK EXPANSION CHALLENGE
Franchise systems have been able to expand and grow by creatively and proactively meeting the network expansion challenge, using approaches built on mutual trust, integrity, and realistic expectations between the franchiser and its franchisees.
Here are four things a franchisee can do to meet the network expansion challenge:
- Make sure to carefully review the franchise agreement particularly on the territory provision. Most franchise agreements are non-exclusive and site-specific, giving the franchiser the opportunity to explore other marketing channels. Although franchise agreements are site-specific, there is also a section that indicates the procedures to be followed when there is an opportunity to open another outlet within the area. Usually, the franchisee operating in that area has the right of first option to open a new outlet.
- Seek the advice of your franchiser on how to market the brand and effectively capture the target market. Based on the experience of its company-owned branches, a franchiser normally knows the population and demographics needed by a particular branch to succeed, and makes it a point to discuss this with the prospective franchisee during the application process. After that, the responsibility for tapping the potential of a particular franchise location rests on the franchisee. Problems can arise if some franchisees who are not successful in doing local branch marketing demand to be given an unreasonably big market area, heedless of the fact that if no marketing effort is done, success would not be guaranteed no matter how large the market area is.
- Maintain an open two-way communication line. From the application process to the actual operation of the franchised branch, franchisees should keep in mind that the franchiser normally would look after the interest of their franchises in their decision-making. On the other hand, since the franchiser is the "big brother" in the relationship, it has to take the extra mile to explain and convince franchisees that they have the latter's best interests in mind at all times.
- Draw clear procedures on resolving territorial issues. For instance, Burger King has come up with procedures for resolving disputes even if the company makes it clear that it reserves the right to approve the site for a franchise. These procedures were developed with the participation of its franchisees. Burger King and its franchisees realize that they share the common goal of maximizing the brand's market potential by securing the best locations and developing new outlets as quickly as possible.
Again and again, franchisers and franchisees have realized that resolution to national expansion confl icts are best resolved not in courtrooms or by recourse to legal processes but by going back to what franchising is all about: working together to achieve mutual benefi ts.
EXCLUSIVITY NOT REQUIRED
The Federal Trade Commission (FTC) -- the body that regulates franchising in the United States--does not require franchisers to give exclusive territories to franchisees. The positions taken and declarations made by the FTC are being cited here due to its long experience in protecting the interest of franchisers and franchisees.
What is specifi cally provided for in the US is that all franchisees should be made aware of the sections that provide for site-specific locations and that they should be given the opportunity to weigh the consequences of this provision.
This provision is satisfied when the franchisees are given 10 days to review the franchise agreement without pressure from the franchiser.
Also due to judicial decisions in the US, many franchise agreements now clearly specify the franchiser's right to establish additional outlets anywhere it chooses and to distribute products using various channels of distribution.
The FTC has consistently upheld its ruling that when there is no specific protected-territory clause in the original contract, the franchisee has no legitimate encroachment claim. It can declare an unfair practice on the part of the franchiser only when three of its criteria are met, namely (1) the act or practice causes or is likely to cause substantial injury; (2) it is not outweighed by countervailing benefits, and (3) it is not reasonably avoidable. Economic injury to the franchisee alone is not sufficient as a cause of action.
Also, the FTC has declared that franchise systems--like all other businesses--are influenced by ordinary market forces, and as such, franchisers naturally would like to have a franchise agreement that can maximize their ability to respond quickly to market changes. The franchiser's choice of contract terms and conditions is often based upon some economic rationale that is designed to benefit consumers or the system's existing franchisees, or both. The benefits flowing from these contractual terms may outweigh complaints and allegations of oppression by individual complainant-franchisees.
Erlinda S. Bartolome, a Certified Franchise Executive (CFE) through the Washington D.C.-based International Franchise Association, is the Managing Director of GMB Franchise Developers. You can e-mail her at email@example.com.