With many franchise concepts looking to expand, banks will be selective about which business models to finance. And potential franchise buyers will be attracted to franchisors who offer the best opportunity to operate a profitable business. For the franchisor looking to expand, this five-point checklist provides strategies that determine the success of his growth plans.
Profile Your Customers
The first priority when planning expansion to new markets is to profile your customers. Understanding your customers is the basis and driver for the other strategies presented here. An accurate customer profile allows you to target markets that have high concentrations of consumers with a similar profile.
If you have a customer address list, it’s easy to profile customers. Customer addresses are the foundation for a profile. Commercially available demographic, lifestyle, and buying behavior data can be correlated to a customer address and used to develop a composite profile of your customer. Retail POS data, if available, can also be part of the profile.
If you don’t have a customer address list, you can still develop a customer profile. Quick-serve restaurants, for example, can collect survey and customer address data on site. In addition, commercial survey data from MRI and other sources can be used in developing customer profiles.
The most important point is that you must know your target customer. Your bank will ask. Your potential franchisees will ask. The better you can define and profile your customer, the easier it is to find more of them.
Find Successful Markets
What other markets will your franchise concept work in? Where might it fail? Analyzing market potential will tell you. There are two basic approaches to analyzing market potential, depending on how you developed a customer profile:
For established retail franchises with a customer list, a bottom-up approach to analyzing market potential is most appropriate. You start with data on current customers. How much and how often do they buy? What is their demographic and buying profile? And, the big question: What other markets have high concentrations of consumers with similar profiles?
A new franchise concept or a franchise that may not have a valid sampling of customer data will use a top-down approach to estimate market potential. A top-down approach starts with market, demographic, and industry data. It looks at a geographic area and creates an estimate of the potential in that area, based on the density of potential customers who are likely to purchase your franchise’s product or service.
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A comprehensive market potential analysis to support market expansion often includes: -
A customer profile to understand where to find similar consumers -
Market penetration and market-share reports showing performance in existing markets and expected performance in new markets -
Market ranking reports allowing you to prioritize markets -
A geographic view of market opportunity on detailed maps and reports -
Allocate Franchise Territories
Most franchisors form territories so they can license their brand and offer franchisees exclusive rights within a specific geographic area. But many questions must be answered: How many franchise territories? How big or how small? Where are they located? Getting the right answer to these territory questions is a big factor in determining the overall success or failure of a franchise business.
A study performed by the Institute for Operations Research and Management Sciences showed that 91 percent of successful franchises have defined territories. The study also showed that new franchise chains that adopt exclusive territories are more likely to survive than chains that do not.
Given the importance of well-defined franchise territories to the success of a franchise system, it’s a wonder why many franchisors still rely on paper maps, instinct, or simply picking the hottest markets. Instead, franchisors need a reliable scientific approach to allocating franchise territories that will provide market coverage as well as an opportunity for the franchisee to make a profit.
Once a franchise territory is defined, analysts can develop a territory model that represents a successful franchise. This model is used to allocate territories in new markets. A model that accurately defines the size and estimates the potential of franchise territories allows franchisors to:
Identify the ideal number of locations
Measure franchisee performance
Maximize royalties from a given territory
Select Store Locations
Optimal site selection can make or break franchised quick-serves.
Who is responsible for selecting the site--the franchisor or the franchisee? While franchisees may have local knowledge, they may not fully understand the complex analysis required to choose successful sites. The franchisor may need to provide resources to ensure successful site selection. In fact, your financing bank may ask about your site-selection strategy.
One flawed strategy is to work only with real estate agents or developers. While real estate agents have an important role to play in securing a location, their portfolio of properties might not include sites that are optimal in terms of capturing market potential or the customer you are trying to attract.
That’s why it’s more productive to think of site selection first as a market and analytical challenge and later as a real estate decision.
One way to determine the potential success of new sites is to analyze the trade area of currently successful franchise locations. If customer address data is available, it can be mapped. The franchise trade area is then defined by an area that encompasses the majority of customer locations. Once the trade area is defined, key variables within the trade area such as demographics, customer profiles, and competition can be analyzed. This information can help franchisors choose high-potential sites when establishing new franchises.
Remember, customer behavior as defined by a customer profile drives market potential, leading to the right answer about where to place your next store. In a multiunit market, one store location impacts the overall network of franchise sites. It’s important to analyze the impact of a new location on the network of stores and take this into account when selecting a site.
Develop an Expansion Model
Market opportunity varies by geography. Consumers behaviors change. Competition comes and goes. How do you overcome conditions over which you have little or no control? By making the most of what you can control.
The four strategies outlined above should be integrated into your franchise expansion plans, giving you a territory and site-selection model you can apply to help ensure success in an ever-changing market. This approach can also help you demonstrate a sound growth strategy to banks and potential franchisees.
To develop and incorporate this model, consider partnering with a firm that has the consulting experience, analytical expertise, software, and data to understand and offer solutions to your franchise expansion challenges.
Since 1985 Capico International has worked with businesses to profile customers, accurately assess marketing opportunity, plan territories, and select successful sites, helping contribute to overall growth and profitability for their clients.
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