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How To Know When a Franchise Is Overbuilt

Written on January 18th, 2008 by Joseph in Franchise Industry.

When every one in ten newly-opened businesses is a franchise, the questions arises: can the market handle all of them? Nothing kills the business than oversaturation of market. Hence, it is very important that you know whether the franchisor you have chosen looks seriously into this problem. A serious franchisor will thoroughly investigate the market before deciding how many franchised units it can hold. If he doesn’t, then the concept will get overbuilt in the market, leading to competition among the different franchised units of the same company!!! Called “Cannibalization,” this situation can lead to not only reduced profits, but also angry franchisees suing the franchisor. Sometimes, it is better to have seven franchisees with reasonable profits than ten franchisees with almost no profit!

Hence, when you are doing a check on the prospective franchisor, ask how much he knows about your target market. The franchisor is supposed to know about all his competitors, the established as well as the emerging ones. He should also know how to tackle them in the right way. Moreover, he must share all information with you (you may have to sign a non-disclosure paper beforehand). By accessing the data, you will get an idea about how big the market is and how you are going to penetrate it. If the market is stable and long-standing, then finding this data won’t be that hard. But if the market is an emerging one then you are required to analyze it well along with the franchisor. Take up the proposal only if you are comfortable with your study of the data.

Once all the market-data is available, check how many open and projected units the franchisor has in it. Next, determine your area of operation and observe the demography of the area. Then look at the position of the nearest outlet of the franchisor. Is it within your projected area or just in the parameter or really far? It should neither be overbuilt nor under-represented. Remember, the more people see the name of your franchisor, the more it will help you to grow the brand-name. It will also help you to cut considerable amount of cost in the advertising department. With the growing number of franchised units, the money you have to put in the combined pool becomes less. It will also increase the bargaining capacity of the franchisor, with the manufacturers and suppliers reducing the cost further. So, you can offer products at competitive prices to the customers and retain your position in the market.

Lastly, it can be mentioned that if the franchisor places the units haphazardly, then it may sometimes lead to overbuilt. But if he places them after long research and adequate planning, then the franchisor is in the right track and the franchisees too are of right size.

To know more about this topic, contact brandEXPANSION.