Initially, a Franchisor must determine the markets in which the franchised business is most likely to be established successfully. These usually will be markets that meet of the following criteria and markets in which:
- Franchisees can be effectively monitored,
- Franchisees can be effectively supported,
- Good sites are available at affordable costs,
- Areas that are not saturated with competitive business,
- One or more large competitor does not dominate that area,
- Suppliers can effectively and economically deliver essential products,
- Trademark is recognized.
It is generally advisable to concentrate expansion in one or a few markets where “critical mass” can be achieved quickly in order that the network have in such markets effective advertising, support and assistance and effective monitoring of Franchisee performance. A Franchisor’s ability to expand is limited by its financial, management, supplier and field service resources.
Franchisors who fail to understand the limitations on their ability to effectively expand are more likely to fail in improvidently selected expansion markets.
In mature franchise systems, decisions by the Franchisor to establish additional outlets in proximity to existing Franchisees is seen by those Franchisees as encroachment on their business.
Franchisees resent and resist such perceived encroachment and the Franchisor is confronted with a choice between fully penetrating the market and preempting competition, at the cost of impairing existing relationships, and accepting a lower level of market development.
Encroachment problems also arise when a Franchisor attempts to penetrate franchised markets through nontraditional outlets or distribution channels in department, grocery, convenience or general merchandise stores, on school campuses, through mobile carts and kiosk facilities and in combination or dual branding arrangements.
Achieving the optimal balance between effective market penetration and good franchise relationships is difficult. Even the best-managed franchise networks have difficulty resolving the problem of balancing the imperatives of network expansion and competition with perceived interests of existing Franchisees.