Protected Territories as a Development Tool
How Can You Maximize the Benefits and Minimize the Costs?
Mark L. BartholomayRichard R. Leveille, Jr.
John W. Fitzgerald
Session Agenda• Introductions and general background• Practical issues and special
circumstances• How does one franchisor approach the
issues• Q and A
What are the Benefits?• Encourages investment by franchisee• Promotes long term growth• Promotes inter-brand competition• Reduces intra-brand competition• May result in greater franchisee
profitability
What are the Costs?• Eliminates intra-brand competition• Risks slower development of the market
(sacrifices short term growth)• Limits system development• Potential limit on brand/market
penetration
What are Types/Styles of Protected Rights?• Express grant of exclusivity• Selected exclusivity (exceptions for
special sites/customers)• Restrictions on franchisor only (no more
co. or franchise-owned units)• No restrictions on other units under
different brand/channels of distribution
Methods of Administration or Enforcement• Development schedules must be met• Sales/unit quotas must be achieved• loss of protection upon default in
schedule/quota• loss of protection upon any default
Practical Traps/Issues/Tools• Definition of the protected territory:
radius, maps, population, households, zip codes, municipalities
• Impact policies• Mapping software
Everyday Issues with Radius Restrictions• Special event vending• Special venues• Delivery or install in another
franchisee’s territory• Similar products under another brand
How Do You Negotiate Restrictions?
• To some degree or another you don’t• Today’s numbers or tomorrow’s• Franchisee usually knows the market
better• There are regional differences
How Do You Handle a Dispute?• Negotiation• Council meeting and/or site survey• Arbitration • Lawsuit
What Are the Norms Today?• Carve-outs for internet• Ancillary branded products are usually
exempt• Gift cards are sometimes excluded• National contracts are very often
excluded
What About Advertising in the Protected Area?
• Sometimes not discussed• Can have an impact regardless of who
pays• Is there a right to approve the content?
Is There a Natural Trend in the Way a Strategy is Developed?• Usually the restrictions tighten as a
concept matures• There are different levels of concerns in
each organization• A lot is driven by market size
requirements and franchisor’s desires• In the end, almost everyone becomes
real
How Does the Development Flow Impact the Discussion?• If separated by a road, which side is
developed first?• What if the exclusivity is lost?• Who gets first shot if multiple
franchisees are available?• Can you pick your neighbors?
Do You Want Restrictions and How Can You Make Sure They Are Manageable?
• Everyone should want them• They are protection for both sides• If they are realistic, they are of great
benefit• If they are not reasonable … RUN!
One Franchisor’s Approach• The Smoothie King Story
Current Stats on Smoothie King
• Originated in 1973• Franchising in 1989• 400+ Units in US• 38 States• 13 Units in Korea• 2006 = 80+ New Units
Smoothie King History• In the very beginning:
– 5 year agreement– Renewal at the sole discretion of the
Franchisor– No protected territory at all– Only protection was the store address
Smoothie King History
In the real beginningthere was no
standard deal…
Negotiation becamethe standard
Smoothie King History
Smoothie King History• As became more confident, we got back
to the standard deal…
• No Protected Territories
Then comes… Encroachment Litigation
• Became publicly aware• Franchisee candidates started to
question our “standard deal”• We knew that change was inevitable
Changes (approx. 1994)
• Protected Territory• Protection against the Franchisor
establishing another franchised or company owned unit within a geographical trade area of the closest 30,000 people (raw population)
• In 2000 we changed this to 15,000
Agreement LanguageUpon Franchisee securing a lease for the
Location and prior to the store opening, Franchisor shall designate a geographical area surrounding the Franchised Business, to be described in Attachment A (the "Protected Territory").
Agreement Language (Pg. 2)
Subject to the following, Franchisor will not establish or operate Smoothie King Units, nor grant a franchise to any person other than Franchisee to establish or operate Smoothie King Units under the System and Proprietary Marks in the Protected Territory.
Agreement Language (Pg. 3)
Franchisor may establish, operate or grant a franchise or license to others to operate Smoothie King Units under the System and Proprietary Marks at any “Special” location, as defined below, or sell product or service lines through other channels of distribution, within and outside the Protected Territory at any time, including those activities described in Section 8.3.6.
Agreement Language (Pg. 4)
Special locations are defined as locations that Smoothie King determines have a restricted trade area (“Special” locations). Examples of Special locations include locations in the following types of environments: malls, universities, schools, hospitals, military bases, casinos, convention centers, arenas, stadiums, airports, health and fitness facilities, office buildings, theme parks, amusement facilities and other locations that are not located on the street and the primary trade area is restricted to certain trade generators.
Agreement Language (Pg. 5)
For Smoothie King Units that are not located at Special locations, the Protected Territory will be defined by identifiable boundaries and include a business, seasonal and/or residential population count of approximately fifteen thousand (15,000) people, based upon then-current Smoothie King site selection data.
Agreement Language (Pg. 6)
The boundaries of the Protected Territory may be shaped, at Franchisor's sole discretion, to match the population criteria, street or walk by traffic patterns and natural geographic features, such as bodies of water, interstate highways and other features that normally define guest trip patterns.
Agreement Language (Pg. 7)
The Protected Territory may include a business, seasonal and/or residential population count of less than fifteen thousand (15,000) people where there is less than 15,000 people within a two mile natural trade area of the location, based upon the criteria above, such as in suburban, rural, or beach communities.
Example A• 30,000 pop• Boundaries very
clear• Streets labeled• Store location
accurate• Coordinates
available• Accurate Demo’s
Example B• 30,000 pop• Boundaries very
clear• Streets labeled• Store location
accurate• Coordinates
available• Accurate Demo’s
Example C• 15,000 pop• Boundaries very
clear• Streets labeled• Store location
accurate• Coordinates
available• Accurate Demo’s
Example D• 15,000 pop• Boundaries very
clear• Streets labeled• Store location
accurate• Coordinates
available• Accurate Demo’s• Prepared by a
third party
Things to Consider• Market Planning
– You need to know where you need to penetrate prior to drawing protected territories.
– You must analyze the market prior in advance of growth.
– If not, you could hurt your ability to expand the brand responsibly.
DFW Expansion Plan
Houston Expansion Plan
Things to Consider• Software
– There are many packages available• Scan/US• Microsoft Mapoint/Streets & Trips• Google Earth
• In-House or Outsource– Maponics (www.maponics.com)
• Real Estate Knowledge
Protected Territories
Q and A
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