Location vs. Market, What Matters The Most in Franchising?
Nov 12, 2024
Can a location determine the success of a franchise unit? Can being on the wrong side of the street affect the performance of your business? How much does the market in which you establish your store influence your revenue and profit? What is more important, market or location?
A few weeks ago, I had an interesting conversation with Josh DuBois from “Conquer the Mind Podcast”. Among the topics we discussed, we talked about a key principle in franchising that is so vital that it has become a maxim in the industry: location, location, location.
Having the right location in the right market is especially relevant now, especially with the multi-unit trend that is happening in the industry. As I explained in my book, “Multi-Unit Franchise Mastery”, many franchisees even say these elements impact their enterprises' efficiency, effectiveness, and profit.
Think about it! The closer the franchise units are to each other (without cannibalizing their customer base), the better it will be for the business's operations and profitability.
Whether you are beginning your journey into franchising or searching for new locations to scale your business, these tips and considerations will help you evaluate the whereabouts of your next franchise unit.
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What is the market?
First, I have to point out the difference between market and location.
The market refers to the number of customers in a specific area. Understanding the market size is important because it helps you assess whether there are enough buyers to generate sufficient sales to cover your expenses and still make a profit. This analysis is crucial to determine if pursuing that market is worth it.
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It also determines the target audience's demographics and if the neighborhood is right for your business. However, I can see most businesses working in most places as long as the franchise has done a proper market study.
If you are in a little town of 1,500 people, for example, it’ll be hard to have enough revenue and a sustainable business. But if the market is big, and those potential customers are willing to buy from you, you will be able to capture those clients and generate sufficient revenue. And, if you manage the business correctly and do a good job, you’ll be on the path to success.
What is location?
Location refers to the physical site of your business if you operate a brick-and-mortar franchise. The phrase "location, location, location" emphasizes the critical importance of this factor.
I would tell you that at the beginning of Domino's Pizza, when it was only a pizza delivery company with no in-store sales, the company didn’t care about where the stores were. That’s why many of the original stores are found in alleys and hidden places because his founder, Tom Monaghan, thought it didn’t matter where they were located.
Of course, later on, he learned that it did matter because when you have a location with better visibility, people know you exist. Otherwise, you won’t generate sales, which are the oxygen to any business.
When it comes to location, it even matters which side of the street you are on. Imagine opening a coffee shop on a busy street that is also the main road for office workers on their way to their workplaces every morning. It would be very easy for them to stop at your business to get their coffee on the way to the office!
But instead of being on the side where the traffic goes, you are on the opposite sidewalk, where office workers drive when they go home. How many people would make a U-turn to get a coffee and then another U-turn to get back on their way, especially if they're in a hurry so they don't arrive late?
The right location will vary depending on your business model; however, these are some of the factors you should consider that may apply to most concepts:
- Accessibility: How easily customers can get to your store. Consider those who go on foot, those who go by car or public transportation, and even if there is wheelchair access.
- Visibility: How visible your unit is within the street, mall, or shopping center. Is it located on a main street or a secondary road? Can you place billboards for visual impact? Is it at street level or on a second or third floor? What other business concepts are around? Analyze this from the customer’s perspective as well.
- Building size: Every business model has a square footage requirement based on how much space it takes to replicate the brand. These size and dimension requirements will limit your site search.
- Lease amount: The ranges vary, but the most common are between 5% and 12% of projected revenue. Ask your franchisor what the acceptable range for your brand should be.
- Parking: especially if people have to enter your store to receive the service, buy your product, or if you sell bulky items that require a vehicle transfer.
- Drive-thru: If you have a quick-service restaurant or a food business, this can be an excellent alternative for many customers.
Site selection from the franchisor’s point of view
Having worked on the franchisor side of the model, Josh asked me about real estate selection and what occurs “behind the scenes.” These are some insights on this matter:
- Within the Franchise Disclosure Document (FDD), item 19 holds the financials. This topic is not a required element of the FDD, and if franchisors put something in there, you have to be aware that that number is the average of the top 25 or 50 stores, not the average of all the units.
So, you have to make sure that those financials make sense to you and that you can extrapolate the unit economics of your location from there. - You must know that what franchisors do regarding site selection support depends on who the franchisor is.
If they are a startup selling its first, second, third, or 10th franchise, their guidance would be primarily based on instinct rather than thorough analysis. In that case, the franchisee would have to conduct their own research to determine the best location (external companies can assist them).
Emerging brands, with 50 to 100 units, may have more knowledge and experience. However, if the franchisee wants to open in a new region, chances are that the franchisor will not be familiar with that market.
Mature franchise brands with multiple hundreds, maybe a thousand units have a lot more knowledge as well as internal and external resources to choose the right location. And legacy brands offer a whole range of tools to select your location. - Regardless of the type of franchisor, they will give you only suggestions and general recommendations to help you make a choice. They will not impose a specific location because otherwise, they would be liable. The final decision will be yours, and you are responsible for the outcome. Therefore, you cannot hold them accountable for your site selection.
You need to understand that as a business owner, you are responsible for selecting the right location for your franchise unit. So, you must do your research thoroughly, as choosing the wrong spot can lead to significant expenses and even business failure.
Which one is more important?
Before answering that question, you must remember that the franchisor provides the marketing systems to promote the brand, but only in terms of brand awareness at a regional and national level. This means that their marketing strategies will revolve around ensuring people recognize the brand when they look, hear, or see something related to it.
Having a local marketing plan with activities, promotions, and offers to promote your franchise, attract local customers within your community, and boost your sales is your responsibility.
That being said, consider that you will have to decide whether you’ll spend more money in a better location or more money on marketing to increase your revenue.
In short, both elements are essential in the franchise model:
- The market has to do with the opportunity to bring continuous sales to your business. And you have to have enough customers to have sales and turn them into profit.
- The location has to do with people knowing you exist and how easily they can access your business.
Having the right location is absolutely critical for the success of your business. You can’t overcome an inadequate site with any marketing effort. However, having a priceless location won’t be enough if the market is not big enough or shows no interest in your product or service.
Last but not least, remember that the American Franchise Academy can help you achieve your dreams of business ownership through franchising. We work every day to help and support franchisees to be successful in the long run.
If you want to explore more about what we do, how we do it, and the outcomes you can expect, click below:
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