protected territories as a development tool...protected territories as a development tool how can...

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