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Franchising: When More Outlets Drive Revenues in the Same Market

Franchising: When More Outlets Drive Revenues in the Same Market

TI Tongil Kim and Sandy D. Jap

How many Marriott hotels are too many in a single market?

For decades, the issue of encroachment, or adding an outlet in proximity to existing outlets, has been contentious. A new outlet increases competition for customers, causing concerns for franchisors and franchisees that the existing outlet’s sales will be cannibalized. Franchising is a key means for growth and market expansion for many companies. These organizations account for as much as $890 billion or 50% of all retail sales across 75 industries in the US (approximately 3% of the US gross domestic product). Therefore, encroachment is a big issue. 

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A new Journal of Marketing study suggests that cannibalization does not always have to be the case. Using five years of hotel sales data, an experiment, and a series of simulations, our research team finds that adding a new outlet in markets with few same brand outlets can modestly benefit existing locations. Specifically, we find that revenues can increase an average of 1.7% (a 2.3% improvement in profits) – in other words, a sunny side to an issue that has historically dissolved in conflict. 

Importantly, this positive impact does not happen when the new outlet is a different franchise brand. In other words, brands matter. We also find that younger brands, cross-brands (e.g., Hyatt Place and Hyatt House), and brand bookings through online travel agencies also benefit from having more versus fewer locations. Customers appreciate and value additional outlets of a brand (up to a point) as well as when the brands are new or when they share a moniker with other franchise locations of the same brand. Customers also value multiple same brand options when booking through websites like Expedia or Kayak.

This means that when looking to expand, franchisors should prioritize markets with few same brand outlets, newer brands in their portfolio, cross brands, and online travel agency sales channels. These potentially represent win-win options in the conflict over encroachment. 

Most of the work around network expansion has focused on the legalities of this process, codes of conduct, expectations, and compliance and monitoring practices. Our work suggests that there may be alternate ways of tackling this thorny problem. Lawsuits and legislation, such as the Iowa Franchise Act of 1992 that prohibits franchise encroachment with same brand, does not have to be the only answer to resolving the differences between franchisors and franchisees.

Read the full article

From: TI Tongil Kim and Sandy Jap, “Can Encroachment Benefit Hotel Franchisees?Journal of Marketing.

Go to the Journal of Marketing

TI Tongil Kim is Assistant Professor of Marketing, University of Texas at Dallas, USA.

Sandy D. Jap is Sarah Beth Brown Endowed Professor of Marketing, Emory University, USA.