Sometimes more really is more. Encroachment has always been contentious because adding a new franchise outlet near existing outlets invariably meant that sales would be cannibalized. But new research in the Journal of Marketing, suggests that this doesn’t always have to be the case. Researchers at the University of Texas at Dallas and Emory University have found that in markets with few outlets, the addition of a same brand outlet can in fact lead to modest, but significant, sales increases for incumbent locations. When the new entrant is a different brand, they see the usual result: sales are cannibalized.
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Kim, TI Tongil, Sandy Jap (2021), “Can Encroachment Benefit Hotel Franchisees?,” Journal of Marketing.
Franchise encroachment is the addition of an outlet in the vicinity of existing franchisees. It is a highly contentious issue resulting in revenue cannibalization of incumbent locations. Against this backdrop, we consider the possibility that the addition of same brand outlets can in fact, create positive effects via customer utility and ultimately, benefit franchisees. This may be due to a range of mechanisms such as quality signaling, learning, or brand awareness, resulting in a positive pathway on franchisee performance. We unpack this using detailed proprietary and publicly available datasets from the hotel industry over a five-year period, and an experiment. Our results evidence positive effects on customer utility for same brand outlets, and stronger effects for newer brands, cross brands, and online travel agency channel bookings. Counterfactual simulations indicate that although encroachment hurts franchisees on average, it can modestly benefit same brand franchisees in low brand density markets. Together, this illustrates the potential “sunny side” of encroachment, underscoring the need to update our view of encroachment as context-dependent. Our novel emphasis on customers versus the dominant firm view suggests customer and incumbent responses to encroachment should be accounted for in the development of franchise strategy and public policy decisions.
Special thanks to Holly Howe (Ph.D. candidate at Duke University) and Demi Oba (Ph.D. candidate at Duke University), for their support in working with authors on submissions to this program.
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