Using data and research to find the line between healthy competition and market oversaturation
Have you ever received a letter from your franchisor about a potential new franchisee in your area? Do you wish your franchisor had consulted you regarding a new franchisee before they opened a new property so close to your location? When a potential new hotel within a franchise system could draw business away from an existing franchise, often the best way to ensure the playing field remains level for everyone is through the use of impact studies. These can help all parties determine whether both businesses can thrive in the market.
BACK TO BASICS
For these purposes, the most basic definition of “impact” is business that one hotel loses to another. When analyzing this impact, one can break it down into two types: base impact (not brand-specific) and incremental impact (brand-specific). Incremental impact is particularly important for a franchisee concerned about a new hotel operating under the same flag.
An impact study is a review conducted to determine whether, and how much, a new hotel in a given market will affect the business of an existing hotel in that market. Franchisors or franchisees request these studies when the proposed new hotel will be operating under the same brand and marks as the existing franchisee.
Generally, a third-party independent consultant will conduct the impact study. The consultant performs a number of interviews, with the owners and/or managers of the existing and proposed businesses and potentially others such as local market participants and local government officials. A consultant also will analyze reservation and operating statistics, as well as economic and demographic information. The consultant obtains this information from sources such as the franchisor, franchisee, proposed new franchisee, chamber of commerce, and other government agencies.
To be as accurate as possible, a consultant should consider how the brand’s reservation systems and loyalty programs operate, as well as the franchisor’s national advertising programs. Given how these details can differ greatly from system to system, franchisees should inquire as to the consultant’s experience with and knowledge of their particular brand.
WHAT’S A FRANCHISEE TO DO?
A franchisee concerned about a potential new hotel under the same brand should pay close attention to any communications from their franchisor about the new property and respond to all requests for information or input. Most hotel franchisors have specific policies and procedures for evaluating impact, so the franchisee should check their franchisor’s manuals or policies and speak with their brand contacts about their concerns promptly.
The existing franchisee should begin by conducting their own fact-gathering campaign to be sure there is sufficient concern to warrant objecting to the new property and to provide the most helpful information to a consultant. The franchisee take the following steps:
- Gather information on the relevant market (e.g. sources of business, seasonality, timing of business).
- Understand the proposed operations of the new business compared to their own (price points, property type, target demographics).
- Be able to explain why the new business could affect their hotel, being specific about same-brand competition issues.
While it’s important to move quickly to comply with the franchisor’s impact policy, a concerned franchisee should also take the time to fully understand the issue and be reasonably certain there is an issue with the proposed new property before diving head first into an impact study.
An impact study can provide helpful information for both the franchisee and franchisor regarding how a new property in the same brand may affect the business of an existing franchisee. However, to obtain the most useful data, the franchisee should be prepared in advance to cooperate with the consultant conducting the study. Working with experienced advisors familiar with the industry will aid a franchisee in navigating an impact study, as well as in using these studies to argue their position to the franchisor.
is a partner and shareholder with Garner, Ginsburg & Johnsen, P.A., a firm that specializes in issues specifically related to franchising and has recovered more cash for franchisees – $240 million – than any other law firm in the country. She can be reached at [email protected].