Store Catchments, Territory Boundaries and Market Holding Capacity – Setting up for Success

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As a location intelligence consultancy heavily involved in the Australian franchise sector,
GapMaps’ is often asked about franchise territory design. Irrespective of the sector
franchisors are working in or the service they’re providing, the questions we’re most
frequently asked are ‘How many franchise territories can we create and how do we best
define the territory boundaries?’


Primary Catchment Areas


Understanding and defining the primary catchment area being serviced by the store (or
mobile service) is the starting point for franchise territory analysis. By primary catchment
area we’re referring to the area within which the majority of customers will commence (or
sometimes conclude) their purchase journey.

Franchisors are notoriously poor at estimating their primary catchment areas. When we ask
franchisors about the catchment area being served by their business, they’ll routinely talk
about the customer who travels from 10km or 15 minutes to visit them. Now that may be
true, but when determining catchment areas, we’re solely interested in what the majority of
customers do and not what ‘outliers’ do.

Because franchisors are poor at estimating catchment areas, and because it’s fundamentally
important for assessing franchise territory potential, we’re strong advocates for the collection
of customer address data. It doesn’t need to be personalised and in most cases, it doesn’t
require street number or name, but collecting suburb data and attaching that to a customer
name or customer ID is enormously valuable.

So how large are the primary catchments? The answer is usually about half as large as the
franchisor initially thinks. A childcare centre primary catchment will typically be around 2km
or less than 5 minutes, a pharmacy is similar and a café in a commercial area might have a
primary catchment as small as 100 metres. We work with many fitness and wellness
franchise systems and their primary catchments rarely extend beyond 5 minutes.

Franchise territory sizes should largely align with the primary catchment area. If the
territories are too large there will be customers who find the franchise location inconvenient
to visit, or, in the case of a mobile franchise system, the customers are too far away for the
franchisee to conveniently and efficiently serve. And if the franchise territories are too small
there are insufficient customers within each territory and inevitably there’s cannibalisation
with franchisees competing for the same customer.


Target Customers and Penetration Rates


When establishing the catchment size, we’re interested to define the target customer within
the catchment. People within a catchment do not have equal value for the franchisee – some
will be likely to visit regularly, some might sometimes visit, and many others will not transact
with the business at all. There are many ways to define a core customer and it’s often that
demographic criteria are very useful – what gender, age, income, family grouping, profession
etc. best describes the core customer?

Once the core customer profile is defined, we can calculate the customer penetration rate
and at this point a case study may be useful. Suppose a fitness club has 1,000 members
and their target customer is aged 20-35 with a personal income above $85,000 or household
income above $110,000. If there are 10,000 of those people (target customers) within the
primary catchment area and 1,000 of them are club members we have a penetration rate of
10%.

Continuing with the fitness club example, if we know that a successful club requires 1,000
members and we know that existing clubs have a penetration rate of 10% then we also know
that each new territory needs to provide at least 10,000 target customers within an area
that’s not so large as to extend beyond the travel times that customers are prepared to
travel.


De-risk Growth by Replicating What Already Works


Using this methodology, you can see that we’re forecasting business performance across
new geographic areas based on what has already been evidenced to work. Growing a
franchise system is both complex and challenging and we can de-risk growth by
replicating what has been proven to work.

And how big to we allow those territories to grow? Only as large as we can see evidence of
customers being willing to travel at the existing locations. So, if the primary catchment area
in the existing locations reflects a travel time of say 5-minutes we don’t want to design new
territories that need to be 10-minutes in size to amass the required 10,000 target customers.
And that’s not to say these larger territories can’t work, but it is to say that there’s no
evidence based on current customer behaviour to support such large territories. In this
example, if a new franchisee with the new larger 10-minute territory captures 10% of the
target customers within a 5-minute travel time (in line with the existing clubs) they’ll fall well
short of attracting the target 1,000 club members.

We also need to reflect on the fact that outlet performance is a function of not just the
catchment but also the micro location attributes. For example, a café requires a retail strip or
shopping centre which it can anchor to, and our analysis consistently shows that better
performing fitness clubs and wellness centres are attached to retail strips or neighbourhood
precincts with a major supermarket. When designing or building territories we’ll set minimum
criteria relating to the presence of other retail activity in the territory, and we’ll often ensure
there is a hub of the desired retail activity in the centre of each territory that we design.

The final territory design question relates to the territory boundaries. In this example we’ve
discussed a 5-minute travel time but that provides a boundary line that can only be viewed
on a map and it’s very difficult to describe the territory area to a potential franchisee. Our
approach is usually to grow the territory size using suburb boundaries until the desired count
of target customers is reached. And we don’t allow the territories to grow beyond the known
travel times of existing customers. Suburb boundaries are better than postcode boundaries
as postcodes are often too large and there are also instances where they have very unusual
shapes. In some instances, we can use smaller geographic boundaries like SA1s but they’re
also difficult to describe to an incoming franchisee.


How Many Territories?


With the territory criteria being defined, we’re able to answer questions relating to the
theoretical maximum number of territories that can established or what we call the market
holding capacity. This requires some spatial mapping software and calculates the total
number of territories that satisfy the design requirements (target customer count plus micro location attributes) within an area that doesn’t exceed the established maximum geographic
size.

It’s often the case in regional markets that customers are prepared to travel a little further to
visit a retailer. When designing franchise territories this will often mean the imposed
maximum territory size will be expanded – so the 5-minute maximum travel time in metro
might become 7-minutes in regional markets.

Once all territories are designed (and counted) the franchisor should consider how best to
progressively sell the territories. Consideration needs to be given to both timelines and
geographic areas.

Make Use of What We Have and Collecting Customer Data

We’re fortunate in Australia to have access to some of the most granular and informative
demographic and retail data in world. Our clients in SE Asia would love to have data even
half as good as we have here in Australia. But for all that is available to us, it’s not
particularly helpful if the franchise system isn’t collecting their own customer data. The
starting point for franchise territory analysis and building boundaries will always be
understanding and leveraging what we know about existing customer behaviours.

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