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What is franchise cannibalization?

On Behalf of | Aug 24, 2023 | Franchise Law |

Does it seem like there is literally a Starbucks on every corner? Is there a Subway just down the block from another Subway?

You’re not imagining things. Before you invest in a franchise, you want to understand more about the concept of “franchise cannibalization” and look closely at the way that the franchisor in question operates.

Subway has been the “poster child” for self-cannibalization

Franchise cannibalization occurs when two or more franchise locations within a brand’s network are situated so closely that they end up drawing customers away from each other – rather than increasing the brand’s overall customer base by bringing in new customers.

Subway has been criticized since the early 1990s for this exact issue. Because franchisees could set up shop quickly, cheaply and easily, and Subway encouraged them to do so, there was no real oversight or planning on how to keep self-cannibalization from happening. Industry leaders say that’s ultimately what’s behind the closure of so many franchises over recent years.

Some businesses seem to do okay with a store on every corner. Starbucks, for example, seems to be able to operate on nearly every corner in urban areas without feeding off each other – probably because they cater to a lot of foot traffic. But not every franchisor is careful – and franchisees (or those thinking about opening one) would do well to remember that market conditions today may not reflect market conditions tomorrow.

Is there anything you can do about it before you get into a franchise?

Before you decide to invest in a franchise agreement, make sure that you look carefully at the market and identify areas where you see the highest potential for growth. You also want to ask questions of the franchisor, to find out if they offer franchisees any form of exclusive territory to prevent overlap and foster a dedicated customer base.

If you want to take a lesson from what has happened with Subway, you have to take the initiative on these topics when you’re considering a franchise agreement – because the franchisor may not. It can help to seek experienced legal guidance before committing to any agreement. That’s the best way to make sure your interests are truly protected before you move forward.