Market and location research: more important than you think

Time and time again, the law practice offers a variety of special situations, which with some regularity contribute to the situation at hand. A practical situation recently showed once again how important it is to carry out a thorough market and location research, as well as to interpret it correctly, before proceeding to open a location. In addition, the responsibility for the right choice of a location in the case of cooperation on a franchise basis can also weigh heavily to the detriment of the franchisor involved. In this case it concerned a cafeteria, in a municipality not to be specified at this location, belonging to a formula not to be specified, opened in a shopping street that is well known in itself. The cafeteria was nicely decorated, the entrepreneurial couple who ran the cafeteria were knowledgeable and well motivated and drawn to this cafeteria by the involved franchisor from another profession with the announcement that good turnovers and ditto earnings could be generated at the location in question. Prior to the conclusion of the franchise agreement, these promotions were accompanied by an externally conducted location survey, which indeed clearly showed good turnovers and results. Part of the site investigation was a competitive analysis. In it, the local cafeteria market was examined. The conclusion of the location study was also that the competitive conditions were such that they would make the predicted turnovers and results more than possible.

As stated, the cafeteria market was examined. However, a nearby McDonald’s branch turned out to be completely overlooked. The reason for this later turned out to be that a McDonald’s restaurant, in the view of the market researchers, did not fall under the term “cafeteria”. For this reason, the Mc Donald’s branch actually located approximately 200 meters away was not included in the competition analysis and was therefore not included in the turnover and result forecasts. The entrepreneurial couple involved, again prior to concluding the franchise agreement, did inquire with the franchise organization about the proximity of the McDonald’s branch, but the answer from that angle was that the competition analysis was sound and the predicted turnovers and results more than feasible goods.

After the opening of the cafeteria in question, the reality turned out to be quite different. The McDonald’s-Restaurant turned out to exert an irresistible attraction on the surrounding area. The turnover and results were and are not achieved by a long shot. The cafeteria is seriously threatened in its survival.

This case shows that market and location studies are by no means sacrosanct in all cases. Entrepreneurs would do well in all cases to study things with a critical eye. Franchisors should take a closer look at this before approving such an investigation, because, as perhaps in this case, they could be liable for the negative consequences of not achieving the predicted turnovers and results. Categorization of branches, and certainly sub-categorization within a branch, such as the division cafeteria/restaurant in this case, can under certain circumstances have a catastrophic effect. Common sense should prevail at all times. Look before you leap.

For the published version, see the section: “Columns, including Franchise+”

Mr DL van Dam – Franchise lawyer Ludwig & Van Dam

Franchise attorneys, franchise legal advice Would you like to respond? Mail to vandam@ludwigvandam.nl