Encroachment or exclusive sales territory issue is very important in franchise business. It affects directly not only the growth of franchisor but also franchisee’s survival. Reflecting the importance and its destructive effect on franchisee’s sale, related regulation were strengthened and tightened by renewal of Fair Transactions in Franchise Business Act in 2013. In spite of the regulation strengthening, however, conflicts between franchisor and franchisees are increasing in territorial encroachment area recently. Encroachment conflicts tend to increase in matured stage in their life-cycle. In matured stage, the possibility of encroachment increase because developed stores cover the market mostly. Many domestic franchisor are in matured stage in their life-cycle especially food and beverage industry.
Conflicts between franchisor and Franchisee are caused by incentive mismatches commonly. Encroachment conflicts occur when franchisor’s incentive conflict with franchisee’s in development a new store. While most of franchisors attempt to develop a new store incessantly for additional growth, franchisees tend to oppose a new store development near their sales territory due to worry about sales decrease. while system size is the most important to franchisor’s decision making, franchisee have no interest in system size. franchisees think their sales or efficiency is more important than system size. A lot of similar situations are observed in real market ordinally. When franchisor face a similar situation, they use some conciliation as follows; • to suggest a franchisee operating a store nearby planned store to develop and operate a new store.
• to compensate for the loss of the existing franchisee nearby planned store But it is difficult for the franchisee to accept the first suggestion because most of franchisees are livelihood-type entrepreneurs in Korea. They have not enough financial capacity and managerial ability to operate multiple stores. The next step is that the franchisor compensates the loss of the existing franchisees. However there are some problems using this alternative. It is difficult to calculate and expect the accurate loss amount of the existing franchisee. Moreover, franchisor cannot compensate their loss consistently after opening the planned store. If the franchisor and the franchisee could have not been able to reach an agreement, the franchisor would enforce the new store development unilaterally. Eventually, severe conflicts between the franchisor and the franchisee happen to occur.
This paper proposes ‘Win-Win Cooperative MUFee(WWC MUFee)’ to overcome the incentive mismatch between the franchisor and the franchisee regarding a new store development. The core concept is that some SUFees in the same area develop and operate jointly new franchised stores. It is possible to reduce conflicts and increase revenues using this method. This method is a modification of the MUFee concept. While MUFee is a single franchisee operating multiple stores, WWC MUFee is co-op company consisting of several franchisees. Win-Win implies incentive matches between franchisors and franchisees vertically while cooperation suggests co-operation between franchisees horizontally.
A particular market condition is supposed as <diagram A> to explain the WWC MUFee. There are four franchisees operating stores in the area. And there is residuary market potential, but the residuary market potential is not enough to operate a standard-size store. If the franchisor developed a new standard-size store in the residual market, encroachments occur within the territory of the franchisees A, B, and C(Show <diagram B>) After opening a new store, the sales of each store is expected as in <table A> : 80(franchisee A), 90(Franchisee B), 90 (franchisee C), 100(franchisee D), and 80(new store). In this case, the franchisor can achieve additional sales but the franchisees’ sales decline except franchisee D. Thus, all franchisees in the territory will oppose to the development of a new store nearby their stores. If the franchisor enforces a new store development, it is too obvious to occur a serious conflict.
But if the franchisees in the territory co-develop and co-operate a new store, the result can be changed. The sales of new store can be allocated to each franchisees by an appropriate ratio, so all franchisees can gain additional sales. The franchisor and the franchisees achieve mutual benefits and progress by cooperation.
It is difficult for franchisees to grow by leaps because a business scale is limited to a store unit. In spite of this limitation, some opportunity-seeking franchisees, however persue a new growth opportunity with a and active attitude and grow into MUFee. MUFee has major advantages over SUFee as more growth, greater financial strength, a better market penetration strategy or a reduction in assistance needs of conflicts. But most of franchisees in Korea are livelihood-type entrepreneurs, so ability and entrepreneurship are not enough. Using WWC MUFee method, it is possible for individual franchisees to overcome the limitation and create the same effect of MUFee.
Active supports from franchisor and government are helpful to vitalize the WWC MUFee method in the market. First of all, franchisors elaborate a structure and requirement specification appropriate for their system. It is necessary to recommend and encourage for franchisees to attempt this method also. And government’s supports, for example employment support program, may be helpful to stabilize the WWC MUFee method.
The effects of the method are as follows ; It is possible to reduce conflicts in the franchise system and to raise up a small livelihood-type franchisee into competitive company. And many job opportunities can be provided if this method is diffused and settled in the market..
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