In a blog entry this past January, we discussed the growing trend of multi-tiered franchise concepts being developed by franchisors that offer potential franchisees multiple price/size entry points into a franchise system. Another trend involves franchisors who seek to grow their brands by selling franchises for operation in “nontraditional locations,” which are other than traditional retail locations such as store front and malls.
A recent article entitled “Moe’s, FOCUS Brands to Explore Nontraditional Venues” posted on June 8, 2012 on www.qsrmagazine.com, a website dedicated to quick service restaurants, highlights recent decisions by Moe’s Southwest Grill, Auntie Annie’s, Cinnabon and Carvel Ice Cream to develop their brands further through nontraditional locations such as train stations, airports, convenience stores, college campuses and military bases.
Moe’s Southwest Grill’s president, Paul Damico, cites a number of reasons for growing his brand through nontraditional locations. They include: (i) access to customers that traditional real estate locations cannot reach; (ii) the ability to devote less money, time and energy on marketing and advertising with respect to these nontraditional locations; and (iii) the ability to open nontraditional locations quicker than larger traditional retail locations.
Franchisors that are interested in expanding their franchise network into nontraditional locations should note that there are challenges to nontraditional locations that differ from franchising in traditional locations. Specifically, the franchisee of a nontraditional location may be a larger corporate food and facilities management company like Aramark Corp., Compass Group Americas Group or Sodexo, Inc. rather than a traditional single-unit franchisee. These companies provide food services and other retail services in nontraditional locations such as hospitals, corporate offices, sports stadiums, schools, college campuses, military bases and convention centers. In some instances, the nontraditional location franchisee may be a larger entity than the franchisor, which may affect the power dynamic of the franchisor-franchisee relationship. For example, as of August 31, 2011, Sodexo, Inc. reports that it generated $8 billion dollars in revenues for the year. Ensuring that the nontraditional location franchisee dedicates sufficient time, energy and focus to the franchisor’s brand and to upholding the franchisor’s values may be more difficult in nontraditional locations.
As a practical matter, when drafting a franchise agreement one should consider how nontraditional location franchises affect traditional location franchises, especially if an exclusive territory is granted to traditional location franchisees. It is important for the franchisor’s franchise agreements to provide it with the right to open and grant nontraditional locations in existing franchisee exclusive territories. This firm’s franchise agreements expressly reserve the right for franchisors to open and/or franchise nontraditional locations to be operated within a traditional location franchisee’s territory. The rationale is that potential customers located within a nontraditional location would not be serviced by a traditional location franchisee. Accordingly, the traditional location franchisee could not expect to benefit from that specific market