An Empirical Analysis of Territorial Encroachment Within Franchised and Company-Owned Branded Chains

Abstract

Franchisees within large branded chains loudly complain of a form of channel conflict known as “encroachment” or “impact.” Encroachment occurs when franchisors add new units of their brand proximately to their franchisees' existing units. Franchisees claim that their revenues have substantially decreased as a result of encroaching same-brand entry. The topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers. Yet, until now, evidence of encroachment has been strictly anecdotal. This paper provides the first systematic evidence of encroachment. Using revenue data from the Texas lodging industry in the 1990s, I find that when franchisors approve new same-brand units in the vicinity of incumbent units, these new units cannibalize the incumbents' revenues. In contrast to the result for franchisors, the addition of a new unit by company-owned brands in the vicinity of same-brand units is associated with an increase in the incumbents' revenues. This contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion. This finding informs theory on governance forms and exclusive territories. Implications for practitioners and policy are also discussed.