Faculty of Management Research Workshop; Sandy Jap, Emory University

‘The Case for Franchise Encroachment’
presented by Professor Sandy Jap

As franchisors add same brand outlets to a geographical market, the resulting encroachment from multiple locations creates franchisee conflict via revenue cannibalization. We empirically explore the possibility that encroachment could, in fact, have the opposite effect by increasing revenues as more same brand units are added. We propose that same brand units create a spillover effect that can heighten the joint revenues and profits from multiple outlets. Using detailed proprietary and publicly available data from the hotel industry, we identify the circumstances under which such revenue growth will be greater than cannibalization. We find that encroachment benefits franchisees in markets with low same brand concentration, but hurts them in markets where the brand is highly concentrated. We model possible brand spillover effects via a structural demand model and estimate it along with the supply side. Confirming the reduced-form evidence, we find a statistically and economically significant customer preference for hotels that have more same brand establishments in the vicinity. A counterfactual analysis examines the impact of encroachment reduction and the impact of legislation that bans encroachment practices outright. Implications for management, public policy, and franchise strategy are discussed.

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