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Physical Locations Are Helpful

Franchising is more effective in industries such as computer stores, in which the product or service is provided to the end customer at a set location, than in industries such as carpet cleaning services, in which the product or service is provided at the customer's premises. While franchising can, and does, occur in service industries without set locations for production and distribution, it is harder to minimize conflict between franchisees in such industries. Franchisees are independent businesses, so they have incentives to compete with each other to serve the same customers, a situation that is not present when the same party owns the different locations.

Franchisors cannot prevent their franchisees from competing with each other. While antitrust laws allow franchisors to refrain from putting an additional franchised or company-owned outlet in a particular geographic area, these laws preclude franchisors from limiting efforts of franchisees to serve customers in one location from another location.

In businesses in which it is difficult to serve customers from a distant physical location, franchisors can effectively minimize between-franchisee competition by limiting the number of locations in a geographic area. Take, for example, the situation with McDonald's outlets. Because you need to go to the neighborhood McDonald's to get your burger fix, there is little between-franchisee competition for your burger business. Another McDonald's franchisee on the other side of town is unlikely to be able to sell you the burger that you are planning to have for lunch.

However, when the franchisee's physical location doesn't matter for the production and delivery of a product or service to the end customer (usually because the production and delivery occur at the customer's premises), franchisees end up competing with each other for the same customers. For instance, online travel agency franchises face the problem of franchisees from one city selling cruise and Disney vacations to customers in another city. That problem makes franchising relatively ineffective in the online travel agency business. In short, in industries that do not require a fixed location to produce and deliver a product or service to the end customer, having a vertical organization in which managers can tell subordinates not to compete with each other for customers is often necessary to avoid between-location competition. Franchising is not as effective in these industries as it is in industries in which fixed locations are needed for production and distribution.

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