Could I face competition while running my franchise?

When weighing up franchise opportunities, one of the key questions you may have is how competition works within a franchise network.

Will you compete with the franchisor or other franchisees? How do exclusivity clauses work, and can you sell online? Here’s what the experts say…

Are franchisees in competition with the franchisor for customers?

In theory, a franchisor can compete with its franchisees. John Pratt, senior partner at Hamilton Pratt, explains: “Unless the franchise agreement says something different, a franchisor can be in competition with its franchisees. This is because there is nothing to stop a franchisor from operating company-owned outlets/franchises itself.”

Most franchise agreements, however, provide some protection. “If, for instance, the franchisor grants you an exclusive territory, then the franchisor cannot compete with you in that territory. It also cannot allow anybody else to compete with you in that territory,” Pratt adds.

National accounts

Franchisors may designate particularly important customers as national accounts, where the franchisee acts as a subcontractor to the franchisor.

“Clearly, from a franchisee’s perspective, the way that a national account customer is defined will be important to ensure that the franchisor cannot designate any customer it wants as a national account customer,” Pratt warns.

How do franchisees co-exist without encroaching on each other’s business?

Competition between franchisees depends on whether they have an exclusive territory.

Pratt explains: “First, not all franchise agreements grant an exclusive territory. In franchises based in retail premises, an exclusive territory would be unusual.

“In that situation, franchisees may well compete with each other, although they hope their franchisor does not allow franchisees to open so close to each other that they are affecting their respective ability to operate a profitable business.”

Even with exclusivity, competition law limits restrictions. “Competition law does not allow franchisors to prevent franchisees from responding to unsolicited enquiries from customers outside their territory. All that a franchisor can do is prevent a franchisee actively selling in another franchisee’s territory,” Pratt says.

Customer exclusivity

Exclusivity clauses can vary, relating either to customers or premises.

Pratt explains: “In the former, a franchisor indicates that it will not allow another franchisee to actively market to customers in an exclusive territory.

Territory exclusivity

“In the latter case, a franchisor simply confirms that it will not allow another franchisee to open premises in the exclusive territory. However, other franchisees would be able to actively market to customers in the territory from premises outside of it.”

He notes that websites do not respect territorial restrictions and “having a website does not constitute active marketing.”

If I buy a franchise, won’t I be in competition with other franchisees selling the same product?

Often, yes. Even with an exclusive area, customers choose where to go. Brian Duckett, former chairman of The Franchising Centre, says: “There could be several outlets of a particular food service concept, say coffee, in the same city, sometimes even in the same street.“

Success, therefore, often depends on service quality and customer experience. “Every network has some franchisees who are better operators than others. The onus is on you to be the best in your area,” Duckett advises.

Will a franchisor compete with franchisee businesses online?

Online sales introduce another layer of complexity. Shelley Nadler, legal director at Bird & Bird, explains: “It’s possible, even if you’re granted an exclusive territory. You need to carefully consider the nature and extent of the exclusivity that the franchisor grants you in the franchise agreement.”

Franchisors may sell online themselves or generate leads for franchisees. However, UK and European competition law treats these as passive sales, which cannot be banned.

“This means franchisors cannot prevent franchisees from selling online. However, they can require that the franchisee’s use of the internet complies with certain standards and conditions relating to quality and brand standards,” Nadler notes.

Conclusion

Owning a franchise doesn’t mean you operate in a competition-free bubble. Even with exclusive territories or customer protections, you may still face competition from both the franchisor and other franchisees.

The key is understanding the terms of your franchise agreement, including territorial and customer exclusivity, and the rules around online sales.

As the experts highlight, success often comes down to how you run your business. By providing excellent service, following brand standards and making the most of the protections in your agreement, you can thrive even in a competitive network.

Being aware of where and how competition may arise helps you make informed decisions and position your franchise for long-term success.