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What is cannibalization and what can I do about it?

On Behalf of | Mar 1, 2023 | Franchise Law |

You may notice a dip in your sales when another franchisee opens a store near your business. Because of your proximity, some of your sales naturally go to the other franchisee. This phenomenon is a typical case of cannibalization between two franchises.

You may feel inclined to go to the other franchisee to talk it out, but this is not exactly their fault. The blame should fall on the franchisor for not planning well enough to prevent it from happening.

Aside from looking at proximity, they should have checked market demands and your contract terms before allowing the other franchise to open. When cannibalization happens between franchises, you and the other franchisee suffer from loss or lack of sales, which could have happened due to your franchisor’s oversight.

What can I do about it?

Cannibalization is usually a sign of encroachment, the act of placing a competing unit that can affect your franchise’s business. Aside from a new franchise, other distribution channels — such as apps or smaller franchise units with more convenient features — may cannibalize your sales.

It may also violate your contract’s implied good faith and fair dealings covenant. Fortunately, you can take the following steps to protect your business:

  • Review your disclosure documents and check clauses regarding territory rights.
  • Send a written notice to your franchisor about the problem.
  • Discuss the issue with your franchisor to resolve the issue.

As a franchisee, you should take the initiative when tackling these subjects. Encroachment is a fundamental problem that directly impacts your business’ earnings, which could lead to other issues. You can reach a resolution that benefits you and other franchisees by taking the proper steps to address this problem.