Adding new stores close to incumbent franchisees, or franchise encroachment, has been a contentious issue in the marketplace. Prior studies on the encroachment effect focus mainly on the store-level cannibalization, lacking the understanding of customer-level post-encroachment outcomes. The authors investigate individual-level transaction data from a cluster of bakery franchise stores to quantify the franchise encroachment effect at store- and individual-levels with store and customer heterogeneity. Our results show that incumbents experience a decrease in sales, and the extent of the lost sales is attenuated by the distance between incumbent and new stores and the size of incumbents’ product assortment. The individual-level analysis reveals that three customer segments exhibit different post-encroachment shopping behaviors: (1) patronizing incumbents only, (2) patronizing both incumbent and new stores, and (3) completely switching to new stores. While the second segment increases the post-encroachment overall spending, the third segment contributes to both cannibalization to incumbents and higher sales to the franchisor. Our findings offer managerial implications of how to manage franchise encroachment with context-dependency and customer segmentation in terms of maximizing overall franchise performance.

• Kyowon Seo(Woosong University, Republic of Korea)
• Junbeom Kim(Seoul National University, Republic of Korea)
• Seongsoo Jang(Cardiff University, UK)