Can Encroachment Benefit Hotel Franchisees?

Abstract

Franchise encroachment, or the addition of an outlet in the vicinity of existing franchisees, has been contentious, due to revenue cannibalization of incumbent franchisee locations. We explore the possibility that the addition of same brand franchisees can, in fact, create positive effects on customer utility and benefit franchisees under certain circumstances. We unpack this using detailed proprietary and publicly available datasets from the hotel industry over a five-year period. We find evidence of positive effects on customer utility, and stronger effects for newer brands, cross brands, and online travel agency channel bookings. Counterfactual simulations indicate that although encroachment generally hurts incumbent locations, it can modestly benefit same brand franchisees in markets where the brand density is low. Our study suggests the need to update the view of franchise encroachment as context-dependent and allow for the possibility that franchisees can benefit.

Keywords: franchise management; encroachment; brand spillover; franchise sales and systems; cannibalization

JEL Classification: C5; M31