An Illustrative Application of Multi-Unit Franchise Expansion in a Local Retail Market

Abstract Retail expansion in a local market offers many challenges, and given the sensitivity of survival to location mistakes, it is imperative to develop site models that incorporate realistic impediments to that expansion. Small independent businesses or local area franchisees facing limits on all forms of capital rarely can open additional units without delays. In this paper, we test the benefit of using Kaufmann, Donthu and Brooks' (2000) multi-unit site selection model that incorporates the reality of delays in the opening of new stores as well as the recognition that local retail chains can face competition from many hard to identify sources. We use data from the actual introduction of a small set of stores in a major United States metropolitan market to estimate the potential for improvement over a pure sequential expansion strategy. When compared to the sequential strategy actually used by the retailer, we estimate that performance could have been improved by 15.5% if a model that anticipated the delays in opening the stores and competition from secondary sources would have been used.

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