The worth of the Indian domestic textile and apparel market has been estimated at US$ 58 billion, of which about 70 per cent is made up by apparel, and the remaining 30 per cent by textile. The substantial population, in conjunction with such key factors as surging urbanisation, increasing number of double-income families, higher disposable incomes, rising presence of modern retail, etcetera, has placed India high on the priority list of both domestic and international retailers. Again, it is anticipated that the apparel segment will benefit by the expansion of modern retail, which currently accounts for 18 per cent of the total market and has the potential to grow to 25 per cent over the next few years.
However, while the overall scenario looks promising, the retail industry has encountered numerous challenges in India. The rising cost of real estate in the metros and tier I cities has forced retailers to rethink their business models. While most retailers do want to achieve scale of operations, they are constrained by the amount of investment required in this endeavour. The overall economic outlook is also continuously exerting pressure upon the retailers’ profitability.
The gloomy macroeconomic scenario has also forced retailers to re-examine their current business models and appraise new ones, as a means to further the growth both within the country and overseas. As may be apparent, strategies vary from retailer to retailer, especially when venturing into unexplored markets. For example, while some retailers may prefer opening concessionary outlets in department stores, others might ally themselves with a franchisee. Ultimately, the choice of retailing model depends on the brand’s business proposition, and the variation is only to be expected.
Again, the popularity of the franchising model comes from it being an asset-light mode of expansion. This allows retailers the luxury of ramping up operations within a short span of time. Franchising also offers the additional advantage of customisability; most agreements with franchisees can be tailored to suit the retailer. What’s crucial is the fact that franchising has a proven record and a high success rate, which makes it undeniably attractive for new ventures everywhere.
With the opening up of Foreign Direct Investment (FDI), a large number of international retailers set up shops in India in association with Indian partners. While the initial investment came in through the joint venture mode, most retailers chose to expand operations via the franchising route. Today, franchising has become an established trend in almost all sectors, such as clothing, footwear, education, training, beauty and health products and services, consultancies, wealth management, e-commerce, and many more.
Some of the key attributes of India, such as the widespread, multicultural geography, pose a serious challenge for retailers looking at expansion. Franchising helps the retailer understand the consumer’s cultural affinities, thus aiding a more effective scaling up. Besides, the local partner also brings in knowledge about the real estate situation in the target geography, apart from a better understanding of the consumer, and the ways by which to reach out to them easily. The franchisee also bears significantly lesser risk. Within the fashion segment, it is not just apparel brands that are looking at the franchise route, but footwear and accessory brands are also following suit. Like the fashion brands, these also have a few company-owned stores and some franchise stores.
Traditionally, franchising has been about low-cost retail expansion, sometimes including a minimum guarantee clause, sporadic franchise recruitment, and a surfeit of face value contracts. However, with changing times and trends, fashion franchising is no longer perceived to be merely a low-cost expansion tactic in India, but is instead seen as the ultimate tool for building scale. Most retailers involve their franchise partners in the sales process. In the process, retailers gain an understanding of the market dynamics and a category-wise sales analysis from their partners, and plan the overall merchandising accordingly. Some also give the franchisees a free hand in choosing what to sell in their stores.
With innovation at its peak, franchising is all set to broaden its horizons. Several techniques have been developed to suit both growing needs and emergent situations. Innovation, in terms of formats as well as concepts, is being touted as the next big leap in this field in the country. For instance, with the advent of the mall culture in recent years, in tier I cities as well as tier II and III cities, small budget kiosks have become popular modes of franchising. This is perhaps the next chapter in franchising after regular retail stores and vending machines. The modern investor doesn’t explicitly look at conventional sectors alone. There is a radical shift in the entire franchising world and even investors are a part of the transformation.
It is expected that franchising will gain momentum in times to come. As retailers will want to develop on overall strengths in brand building, understanding the consumer and developing a wider array of offerings to invite the consumer to buy more, as well as the day-to-day running of the stores will be let out to the franchisees. The latter will also not remain specific to a store but will try to utilise the relationship with the retailer to get better organised, over a period of time. The basic operating rules may also be rewritten, making the franchisees take an active part in the risks of the business. Hence, the overall sensibilities of people coming into the franchise business may get redefined in the coming years. In the short term, the franchisees might like to derisk themselves by working with multiple brands simultaneously, rather than tie up with just one brand. As a result, there could be various models working in conjunction at any point of time.
The more organised of the retailers will end up using better IT tools to ensure that the overall analytics of the business are mapped on real-time store data. This will also help them continuously engage with franchisees and make improvements wherever necessary and possible.
With both pros and cons, it is anticipated that franchising will develop into the predominant model of operation. However, success will only be achieved by those franchisors in the fashion industry which have strong entrepreneurial skills, risk-taking ability, and which can tap the extant opportunities in these changing times.
ABOUT THE AUTHOR
Amit Gugnani is currently working as the Senior Vice President, Apparel Operations at Technopak. He has over 14 years of experience in apparel manufacturing. His key skills include operations consulting with domain expertise in apparel operations, with on-the-ground experience in India, Sri Lanka, Bangladesh, Pakistan and China.