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Franchising Fervour

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International food brands like Kenny Rogers Roasters, Cake Boy, Angel Berry, The Counter, and Burger King are set to whet the appetite of Indian consumers. They will be taking the franchise route to enter India in the next two years, much like McDonald’s, Domino’s, KFC, Subway, and Booster Juice.

“Franchise is a smart and efficient option for investors because they get the benefit of years of learning from the parent brand. This also gives first time entrepreneurs to evolve as restaurateurs. Usually, it works out, because entrepreneurs or investors have a support system to fall back on,” says Samir Kuckreja, President, NRAI, and Founder-CEO, Tasanaya Hospitality.

“A brand should have certain qualities before inviting investors to become its franchise partner. Goodwill, quality, success story of their own outlets, strategized marketing techniques, and a complete understanding of the market sentiments are qualifying factors,” cautions Gulshan Mishra, Director at FranchiseZing, a company with expertise in franchise.

According to a KPMG report ‘Indian Franchising Industry-2013’ brought out in association with Franchising Association of India, formats like the QSR, café/bars, fine- and casual dine are expected to see a rapid jump. KPMG estimates franchising investments to the tune of USD 1.5 billion, 1.4 billion and 1.2 billion, for the respective formats, by 2017.

“The QSR is the fastest growing format in restaurant franchise as the concept of malls is being incubated in almost all the cities that have food courts. A franchised outlet in a food court saves big money as the franchisee does not have to spend much on interiors/exteriors, furniture and fixtures, and shares a common area with other brands,” comments Mishra.

Ketan Kadam, owner of Maroosh in Mumbai, is one of the early proponents of the QSR segment, which he pitched through a location formula. He started his Lebanese cuisine QSR, Maroosh, next to his entertainment spot Fire n Ice so that late night party-goers at the latter would come for hummus, pita bread and wraps at Maroosh.

The brand has grown into a franchised chain of 14 outlets. Kadam supports investors with material management systems, trained chefs and vendors. “We charge 5 percent as a start; this would increase to 7 percent in the near future. This is on the gross revenue, which is net of taxes,” he says about the revenue sharing model and a contract of 3-5 years. However, he has stopped offering franchise in the domestic market, and his three new outlets are all company-owned, but plans to franchise the brand in Hong Kong and Singapore.

For Darshak Nitin Parikh, Director, Ganancia Hospitality, repeated visits to a Maroosh outlet made him consider the brand as a viable investment. “I’ve been visiting Maroosh since the last couple of years as the food is good and priced well.  I chose Maroosh because it’s a successful brand, and I know what it stands for,” he says. The first time entrepreneur/investor pumped in an initial sum of Rs 28 to 30 lakh, and got his ROI within 18 to 24 months. “We give 5 percent on gross revenue per month and I have a license agreement for a five-year tenure with the parent brand,” says Parikh and adds, “I’d love to open a second franchise outlet of Maroosh but it’s a pity they’ve stopped franchising.”

International brand, desi flavour

Yum, Subway and TGIF are among the most successful franchised international brands in India. “For any franchise, you should have a concept, a target market, supply chain and location. A foreign brand will work in the Indian market provided the company understands the needs of the local consumer and adapts accordingly,” says Kuckreja. “A case in point is Pizza Hut which has localized its flavour (its latest offering is biryani pizza) and this message is conveyed through regular campaigns,” he adds.

When a brand localizes its flavour, it connects with food lovers. Subway’s Chatpata Chana and Chicken Tandoori have a local fan following, and it makes an effort to keep the vegetarian and non-vegetarian service counters separate, subject to space. The chain also runs fully vegetarian restaurants at select locations, and has around 428 restaurants across the country. Its India plans are in line with its growth plans for Asia for which it has set a target of 650 restaurants by the end of 2015.

“Subway restaurants have replicated the brand’s inherent appeal of being a healthier QSR chain across the globe quite successfully,” explains Manpreet Gulri, Country Head, Subway Systems India Pvt Ltd. “In order to grow in new markets, knowledge and understanding of consumer needs and preferences, and a strong local network is necessary. Hence, the brand has adopted the franchise-route globally, and operates a 100 percent franchise model, with agreements spanning 20 years.”

According to Gulri, since the set-up and operational cost of a Subway outlet is reasonable (between Rs 40 to Rs 60 lakh), it doesn’t put pressure on the franchisees, and even in a difficult economic environment, it is profitable. It offers flexible store formats and customization, and training is imparted to franchisees at its center in New Delhi, while the University of Subway offers online training. The brand takes 8 percent as royalty fee. “In India, franchisees contribute 4.5 percent of their sales to the advertising fee. The Franchise Advertising Fund (FAF) then manages the advertising on a global, regional, national and local level,” informs Gulri.

The KPMG Report indicates that currently the organized food service industry is  around 3.5 percent, with franchisee penetration around 70 percent — as against 90 percent in the US — indicative of massive growth potential. Most of the growth  is expected to come through expansion of food service chains like QSRs, ice cream parlours, juice bars, cookie shops, bakeries, and single/multi cuisine restaurants.

When Pan India Food Solutions became the Master Franchise for Coffee Bean & Tea Leaf (CBTL), it opened new avenues for the brand. Says KS Narayanan of Pan India Food Solution, “We own over 90 percent of the outlets, and are present in Mumbai, Delhi-NCR, Chandigarh, Pune, Chennai, Kolkata and Bangalore.” It also has two sub franchises of CBTL and of Copper Chimney, and manages the brands in metro cities, and sub franchises them in tier two cities. “Of course, sub franchisees should have the right bent of mind to make it work. Essentially, we look at people with local knowledge and a passion for the brand,” he adds.

Narayanan informs that the initial investment for a franchisee would be Rs 1.5 to Rs 2 crore for a fine dine; and around Rs 50 lakh for a coffee shop/kiosk. “The parent company sets the standards, menu, software, hardware and branding, and provides staff training. We’ve been getting a number of enquiries for franchise and are in the process of evaluating new parties and newer locations this year.”

Franchise clicks with desi brands

“In the absence of capital, franchising is the best way to expand and grow your business. It’s a smart channel with high volume growth,” reasons Murali Krishna Parna of Sagar Ratna. He offers a 10-year license agreement to franchisees who invest Rs 1 to Rs 1.5 crore for his Sagar Ratna brand – one of the largest and fastest growing South Indian restaurant chains in India – with 25 to 30 percent year-on-year growth.

To Monish Gujral goes the credit of spreading the flavour of Moti Mahal nationally. Moti Mahal, rechristened Moti Mahal Delux Tandoori Trail, has established itself through diverse formats such as fine dine and QSR, with a pan India presence.
Gujral, who has propagated the legacy of Moti Mahal founded by his grandfather Kundan Lal Gujral, has grown the brand to 125 restaurants, earning 7-8 percent sales revenue from the franchisees for a 9-year contract.

Gujral, aware of the sensitivity and responsibility associated with a legendary brand, gave the franchisees all the SOPs and built the back-end processes. “We train the chefs to ensure uniformity of taste, and a standardized look and feel is maintained across all the outlets.” He is aiming at two new franchised restaurants a month, but given the option (like most owners) would prefer own restaurants. Moti Mahal has been present in the Far East since 2008, and Gujral is eyeing the US market. “However, in New York and London, Indian food tends to be considered ethnic and not mainstream. We would like to change that mindset,” he says.

Franchise, not the Ultimate Choice

Bangalore based Abhijit Saha, Founder, Director and Chef, Caperberry and Fava, Avant Garde Hospitality Pvt Ltd, hasn’t been bitten by the franchise bug. His Caperberry and Fava are company-owned standalone restaurants. “We wanted to create a strong foundation for our outlets and guage our food service capabilities, at least for the first five-six years, before we began to consider scalability and franchising,” he says.

Caperberry is positioned as a signature fine dine and Fava is a casual bistro lounge located in UB City. Saha enjoys the freedom to customize the cuisine and take independent management decisions, but he’s quick to add, “When the time is right for creating a chain we will make the process seamless and based on sound management and principles of quality and consistency.”

Says Anurag Katriar, Director, deGustibus Hospitality Pvt Ltd, whose restaurant portfolio comprises Indigo, Indigo Delicatessen, Indigo Café and Tote on the Turf, “We believe that franchise is not the most sustainable model of growth in the long run. Firstly, a restaurant is a business of personalized hospitality and not many franchisees possess the same degree of passion as that of the promoter. This  can affect the brand image in the long run.”

He feels that food is one of the most difficult products to churn out with consistent taste and quality across all the outlets. “While there are many tools like recipe standardization, documentation and training to maintain consistency, we have come across instances (of other brands) where the local franchisee has tweaked the product to suit the local palate, thus jeopardizing the brand value.”

The company will be opening one Indigo and two Indigo Delis in New Delhi, apart from one more Deli in Mumbai. The company invests around Rs 200 to Rs 250 lakh in an Indigo Deli outlet, and ROI can take 12 to 24 months. “Since the ROI is reasonably good, we don’t have any compelling need to seek franchisee investment to grow and prefer deploying our own capital,” avers Katriar.

He informs that the flagship Indigo will continue to be a destination brand and will be restricted to one a city. The company is also considering creating new brands and formats such as the QSR to cater to different economic groups, and newer cuisines such as Asian food.

Investors forum

When Sajal Jassal, Director, Punjab Grill, Bangalore, entered the F&B industry, he chose to invest in Punjab Grill, and entered into a 9-year contract with them through his company Avalon Hospitality Services. Other Punjab Grill restaurants are in Delhi, Mumbai, Pune and Singapore. Avalon Hospitality bought the brand rights for Bangalore from Lite Bite Foods. “The management operations are controlled by us and the staff is on our payroll,” explains Jassal.

With an initial investment of around Rs 4 crore, Jassal expects to break even in FY 15, though the first time restaurateur admits to the risk factors. “Bangalore is a tough market as there’s too much competition. We try to maintain consistency and market our brand through social media, and have a tie up with 55 corporate offices, ” says Jassi, who plans to open another Punjab Grill this fiscal.

Amandeep Singh is Managing Director, Anand’s Awe-spring, a franchise of Moti Mahal, based in Rudrapur, Uttarakhand. Rudrapur has a sizeable number of industrial companies due to which many fast food outlets have sprung up here. Says Singh, “We saw that Mughlai delicacies were missing and thought that this would be the best time to capture the market. This zone is known as ‘Mini Punjab’ and Moti Mahal’s kind of food matches the taste of the local population here.”

Singh, who has a 10-year license agreement with Moti Mahal, reveals that they decided on the brand (after checking out many others) because the owners of Moti Mahal lent a personal touch to their partnership, besides which, the brand is known for its flagship dal makhani and butter chicken.

“The royalty fee is on a pro-rata basis. Every bill generated has a fixed percentage, regardless of the amount, and is calculated on gross sales at the end of every month.The Moti Mahal chain had grown enormously within a short time, so when a new dish is introduced, it becomes common knowledge amongst the consumers,” says Singh, who is also planning to open a lounge, and start outdoor catering under the Moti Mahal brand name.

According to the KPMG report, the food service industry in India (estimated to be worth USD 48 billion in 2012) is expected to grow at 13 percent over the next five years. While there is an active interest in India by international brands, there is immense potential for Indian brands to go global as well. Not only can Indian brands look at leveraging the Indian diaspora present across the world, but also use this as an opportunity to spread Brand India.

Saravana Bhavan has a presence in the USA, Canada, Singapore, West Asia, UK and China. Khana Khazana is in Dubai, and Sankalp has established itself in Australia, Canada, UK, USA and UAE. But it’s critical for Indian brands going global to note the differences in local competition, demographics, price points, pay structures and labour laws. Industry associations such as Franchising Association of India and other such bodies could leverage their relationships with global franchising councils in assisting such companies for a soft landing in other countries.

Other options

Today, franchising is not the only choice for restaurant expansion. Investors can choose from a suite of options like the dealership model, distributorship model, co-operative society, multilevel marketing, multi-brand outlets, shop in shops, and management franchise model. “Restaurant groups have many options. Joint venture partnerships are as much a choice as single unit franchises. Another alternative is to take the equity route,” says Kuckreja.

“A joint venture is not, per se, a type of franchising arrangement, but a contractual agreement between two parties to jointly promote and carry on a business,” explains Mishra. He adds, ” However, it is not uncommon to use the joint venture model whereby the franchisor, eager to promote its brand and product in a territory, enters into a joint venture agreement with a local company, as a first step.” FOCO Model (Franchise Owned and Company Operated Model) is an another alternative to franchising for expansion wherein, the franchisee does the Capital Expenditure but the entire Operating Expenditure is borne by the Company.

This implies there’s ample scope for new restaurants to enter the business. When restaurants decide to get visibility and expand, both Indian and International brands have diverse strategic options to choose from,” he adds.

Top 10 best franchises

1. McDonald’s
2. Domino’s Pizza
3. Pizza Hut
4. Kentucky Fried Chicken
5. Subway
6. Quiznos
7. Moti Mahal
8. Rajdhani
9. Red Mango
10. Punjab Grill

Selection parameters:

  1.     Worldwide recognition
  2.     Goodwill in the market
  3.     Quality and unique recipes
  4.     Profitability
  5.     Big and better concept

Credit: Gulshan Mishra, Director, FranchiseZing

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