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Franchising- The Retail Way Forward

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To put things in context, it will be interesting to go back a bit in history to understand what led to the inception of franchise business model. The origins of franchising can be traced back to America’s Issac Singer, the man behind the world-famous Singer sewing machine. Post the US Civil War in the 1860s, Singer had achieved the ability to mass-produce his famous sewing machines, but he lacked an economically viable way of repairing and maintaining them across the US. Thus, he then began to license out servicing and repairs to local merchants around the country, who were later permitted to become regional salespeople for the machines too. Singer’s use of a contract for this arrangement introduced the earliest form of franchise agreements, leading to the inception of the first modern franchise system.

Franchising became more widely used in the US as a way to standardise products and standards from one coast to another. First was the car dealership model pioneered by General Motors in the early 1900s, granting exclusive rights and territories to franchise business owners; then oil companies and grocery stores took advantage of a business model that offered them a route of fast growth towards national distribution with reduced risk. As we notice, in its earliest avatar, it was usually the franchisor looking out for an expansion and risk mitigation to have a broader brand presence to take care of customer service. However, the trend became a twoway phenomenon gradually, where it was not just a franchisor looking for franchisees for their business but also where individuals were seeking franchise rights of reputed brands or brands that were seen to have a long term Potential.

The India story

Rajeev Manchanda, Director, Inventure and VP, Franchising Association of India (FAI) talks about what makes India an apt market for the franchise model: “Franchising is apt for India due to its sheer geographical size. Penetrating markets on its own can be an arduous task for brands. Further, the country is so diverse in culture that a franchisee is better placed to do business with their local connect, understanding and familiarisation with local conditions.Also, they offer a better commitment towards running the business (as it becomes their own business) rather than an employee working for a brand at the same location. This business model offers an inorganic growth, which can bring excellent results with minimal capital infusion – something very important for any brand.”

Manish Shukla, Founder, Retailscape well explains the benefits this type of business model has for the franchisor as well as franchisee: “It is not only a great way of growing your business, it is also a great way for first-time entrepreneurs and prospective franchisees to de-risk their plunge into the world of entrepreneurship, by learning the ropes of an operational and tested business, within an established framework.”

In India, perhaps one of the most successful brands running on franchise operation would be Naturals Ice Creams and Naturals Salons, and both of them are not related though.

Out of the 120 stores that Naturals Ice Creams has, 117 are franchisee driven yet the very essence of the brand is well-preserved over the years. Also, such is the demand for the franchise of Naturals Ice Creams that the WhatsApp status of Srinivas Kamath, Director, Kamaths Ourtimes Ice Creams Pvt. Ltd. reads: ‘No franchise enquiry please!’ Sharing the brand’s journey, Kamath says: “The challenges for us have always been at the production level. There was always a huge demand for our product and franchise but we did not want to expand at the cost of quality so we were very selective and opened few stores that we could manage within the production level. I would say that the earliest challenges were to control huge franchise demand.”

Another heritage brand that chose to opt for the franchise model is North India’s Chhabra 555. Sharing a brief history, Asheeta Chhabra, Head – Business Development, Chhabra 555 divulges: “The genesis of Chhabra 555 dates back to more than half a century. Growing popularity among the customers inspired us to expand our network of outlets and in the late 90s, we opened our second showroom. Taking cue from the changing credit scenario and the domestic retail growth story, we took a strategic decision in 2005 to shelve our wholesale operations and step into the retail segment in a big way. Soon people started approaching us for dealership in various parts of the country and in 2010, we reached a store count 50 across the country. Our aim now is to reach 100 in the next 5 years. More than 90 per cent of our stores follow the dealership model. We only have a couple of company-owned showrooms.” Chhabra adds that tier-II cities like Noida, Amritsar, Kochi and Ghaziabad, are emerging as the favoured destinations for retail franchises due to the huge growth potential they offer.

In the beauty space, Naturals Salon has achieved a remarkable feat of having over 400 salons and out of these just five of them are company-owned and company-operated (COCO). The brand was established in 2000 and the franchise operation began since 2006. C.K. Kumaravel, CEO and Co-Founder, Naturals shares: “In 2007, we ventured out of Chennai and forayed into the markets of Coimbatore and Pondicherry. In 2008, we expanded into Andhra Pradesh and Kerala and then in 2009 we commenced our operations in Karnataka. By 2010, we had expanded to 50 salons, and by 2011 to 100 salons. In 2012, we reached 200 salons; in 2013, we had a total count of 300 salons and now we stand at 400+ salons.”

In the telecom space, it becomes imperative for service providers to have innumerable stores and preferably in dominant areas within each city – be it tier-I or -II and even tier-III. Tata Teleservices Ltd. has a network of 1,000 stores in over 100 towns with a combined retail space of approximately 500,000 sq.ft., catering to over two million customers. For the brand, more than 600 stores are COCO and the remaining are franchise outlets. Shares Sandeep Singal, Head – Branded Retail, Tata Teleservices Ltd.: “Our focus is on customer experience and we aim to deliver through a healthy mix of efficiently managed COCO and franchise stores.”

For Singal, taking the franchise route obviously makes sense considering the growing mobile penetration and use of voice data services even in smaller cities. Singal says: “Setting up our retail shops using franchise partners who have the relevant market knowledge tends to be more efficiently manageable and relatively more economical.”

On the other hand, food brand Oriental Cuisine opted for the franchise model in this financial year for its two properties – The French Loaf and Wangs Kitchen. Narendra Malhotra, CEO, Oriental Cuisines Pvt. Ltd. shares: “We have almost doubled as an organisation in terms of turnover, profitability and number of outlets in the last two years. Our growth engines have been The French Loaf – Confectionery/Bakery and Wangs Kitchen – QSR. We are one of the largest company-owned bakery chains in India with 55+ outlets and 4 franchise-owned and franchise–operated (FOFO) outlets. We are proud to announce that we are looking at 50 franchisees all India within 2015, to have a faster phase of growth. Within 3 months, now we have 4 French Loaf Franchise outlets and will add another 7 for French Loaf and 5 for Wangs Kitchen in the month of November 2014. By end of this fiscal year, we will be 150 stores of French Loaf and Wangs Kitchen (70+60).”

Celebrity endorsed and supported fashion brand Being Human Clothing by Mandhana Industries has a total store count of 29, of which 22 are COCO and the remaining 7 are franchised. Before appointing and narrowing down on a franchisee, Kunal Mehta, Vice President – Business Development & Marketing, Mandhana Industries and his team undertake a catchment area analysis, store feasibility study, zone wise mapping and competitor analysis. With the franchisee network, the brand has its presence in countries like Nepal, and the response generated has led them to open a second store as well. Mehta shares: “We would be having 14 franchise stores in a span of next one year. We want to reach out to maximum people all over the world and for this we have been launching several new stores every year.”

Crocs India took to the franchising route in late 2010, but going forward it has decided to expand only via this business model. According to Nissan Joseph, GM, Crocs India: “India is a country where business model has to be tweaked as per the state and region. The differences of geography, psychography, demography and religion are quite distinct not to mention local regulations in different parts of the country. Hence, tapping into local expertise through a multiple franchise model is bound to prove beneficial to a brand as the franchise partner brings their expertise and knowledge of the local market to the table.”

In the entertainment and leisure genre, Vijayender Tulla’s SVM Bowling and Gaming is creating a niche for itself with its gaming centres. The brand so far was only operational via the COCO route but has now decided to let in franchisees. Tulla says: “In terms of setting up gaming centers we are looking at COCO:Franchise ratio of 3:1. Our first franchise has just come on board. While SVM has been in the market since the last 6 years, we have decided to take the franchise route only now. Our strategy being the need to equipping ourselves first before finding partners because the industry we operate in is very niche. We wanted to be extremely well prepared before bringing in partners to work together.” Where for apparel and food brands, it is easy to rope in franchisees, for the gaming industry there is a mammoth challenge when it comes to choosing franchisees considering the space required is huge and so is the investment in terms of having the latest of gaming avenues or gadgets.

Tulla elaborates: “There could be a misconception or misunderstanding that setting up an entertainment zone follows a fixed protocol and hence can be easily adapted by anyone. However, this is far from the truth. For instance, no 2 SVM centres in India are alike because we set up our entertainment centres according to the requirements of that particular city or town and depending on the demography of that place. Customisation of our centre offers innovation and entertainment according to one’s liking and interests.” He further adds: “There is a total lack of awareness on the opportunity or the business model that the entertainment industry presents for franchisees. This could prove to be a challenge in finding franchisees to partner as they may not be aware of such an available opportunity.”

Funskool (India) Ltd. is a brand that operates on an all-franchise model. The brand has 6 stores across the country as of date. P. Madhu, Business Development and Sales Promotions Manager, Funskool (India) Ltd. shares: “The benefit of a simplified management structure usually means that franchised networks can be expanded more quickly than company-run networks. Franchising is all about replicating a clear and successful business formula. Provided the franchisor is prepared to make a reasonable investment in marketing, the brand can quickly be expanded nationwide. This will, in turn, take some of the lesser-known international acclaimed toy brands to smaller cities.”

The working According to Kamath, what makes this business model viable for India is the huge diversity they offer to the country. He explains: “The local entrepreneurial skills come in handy when expanding to a new territory and in most cases the brand owners and franchisees are in direct touch and accessible to each other when needed. It is the fastest way to grow a brand.”

Mehta has a valid point on financial easing with a franchise business model. As he explains: “We get the franchisee positioned at the best location due to the local expertise from the franchisee owners. Thus, it helps in reduction of capital burden for the brand, which otherwise would be huge if only COCO were opened.”

Out of a well-earned experience, Chhabra has some interesting lessons to share: “The franchisor-franchisee relationship is marked by two significant financial transactions. One is the payment of the franchise fee, which many franchisors charge in lieu of letting the franchisee use the brand name and the business model. The other is the margin payment, which a franchisee is liable to make at regular intervals and which is calculated as a percentage of sales. However, many franchisors are now shying away from charging a franchise fee in order to reduce the initial financial burden on the franchisee. But we, at Chhabra 555, see our move of not charging royalty fee as a business decision. At the inception of any business, it is imperative to decide which costs the company wants to bear and which costs it wants to charge. At Chhabra 555, we are tilted towards the former way of working.” Adding further on the nature of franchise business as seen in India, she says: “Over the last few years, a realisation has dawned that franchising need not be limited only to education and food. A unique business offering can be created and replicated further through this route in many other segments like retail, telecom, entertainment, personal grooming, etc. A case in point is our company, where we realised the potential of growth of franchising and subsequently managed to establish a network of 50 stores spread across the country in a short span of 5 years.”

Turtle, one of the leading brands in East India, has 18 stores which are COCO and another 70 stores which are operated through the franchisee model.

Talking about Turtle’s journey, Narendra Parekh, Head of Marketing, Turtle says: “The initial phase was a learning curve for us being from a traditional non-retail background. The problems were store roll-out, selection of property and franchisee, and mistakes were made and remade. The other and major concern area was proper inventory management and setting up the supply chain management.”

Indus League as a brand has a wide network across India with over 170 stores, out of which currently 114 are COCO and 57 are based on the franchisee model. On what makes this model viable, Babu MP, General Manager – Sales, Indus League says: “In tier-II and -III markets COCO store operation is a challenge. Franchisee model is the best option of expanding the brand store in these markets.”
Move with cautionHow easy is it to resist the temptation of having more and more franchisees on board, especially since that means having more of brand presence and more royalty fees? To keep temptation at bay, Kamath has a simple funda: “We ensure that we abide by the principle ‘QUALITY comes before GROWTH’.”

Manchanda has some sound advice to resist the temptation to have multiple franchisees in one location: “Any brand looking at franchising to expand and grow must have aspiration and ambition to do so but should be clear on that fine line where to stop to avoid cannibilisation of its own business. It is not difficult at all and can be achieved by defining territories while charting our roadmap for such expansion. If there exist potential in same location where business is already running, opportunity can be offered to existing franchisee to open another one (first right of refusal).” According to him, another strategy brands can follow is to look for a franchisee partner who goes for multi-unit franchise so that they can open more stores in the territory and take full advantage of the potential. It also makes business more efficient and utilise resources more optimal and give a good size to business, which is a win-win situation for both the brand and the franchisee.

For Being Human, there is a set strategy in place to ensure that there are not too many franchisees eating into each other’s business. According to Mehta: “We have strategically divided the nation into four zones and have mapped the locations we wish to open the stores in. The locations are targeted on the basis of these plans. The franchisees are given only to individuals with a strong retail background. It helps them in understanding the market trends and run the store in an efficient manner. Also, we follow a thumb rule of giving the first preference to our existing franchise owners in case we are opening a new store in the same city. The opportunity for franchise is passed on to the next prospective client only when the existing franchise owner does not wish to own the second store. Moreover, every city is also geographically divided into zones and we open stores accordingly. We do not open two franchisee stores in close proximity to each other and have a very well defined strategy.”

For Naturals Salon, Kumaravel is certain not to expand just for the sake of numbers. As he shares: “We measure the prospects of a salon depending on the population of the area and the per capita income. We do not open salons for the sake of numbers as a brand flourishes only when their franchise makes business. It is important to measure all these aspects before deciding on opening a salon in a particular region. With years of experience and more than 400 salons all over the country, we have learnt to curb our temptations. The most important thing to be kept in mind is to build a structured business model that defines the agreement and ensures the best support mechanism. The success of a business ultimately lies in the hands of the franchisees. Franchisors work towards ensuring that the entire system is aligned correctly in order to make a franchisee successful.”
Talking about keeping quality check in control, Anil Jhawar, Director, Presto says: “We have a dedicated research and development (R&D) team, which is in continuous process of controlling the quality of the product. As a matter of fact, innovation is really important. Hence, it is imperative to keep on launching new products as per market demand. We are having a strong HR department, which assists in recruiting manpower to the franchisee. Our technical assistance is very strong, as a lot of machines are required in the process.”

Nuances and challengesWhen it comes to nuances that are typical in this business model, one without doubt would be that of having a similar wavelength in terms of safeguarding the brand ethics, values and principles. Over and above, there are a host of other nuances. Kamath shares: “Disregard to local compliances, neglect of contracts and agreements, and most franchisees aiming to be profitable from day one of the business.” Mehta shares that an important challenge typical to this model is related to manpower. He explains: “There are issues like stability of the franchise system, problems pertaining to manpower retention at the franchise end.”

Citing the challenges faced, Joseph feels: “Proliferation of franchisees is high in India as compared to the West, and polarization of national players persists in India and there is a huge gap between them and an in-state player.”

A drawback that Manchanda cites that India has when it comes to successful operation of this model rests with the fact that there are no specific laws in the country. He shares: “In India, there are no specific franchise laws. It is furthermost important to have watertight documents which can be enforced. Unlike matured markets where there are specific franchise laws and both franchisor and franchisee are adequately covered under such laws, in India franchising is covered under general business laws. This makes it important to have the right documents in place.”

He adds: “We can say franchising is still in its evolving stage in India, unlike developed markets where this format is a preferred model for expansion. Brands in India are still experimenting with various models. Many such models are termed franchising even when those are based on other business philosophies like minimum guarantee or fixed assured returns. This simply leaves the markets in a state of confusion. Franchisors are looking at rapid expansion but not geared up for supporting the network thus created. Lack of commitment and support is a major issue here.”

Talking about the challenges and scope of expansion through franchise business, Vishal Jain, National Sales Head, Skipper Textiles says: “The first challenge for us was creating a business model suitable for franchising, as we all know how furnishings is a highly unorganised sector. Hence, creating an organised format in this sector was a difficult task. Initially, we found it somewhat difficult to find franchisees as home furnishings is a rather unexplored sector in India. So convincing someone to put their money and time in this line was a difficult job. We are very choosy with respect to who we give the franchisee as this line of business requires a personal touch and so we needed personal involvement of the franchise in the store. We also made very strong efforts to minimise the investment so as to convince the prospective franchise.”

Jain further talks about their upcoming retail format, which will be called Skipper Home Fashion. “This format will be relatively small and will be spread over an area of 300-400 sq.ft. Skipper Home Fashion will be opened only in the malls, and in its first phase of expansion will only target to be opened in the leading malls of Kolkata. And, this model is easily franchisable and the company plans to open 100 stores of this format in coming one year,” he says.

Sharing a bitter truth as seen in India when it comes to the working of a franchise business model, Shukla minces no words when he says: “Though we will find plenty of examples of successful franchising businesses in India, a closer look will reveal the underlying friction and distrust that exists in the franchisor-franchisee relationship. Most franchisors are hustling and hard-selling high hopes and expectations in order to entrap the prospective franchisee to enroll and collect the one-time fee, without marketing support and a clear path to profit. Once the franchisee signs the dotted line and parts with the money, it is their turn to run around, beg and plead with the franchisor. I have met far too many franchisees and with almost all of them, it is mostly the same story repeating itself, across the board.”Shukla adds: “The franchising industry in India is still in its infancy and will remain so, until there is a better level of education or certification for the industry players. For franchising to grow in India, the conversations between franchisor-franchisee need to be transparent, rational, realistic and mature; more so in setting and managing expectations. I believe if one cannot run a profitable franchisee of their business, or cannot prove enough local case studies of profitable franchisees in their system locally, you have no reason to be in the business selling dreams.”

According to Singal: “Franchising in India tends to be more around individual businessmen or shop owners vs chains in other parts of the world. This also entails greater level of training and alignment required to deliver a consistent customer experience. At the same time, it reduces the risk of dependence on a few partners.”

At Tata, one key measure taken to ensure consistency in service across the stores is the regular training of store staff. Singal reveals: “We have a rigorous 11-day induction module and weekly training updates thereafter. Given the dynamic category that we operate in and high level of service orientation, the weekly process enables our staff to be high on knowledge and skills to serve the customer. We also have more extensive quarterly training programmes. The manner, knowledge and people skills of our retail staff are an integral part of our brand experience. We want to ensure we provide them with the right behavioural tools and information they need to competently address the concerns of our customers and effectively guide them through their decision-making process. We also pay close attention to the way visual merchandising is handled in the stores for an interesting and consistent experience. It is critical that the store space and signage is easily navigable for our customers. We deploy effective mystery shopping tools and processes to ensure that core brand principles and service orientation is maintained at a high level.”

ChecklistThe checklist in place for Naturals Ice Creams includes compulsorily having the store designed by a company-appointed architect so as to maintain uniformity in the design and ambience. Kamath also ensures that the franchisee and his team undergo a compulsory training before any store opening, which also includes a two-day training programme in the factory. Once the store is opened, their auditor visits the store unannounced and conducts a thorough inspection of the same. Kamath says: “It is mandatory for all store managers to attend the annual training session. This is followed by the annual managers meet and we have connected our stores to our ERP system so the communication happens in real time.”

With more than 70 franchise stores out of the 125 stores, Madame has its presence across India and in Saudi Arabia as well. Akhil Jain, Creative Director, Madame strongly advises against entering into a franchisee with someone who does not have the necessary experience of any form of retailing and also opines that master franchise should be capped.

Sharing in detail the pre-requisites for having a franchisee of Chhabra 555, Chhabra says: “While joining the Chhabra 555 team we do not need our dealers to be experts in fashion retailing, as we can train them initially and then support their development. However, there are certain qualities that we look for, such as passion for customer satisfaction, confident interpersonal skills to deal with customers, committed management skills to help get the best of the team and commercial awareness to help make the best decision for the business. The initial contract is for a term period of 5 years. The showrooms must be located in high footfall areas and should have an area of about 2000 sq. ft. The dealer has to pay an upfront amount equivalent to only 40 per cent of the sale value of stock provided by Chhabra 555. Once a dealer has selected a location, duly approved by Chhabra 555, the technical staff assists the dealer by designing a workable layout for the showroom. Accounting software for efficient billing and inventory management functions are provided by Chhabra 555. The company also deputes staff for training at the dealer’s showroom in the initial stages, if so required.”

Mehta has also taken care to install a uniform POS system across all the stores to help maintain a centralised database for analysis purpose. He adds: “We have stock audits in place to avoid any stock discrepancies at the franchisee stores. In addition to this, we have a dedicated team of professionals handling the franchisee stores. If the franchisees face any difficulties in case of stock, marketing or any other problem they are addressed with utmost urgency.” To extend a uniform customer service experience, the brand also organises training sessions for all the store managers before the start of the new season, where they brief them about how the new season will be. It includes the briefing of marketing campaigns, contest and offers for the upcoming season. “We have a day dedicated for IT training in case we introduce any new software. A question-and-answer session is also held where the store managers raise their concerns and doubts which are then resolved,” shares Mehta.

Talking about choosing the right partner, Parekh from Turtle says: “The most important factor is we need franchisees and not investors as they have the hunger to develop and grow along with the organisation. Also, for proper selection of franchisee model there should be proper selection criteria clearly defined and last but not the least is selection of the franchisee who shall be the brand ambassador of the company in the location.”

Citing the conditions in place to have a franchisee of Funskool, Madhu reveals: “All that a prospective franchisee should have is 1,000 to 1,200 sq.ft. store space, preferably in the best performing mall, and an investment of Rs.15 lakh on stocks. Funskool will invest in the store fit-outs and support the store in the initial marketing and promotional activities, besides ensuring that the franchisee does not run into losses.”

Not all businesses are franchisable. It is important to understand the dynamics of business and franchisability is the concept.

The business model should be well established and proven before a brand opts for the franchise model.
The financials should work and should be proven to work at unit level (franchisee level) for any business to be successful through franchising. Some models work well at the corporate level for a brand but may not be very attractive for the franchisee at unit level. These are not long term and may collapse.
Brands should have a very clear strategy in terms of roll-out and expansion.

Brand should have a robust system in place and back-end to support franchise network. Most of the time brands find it easy to expand through franchising and begin operations not realising that they need infrastructure to support that network.

Two key levers of franchising are ‘Brand of Franchiser’ and ‘Efficiency and Entrepreneurial Energy of Franchisee’. IT systems play a key role in enhancing both the levers. They help in delivering uniform customer experience across a large number of franchised outlets apart from aiding in product development, inventory management and customer relationship management.

Franchising as a channel strategy is very popular in two broad segments: quick service restaurants (QSR) and fashion retail (apparel, footwear and specialty stores).

Uniform customer experience is delivered through quick service, efficient billing in case of QSR like McDonald’s and Subway. In-store production process is also automated using IT systems to ensure quick turn-around time (TAT).  Integrated billing, production and delivery systems ensure quick production and orderly delivery. Inventory management systems ensure availability of right ingredients in right quantities.
Store ambience and layout also play a key role in fashion stores. Technology tools are leveraged to do space planning and display. Managing right inventory is key to the success of fashion business. They run the risk of both overstocking and stock-outs. Inventory management systems ensure right inventory is deployed at the right store based on fashion trends, historical sales trends and stock on hand.

CRM system enables to serve customers better by communicating the right offers to customers. This is achieved by profiling customers based on their demographic and behavioural attributes and purchase history. Mobile-based customer engagement platforms are deployed to deliver superior customer experience.
Accounting system helps the franchisee to draw up their P&L and balance sheet.

PLM and sourcing systems help franchisors to develop the right products in quick time, source them out and make them available to their franchisees.

Thus, IT systems are essential to develop right products, source, supply and sell through franchised retail outlets.

Taking the Franchise Way

Woodland has a huge fan-following across India. The brand has managed to create an international aura around it, being one of the earliest premium footwear brands. What is worth noting is that all the 500 stores that Woodand has across the country, all of them are COCO.

Harkirat Singh, MD, Woodland talks about the brand’s COCO journey and their plans to now invite franchisees to take the brand forward: “We are proud to be one of the early movers in the Indian retail revolution and have seen consistent growth. With over 500 company-owned exclusive stores and with presence in around 4,000+ multi-branded retail outlets, Woodland’s foothold is strong across the country. However, the market is dynamic and so is the business model that a brand may decide to follow. Those were the times when the need was to build a brand and we, therefore, decided to invest in a COCO model based network. Now that we are a strong brand with global presence, the idea is to expand our reach and what can be better than joining hands with like-minded partners who know their local market well. Woodland too is reviewing the possibilities of expanding further through franchisees and you would see another wave of growth in brand presence. Having said that, the key to a franchisee model is to choose apt partners since they are the brand custodians and represent us in their local markets and this is something that we would be focusing on while choosing franchisees.”

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