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Retail Franchising: A popular model for successful business expansion in India

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Franchise is a motivating business opportunity that can lead to the foundation of a successful business empire. In a straight, one line definition, franchise is a marketing concept adopted by companies for business expansion. Where implemented, a franchiser licenses its know-how, procedures, intellectual property, use of its business model, brand and rights to sell its branded products and services to a franchisee. In return the franchisee pays certain fees and agrees to comply with certain obligations, set out in the franchise agreement.

Retail Franchising: A popular model for successful business expansion in India
Franchise is a motivating business opportunity that can lead to the foundation of a successful business empire

Franchising in India is at a growing stage. As per a report published by Franchise Asia, the growth of the franchise industry in India shows no signs of slowing down. The sector proved to be highly profitable in 2017 and 2018 is on track to produce similar results. India’s gross domestic product (GDP) grew by 7.2 percent in the fi nal quarter of 2017. It is expected that this growth will continue over the next number of years, reaching an estimated 7.4 percent by the end of this year and 7.8 percent in 2019. India is now seen as one of the world’s largest and fastest emerging markets, and its vast population size and cultural diversity have made it a prime environment in which franchising can thrive. The franchise industry is growing at a rate of 30-35 percent per annum and the sales turnover of the sector was recently valued at over US$ 7 billion.

Over the last number of years there has been a huge growth in an interest in entrepreneurship in India. Th is has incited growth within the franchising sector, as franchises provide the perfect solution for budding entrepreneurs who wish to invest in the security of an established brand, whilst enjoying the freedom offered by franchise models.

According to a KPMG and Franchise Association of India (FAI) report, the current estimated market size of the Indian franchise
industry is US$ 50.4 billion, an increase from US$ 13.4 billion in 2012. In the US, among the top prospects for franchisors are education, food, retail, and health, beauty & wellness services. Other industry sectors with potential include apparel, travel and tourism, and business/ financial services.

The Franchise Business Model

As a model, franchising has proven itself to be highly resilient, even in times of economic downturn. It is considered as a more attractive prospect for many people than opening their own business. In a way franchise provides a stability of an existing model as it lessens a lot of the risk of opening a brand new business. This is what that clicks in the minds of the Indian businessmen, as many of them believe in relying on the fact that they are at least investing into an established brand with a target market/ audience which has already been identified and is popular.

Franchise Options & International Interest

The Food & Beverage sector dominates India’s franchise sector. As Franchise Asia reports, one-third of new food outlets in India are established through franchise systems. Quick Service Restaurants and fast food outlets are the most popular, pointing to a shift in the pace of consumer lifestyles. By 2022 it is estimated that the food and beverage industry will have doubled its workforce, providing plentiful employment within India. The market value of the food and beverage industry was US$ 26 billion in 2017; this figure is projected to increase to US$ 46 billion within two years.

Retail, beauty and healthcare and education are also attractive markets for franchising. The US is a key player in India’s franchise boom as their brands are identifying the Indian market as a huge opportunity for expansion. Indians demand products and services of good quality, which is delivered by US franchises at ease. Simultaneously, India is witnessing huge growth in entrepreneurial energy and talent. These new entrepreneurs are very receptive to American franchises. Several foreign companies with strong brands have established a presence in India through franchising. In the hospitality and food service industries, this has been the preferred method for starting operations in India.

The key to the success of international brands within India is an accommodation of the market. India’s culture is richly diverse, and this is reflected in the population. The needs and tastes of India’s consumers are unique, and international brands who have adapted their franchise model specifically to suit the particularities of the Indian market have experienced notable success. The most successful franchise sectors in India are Food and beverage, Hotels, Retail, Beauty & Fitness, Health care, Medical services, and education.

Role of Franchising in Expanding Brand’s Footprint

, Managing Director and CEO, Sports And Leisure Apparel Limited – Lacoste Licensee in India explains, “In today’s fast changing retail eco-system, one has to be present at the right place to tap the target audience. One of the major benefits of running a franchise model is that franchisees bring an extensive knowledge of their local markets that can help a brand to understand the audience behaviour faster. Second, the franchisees have a better control in terms of handling the local operations. Therefore, with the help of a franchisee, a brand can experience ease of operations in day-to-day life while operating in different regions. Third, a brand can speed up its expansion through Franchisee business model.”

, MD & CEO, adds, “Franchise and company-owned stores, both are equally beneficial. Of course, the risk is lower in franchise store because the franchise owner takes the big portion of the risk. But we are very careful when we open franchise stores, if I am not sure whether the store will be a success or not, then I will not open it. Even if the company tends to benefit either ways but we do not want franchise to lose money.”

- Managing Director- Pepe Jeans India, states, “Franchising is a key component when a brand wants to extend its retail footprint and is one very important aspect of our business model. This is basically centered on appointing partners across regions that do distribution for the brand and who also open retail franchise stores. The beauty of franchising is that it helps a brand tailor it’s target markets with a focused approach. At Pepe Jeans, we regularly asses all our market; so for instance if the store in a particular area is not profitable we’re shutting it down or turning it into a big format store. Another factor that will help boost brand expansion is the ease in norms on Single Brand Retail, so we are now also opening our own stores with the focus on the top five cities which will have our big format retail stores.”

, CEO, Pvt. Ltd. dds, “In an ever-changing and increasingly demanding global marketplace, franchising has showed great resilience and sustained continued growth despite the economic and political challenges presented over the past decades. Franchising has historically proven to be a rather efficient way of expanding the market penetration and consumer basis of retail brands, both locally and internationally. This is so because it allows the brand owner, the franchisor, to expand its business faster and with less financial and human resource investments, while at the same time ensuring the maintenance of the quality and operational standards of the brand, especially when compared to other structures such as trademark licensing, agency and setting up a local legal entity or joint venture with a local partner.”

T Sudhakar Pai, CMD, Enterprise Limited, states, “Franchising is an opportunity to create job at grass root level and Kurl-on firmly believes in the idea of franchising. Currently we have 1,000 franchisee stores and we are planning to have another 1,000 in next 12 months time.”

, COO, - Bagzone Lifestyles Pvt. Ltd. adds, “Franchising enables to reach a varied set of audience enabling faster growth for the business. understands the importance of franchising from business point of view. The brand is positioned very strongly in the handbag sector in India and expansion is the next step to grow the business. We want to reach out to Tier II & III cities but running operations in these regions can be done best by people who have the local expertise, this is where franchising comes in.”

, Chairperson, points to the fact that franchising is a way to scale any business rapidly.

How to Choose Right Franchiser & Franchise

Choosing the right franchise is about matching your personality, skills, experience and motivation to a particular franchise. It’s about getting a good fit between you and the business. Here are a few recommended pointers to be kept in mind while screening prospective franchisees. It is imperative for both parties to be on the same page, as mutual understanding, trust and overall earning is very important in this partnership. Some want to work on long term basis with the franchisers. It is a two-way street, the franchiser needs to be as enthusiastic about the brand as the franchise is.

– Pointers While Screening Prospective Franchisees
– Having an interest in entrepreneurship
– Being able to work independently
– Being well organised and proud of one’s personal presentation.
– Being able to organize and motivate others to get things done.
– Working effectively as part of a group.
– Being attracted to continuous improvement.
– Being trustworthy in giving accurate information.
– Having a realistic understanding of the franchise relationship and background in retail business.
– Drive and passion along with great organizational skills.

Why Franchising is Important

The right franchisee will give the brand market insights and a deeper understanding of what will and won’t work in that particular region:

– Knowing the expenditure involved in setting up the store as well as maintaining a fixed budget.
– Research is crucial when finalising on a retail partner, being aware of the history as well as a proven track-record will help on establishing the partnership.
– Integrity and past experience (track record) also plays an important role.
– Relationship building along with the business
– Brand pedigree
– Proven business model

Growth of sector

Working on a mix of company-owned and franchisee distribution model can really help in the long run if franchisee partners are selected carefully. One should be extra cautious in choosing the right Franchise partner. While there could be many brand specific parameters, a brand should invest time and energy in pre-screening of the prospective Franchisee.

In addition, the brand should scrutinize the franchisee upon the following parameters:
– Financial Health
– Existing Portfolio
– Industry experience & knowledge.

Above all, it is extremely important to have a like-minded Franchisee partner, who can understand Brand parameters ad brand DNA and can implement the guidelines without any compromise.

How Franchising Works in India

India offers mainly four types of entry points for franchises, which includes:
– Direct franchising
– Master franchising
– Regional franchising
– Local incorporation.

Direct franchising is where a company creates a direct network of franchises. This works well for local companies with pre-existing experience in India. However, it can prove to be challenging to foreign companies entering India for the first time. In this case, the owner company directly provides sales and support services to the franchisees. A common example of direct franchise is the franchise opportunities off ered by Monsoon Salon & Spa in metro cities like Delhi, Mumbai, Pune, Chandigarh, Kolkata and more.

Master franchising is where a company awards exclusive rights to develop a foreign brand to a local entity, often accompanied with a large investment made by the franchisor. The owner recruits a specific person or a company to provide services to franchisees in a specified territory which can typically be a major market or even one or more states. The master franchisee is then in charge of developing the company’s brand either through cultivating a sub-franchised network or opening outlets owned by the master franchisee (though the two are not mutually exclusive). A master franchise can own a number of individual franchisees in a certain area, however, the same is not applicable for a direct franchise. Generally master franchise model is adopted by fast food restaurants, real estate agencies, and convenience food stores.

Regional franchising operates in the same way as master franchising but covers only a specific regional area as opposed to the entire country. Given India’s diversity along with the complexity of state-specific laws, many franchisors choose a regional franchising approach.

Local incorporation is when a foreign franchisor forms a subsidiary company and awards it franchising rights in India. The American fast food chain Subway, for example, has established a subsidiary in India, which handles their franchising network.

Franchising and Legislation

As per Dezan Shira & Associates, unlike western countries, India does not have comprehensive legislation related to franchising. There are no direct, potentially restrictive regulations on franchisors. However, this lack of direct regulation creates tremendous confusion as a patchwork of national and regional laws arbitrarily governs franchisor-franchisee relationships.

Th e following laws impact franchisor- franchisee relations in India:
– The Indian Contract Act, 1982;
– The Trademarks Act, 1999;
– The Designs Act, 2000;
– The Patents Act, 1970;
– The Copyright Act, 1957;
– The Competition Act, 2002;
– The Foreign ExchangeManagement Act, 1999;
– Income Tax Act, 1961;
– The Consumer Protection Act, 1986; and
– The Arbitration and Conciliation Act, 1996.

Summary

Franchising is clearly rated as one of the most successful and popular model for business expansion in the retail sector. It is becoming an important part in the years to come, as far as the growing services sector of the Indian economy is concerned. Changing dynamics in franchising industry would warrant a mindset change as well. A collaborative approach involving Franchisees, Franchisors, Financial institutions and industry associations is the need of the hour.

(With inputs from Charu Lamba)