Franchising is one of the few means available through which the brand owners gets access to capital without the need to give up control of the brand (as in case of raising money from through equity dilution) or increasing the burden of debt servicing (as in case of raising capital through debt).
Most brands also find the last mile/ POS control and management an issue, which franchising addresses. Franchising, being an entrepreneurial option, appeals to a large mass of people with small to medium investment potential. The largest population of franchisees consists of those who manage their shops on a day-today basis and hence tightly control the costs and the brand experience. Franchising also helps the brand expand its footprint at a very fast pace.
Difference Between Franchising & Licensing
Licensing is an arrangement in which a company (licensor) sells the right to another company (licensee) to use its Intellectual Property (IP), or produce a company’s product, for a negotiated period and fee/ royalty. The licensor may exercise control over how its IP is used but does not control the business operations of the licensee. Since licensing is a related to usage of IP, such partnerships are much fewer, as the IP owners would want to tightly control the IP, while commercially leveraging the same.
Franchising is more a day-to-day, operations management arrangement in which the franchisor permits the franchisee to use business model, brand name or process for a fee, to conduct business, as an independent branch of the parent company (franchisor). Since franchising is about one or more points of sale, multiple franchisees can co-exists in the same geography.
In short, “licensing” is more a business / company level decision and “franchising” is more an operational decision.
Things to Look Out For When Scoping Out a Potential Franchisee
The key aspects that franchisor look for in a franchisee are:
i. For most franchisors, having adequate capital is the most important criteria for selecting any franchise partner. Th e franchisee should be able to invest, sustain and grow the business.
ii. Someone who understands the market/ business or has prior experience in the similar segment is preferable. Th is will help the franchisor build the brand with the franchisee and tightly control the retail structure.
iii. Someone who is willing to follow a system and established processes/ models.
iv. Good at marketing the brand and managing the business (financials)
Benefits of a Franchise Model
Franchising is seen by many as a simple way to go into business for the first time. But franchising is no guarantee of success and the same principles of good management – such as informed decision-making, hard work, time management, having enough money and serving your customers well – still apply. However, there are many benefits of starting out with a franchise model:
Benefits for Franchisor:
– Ability to grow the brand without using too much capital from the company
– Expand the brand more rapidly in existing market or enter a new markets
– Inject entrepreneurial energy into the business.
– Tightly control the retail structure
– The initial franchise fee and ongoing royalties allow franchisors to build their brand without sacrificing control. The fees and royalties can be used for various purposes e.g. to fund operations at corporate headquarters, train and support franchisees, market and advertise the brand, improve the quality of goods or services, and build the brand in the marketplace.
Benefits for Franchisee:
– Faster startup of operations as many things are already standardized/ templated
– Reduced risk of failure as business is based on established idea.
– Established market of the brand. Franchisee can use a recognised brand name/ trademark.
– Support from the franchisor- training, marketing, etc.
– Assistance in systems and processes, best practices adoption etc.
– The brand also helps the franchisee grow his business better and faster through enhanced planning.
Franchising is a win-win for both partners and is thus a very prevalent form of partnership in India. Good franchisees earn anywhere between 18-24 percent ROI on their investments. ‘
Disadvantages of Franchising
If the expectations on both sides are not realistic or are not properly aligned then this could result in souring of the franchisee-franchisor relationship. It is thus very important that the franchisor has good systems, process, and controls as well as clearly laid down the roles and responsibilities for the franchisee before franchising. Initial hand holding/ training is required so that the franchisee is well equipped to manage the operations.
Going into franchising without these systems, process and controls may result in hurting the brand and in loosing customers.
Also, an ongoing supervision/ management of the franchisee and ensuring that the franchise partners do not go into deep losses is essential.
For the franchisee some of the other disadvantages may be as follows:
i. Restrictions on how one can run the business/ lack of complete control
ii. The upfront investment (time and money) required
iii. Sharing of profits with the franchisor
Role of Technology in Embracing Franchising
i. Latest point-of-sale technologies offer a lot of benefits that extend well beyond the convenience of quick and easy payments. Cloud based POS systems helps in generating detailed data (sales and other day-today reports), customer retention, billing, etc.
ii. Detailed data driven analytics support can be provided by the brand to the franchisee to optimize his inventory and maximize his sales.
iii. The real-time reporting of key metrics (e.g. inventory), especially when integrated with accounting platforms, is one of the most important advancements available to franchisors and franchisees. Franchisors can thus make the planning and forecasting more accurate, real time and minimize inventory.
iv. Franchisors can also use cloud-based technologies to obtain greater transparency of the performance of its franchisees. For example, fast and accurate reporting and data analysis against metrics (i.e. by reference to a franchisor’s operating manual).
v. Online trainings to the staff through webinars, virtual conferences and conference calls),or operating online knowledge platforms.
i. Most of the franchisors provide marketing and advertising support to the franchise at the time of opening (market introduction/ grand opening).
ii. Some franchisors also provide complete marketing plan for the new business for a period of 3-12 months. This plan should include the timing, promotional material and costs for every effort to be made during the plan (some would also include franchisor representatives actually booking the advertising for the new franchisee to make sure nothing is missed.)
The different types of operating model for franchising are:
i. Product distribution franchising: the dealers are given a limited right to distribute goods of the brand. The franchisee is required to pay a franchisee fee or buy a minimum number of products to obtain the right to sell the trademarked goods. Typically, the franchisees sell only the franchisor’s products but there are some agreements where they have the choice to sell only certain products of the brand which they feel will be profitable to them. Few international brands operate on such a franchise model in India and other markets.
ii. Manufacturing franchising: involves granting of manufacturing and selling rights to the franchisees by the franchisor. Franchisees, however, are required to sell the goods under the trademark and name of the franchisor’s brand. It is common in F&B industry, clothing industry, and automobile industry. E.g. Coca Cola, Hyundai, Nestle, etc.
iii. Business format franchising: it is an enhanced version of product distribution model. Th e franchisees notonly sell the franchisor’s products under the name of the franchisor’s brand, but also follow the standardised format and procedures of retail sale that include visual merchandising, appointment of staff ,implementation of marketing activities,etc. In return, they get operational and marketing assistance from the franchisor. E.g. McDonalds, Nike, etc.
iv. Master Franchise: the franchisor grants rights to the franchisee (master franchisee) to control franchising activities of the brand (like appointing sub-franchisees) within a specified geographical area. The master franchisee usually has exclusive business rights to the specified territory. There isn’t any competition, interference or distraction from other players selling the same brand’s products, which eventually leads to easier and better ROI for them.
When it comes to retail/ shop level franchising, there are many franchising models,but these can essentially be bucketed into three types, as detailed below:
i. FOCO (Franchise owned company operated): Companies adopt this model when they want to reduce their capital expenditure and expand faster in an already established market or in a known market. In this model the franchise owns the business but the brand and the operations are largely/ completely handled by the company.
There is a regular reporting done to the franchisee on performance of the business, and in most cases the franchisee gets an almost assured return, though this may not be in the contract. T is model is usually signed under profit sharing basis where in the company gets a bigger share of the profit compared to the franchisee as risk is largely on the company. The franchise can oversee the business and question the Company in case of poor performance. This is a low risk, low reward model and floated by brands/ companies who want to very tightly control the retail /front-end.
ii. FOFO (Franchise owned franchise operated): This model is adopted by companies for faster expansion of business/ brand and to penetrate completely new markets with the help of local businessmen/ entrepreneurs. In this model the entire store layout / fixturing is asper the brand guidelines and training of staffs, initial store setup is done/ assisted by the Company and handed over to the Franchisee. The franchisee manages the operations independently and maintains standards based on SOPs set by the Company. Surprise and scheduled SOP audits are done by the Company to ensure that the brand standards are maintained.
The inventory, sales responsibility etc. is the responsibility of the franchisees, assisted by the brand teams.
iii. COFO (Company owned franchise operated): Companies adopt this model when they want to reduce their operational expenditure. In this model the company leases the operations of the business to an interested franchise to take over the operations of the business with the former holding trainings and SOP audits to ensure standards are adhered to. The business ownership still lies solely with the Company and the franchisee can be changed when the company identifies a more efficient franchisee, or due to any other reason. Since the premise is company owned, for the consumers, nothing much changes.