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Franchising as a model for business expansion in foodservice

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Franchise is a business opportunity that can lead to the foundation of a successful business empire. It is a marketing concept adopted by companies for business expansion. When 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.

A Franchise is generally a person or a company that is given the license to run a business under the Franchisor’s brand name, trademarked by the Franchisor. The former purchases the Franchise from the latter. The Franchise in all circumstances must follow the rules and regulations that are established by the Franchisor, and usually, the Franchise has to pay an ongoing Franchise royalty fee to the franchisor.

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 and is on track to emerge even stronger this year. 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 past few years, there has been a huge growth in entrepreneurship in India. This has stoked growth within the franchising sector, as franchises provide the perfect solution for budding believe that they are at least investing into an established brand with a target market/ audience which has already been identified and is popular.

The Food & Beverage sector dominates India’s franchise sector. In India, the foodservice industry has evolved from homegrown, standalone, family-run business ventures to international partnerships with various business models. Specific to Quick Service Restaurants, the Fast Food Franchise model remains one of the most attractive operating models for international brands foraying into India. The KPMG Report on Indian Franchising Industry says that formats like the QSR, café/bars, fine and casual dine are expected to see a rapid jump. The Report further states that currently the organized food service industry in India is about 3.5 percent, with franchisee penetration around 70 per cent — as against 90 per cent in the US — indicative of the 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.

According to the Report, 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.

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. Like, Sagar Ratna offers a 10-year license agreement to franchisees who invest Rs 1 to Rs 1.5 crore for the brand – one of the largest and fastest growing south Indian restaurant chains in India – with 25 to 30 percent year-on-year growth. Restaurant franchising is essentially used for expanding business and distributing goods and services to meet higher consumer demand. It is a relationship between the brand owner and the local operator to skilfully extend the already established business.Before commencing operation of the franchise, the franchise makes a required payment or commits to make a required payment to the franchisor or its affiliate. Now, fast food and QSRs are one of the most blooming formats in India. International brands, as well as local brands who want to scale across the country, are readily accepting the franchising model.

Currently, there are several major US restaurant brands that operate in India through franchisees. These include Krispy Kreme, Dunkin’ Donuts, Wendy’s, Chili’s, Burger King, Johnny Rocket’s, Hard Rock Café, Cinnabon, Papa Johns, McDonalds, Kentucky Fried Chicken (KFC), Pizza Hut, Taco Bell, Domino’s Pizza, Subway, and Baskin Robbins. International food brands like Kenny Rogers Roasters, Cake Boy, Angel Berry, The Counter, and Burger King are all betting big on the franchise route to expand their footprint in India over the next couple of years, much like McDonald’s, Domino’s, KFC, Subway, and Booster Juice.

Yum, Subway and TGIF are among the most successful franchised international brands in India. Experts say, 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. A case in point is Pizza Hut which has localized its flavor (its latest offering is biryani pizza) and this message is conveyed through regular campaigns.

When a brand localizes its flavor, 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. In order to grow in new markets, the restaurant chain believes that the 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 per cent franchise model, with agreements spanning 20 years.

According to Subway, since the set-up and operational cost of its 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 centre in New Delhi, while the University of Subway offers online training. The brand takes 8 per cent as royalty fee. In India, franchisees contribute 4.5 per cent of their sales to the advertising fee. The Franchise Advertising Fund (FAF) then manages the advertising on a global, regional, national and local level.

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.

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 and brand DNAand can implement the guidelines without any compromise. 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. 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.

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