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FRANCHISING SCENARIO IN INDIA : FRANCHISE CONNECT

INTRODUCTION

Levi’s, Nike, Adidas, McDonalds, Benetton, Marks & Spencer, Pizza Hut.!! The Indian customer is surely ruling the roost today. And it is not just foreign brands that are vying for his attention. Indian apparel brands like Park Avenue, Color Plus, Provogue; food chains like Nirulas and Sagar Ratna; Liberty and Woodland shoes; and numerous other brands across product categories are all just waiting to serve him. And one of the key drivers of this consumer revolution is Franchising.

With the arrival of MNCs the Indian market has woken up to the concept of franchising as a way of doing business. Though the concept of franchising has existed in India since many years, it is only now that the average Indian entrepreneur and companies have woken up to the possibility of using it as the fastest route to growth. And we are not just talking of growth in India. Many industry majors, especially in the IT industry are also growing offshore through franchising.


What makes franchising so attractive to the companies is the obvious fact that it is the fastest and cheapest way to get your product across to millions of people and into new uncharted territories. But more importantly, in a country like India where cultural diversities make retailing a big challenge, franchising is allowing the companies to truly think global and act local. As a result of having franchise outlets, a brand owner based in North India does not have to worry that he will be unable to identify with his potential customers in South. He knows that his face in South is his franchisee, who is a local and understands that particular market. Hence, he does not have to worry about lack of identification at the retail level. Nor does he need to invest in the costly process of setting up his own outlet, finding the right people, managing large number of culturally diverse stores on a daily basis and so on.

On the franchisee side, today’s businessman is no longer willing to sit idle and just live off his real estate rent. He wants a bigger slice of the profits. He is looking for something that can assure him income and at the same time give him social credibility. Which makes franchising an extremely attractive proposition to him. So today, instead of just leasing out his property, he is actively looking for companies that are willing to take him on as a franchisee.

And it is not just in education & retail that franchising is making its mark. Service industries like consultancy, housekeeping, travel etc. are all only too keen to grow via the franchising route.

In the next few pages, we have charted the present status of the Franchising business in the country and have also tried to outline the future growth prospects of the same.

1 The Business of Franchising

1.1 The Concept

Franchising as a concept was pioneered way back in the 1840s in Germany when certain major ale brewers granted franchises to certain taverns to exclusively sell their ale. However it was in 1851 in the US that Isaac Singer of the Singer Sewing Machines introduced what is generally known as the Business Format Franchising today. Singer introduced one of the most sophisticated written franchise contracts, which is still considered the basis of modern franchise agreements. Since then, success of this business model has been unprecedented. Across the world franchising has emerged as the fastest and most popular route for expanding business operations. In fact, franchising is probably the only concept that has found equal favor amongst both small and big business houses.

1.2 How Franchising Works

Franchising essentially works by replicating a successful and proven business model across multiple locations through a network of entrepreneurs. The person who develops the business format, known as the franchisor, grants access to his business name, goodwill and business model to another person, known as the franchisee in return for a certain fee. This ensures that the franchisor can extend his reach without having to invest substantial amount of money in new markets. The franchisee on the other hand profits by having a readymade business model with access to backup facilities like training, marketing tools, technology etc. He hence benefits from the security provided by a tried and tested business model

Many variations of franchising model exist within the sector. Some of the more popular ones include Master Franchisee, Area Development Rights and Unit Franchise. India has seen the emergence of other models also like Joint Venture cum franchise agreement, Management Contract etc.

1.3 The Growth of Franchising Internationally

Starting with food related businesses, franchising has now spread to retail operations, automotive industry, education and recently in health related services. Franchise operations in all these industries are benefiting from the combined buying power, operational speed & efficiency and brand strength that the franchise business model is able to generate.

Over the last fifty years, Franchising as a business model has proved to be extremely successful across the world. So much so that it is estimated that in developed economies like the US, over 50% of all retail sales come through franchised businesses. Similar trends are being seen in Europe and increasingly in the Asia Pacific economies. In fact, the last few years have seen the fastest franchising growth taking place in the Asian and South American markets.

Typically, it has been observed that it is the entrance of the major American franchises into new markets that spur the growth of a particular market. However, the result is that local entrepreneurs catch on to the potential of the franchise model, which increases the acceptability for franchises as a whole.

Increasingly, management experts are recognizing that franchising offers significant advantages over other conventional business models. These include reduced management structures and maximum capitalization of intellectual & proprietary products. These advantages help franchise operations achieve economies of scale without having to create the huge management structures they would have otherwise required.

Perhaps the greatest indication of the value of franchising comes from the governments of states like Malaysia, Singapore and China who have started to promote franchising positively as a way of encouraging locals to acquire business skills by learning from successful systems. Some of these governments have in fact started giving grants to new franchisors to help them promote their business.


2 Franchising in India

In India, the franchise economy is yet to take off. Currently accounting for just over 4% of the country’s gross domestic product, Franchising is a sector that is waiting to happen.

Traditionally, local franchising in India was limited to the clothing and footwear brands. However, the last few years have seen the penetration of Franchising into industries like computer education, F&B, healthcare and more recently entertainment and cyber kiosks. In fact, it is the IT Education industry which has been responsible for making the concept of franchising acceptable to people across the length and breadth of India. No wonder then that over 55% of India’s 600 odd franchisors happen to be in the IT services industry.

With the current boom in retailing and entertainment sectors, franchising is being examined by an increasing number of operators as a growth option. There are a number of both home grown and foreign players currently eyeing the sector.

2.1 Key Facts

Some key facts that point to the growth of the Franchising sector in India are as follows:

• There are over 2000 active franchisors in the country.

• There are over 1,00,000 franchisees (across sectors) in India today.

• The total investments put in by these franchisees in setting up their individual franchised businesses is over Rs.1,50,000 crores.

• The total annual turnover achieved by franchised businesses in India is in the region of Rs.80000-10,0000 crores.

• The total manpower directly employed by these franchised businesses is around 10,00,000.

All these facts & figures point clearly to the extent to which Franchising has been accepted in India as a way of doing business. There are an increasing number of businesses that are exploring the Franchising route to business expansion.

2.2 Key Figures

In the next few pages, we analyze the two critical components of the Indian Franchising system – the franchisors & the franchisees. The graphs below depict the general trends in franchising in India. The same are divided into separate sub-sections for franchisors & franchisees respectively.

2.2.1 Franchisors

2.2.1.1 Industry Classification

The graph above reveals that IT-Education sector dominates the Indian franchise sector with a sizeable share of 40%. This is followed by IT enabled services at 14%. Closely behind are Business Services (11%) and Professional / Vocational education (10%).


2.2.1.2 Number of Outlets

A majority (68%) of franchise operations are small with 50 or less outlets. Only 3% franchisors have more than 500 outlets while 22% have outlets numbering 51 – 100. The fact that most operators are comparatively small is in all probability because most of the franchisors are still comparatively new.

2.2.1.3 Annual Turnover from Franchising

Turnover from franchising is still not very large. Only 2% of franchisors have turnover of more than Rs. 500 crores from their franchising operations. 5% have a franchise turnover ranging Rs. 100 – 500 crores; 45 have a turnover ranging Rs. 50 –100 crores; 11% have a turnover ranging Rs. 20 –50 crores and 24% have a turnover ranging Rs. 5 –20 crores. However more than half (54%), have a turnover less than Rs. 5 crore.

2.2.1.4 Upfront Franchise Fees

A majority of the franchisors (64%), charge a fixed upfront franchise fees from the franchisees. 31% charge an incremental fee depending upon the scale of operation whereas only 5% of franchisors have no upfront fee charges.

2.2.1.5 Amount of Upfront Fees

A sizeable 57% of franchisors charge an upfront franchisee fees ranging between 1-5 Lac. This is followed by 23% franchisors that charge a fee ranging between 6-10 Lac while 15% franchisors charge a fee less than 1 Lac. Only 1% franchisors charge a fee over 20 Lac.

2.2.1.6 Ongoing Royalty

Percentage of Turnover seems to be the most preferred mode of charging ongoing royalty fees with 54% franchisors opting for this mode. 21% franchisors charge royalty as a percentage of profit while 19% charge a fixed fee as royalty. Only 2% of franchisors have no royalty fees.

2.2.1.7 Average Investment Required

Leading the average investment requirements are 30% of the franchisors who require an investment between Rs. 10-20 Lac from the franchisee. This is followed by investment requirement of Rs. 5-10 Lac by 29% franchisors; followed by 21% franchisors who expect average investment between Rs. 1-5 Lac. Only 4% franchisors have average investment requirement of less than Rs. 1 Lac. On the higher side, 6% franchisors have an average investment requirement ranging Rs. 20-40 Lac, 6% between Rs. 40 Lac to 1 crore and 4% over Rs. 1 crore.

2.2.1.8 Value Proposition from the Franchisor in the Relationship (in order of ranking)

1) Brand name
2) Economies of scale
3) Proven business format
4) New product/service development
5) Training/support

2.2.1.9 Value Proposition from the Franchisee in the Relationship (in order of ranking)

1) Local market knowledge
2) Business background
3) Investment/Real Estate
4) Training/Support
5) Educational/Professional Qualification.

2.2.1.10 Critical Success Factors for a Franchise System

1) A well established business network
2) Constant New Product Development
3) Innovative Product/ Service
4) Quality of Franchisees
5) Transparency
6) Return on investment to franchisees

2.2.1.11 Causes of Friction between Franchisors and Franchisees

Transparency in operations (39%) and training/support (26%) seem to be the key causes of friction between franchisors and franchisees. Revenue sharing is a cause of concern to 10% and product/service delivery to 7%. 18% seem to find no cause of friction between themselves and their partners.

2.2.2 Franchisees

2.2.2.1 Industry Classification

The sample for the franchisee survey included all the prominent sectors with education & retailing forming the bulk of the sample size.

2.2.2.2 Years in Operation

More than 50% of the franchisees surveyed were relatively new, having been in operations for less than 3 years. However, what is heartening is that fact that as many as 28% of the franchisees have remained with the same franchisor for over 6 years.

2.2.2.3 Upfront Investments

Half the franchisees have made upfront investments of less than Rs. 10 lacs in setting up their business, while another 31% are in the Rs. 10-25 lacs group. The high investment franchises (Rs. 50 lacs and above) constitute a miniscule 3%.

2.2.2.4 Annual Turnover

Almost 1/3rd of the franchisees had an annual turnover in the region of Rs. 25-50 lacs. Around 9% have a turnover in excess of Rs. 100 lacs per annum.

2.2.2.5 Intention to Renew Contract

This is good news for the franchising industry. As many as 76% of the respondents expressed a desire to renew their contract with the franchisers.

2.2.2.6 Support from Franchisors

Most of the respondents felt there was support provided by their franchisors. Largely, the support came in the form of Advertising (37%), followed by Recruitment (17%) and Sales Support (16%). 4% of the franchisees felt that their franchisors were not providing them any support.

2.2.2.7 Welfare Tools

10% of the franchisees are of the opinion that the Franchisors do not provide any kind of welfare tools to the Franchisee while 51% regard Franchisee meets to be the main welfare tool offered by the Franchisors.

2.2.2.8 Satisfaction Rating

Most of the Franchisees (84%) are satisfied with their relationship with the Franchisors. This comes across as good news for the Franchising Industry as a whole.

2.2.2.9 Value Proposition from the Franchisee in the Relationship (in order of ranking)

1) Investment/Real Estate
2) Business background
3) Local market knowledge
4) Educational/Professional Qualification.
5) Training/Support

2.2.2.10 Value Proposition from the Franchisor in the Relationship (in order of ranking)

1) Brand name
2) Economies of scale
3) Proven business format
4) New product/service development
5) Training/support

3 Sector Analysis

In the next few pages we analyse some of the prominent sectors within Franchising in India.

3.1 Education

Overview

The Education sector and Franchising go hand-in-hand in India. While in the developed economies, education occupies a relatively lower slot within the franchising sector, in India it is numero uno.

Being the vast country that it is, India naturally needed the education institutes to be spread far & wide across the nation. Only Franchising could have been a viable option for the education institutes, which is why it has been the most popular mode of expansion for the education sector.

Reasons Behind Growth of Private Participation in Education

Firstly, let us look at the key reasons why the education sector has seen such a high level of private participation. Some of the key reasons behind the stupendous growth of private participation in education are:

Poor Public Education Infrastructure

Over the years, the public education infrastructure run by the government has deteriorated in standards and has also failed to keep up with the changing needs of today’s students. Private players have stepped in to provide a viable alternative to government education and also to provide students with access to latest courses and teaching aids.

Increasing Competition

The opportunities thrown up by the economy have failed to keep pace with the growth in population, resulting in intense competition. Every student needs something ‘extra’ to be able to make the grade and in most cases, there are private players catering to the student’s requirements.

Growing Demand for Vocational Education

With more and more people preferring job-oriented courses and the state run education centers inadequate to provide these to them it was left to the private players to provide these opportunities to the aspiring students.

Major Sub-sectors within Education

Within the education sector, there are several major sub-sectors that have emerged in the last few years. These include:

Computer Training

Within education franchising, it was the computer training business that was spearheading growth till the global IT slowdown last year. In the last decade, hundreds of computer training companies and thousands of their franchisees mushroomed all across the country. Key players in this sector include NIIT, Aptech, SSI & STG.

In the last one year, there has been a drastic downtrend in the demand patterns for IT professionals, which has severely affected many of these companies & their franchisees. However, with the likelihood of an increase in demand for IT professionals, the fortunes of the sector should start looking upwards in the next 2-3 quarters.

Vocational Education

A relatively newer stream within education, this has become an important sub-sector because of an increased requirement from students for job oriented courses. Within vocational education would be areas like fashion designing, sales management, interior designing etc. Also within the same sub-sector would be private / foreign education institutions. Key players here include JD Institute of Fashion Technology, NIFD, Wigan & Leigh College etc.

Preparatory Education

Riding on the increased competition for premium courses & institutions is the Preparatory education sector. Comprising primarily of institutes that train students for entrance examinations like medical, engineering, MBA, GRE, GMAT etc, this is a sector that is growing at a fast clip right now. Major players include Career Launcher, FIITJEE, TIME, Excel TutorOnline etc.

Kids Education

The Kids Education business in India has seen phenomenal growth in the last two years. From being dominated by neighborhood play ways and 2-room back-of-the-house schools, it has come to be catered by large market savvy chains with fancy air-conditioned playschools spread over thousands of square feet. Some of the key organized players in the Kids Education business include Kangaroo Kids, Shemrock, Euro Kids, The Little Kingdom, Mother’s Pride etc.

Although it is still a metro phenomenon, it is expected to rapidly gain ground in smaller cities and towns as well.

Apart from the above, another large potential sector still not utilizing the Franchising route is Senior Secondary schools. With the notable exception of The Delhi Public School Society, no other organization has utilized this format in a big way so far. In the years to come, it is expected that a larger number of brands in this sector to take to Franchising, as quality school education is a huge demand area across the country.


The Education Sector Franchise Model

Typically the pure franchise format is followed in the education sector – which means that the franchisee makes all the investments in the venture as well as takes the responsibility for the day-to-day operations of the business.

An average franchise in the categories mentioned above (apart from senior secondary schools) requires an investment to the tune of Rs.12-20 lacs. This could vary depending on the location and the business potential. The franchise fees would typically be around 30-40% of the total investment.

On the operational basis, the franchisor would be expected to provide support like site selection, layout designing, staff recruitment & training, course material, advertising & marketing, course up gradation, certifications etc. The franchisee on the other hand would be responsible for all day-to-day activities of the center, local marketing, financial administration etc. The franchisor would take between 15-30% of the franchisee’s top line as its on-going royalty towards providing support to him.

The Path Ahead

There is no doubt that education remains a lucrative business proposition across streams. With the huge population and the growing pressures of competition, it is highly unlikely that parents are going to cut spending on educating their children. While there would be ups & downs in the various sub-sectors, it is unlikely that the whole business would see a decline in demand in the foreseeable future. Thus the outlook for the sector is positive on a long-term basis.

3.2 Food & Beverage

Overview

Despite the fact that there remains a high level of interest from prospective franchisees, franchising in the Food & Beverage industry has never really taken off in India. In fact, the biggest paradox of franchising in India is its absence from the F&B sector. While in most countries Food chains are a major growth engine for franchising activities, the scenario in India could not be further removed.

On the other hand, developed countries like the US now have well developed segments as well as multiple sub-segments within each food category. Some of the sectors include Bakeries; Beverages; Chicken; Cookies; Ice Cream / Yogurt; Pizza; Popcorn / Candy; Restaurant / Bar; Sandwiches / Soups / Salads; Seafood; Tacos and the like. Just to demonstrate the complexity, the Beverages segment may further be subdivided into coffee pubs, juice corners, smoothies, water etc. And there are multiple brands competing within each such sub-segment. A large majority of these brands utilize the franchise route to grow. This basically implies that for any prospective franchisee would have hundreds of opportunities to choose from when evaluating the franchise purchase decision.

Cut to India. There is no doubt that there is plenty of activity happening in the F&B sector here. The proliferation of coffee parlors; the growing numbers of pubs; the success of the South Indian cuisine restaurants; and the crowds at the halwai shops bear testimony to the fact that the Indian consumer is willing to spend money on eating out. The increased acceptability of eating out even within conservative families is demonstrative of the changes in our socio-cultural behavioral patterns. Gradually, the Indian consumer is also becoming adventurous and is trying out a variety of cuisines – from Mexican to Japanese to Thai.

The Concerns

However, almost all the growth that is happening is limited to the top 10-12 cities. Beyond these cities, it is impossible to find a restaurant that is part of an organized chain. The primary reason for such slow growth is that almost all the chains are growing through setting up company-operated outlets, which puts a strain on their financial & managerial capabilities. F&B franchising has never been able to take off in the country because of a variety of factors. These include:

Logistics & supply chain mechanisms in India are still developing and any food chain aiming to develop a national presence will have to consider heavy investments into setting up its own logistics infrastructure and developing a dedicated vendor base. Because of the costs involved, many companies are content with having a regional presence.

Secondly, a large number of franchisees lack the skills & the attitude to manage a food business (which is very different from the retail or education business). Because of this, many F&B companies fear a loss of reputation because of the actions of some of their franchisees that might not adhere to system & quality guidelines. Thus they avoid the franchise route to expansion.

Finally, typical opportunities on offer within the F&B business are fairly high on investments that put them out of the financial capabilities of the average franchisees. There are not many low investment franchise opportunities in the F&B sector in India.

It is not that these problems are insurmountable. Logistics infrastructure can be developed gradually or shared with other companies; franchisees can be carefully screened & trained adequately; and low investment franchise opportunities can be developed.

The Path Ahead

In fact, there are several companies that are looking at the franchise route to grow aggressively in the Indian market. These include brands across the spectrum – Subway, Qwiky’s, Sagar Ratna, Movenpick, Amul, The Great Indian Kabab Factory, Superstars Bar, Cookie Man, Bikano, Rameshwars, Marrybrown and Wimpy besides several others. Also to be mentioned here is the expansion model of brands like Nirulas, which offer a management contract.

Additionally, there is substantial interest from overseas F&B franchisors to enter the Indian market through the Master Franchise route. Brands that are already utilizing the Master Franchise route in India include McDonald’s, Domino’s Pizza, Pizza Hut etc. However, many of these master franchisees are not awarding unit franchises at the moment and are concentrating on growth through company-operated outlets only.

Some Services ues of the likely growth of the F&B franchise scene in India can be taken from the experience of McDonald’s in China. McDonald’s will launch its first franchise in China in 2003. It already has 430 company-owned restaurants in China and plans for an additional 122 units. A reported investment figure for a McDonalds franchise in China of no less than $300,000 appears attractive. What is interesting is that the business structure will require that franchise owners must first operate company owned units to gain first hand experience. It is only after they have operated the company owned units for a while that they would be allowed to operate their franchise. Several other overseas chains also require their franchisees to work as a part of the company’s existing restaurants before starting their own.

Despite being a country of over a billion people, we are yet to have our first nationwide food chain. However, the silver lining is that there are still a lot of unfulfilled need gaps in the Indian F&B sector as the success of coffee pubs has amply demonstrated. The Indian consumer is willing to experiment and spend money. What is needed is a business model that takes into account the nuances of the Indian market and addresses the problems mentioned above. That would surely

3 Sector Analysis
In the next few pages we analyse some of the prominent sectors within Franchising in India.

3.1 Education

Overview

The Education sector and Franchising go hand-in-hand in India. While in the developed economies, education occupies a relatively lower slot within the franchising sector, in India it is numero uno.

Being the vast country that it is, India naturally needed the education institutes to be spread far & wide across the nation. Only Franchising could have been a viable option for the education institutes, which is why it has been the most popular mode of expansion for the education sector.

Reasons Behind Growth of Private Participation in Education

Firstly, let us look at the key reasons why the education sector has seen such a high level of private participation. Some of the key reasons behind the stupendous growth of private participation in education are:

Poor Public Education Infrastructure

Over the years, the public education infrastructure run by the government has deteriorated in standards and has also failed to keep up with the changing needs of today’s students. Private players have stepped in to provide a viable alternative to government education and also to provide students with access to latest courses and teaching aids.

Increasing Competition

The opportunities thrown up by the economy have failed to keep pace with the growth in population, resulting in intense competition. Every student needs something ‘extra’ to be able to make the grade and in most cases, there are private players catering to the student’s requirements.

Growing Demand for Vocational Education

With more and more people preferring job-oriented courses and the state run education centers inadequate to provide these to them it was left to the private players to provide these opportunities to the aspiring students.

Major Sub-sectors within Education

Within the education sector, there are several major sub-sectors that have emerged in the last few years. These include:

Computer Training

Within education franchising, it was the computer training business that was spearheading growth till the global IT slowdown last year. In the last decade, hundreds of computer training companies and thousands of their franchisees mushroomed all across the country. Key players in this sector include NIIT, Aptech, SSI & STG.

In the last one year, there has been a drastic downtrend in the demand patterns for IT professionals, which has severely affected many of these companies & their franchisees. However, with the likelihood of an increase in demand for IT professionals, the fortunes of the sector should start looking upwards in the next 2-3 quarters.

Vocational Education

A relatively newer stream within education, this has become an important sub-sector because of an increased requirement from students for job oriented courses. Within vocational education would be areas like fashion designing, sales management, interior designing etc. Also within the same sub-sector would be private / foreign education institutions. Key players here include JD Institute of Fashion Technology, NIFD, Wigan & Leigh College etc.

Preparatory Education

Riding on the increased competition for premium courses & institutions is the Preparatory education sector. Comprising primarily of institutes that train students for entrance examinations like medical, engineering, MBA, GRE, GMAT etc, this is a sector that is growing at a fast clip right now. Major players include Career Launcher, FIITJEE, TIME, Excel TutorOnline etc.

Kids Education

The Kids Education business in India has seen phenomenal growth in the last two years. From being dominated by neighborhood play ways and 2-room back-of-the-house schools, it has come to be catered by large market savvy chains with fancy air-conditioned playschools spread over thousands of square feet. Some of the key organized players in the Kids Education business include Kangaroo Kids, Shemrock, Euro Kids, The Little Kingdom, Mother’s Pride etc.

Although it is still a metro phenomenon, it is expected to rapidly gain ground in smaller cities and towns as well.

Apart from the above, another large potential sector still not utilizing the Franchising route is Senior Secondary schools. With the notable exception of The Delhi Public School Society, no other organization has utilized this format in a big way so far. In the years to come, it is expected that a larger number of brands in this sector to take to Franchising, as quality school education is a huge demand area across the country.

The Education Sector Franchise Model

Typically the pure franchise format is followed in the education sector – which means that the franchisee makes all the investments in the venture as well as takes the responsibility for the day-to-day operations of the business.

An average franchise in the categories mentioned above (apart from senior secondary schools) requires an investment to the tune of Rs.12-20 lacs. This could vary depending on the location and the business potential. The franchise fees would typically be around 30-40% of the total investment.

On the operational basis, the franchisor would be expected to provide support like site selection, layout designing, staff recruitment & training, course material, advertising & marketing, course up gradation, certifications etc. The franchisee on the other hand would be responsible for all day-to-day activities of the center, local marketing, financial administration etc. The franchisor would take between 15-30% of the franchisee’s top line as its on-going royalty towards providing support to him.

The Path Ahead

There is no doubt that education remains a lucrative business proposition across streams. With the huge population and the growing pressures of competition, it is highly unlikely that parents are going to cut spending on educating their children. While there would be ups & downs in the various sub-sectors, it is unlikely that the whole business would see a decline in demand in the foreseeable future. Thus the outlook for the sector is positive on a long-term basis.


3.2 Food & Beverage

Overview

Despite the fact that there remains a high level of interest from prospective franchisees, franchising in the Food & Beverage industry has never really taken off in India. In fact, the biggest paradox of franchising in India is its absence from the F&B sector. While in most countries Food chains are a major growth engine for franchising activities, the scenario in India could not be further removed.

On the other hand, developed countries like the US now have well developed segments as well as multiple sub-segments within each food category. Some of the sectors include Bakeries; Beverages; Chicken; Cookies; Ice Cream / Yogurt; Pizza; Popcorn / Candy; Restaurant / Bar; Sandwiches / Soups / Salads; Seafood; Tacos and the like. Just to demonstrate the complexity, the Beverages segment may further be subdivided into coffee pubs, juice corners, smoothies, water etc. And there are multiple brands competing within each such sub-segment. A large majority of these brands utilize the franchise route to grow. This basically implies that for any prospective franchisee would have hundreds of opportunities to choose from when evaluating the franchise purchase decision.

Cut to India. There is no doubt that there is plenty of activity happening in the F&B sector here. The proliferation of coffee parlors; the growing numbers of pubs; the success of the South Indian cuisine restaurants; and the crowds at the halwai shops bear testimony to the fact that the Indian consumer is willing to spend money on eating out. The increased acceptability of eating out even within conservative families is demonstrative of the changes in our socio-cultural behavioral patterns. Gradually, the Indian consumer is also becoming adventurous and is trying out a variety of cuisines – from Mexican to Japanese to Thai.

The Concerns

However, almost all the growth that is happening is limited to the top 25-35 cities. Beyond these cities, it is impossible to find a restaurant that is part of an organized chain. The primary reason for such slow growth is that almost all the chains are growing through setting up company-operated outlets, which puts a strain on their financial & managerial capabilities. F&B franchising has never been able to take off in the country because of a variety of factors. These include:

Logistics & supply chain mechanisms in India are still developing and any food chain aiming to develop a national presence will have to consider heavy investments into setting up its own logistics infrastructure and developing a dedicated vendor base. Because of the costs involved, many companies are content with having a regional presence.

Secondly, a large number of franchisees lack the skills & the attitude to manage a food business (which is very different from the retail or education business). Because of this, many F&B companies fear a loss of reputation because of the actions of some of their franchisees that might not adhere to system & quality guidelines. Thus they avoid the franchise route to expansion.

Finally, typical opportunities on offer within the F&B business are fairly high on investments that put them out of the financial capabilities of the average franchisees. There are not many low investment franchise opportunities in the F&B sector in India.

It is not that these problems are insurmountable. Logistics infrastructure can be developed gradually or shared with other companies; franchisees can be carefully screened & trained adequately; and low investment franchise opportunities can be developed.

The Path Ahead

In fact, there are several companies that are looking at the franchise route to grow aggressively in the Indian market. These include brands across the spectrum – Subway, Qwiky’s, Sagar Ratna, Movenpick, Amul, The Great Indian Kabab Factory, Superstars Bar, Cookie Man, Bikano, Rameshwars, Marrybrown and Wimpy besides several others. Also to be mentioned here is the expansion model of brands like Nirulas, which offer a management contract.

Additionally, there is substantial interest from overseas F&B franchisors to enter the Indian market through the Master Franchise route. Brands that are already utilizing the Master Franchise route in India include McDonald’s, Domino’s Pizza, Pizza Hut etc. However, many of these master franchisees are not awarding unit franchises at the moment and are concentrating on growth through company-operated outlets only.

Some cues of the likely growth of the F&B franchise scene in India can be taken from the experience of McDonald’s in China. McDonald’s will launch its first franchise in China in 2003. It already has 430 company-owned restaurants in China and plans for an additional 122 units. A reported investment figure for a McDonalds franchise in China of no less than $300,000 appears attractive. What is interesting is that the business structure will require that franchise owners must first operate company owned units to gain first hand experience. It is only after they have operated the company owned units for a while that they would be allowed to operate their franchise. Several other overseas chains also require their franchisees to work as a part of the company’s existing restaurants before starting their own.

Despite being a country of over a billion people, we are yet to have our first nationwide food chain. However, the silver lining is that there are still a lot of unfulfilled need gaps in the Indian F&B sector as the success of coffee pubs has amply demonstrated. The Indian consumer is willing to experiment and spend money. What is needed is a business model that takes into account the nuances of the Indian market and addresses the problems mentioned above. That would surely be a winner!

3.3 Healthcare Services

Overview

The Healthcare Services sector is witnessing rapid growth across the world and is expected to be $4 trillion market by the year 2005. The Indian market is estimated to be around Rs.8000 crores annually and growing at a rate of 15-20% per annum.

As we make the transition to a developed economy, it is critical that India is able to provide a better quality of life for its citizens. One of the most important factors determining quality of life is the availability of advanced healthcare facilities. Unfortunately, in our country, decades of government & trust healthcare facilities have provided for nothing else but poor infrastructure and a low quality of service.

However, things are changing now. With the entry of several large private players in the healthcare business in the last decade, things have begun to improve. The names include Apollo Hospitals, Escorts Group, Ranbaxy Laboratories, Wockhardt, Max Healthcare, and several others. Besides these players in the healthcare services sector, there are several else who have come up in allied services like diagnostic centers, pharmacies, telemedicine etc.

Currently, most of the activities of these players are restricted to the top 10-15 cities. However, for an overall development of healthcare infrastructure across the country, it is imperative that these activities percolate down to smaller cities and towns as well. This is an area where Franchising could play a dominant role.

Sub-sectoral Analysis

A brief analysis of the various sub-sectors & opportunities within healthcare is provided below:

Healthcare Services

Healthcare services can be divided into three categories – primary, secondary & tertiary. Currently, there is a fair amount of activity happening in the primary category. Apollo Health & Lifestyle Limited is rolling out its ambitious plans of setting up franchised Apollo Clinics across the country. These would provide primary healthcare services, diagnostic facilities and a pharmacy at a single location. The company is working on a pure franchise model whereby the franchisee has to invest in the clinic as well as manage the day-to-day operations of the same.

As far as secondary & tertiary sectors are concerned, most of the activity is limited to management contracts, whereby the franchisee / investors are required to set up the facility as per the specifications of the healthcare service provider. The service provider provides its brand name and expertise and is also responsible for the day-to-day operations of the same. Some of the players taking this route are Apollo Hospitals & Max Healthcare.

Diagnostic Services

Diagnostic services is another area where a number of players have entered in the last few years. These include Pathnet (a joint venture between Gribbles Pathology Australia and Dr. Reddy’s Labs India), Specialty Ranbaxy Limited, Dr. Lal PathLabs, Metropolis and Abhay Clinic (a Govt. of India project).

Typically the business model followed by most of these players is a hub and spoke operation. In almost all cases, the collection centers are franchised out. In some cases, even basic diagnostic tests are also handed over to the franchisees. However, in all the cases, the companies themselves control the critical diagnostic facilities.

Pharmacies

At the retail healthcare level, it is the pharmacy chains that have started emerging now. Major players include Medicine Shoppe, Apollo Pharmacy, Health & Glow and Dr. Morepen Lifespring. The need for a reliable pharmacy has been felt for a long time now these companies are trying to fill that gap. All these brands aim to be much more than a normal neighborhood chemist through the wider selection of products and services they offer.
Their franchise models are working in the typical specialty retail franchise style, which means that the franchisee invests in premises, interiors & stocks and manages the show on a day-to-day basis. The franchisor supports by way of advertising, sourcing and other corporate functions.

Although most of these chains are quite small & regional in focus currently, yet there is an immense potential for them to grow in numbers across the country.

Telemedicine

Although in its infancy currently, Telemedicine has the potential to become a significant contributor in the healthcare services sector. Especially so in a country like India where distances are great and advanced healthcare facilities are yet to touch many geographic areas.

Beauty & Slimming

The need to look good is translating into big business for the beauty & slimming services sector (which can be called a quasi-healthcare sector). The rapid growth of various national and regional beauty brands bears testimony to the fact that both consumers and franchisees are lapping up this sector. The services offered by most of these brands include slimming, beauty services, hair care and fitness & weight management.

Some of the major brands within this sector include Vandana Luthra’s Curls & Curves (VLCC), Personal Point and Lakme Beauty Salons (only beauty services). Initially restricted to the major metros only, these brands have now proliferated into A & B category cities as well.

The typical franchise formats within this sector vary from management contracts to joint ventures to pure franchises. The outlook for the sector is very positive because of the nature of services and their growing demand with greater importance being accorded to looks and physical fitness by the younger generations.

The Path Ahead

As the sector grows and matures, Franchising is likely to play a greater role in ensuring geographic coverage for the various service providers. However, franchisors need to take immense care in the selection of franchisees as service quality is critical in this sector and a goof-up or a reduction in quality at the franchisee’s end could result in a major mishap.

There is no doubt that there is immense potential for growth in the Healthcare services sector. We are sure to see a lot of action happening here in the years to come.

3.4 Retailing

Overview

Retailing (apparel / footwear) was one of the first few sectors to take to franchising in the country. It started with brands like Raymond and now boasts of scores of brands like Arrow, Lee, Levi’s, Live In, Planet Kids, ColorPlus, Allen Solly, Peter England, Proline, Freelook, Numero Uno, Lacoste, Benetton etc.


Expansion Models

A summary* of the expansion models utilized by most companies in the retailing sector is as follows:

Model Pure Franchise Management Contract Hybrid Format**
Player Franchisee Franchisor Franchisee Franchisor Franchisee Franchisor
Input

Premises      
Franchise Fees      
Interiors     (50%) (50%)
Equipment     (50%) (50%)
Stocks      
(Consignment)
Management      

Franchisee’s Returns Margin on Sales Rent + Depreciation + %age of Sales Higher of Minimum Guarantee or Margin on Sales
* This summary is also applicable to several more sectors
** Many more varieties of the Hybrid Format exist.

As it is clear from the above chart, in the Pure Franchise format, the franchisee contributes all the investment into the store & stocks and also manages the show on a day-to-day basis. The return for the franchisee comes from the margins on the sales he is able to achieve from his store. Thus, the primary business risk remains with the franchisee.

On the other hand, in the Management Contract format, while the franchisee makes substantial upfront investments, the franchisor also contributes through stocks. The day-to-day management of the store is handled by the franchisor. The franchisee is assured of some fixed returns plus some variable returns.

Under the Hybrid Format however, there are no sacrosanct rules. The structure of the format depends on the relative negotiating power of the franchisor and the franchisee. However, it is not unlikely to find examples where the franchisor makes all the upfront investments into the store, provides stocks on consignment basis and also gives an MG to the franchisee. The example given in the table above is just one of the many such formats that exist.

The Path Ahead

Because of the importance attached to the right location of the store, apparel retailing has been badly hit by the unrealistic real estate markets in India. With quality retail space in short supply, franchising in the apparel sector has been transformed into a race for Minimum Guarantee (MG) for the property owners. Whichever brand offers a higher MG wins the game. With the situation of retail real estate supply versus demand not showing any signs of improvement, it is unlikely that the retailing sector shall be able to get out of the MG cycle in the short term.

Most franchisors in the sector follow the management contract or hybrid formats, especially for the premium or metro locations. In smaller towns and cities however, it is typically the pure franchise format that is put to use, primarily because of lower real estate costs.

Another point worth noting is that almost all franchises in the apparel & footwear sector are Product Distribution / Trademark Franchises, where the franchisor / manufacturer provides its trademark & products to the franchisee. It also means that the franchisors typically provide basic operating guidelines, but their involvement in the franchisee’s business is far lesser than that in a Business Format Franchise (as in the education sector, for example).

Till a few years ago, apparel and footwear retailers dominated the retail scene in India. However, the scenario is changing very rapidly with the entry of specialty retailers. Covering sectors like books, music, jewelry, furniture and home furnishings, specialty retailers are adding colour & variety to the Indian marketplace.

Key specialty retail players include Music World, Planet M (music); First & Second, Crossword (books); Oyzterbay, Tanishq (jewelry); Interiors Espania, Gautier (furniture) plus a host of others in a variety of sub sectors. A large majority of them are either utilizing or exploring the franchise route currently.

Most of the franchises in this sector are in the Business Format category whereby the franchisor not only licenses the brand name to the franchisee, but also provides him a complete business format (including guidelines for store operations, staffing, merchandising etc) for managing the business.

Some of the specialty retailers have been able to manage the minimum guarantee (MG) issue by virtue of being Destination Stores, which means they can compromise on the store location (albeit only to some extent).

As the Indian market matures further, there would be a greater variety of retailers entering the fray with their distinctive business formats and merchandise offerings.

4 Looking Ahead

After evaluating the above, there is no doubt that Franchising is here to stay in India. All it needs is an impetus in the right direction. We feel the following are some of the key issues that need to be resolved for the sustained growth of Franchising in the country:

4.1 Working Group / Regulatory Authority on Franchising

There is clearly a need for a working group on Franchising , Which can identify the correct priorities for the growth of the sector in the country. Such a group should preferably be set up under general industry bodies like FICCI and the Franchising Association of India. The group should have a mandate to identify the correct priorities of the sector as well as lobby for them with the relevant government authorities.

The same working group should at a stage from a Regulatory Authority which would be responsible for regulating the Franchising sector in the country.

4.2 Need for Disclosures Norms

In most countries where Franchising is developed and accepted, there are well developed disclosure norms for franchisors in place. These include:

• Mandatory registration of franchise offers with the relevant government departments / regulatory authority

• Mandatory disclosure of information on franchisors along with the franchise offer. The information to be disclosed via this UFOC ( Uniform Franchise Offering Circular ) could include – background of the franchisor, its financial status, operating history, number of units operational , number of units closed down along with reasons for closure etc.

• Cooling-off period. In many countries the franchisee is given a mandatory cooling-off period which has to lapse before the franchisee can sign the final franchisee agreement. This is to ensure that the franchisee does not take a decision in the heat of the moment but rather thinks before he signs on the dotted line.

These are some of the disclosure norms prevalent overseas. There needs to be an effort made towards identifying what would suit Indian business conditions and then implementing the same with a Regulatory Authority in place.

4.3 Need for Franchise Laws

Along with the setting up of disclosure norms and the regulatory authority, what is also required is a set of Franchise Laws developed for the sector. Currently, Franchising in India is regulated by the Contract Law and a number of other business laws but there is no specific law to take care of specific issues arising out of Franchising. This is badly needed to regulate the growth of the sector.

4.4 Understand & Honor Commitments

Last but not the least, it is important that both franchisors as well as franchisees need to recognize the fact that understanding and honoring their commitments to each is the only way the relationship would remain long-term. If any one out of the two parties loses sight of this fundamental factor, relationship is bound to fail.

As simple as it may sound, we believe this is one of the key factors that will determine the fate of Franchising in India.

For Reports On Franchise Sector & Brands Mail us at info@franchiseconnectindia.com


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