Evolution of Franchise in India

Presented by: Ram Niwash Singh Yadav

Submitted to: Mr. Dibyendu Dutta

Roll- 21, FMS – I , NIFT, Kolkata
 Introduction to Franchising
The general concept

 In simple terms it is the granting of certain rights by one Party (the franchisor) to another (the
franchisee) in return for a sum of money. The franchisee then exercises those rights under the
guidance of the franchisor.

 The consumer's perception should be that, save for any express statement to the contrary, there
is no difference between one of the franchisor's corporate outlets and a franchised one. The
decor of the shop premises, the livery of vehicles, the selection of the goods or services and
uniforms of the staff should be identical to the franchisor's own outlets. The franchisor is
renting the franchisee the right to use its business format; hence the name 'business format
franchising'. However that right to use the business format is for a limited period of time. The
franchisee gains no interest in the actual ownership of the format or associated marks. The
rights he enjoys are similar to those of a tenant when leasing a house. During the period of the
lease the tenant has full enjoyment of the demise, but the day after the expiry of the lease he has
no rights over the property at all.
 Introduction to Franchising
The commercial bargain

 In crude commercial terms the reason for both the franchisor and
franchisee entering into a contractual relationship with each other is to
make a profit. The franchisee makes a profit from supplying the goods or
services to the customer. The franchisor makes it from allowing the
franchisee to use its package of know-how and intellectual property rights.
The bargain is struck between two independent legal entities of supposedly
equal bargaining power. In reality however, the more successful and
established the franchise becomes, the more eager the franchisee and the
wider the choice of potential franchisees the franchisor enjoys. To obtain a
McDonald's franchise for example is nowadays a major achievement.
 Types of Franchising
Creation of a new business specifically for franchisors
 An entirely new product or service can be created specifically for franchising. This has been done with businesses
such as Snappy Snaps in the UK - which provides 1 hour film processing services and retails associated products such
as picture frames and the like in the high street. Dublcheck is another example, it operates a contract cleaning
business. Very often a local businessman identifies a successful franchised concept in another market such as the USA,
and decides to create a similar concept in his own jurisdiction.

Development of an existing business

 This is perhaps the most usual way of evolving a franchise. An existing product or service is further developed by use
of the franchising method. Such businesses include the Dyno-rod drain cleaning business, the restaurant businesses
and so on.

Conversion of existing business to the franchise format

 Sometimes an established business can decide to convert its managed outlets to franchised outlets. The Thresher off-
licence chain in the UK is a good example of this. Such decisions are usually taken because of a desire to accelerate
growth and reduce overheads without sacrificing quality control.

Importation
 This is a very common method of evolving a franchise in the specific territory. The United States is the great exporter
of franchise concepts around the world. Brands such as KFC, Holiday Inns, Hilton Hotels, Pizza Hut and McDonalds
are all American exports. Body Shop is an example of a British franchise that has established itself around the world.
 Franchising Applications
Automotive products and services
 Automotive supplies, tyres, parts, tools, etc., axle alignment, car valeting, engine tuning, exhaust systems,
rust proofing, sun-roofing fitting, tax hire, transmission repairs, tyre remoulding, vehicle cleaning, vehicle
rental, vehicle repair, vehicle security, windscreen replacement, windscreen repair, chauffeur hire.

Business aids and services

 Accountancy, bookkeeping, advertising services, information bureaux, display cards, postal centres,
business brokerage, business counselling, computer bureaux, data processing, financial and debt
counselling, job recruitment, temporary staff, office communications, photographic services, tax services,
word processing bureaux.

Construction, home improvement and maintenance products and services

 Air conditioning services, bathrooms and bath renovations, brick and stone pointing, ceiling cleaning,
chimney lining, heat and energy conservation, condensation control, damp proofing, domestic boiler
servicing, double glazing, draught exclusion, drain cleaning, electrical services, environmental cleaning,
fireplaces, fitted kitchens, flooring materials and laying, garage doors and other doors, gutters, insulation,
loft conversion, pavement surface repairs, plumbing, ready-mixed concrete, roof insulation and repair, tiles,
timber preservations, water softening equipment.
 Franchising Applications
Education services
 Educational tuition, kindergartens, management skill training, secretarial training.

Entertainment, recreation, etc.

 Hotels, whirlpools, adventure games indoors and outdoors.

Fast foods, restaurants and takeaways

 Chicken, coffee, croissants, hamburgers, ice cream, orange juice, pancakes, pizzas, popcorn, potatoes, sandwiches,
steaks, general restaurants.

Food stalls
 Baked goods, confectionery, convenience stores, dairy produce, eggs, fish, grocery stores, health foods, fresh juices.

Health, medical and beauty care

 Acupuncture and hypnotherapy, ambulance service, beauty centre, fitness health clubs and studios, hairdressing,
optical goods, skin care, fitness equipment.

Household services
 Carpet cleaning, curtain design and fitting, domestic cleaning services, furniture and fabric cleaning, furniture
stripping and restoration, upholstery and vinyl repair.
 Franchising Applications
Retailing (products and services not specified elsewhere)
 Aquatic centres, bag stores and luggage, batteries, bridal wear, maternity
wear, fashion wear, sports wear, ties, formal wear for sale and for hire,
computer hardware and software, cosmetics and beauty products, dry
cleaning, giftware, housewares and furnishings, knitting wools, instant print
and copying shops, linen, original art, personalised badges, picture framing,
photographic development, family histories, sewing machines, telephones and
car telephone services, video films and equipment, window blinds.

Miscellaneous
 Driving schools, equipment leasing and hire, estate agencies, publishing, local
newspapers, etc., security equipment services, tent hire and instant
accommodation hire, travel agencies, veterinary support services, wholesaling
of carpets, biscuits, electrical and video equipment, will writing and storage.
Franchising Internationally
 Very well accepted
 Entrenched deeply within USA & Western Europe
 Fairly well structured in terms of framework
 In USA:
› $1 Trillion is spent each year on goods bought at franchised outlets
› One out of every 12 business establishments is a franchised business
› A new franchise business opens every 8 minutes of every business day
› 50% of retail trade is through franchised outlets
 High growth areas are South-East Asia, Latin America & the
Middle East
 US franchisors lead the way in International expansion
 Franchising history in India
 International soft drink and hotel franchises arrived in India as early as in the
1960s, but in 1977 the Government of the day had expelled foreign brands from
India. The foreign brands started returning gradually from the mid ‘80s. In the
1990’s as the market opened, foreign franchises started coming in gradually,
and faced many hiccups along the way especially KFC, Schweppes etc.
 The well-known franchises relating to soft drinks, ice-cream parlours or
restaurants include Pepsi, Coke, Baskin Robbins, Movenpick, Subway,
McDonalds, TGIF, Geoffry’s, Taco Bell, Pizza Hut, Pizza Piazza, Dominos
Pizza, O’Brian’s Sandwich Bar, Ruby Tuesdays and Barrista. Retail franchises
include Marks & Spencer, West Side, Evita Peroni, Pepe Jeans and Adams.
Courier companies like Air Action and DHL are there along with computer and
software related franchises. The Government has liberalised the rules and
regulations in relation to the retail industry and a boom in this sector is on its
way.
 Franchising in India
 Acceptability growing by the day
 Fairly conventional industry spread
 Approximately 600 franchisors spread across industries like
education, retailing, professional services, healthcare etc
 Over 40,000 franchisees
 Annual turnover from Franchising – anywhere between Rs.8000-
Rs.10,000 crores
 Total investments made by Franchisees – over Rs.5000 crores
 Over 300,000 people directly employed by franchised businesses
 Variety of hybrid formats in practice
 Number of International franchises already existing, more coming in

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

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 Factors Defining the Growth of
Franchising in India
 Positive Factors

› Huge consuming class

› Fast-growing consumerism
› Shift towards Services from Agriculture & Manufacturing
› Franchising has already proven to be successful in several
sectors
› Large entrepreneurial pool
 Factors Defining the Growth of
Franchising in India
 Negative Factors

› Lack of regulatory framework

› Financing mechanisms not in place
› Skewed real estate markets

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 Franchising Trends in India
 The Education sector dominates the Indian franchising
scenario, although Retail is fast catching up
 Most of the franchisors are relatively new and small
 Several large Indian corporates also going the franchising
way
 Newer & innovative concepts being introduced
 Substantial interest from international franchisors as well as
Indian business houses for master franchises
 Franchising is now spread across the country, thereby
providing opportunities to entrepreneurs everywhere
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 Benefits of Franchising
 Franchising allows the franchisor to:

› Have greater access to capital

› Expand rapidly
› Save operating costs
› Capitalise on the abilities of independent entrepreneurs

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 Benefits of Franchising
 Franchisees joining a franchise system enjoy the
following benefits:

› Backing of a bigger organisation

› Shorter learning curve
› Established trade mark or service mark
› Economies of scale
› Joint advertising and promotion
› Transfer of management expertise
› Training & support from the franchisor
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 Retail Franchising within India
 Grew initially in the apparel & footwear sectors
 Has gradually grown to cover a wide variety of sectors including food,
consumer durables, jewelry, books, home décor etc
 Two varieties of Retailers:
› the manufacturer-retailers – typically Product Distribution Franchises – have been
around for a while
› the aggregators – typically Business Format Franchises – only now beginning to
show up
 Existent & likely to be successful only in smaller formats
 Substantial action also happening in non metro locations
› Thereby spreading organised retailing over a larger footprint
 Has had to contend with the peculiarities of the Indian real estate markets
› Result – MG (Minimum Guarantee) has become the key driver

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 Franchising in Retailing – A Variety
of Models
Model Pure Franchise Management Contract Hybrid*

Player Franchisee Franchisor Franchisee Franchisor Franchisee Franchisor

Input

Premises      
Interiors      (50%)  (50%)
Equipment      (50%)  (50%)
Stocks      
(Consignment)
Management      
Franchisee’s Margin on Sales Rent + %age of Sales Higher of Minimum Guarantee or
Returns Margin on Sales

*many more varieties of the hybrid model exist.

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 Non Retail Franchising within India
 Comprises of sectors like Education, Health & Beauty
and Professional Services
 Is widely practiced and accepted across the country
 Differs from Retail franchising in terms of the
importance given to the location
 Pure franchises / Management contracts followed

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 Brief Sectoral Analysis
 IT Education – Down for the moment but surely not out; likely
to re-emerge through IT Enabled Services
 Retail – Going strong but getting hurt because of the real estate
markets
 Vocational / Preparatory Education – Fundamentally strong
because of huge population base and high competition in public
examinations
 F&B – Low level of activity currently but attractive long-term
potential
 Professional Services – Low level of activity currently but
attractive long-term potential
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 Value Proposition from a Franchisor

Ranking Value Proposition Value Proposition

(Franchisors View) (Franchisees View)
1 Brand Name Brand Name

2 Economies of Scale Economies of Scale

3 Proven Business Format Proven Business Format

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

 Value Proposition from a Franchisee

Ranking Value Proposition Value Proposition

(Franchisors View) (Franchisees View)
1 Local Market Knowledge Investment /
Real Estate
2 Business Experience / Business Experience /
Background Background
3 Investment / Local Market Knowledge
Real Estate

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

 Critical Success Factors for a Franchise
System
Ranking Factors

1 A Well Established Business Network

2 Constant New Product Development

3 Innovative Products / Services

4 Quality of Franchisees

5 Transparency

6 Return on Investment to Franchisees

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

Most Common Causes of Friction between
Franchisors & Franchisees

Ranking Causes of Friction

1 Transparency

2 Training and Support

3 Revenue Sharing

4 Product / Service Delivery

Source: Annuals Surveys of the Indian Franchise Sector, conducted by FirstFranchising

 Key Concerns for the Indian
Franchise Sector
 Herd mentality – both franchisors as well as franchisees

 Several wrong precedents of franchisors as well as franchisees

 To an extent:
› many franchisee’s commitment to service quality is missing
› many franchisor’s commitment to provide the promised support to
their franchisees is in doubt

 Result – a tense relationship, which doesn’t help anyone

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 Key Concerns for the Indian
Franchise Sector
 Financing for franchises is a problem area with financial
institutions
› soft expenses not recognised as part of project cost by many institutions

 Legal & disclosure framework for franchises is not in place

› increases chances of fraud by fly-by-night franchisors
› makes it difficult to resolve disputes

 Real Estate markets completely unstructured & unrealistic

› make Franchising unviable for start-up entrepreneurs

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 Way to go
 Need for a Working Group / Regulatory Body on
Franchising to identify correct priorities and lobby for
them

 Need for disclosure norms & legal framework on the

regulatory side

 Most importantly, Franchisors as well as Franchisees need

to understand & honour their commitments &
responsibilities towards each other
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 THANK YOU