Professional Documents
Culture Documents
Non Store Retailing & Franchising
Non Store Retailing & Franchising
GOVERNMENT OF INDIA
SEMESTER – III
HANDBOOK
2 Direct Marketing 6
4 Direct Selling 32
5 Multi-Channel Marketing 45
6 Introduction To Franchising 51
7 Basics Of Franchising 69
9 Franchisee Perspective 89
15 Bibliography 135
Introduction
Non store retailing is a form of retailing in which sales are made to consumers without using
physical stores. The non-store retailers are known by medium they use to communicate with
their customers, such as direct marketing, direct selling, vending machines or e-tailing. Non
store retailing is patronized to time conscious consumers and consumers who can’t easily go to
stores, or compulsive buyers. Most non-store retailers offer consumers the convenience of
buying 24 hours a day seven days a week and delivery at location and time of their choice.
Non store sales are now growing at a higher rate than sales in retail stores. The high growth
rate is primarily due to the growth of electronic retailing. The growth of catalogue retail sales
and sales in other non-store retailing formats such as TV home shopping, direct selling, and
vending machines are slower.
The non-store distribution channel can be divided into direct selling (off-premises sales) and
distance selling, the latter including all forms of electronic commerce. Distance selling includes
mail order, catalogue sales, telephone solicitations, and automated vending. Electronic
commerce includes online shopping, internet trading platforms, travel portals, global
distribution systems and teleshopping. Direct selling includes party sales and all forms of selling
in consumers’ homes and offices, including even garage sales.
The non-store distribution channel is marked by low entry thresholds. Compared to store
retailing that requires a retail outlet, inventory, cash flow to hire staff and advertising, non-
store retail start-ups usually have to invest little to reach out to potential buyers of the goods
and services they offer. Non-store retailing is therefore not only used by established brick and
mortar business retailers who develop an online bricks and clicks business model presence, but
also by the individual pure play, often him- or herself a consumer, to create an E-Shop or to run
sales parties.
Web definitions
Non-Store Retailing is the selling of goods and services outside the confines of a retail facility.
It is a generic term describing retailing taking place outside of shops and stores (that is, off
the premises of fixed retail locations and of markets stands).
en.wikipedia.org/wiki/Non-Store Retailing
(Non-store retailers) Included are sales of food through mail-order houses, vending machines,
home delivery sales, door-to-door sales, and electronic shopping. Direct sales of food by
farmers, manufacturers, and wholesalers to consumers are also included.
www.ers.usda.gov/Briefing/FoodMarketingSystem/foodretailing
Form of retailing independent from the existence of a store, i.e. conducted through vending
machines, direct sales and marketing, party-based sales, direct mail, catalogs, television
programming, telemarketing and internet.
www.shopic.com/retail/supplier/glossary.php
With the centralized structure, operating costs remain flatter than with physical stores. Once
the distribution and promotional network has been established, and operating costs covered,
most all further gross profit falls immediately to the bottom line, boosting net profits in a way
difficult to achieve with physical retail outlets.
Non-store retailers also have an advantage in flexibility. If sales in a certain geographic area are
sluggish, they can just cease marketing there, and avoid the expensive charges necessary to
close a store. Seasonal products can also be pushed more efficiently, because there is no need
to expand retail space to fit them for a short selling season.
Direct marketing attempts to acquire and retain customers by contacting them without the use
of an intermediary. The objective is to achieve a direct response which may take one of the
following forms:
Direct marketing, then, is the distribution of products, information and promotional benefits to
target consumers through interactive communication in a way which allows response to be
measured. It covers a wide array of methods, including the following:
Direct mail;
Telemarketing (both inbound and outbound);
Direct response advertising (coupon response or ‘phone now’);
Electronic media (internet, interactive cable tv);
Catalogue marketing;
Direct Mail
Electronic Tele-
Media marketing
Direct
Marketing
Direct
Catalogue
Response
Marketing
Advertising
Inserts,
Leafets,text
Messages
Business Advantages:
Limitations:
Despite these and many other successes, direct marketing did not come into its own as
marketing discipline until the 1970s. It's interesting to note that the successful introduction of
bank credit cards, including Visa and MasterCard, in the 1960s and 1970s was conducted using
direct marketing methods to persuade consumers, merchants, and banks to accept the cards.
From the many factors contributing to the growth of direct marketing and mail-order catalogs,
direct marketing expert Jim Kobs selected four as, the most important.
2. Another factor contributing to the growth of direct marketing was the increased cost
associated with personal sales calls. By the end of the 1970s, the average cost of a single
4. Increased consumer acceptance of the telephone as a way to place orders has also
helped direct marketing achieve phenomenal growth. Coupled with telephone-based
ordering are faster order fulfillment and the elimination of delays previously associated
with mail order.
For example, a special offer on garden tools from a mail order company can be targeted at
those people who have purchased gardening products in the past. Another example would be a
car dealer, which by holding a database of customer names and addresses and dates of car
purchases could direct mail to promote service offers and new model launches.
1. Information on actual and potential customers. Basic data such as names, addresses and
telephone numbers enable customers to be contacted. This may be supplemented by
psychographic and behavioural data. In business to business markets, information on key
decision-makers and their choice criteria may be held.
4. Product information. Information relating to which products have been promoted, how,
when, where and associated responses can be held.
The direct marketer has a range of media that can be used to reach target audiences. Direct
mail, telemarketing, direct response advertising and catalogue marketing will now be analysed.
DIRECT MAIL
For example, if a company wished to target households living in modern private housing with
young families, the electoral roll can be used to provide names and addresses of people living in
such areas. Business to business lists may be bought from directory producers, trade magazine
subscription, or from exhibition lists. Perhaps the most productive mailing list is that of a
company’s own customers which is known as the house list. This is because of the existing
relationship that a company enjoys with its own customers.
Why: Why should they buy or make an enquiry? Is it because our product is faster,
cheaper, etc.?
Where: Where can they be reached? Can we obtain their home or working address?
When: When is the best time to reach them? Often this is at the weekend for
consumers, and Tuesday, Wednesday or Thursday for business people. (Monday can
be dominated by planning meetings, and on Friday they may be busy clearing their
desks for the weekend.)
Elaborate personalisation is possible and the results directly measurable. Since the objective of
direct mail is immediate – usually a sale or an enquiry – success can easily be measured. Some
organisations such as the Reader’s Digest spend money researching alternative creative
approaches before embarking on a large-scale mailing. Such factors as type of promotional
offer, headlines, visuals and copy can be varied in a systematic manner and by using code
numbers on reply coupons, responses can be tied to the associated creative approach.
The effectiveness of direct mail relies heavily on the quality of the mailing list. Poor lists raise
costs and can contribute to the criticism of ‘junk mail’ since recipients are not interested in the
contents of the mailing. Initial costs can be much higher than advertising in terms of cost per
thousand people reached and the response can be low (an average response rate of 2 % is
often quoted).
Added to these costs is the expense of setting up a database. In these terms direct mail should
be viewed as a medium- to long-term tool for generating repeat business from a carefully
targeted customer group. An important concept is the lifetime value of a customer which is the
profit made on a customer’s purchase over their lifetime. In summary, direct mail can be very
cost-effective at targeting specific segments of the population, but its critics point to low
response rates, the existence of junk mail, the fact that personal information can be sold to
TELEMARKETING
Telemarketing has been around for a number of years, but still remains a very powerful lead
generation and sales tool, if it is done well. Telemarketing can give immediate results and can
be used to reach a wide range of objectives; whether it is lead generation, appointment setting,
attendees to seminars, customer surveys or data cleansing. It is a chance to talk to other
businesses in a non-threatening, non-sales environment. Telemarketing is, quite simply,
marketing through telecommunications.
What is telemarketing?
While telemarketing tends to be most strongly associated with thick skinned individual
hammering their way through a list in search of sales leads, it is actually a very broad term that
applies to a multiplicity of both inbound and outbound telephone marketing. The oft quoted
growth in telemarketing is due largely to the huge increase in the number of call centres
handling high volume inbound and outbound business/consumer calls. This work includes for
example, handling responses to an advertising campaign, or calling existing customers to offer
additional services. Generally a differing set of skills are required for inbound and outbound
telemarketing, but this article concentrates on the latter, which tends to involve a wider range
of selling skills.
Importance of Telemarketing
Very few companies can survive without sales and for many companies telemarketing is, or
should be, the first stage of the sales process. It can be used for database building, lead
generation, customer retention, cross selling and market research, the list of the benefits of
telemarketing is long. There are also many downsides to telemarketing if it is done badly,
expensive, high staff turnover, poor results and ultimately brand damage and lower sales.
Telemarketing delivers reliable information quickly, allowing your sales team to make the most
effective use of their time. Telemarketing gathers the specifics that your field sales team need
in a non-threatening, non- sales environment. Telemarketing identifies the needs and exact
requirements of your customers and prospects. The results of telemarketing are completely
measurable, accurate and immediate. You will always get a response, whether you make the
sale or not, which helps with data gathering and data records. Records of these responses will
aid when planning your customer relationship management.
Personalisation is known to increase success rates by three times more than non personalised
messages. Also 80% of customers like to do business by phone. The marketer can tailor the
telemarketing script for the individual to encourage maximum success rates. For example,
special offers for new and valuable customers. Telemarketing’s characteristics allows
relationship marketing to occur and an increase in loyalty. You can get a lot of information
across if the script is properly structured. Telemarketing allows questions/queries to be asked
and answered during the conversation which establishes trust and understanding.
Telemarketing is very effective when integrated. Using telemarketing to follow up the leads
produced from an email marketing campaign or direct marketing campaigns will increase the
leads by at least ten fold.
Whilst using telemarketing, multiple objectives can be fulfilled at the same time. For example a
telemarketing team can ring a contact and check their data is correct in the system (data
cleansing) while doing this, they can then go onto making a sales call.
Telemarketing Procedure
Telemarketing may be done from a company office, from a call centre, or from home. It may
involve either a live operator voice broadcasting which is most frequently associated with
political messages.
An effective telemarketing process often involves two or more calls. The first call (or series of
calls) determines the customer’s needs. The final call to serious Prospective customers are
identified by various means, including past purchase history, previous requests for information,
credit limit, competition entry forms, and application forms. Names may also be purchased
from another company's consumer database or obtained from a telephone directory or another
public list. The qualification process is intended to determine which customers are most likely
to purchase the product or service.
Charitable organizations, alumni associations, and political parties often use telemarketing to
solicit donations. Marketing research companies use telemarketing techniques to survey the
prospective or past customers of a client’s business in order to assess market acceptance of or
Telemarketing techniques are also applied to other forms of electronic marketing using e-mail
or fax messages, in which case they are frequently considered spam by receivers.
A call centre is operated through an extensive open workspace for call centre agents, with work
stations that include a computer for each agent, a telephone set/headset connected to a
telecom switch, and one or more supervisor stations. It can be independently operated or
networked with additional centres, often linked to a corporate computer network, including
mainframes, microcomputers and LANs. Increasingly, the voice and data pathways into the
centre are linked through a set of new technologies called Computer Telephony Integration
(CTI)
A contact centre, also known as customer interaction centre is a central point of any
organization from which all customer contacts are managed. Through contact centres, valuable
information about company are routed to appropriate people, contacts to be tracked and data
to be gathered. It is generally a part of company’s Customer Relationship Management (CRM).
Today, customers contact companies by telephone, email, online chat, fax, and instant
message.
Call centre technology is subject to improvements and innovations. Some of these technologies
include speech recognition software to allow computers to handle first level of customer
support, text mining and natural language
processing to allow better customer
handling, agent training by automatic mining
of best practices from past interactions,
support automation and many other
technologies to improve agent productivity
and customer satisfaction.
The concept of the Universal Queue standardizes the processing of communications across
multiple technologies such as fax, phone, and email whilst the concept of a Virtual queue
provides callers with an alternative to waiting on hold when no agents are available to handle
inbound call demand.
Virtual Call Centre Technology: With the advent of the Software as a service technology
delivery model, the virtual call centre has emerged. In a virtual call centre model, the call
centres operator does not own, operate or host the equipment that the call centre runs on.
Instead, they subscribe to a service for a monthly or annual fee with a service provider that
hosts the call centre telephony equipment in their own data centre. Such a vendor may host
many call centres on their equipment.
Cloud Computing for Call Centres: Cloud computing for call centres extends cloud computing to
Software as a service, or hosted, on-demand call centres by providing application programming
interfaces (APIs) on the call centre cloud computing platform that allow call centre functionality
to be integrated with cloudbased Customer relationship management, such as Salesforce.com
or Oracle CRM and leads management and other applications.
The APIs typically provide programmatic access to two key groups of features in the call centre
platform: Computer Telephony Integration (CTI) APIs provide developers with access to basic
telephony controls and sophisticated call handling on the call centre platform from a separate
application.
Configuration APIs provide programmatic control of administrative functions of the call centre
platform which are typically accessed by a human administrator through a Graphical User
Interface (GUI).
Benefits of using Telemarketing: The main benefit of using telemarketing to promote your
business is that it allows you to immediately gauge your customer's level of interest in your
product or service. Additionally it allows you to do the following:
A useful set of guidelines for conducting a telemarketing call has been developed by the Bell
Telephone System of America:
Mobile marketing (the sending of short text messages direct to mobile phones) is extremely
successful. Every month in Britain over a billion chargeable text messages are sent. Marketers
have been quick to spot the opportunities of this medium to communicate, particularly to a
youth audience.
Marketers now send out messages to potential customers via their mobile phones to promote
such products as fast food, movies, banks, alcoholic drinks, magazines and books. A new
acronym, SMS (short messaging service), has appeared to describe this new medium, which is
available on all mobile phones that use the global system for mobile communications (GMS),
which dominates the second generation (2G) standard.
Mobile marketing does have certain limitations though. These are as follows.
Short text messages: the number of words in a text message is limited to 160
characters. Future technological advances may remove this limitation.
Visually unexciting: 2G systems do not permit picture messaging. Although multimedia
messaging services and 3G technology allow picture messaging, the extra cost may
deter its widespread use. Wear-off: while mobile marketing is still novel, response rates
are good, but sceptics argue that once the novelty has worn off and consumers receive
more and more advertising/promotion-related messages, the effectiveness of the
medium will wane.
Poor targeting: as with poorly targeted direct mail, ‘junk’ text messages cause customer
annoyance and lead to poor response rates. At the moment, mobile marketing is not
just acceptable, it is actually popular. Research by the Mobile Marketing Association
showed that 68 per cent of consumers would be likely to recommend the service to
their friends, and 43 per cent said they would respond to messages positively, perhaps
by visiting a website or viewing an advertisement.
Catalogue marketing is the promotion and sale of goods through catalogues distributed to
agents and customers by mail or at outlets if the catalogue marketer is a store owner.
Traditionally catalogue marketing was a form of mail order where agents passed the catalogue
to relatives and friends who ordered through the agent. A key benefit to customers was the
credit facility of weekly payment.
More recently companies such as Next and Trois Suisse moved catalogue marketing more
upmarket by targeting busy, affluent consumers who valued the convenience of choosing
products at home. A major UK success story has been Argos, which has built its business
entirely on catalogue marketing. A wide range of products such as cameras, jewellery, toys,
mobile phones, watches, household goods and gardening equipment is sold through their
catalogues.
The internet is a much cheaper way of displaying products to consumers. Like the internet,
catalogues do not allow products to be tried (e.g. a hi-fi system) or tried on (e.g. clothing)
before purchase. Furthermore there can be differences between the colour displayed in the
catalogue and that of the product when it is delivered. This can be an important issue for
products such as home furnishings.
Consumer catalogs are mailed to consumers at home. Unaffiliated catalogs are stand-alone
ventures whose primary purpose is to
sell merchandise by mail. These
independent catalogers are not affiliated
with any retailer or manufacturer.
Consumers are also quite familiar with retail catalogs identified under three types:
traffic generators,
independent profit centers,
Combination of the two.
A successful catalog operation is built on several key elements, including the right personnel,
merchandise, catalog design and format, sales promotion, mailing lists, and order processing
and fulfillment.
1. Catalog Personnel
Many of the functions necessary to maintain a catalog operation can be fulfilled either by
employees or outside services. Within the company individual employees can be assigned to
handle more than one function. Key functional areas include merchandising, catalog design,
marketing and production, office services and data processing, warehouse operations,
2. Merchandise
Merchandising involves selecting the appropriate items for the catalog. Catalogs affiliated with
retailers or manufacturers typically include merchandise that is also sold by the retailer or
manufacturer through a store or other channels
Once the merchandise has been selected, it is necessary to determine how it will be presented
in the catalog. Catalogs come in a variety of sizes, shapes, and overall general appearances. A
cataloger must select a design concept for its catalog that is appropriate for its company.
Catalog carrying discounted merchandise should look like a sale catalog. Catalog carrying high-
end merchandise should have a quality look and feel about it. In the hands of a consumer it is
the catalog that presents the image of the company.
Keys areas that catalog marketers focus their attention on when designing a catalog include
page layout and design, space allocation for various products, the front cover, the back cover,
sales copy, headlines, and the sales letter. The inside and outside of both covers as well as the
center of a catalog are considered "hot spots" that have a disproportionally large influence on
sales generation and how the prospect responds to the catalog.
4. Sales Promotion
The order device is also an important "hot spot" in any catalog. Sales can be won or lost with
the order form, so most catalog marketers regard it as an important sales tool. The key to a
successful order form is making it easy to use. Whether the order is placed by mail or a toll free
telephone call, a well-designed order form can facilitate the sale.
In addition the order form usually carries other information that is designed to overcome any
reservations that prospects might have about ordering merchandise through the mail or over
the telephone. Customers usually look to the order device or pages surrounding the order form
to include information about warranties and guarantees, customer service, and any
promotional incentives that might be offered.
As with all types of direct marketing, a key factor in a successful catalog marketing campaign is
being able to reach the right audience. Catalog marketers acquire customers by renting mailing
lists, and then they build in-house databases based on customer histories. Response lists
contain the names of prospects who have responded to the same offer. These typically contain
individuals who share a common interest. Response lists are not usually rented; rather, they are
an in-house list compiled by a particular business.
Catalogers who seek to build relationships with their existing customers and acquire new
customers must have an efficient system of fulfilling orders in a timely and accurate manner.
Nothing turns a customer off more than receiving the wrong merchandise or receiving it too
late for the purpose for which it was originally ordered. In some cases catalogers may have
their own warehousing operation that is involved in picking, packing, and shipping orders. In
other cases merchandise may be drop shipped from another location, or the entire order-
fulfillment process may be handled by an outside service bureau.
In addition to efficiently fulfilling orders, catalogers capture order information to build their in-
house customer databases. Such databases typically contain information concerning the
amount of the purchase, what items have been purchased, and the dates purchases were
made. Armed with this data, catalog marketers can more effectively target future mailings to
customers based on when, what, and how much they have ordered in the past.
The catalog must deliver the right offer at the right time to the right person in the right way.
The target audience must be correctly identified. The offer must be made in the best possible
way, and the catalog must employ the most effective creative execution to present the
merchandise offered for sale. At its most effective, catalog marketing is an ongoing process of
communication to maintain relationships with existing customers and build relationships with
new ones.
There are certain situations where direct marketing is more likely to work than others. The
direct marketer must be able to identify the target audience in terms of shared characteristics.
Are they likely to read a particular magazine? Live in a certain geographic area? Have a certain
minimum income? Be a certain age or gender? The more characteristics of the target audience
that can be identified, the more likely a direct marketing campaign targeted to those individuals
will work. Since direct marketing relies on one-on-one communications and motivating the
recipient to act, it is essential to be able to reach the target audience. It's no use identifying a
target market if there's no mailing list or print or broadcast medium available to reach them.
Some other situations in which direct marketing works well are when there's a lot to say about
a product or service; when the product or service has the potential for repeat sales; and when
there's a need to have greater control over the sales message.
Kettle Foods has discovered that its Chips brand does not need advertising support. Might this
be a problem now supermarkets are promoting their in-house brands?
In the UK, the snack market is worth around £3 billion a year, of which potato crisps forms one-
third. This has remained steady for about ten years with the exception of the premium hand-
cooked chips market (principally occupied by Kettle Chips) which is growing at 30 per cent per
year. Kettle Chips are never advertised, so what is the secret of their success?
Cameron Healy had no working capital when he founded Kettle in Oregon in 1978. He
contended that customers with sufficient discretionary income would be prepared to pay
around £2 for a top quality packet of crisps. His idea turned out to be correct and he developed
Kettle Chips. By 1982 they were the only hand produced potato crisps in the USA. He came to
Britain in 1987 to research ‘natural foods’ and set up crisp production with Tim Meyer in
Norwich in 1988 and moved to larger premises in 1998. Since then year-on-year growth has
been over 30 per cent and exports to Europe have grown at an even faster rate.
Josh Layish, joint Managing Director at Kettle, contends that company growth has been a direct
result of not targeting a mass market. He says: ‘Financial discipline is essential, but it cannot
form the vision and direction for the company. We’re not a volume driven business.’ As Kettle is
not a public company it has the managerial independence to make such decisions. Being a high-
quality premium product encourages loyal consumers. ‘Our customers are prepared to pay for
premium products,’ explains Layish. ‘They’re ABs – foodies and prosperous. Typically they
haven’t yet had kids, or they’re older and their kids have left home and they want to be
communicated with intelligently.’
• Direct mail that extends to a database of 40,000 names obtained from customers who
register at food fairs, county shows, English Heritage concerts, the BBC Good Food Show and
such events as the National Wedding Show.
• A website that features a recipe book, plus a quarterly booklet for those who request it, as
well as a free 0800 telephone facility.
Kettle wants major sales through supermarkets, but it does not necessarily want this to be the
first place where customers discover the brand. Originally it was marketed through
delicatessens, but now it is offered in upmarket settings such as Coffee Republic, All Bar One
and Ha Ha’s as the only hand-cooked crisp on offer.
When asked about competition from supermarket own brands, Layish responded: ‘We are
conscious of this, but we believe we can stay ahead on quality and innovation. Our seasonings
are second to none.’ Competition from own-label intrusion suggests a harder hitting marketing
approach than Kettle has previously adopted. With 30 per cent growth from a firm that seems
satisfied, what else can Kettle do?
Phil Teer, head of planning at St Luke’s Communications Consultancy, argues that although
Kettle Chips is perceived to be an innovative product with a modern pack design, we live in
dynamic times and trends can quickly go out of fashion. With Kettle, they have successfully built
an intense relationship between the brand and its customers, but he questions how strong that
bond will be in two or three years. He suggests building a strong online community similar to
the Friends Reunited website, as well as branding a TV programme. Teer contends that Kettle
could create a strand of programming around its brand of crisps or its target market in the form
of a deli-culture.
Teer says: ‘I associate Kettle with the home . . . Kettle parties or events at high profile venues
would enhance its out-of-home role and deepen the relationship in a contemporary way. You’d
look to ensure that Kettle is a part of people’s lives in a way that reflects how they’re living it.
People are smart. They look behind the brand and see that it’s not some big corporation, but a
small team who believe in what they do. That’s a marketable quality.’
Source: Wynn, S. (2002) ‘Crisp Growth Without Paying for the Ads’, Management Today, May, pp. 70–2
Discussion Questions:
1. Which view is the more convincing – Teer’s or Layish’s? Give reasons to justify your answer.
2. Suggest ways in which Kettle Foods can surmount the threat from own-label brands, with
particular reference to direct marketing.
3. How might Kettle sustain or even increase its 30 % year-on-year growth?
Direct selling refers to the selling of goods and services to consumers who are away from a
fixed retail outlet, generally at their homes, workplace, etc., through an explanation, and
demonstration of the product by sellers. It is one of the oldest modes of sales, and is similar to
the traditional consumer goods retail model.
The modern direct selling industry can be considered to have pioneered in the USA, with the
establishment of Avon in 1886. With the success of this model, involving lower sales, and
distributions costs and greater direct interaction with the consumer, the portfolio of products
swelled to include cosmetics, personal care, household goods, accessories and other products,
over time. The movement was supported by the engagement of women as direct sellers, who
considered this opportunity as a means of empowerment and self-reliance.
The introduction of the multi-level marketing compensation plans (MLM plans) opened another
chapter in the evolution of direct selling. Introduced in the mid-twentieth century, the plan for
the first time enabled consumers to benefit from the success by providing them the option to
become a direct selling partner of the business. MLM plans became widely accepted and a large
Today, direct selling is a US167 billion (2012) industry globally, engaging over 89 million direct
sellers. Asia-Pacific forms the largest direct selling market with a share of 44 per cent followed
by North America, Central and South America (20 per cent share, each) and Europe (15 per
cent).
Modern direct selling can be considered to have been kick-started in India in 1980s. The
industry witnessed major growth post-liberalisation with
many global players entering the Indian market. Amway
was one of the first major global direct selling companies
to enter India in the year 1995, which was followed by
companies like; Avon, Oriflame and Tupperware in 1996.
Around the same time Modicare was one the first few
Indian companies to adopt this channel of distribution.
c. Development of the SME sector: Many direct selling companies rely on SMEs for
manufacturing their products. In a lot of cases, the direct selling companies impart the
manufacturing know-how, technology and processes to enable the SMEs to produce excellent
products. Many direct selling companies also invest in providing the right equipment and
machines to the SMEs for production. Driven by these initiatives, several SMEs have now
developed capabilities to cater to the needs of other MNCs and have commenced supplying to
them, in the process promoting India as a manufacturing destination.
Direct selling started with hawkers and peddlers, who travelled great distances to sell
unbranded products and services. Doorbells, catalogues and purchase orders were centuries
away from the early direct seller who relied on his instincts and common sense to make a living
through selling. The early direct seller exchanged pottery, stone weapons, tools, agricultural
products and raw materials with people from other lands. They later evolved into independent
salesmen who went from door to door and house to house selling branded products in an
urbanised environment.
Beginning in the mid to late 1800s, direct selling companies were formed in USA offering
various products directly to the final consumer. Avon, which today is one of the largest direct
selling companies, was established in 1886, initially represented a means for women to earn
money and work outside their homes, and by 1920 topped its revenue at USD1 million.
Global Direct Selling Market Size Direct selling is a USD 167 billion industry globally. While the
industry grew at a low rate of 5.4 per cent in 2012, over 2011 (growth rate of 19.7 per cent),
due to global economic slowdown, the long term growth prospects of the industry remain
robust.
Gender-wise participation in
the Industry As of 2012, 75 per
cent of females were part of
the industry.
Companies around the world use the direct selling channel to promote, demonstrate and sell a
wide range of products across various categories. There are more than 10 different categories
of products sold by the global direct selling industry. With time, there has been an evolution in
the spending trends globally in favour of cosmetics & personal care products, and the industry
has seen tremendous growth.
This has also led to increase in sales through the direct selling channel. Cosmetics & personal
care is the largest direct selling segment capturing a market of USD 58 billion in 2012 and with a
35 per cent share of the industry revenue, followed by wellness products with a share of 25 per
cent and a market size of USD 42 billion.
These products benefit from the personal touch offered by direct sellers who are able to
demonstrate and explain the benefits of these products. Household goods & durables and
clothing & accessories are also significantly large product categories generating revenues of
approximately USD 23 billion and USD 15 billion from direct sales globally.
Home improvement, utilities, books & stationary are smaller segments, with each of them
capturing a market of close to USD 3-5 billion. All these segments have witnessed double digit
growth over the three years from 2010 to 2012.
While some direct sellers maybe employees of a direct sales company, authorised to act for the
company in business matters, most direct sellers are independent business operators or
selfemployed. They enjoy the advantage of deciding when and how much time will be devoted
in selling the company’s products. Traditional Direct selling methods include:
Interpersonal
Direct selling simply will not work if you do not have adequate interpersonal
communication skills. Before you can consistently get customers to buy your products, they
must trust you and connect with you as a salesperson. This is especially true if the products
you sell through direct selling are higher priced and you must convince the prospect of their
Presentation
Product Knowledge
Closing
Closing a sale is important in any selling format, but it is necessary in direct selling. Some
companies heavily emphasize assertive closing techniques. The close is the point at which
all key concerns of the prospect are addressed and you need to persuade him to finalize the
purchase. Confidence, persuasiveness and a certain amount of courage are keys to
effectively closing deals. Some direct selling companies maintain strict quotas or
conversation ratios to hold sellers accountable for closing deals.
Disadvantages:
A number of disadvantages come with direct selling, which can include both face-to-face and
phone sales. These disadvantages can pertain to the associated costs of direct selling,
shortcomings of the method itself or its overall effectiveness. Small companies are usually
Expensive
Direct selling is relatively expensive compared to other forms of marketing. Each direct sales
call can cost over $300 in some industries, according to "Know this" online, a reputable
business reference site. Companies that sell directly must hire sales reps. hence, the sales
reps' salaries and benefits must be factored into the costs of all sales appointments. Sales
reps must also be trained in classrooms and on the job before they can even call on
customers. These training programs often last several weeks, which can get expensive. Sales
reps also incur expenses traveling by air or car as not all customers are local.
Time Consuming
Sales calls can be time consuming. A sales rep may spend an hour or more introducing the
features and benefits of her products. During this process, she may need to ask questions,
overcome objections and try to close the sale. Moreover, reps may take several visits or
calls to actually make sales. Some consumer or business clients need to think about their
purchasing decisions. Also, the decision maker or owner may not even be available at the
time of the sales call. Sales reps can only make one sale at a time. Contrarily, an online
marketer may receive several sales in the same time period.
Limited Coverage
Small companies have limited coverage when they sell to clients directly. In other words,
they can only cover one or more markets at a time, depending on the number of sales reps
they employ. For example, yellow pages sales reps may spend 3 to 6 weeks in one market to
visit all advertisers. They may then move on to a contiguous market and complete coverage
for the next directory. Contrarily, companies using advertising or online sales methods can
cover entire regions or the national market with single promotions.
Inconvenient or Obtrusive
Direct selling can also be inconvenient or obstructive for business clients or consumers.
Sales reps often appear at times that are inconvenient for business owners or managers.
These individuals may be having relatively busy days, or they may have crucial deadlines to
meet. Consequently, the last thing they want to do is make a buying decision. Small
company sales reps may get around the inconvenience factor by leaving brochures or
business cards with web addresses. Those way customers can study the information at their
convenience.
Similar to the traditional consumer industries, the direct selling industry faces challenges in
setting-up manufacturing facilities, dealing with import duties, etc. A daunting challenge for the
direct selling industry in India is lack of regulatory clarity.
Due to this, often direct selling companies are mistaken for fraudulent pyramid/ ponzi schemes.
States like; Andhra Pradesh, Kerala, Sikkim and union territories like Chandigarh, have on
several occasions mistook legitimate direct selling companies with fraudulent players because
of absence of required regulatory clarification.
Such uncertainty is likely impeding the growth and reputation of direct selling companies in
India. In many cases, due to absence of clarity, representatives of the direct selling companies
have been harassed by the local police and state governments. Such incidences tend to hinder
the growth of the industry and can have an adverse effect on consumer confidence.
Brick-and-mortar stores
Websites
Tablets
Kiosks
Smartphones
Digital signage
Call centers
Social media
Over the past few years, multi-channel retailing has received growing attention as customers
increasingly turn to a range of different channels as part of the buying process. Recognizing this
86 percent of retailers now include URLs in catalogues, 80 percent use email to promote store
or catalogue sales, and 87 percent accept in store returns of online purchases.
According to Shop.org, 34 percent of consumers today use at least three channels when
shopping. Research has found them to spend up to 10 times more, to generate 25 to 50 percent
more profit and demonstrate greater loyalty than their single-channel counterparts.
“Today the customers expect that if they order an item online, they can return it in the store,
that kind of thing. It’s up to retailers to make sure that expectation is met.
Multi-channel retailing also offers plenty of benefits to retailers, benefits that make investing in
the strategy worthwhile.
“Channels are disintegrating for customers,” said Jeremy Gustafson, vice president at KSC
Kreate, a digital commerce agency based in Hollywood, Fla. “People are watching television and
using their tablet at the same time. They expect the same
kind of integration with their shopping experience.”
Increased sales
The primary driver for a retailer adopting any strategy is, of course, increasing profit, most
frequently by increasing sales. Multi-channel retailing, by offering a variety of engagement
points for the customer to make a purchase, increases the convenience and ease of sales, thus
boosting profit. A customer who thinks about buying a pair of pants, for example, may not want
to drive to the mall, park, walk to the store, find the pants and try them on.
For that customer, she can go online at home and order the pants from the store’s website.
Another customer, however, might be in the store trying on the pants and decide she’d like
them in a different color. In that case, she can use an in-store kiosk to find the pants in the
preferred color, order them and have them delivered to her home.
Still another customer can use her smartphone to take a picture of the pants, send it to a friend
and discuss whether to purchase them or not. Having a variety of engagement points gives
retailers more tools to make a sale.
Knowing the customer is a key tenant for successful retailing, and multi-channel engagement
points provide more opportunities to gather information about customers. There are two
benefits to the data collection offered by multi-channel retail:
First, the possibility for gathering more information exists, and the information can be used
more effectively. “People usually are more comfortable entering information themselves,
rather than giving it to a salesperson,” said Steve Deckert, marketing manager for Sweet Tooth,
a Toronto-based provider of loyalty programs to retailers. “So they are far more likely to enter
their email address into a kiosk than give it to a cashier.
At the same time, by having that information available across a variety of channels, the retailer
has more opportunities to capture the information, and more of it.” If a retailer can track what
a customer is purchasing, and where, more targeted marketing can be introduced. Someone
who tends to browse online and then purchase in-store, for example, can be emailed an
invitation to a private showing in a store, and the list of products to be shown can be sent
before the event, increasing the likelihood of purchase.
Not only is it more likely that the customer will provide important information, but if all the
different channels are communicating, then the information only needs to be entered once. “If
Enhanced productivity
Multi-channel retailing offers benefits for more than shoppers. Workers, too, can benefit from
the use of new technology because it arms them with more information and increases their
efficiency. A tablet, for example, frees employees from the point-of-sale system, instead
allowing them to carry the register with them.
Employees can go directly to the aid of customers, helping them to find out what is in stock,
what is available at other stores and when new products might be launching. The tablet also
can contain information about the loyalty program, so a frequent customer can be given VIP
status. Then, when a purchase is ready to be made, the customer does not have to stand in line,
but rather can simply continue talking to the salesperson and make her purchase via tablet.
BEST PRACTICES
While every type of channel has its own unique set of challenges, there are some strategies that
are true across all engagement points.
Be consistent
Messaging across all channels should have the same look and feel; the customer should always
know exactly what brand she is interacting with. “Traditionally, retailers have approached each
channel individually,” said Gustafson. “What is needed, though, is to create a single marketing
message, and then figure out how to deploy it across all channels. The messaging doesn’t have
to be identical, but it all needs to be clearly related.”
Provide a value-add
Make sure each engagement point offers something to the customer. An in-store kiosk that
simply accesses the company’s website, for ex ample, is not bringing anything unique to the
customer; instead, she can check the website at home, on her own. The same is true of a tablet.
If the salesperson with the tablet does not have access to more or better information than the
customer can access via her own tablet or smartphone, the application will not bring much
value to the transaction.
Be committed
Multi-channel retailing requires an investment in time and money. There needs to be a clear
strategy across all teams, and cooperation is critical to success. “In order to have a totally
seamless solution, all stakeholders need to be involved, giving their insight and taking
ownership and having support and understanding as to what is being done, why and how,” said
Bowers. “This is not a sometime commitment; this is a total marketing strategy for the retailer
to invest in the future of the customer acquisition, retention process and loyalty programs.
In a basic franchising arrangement the franchisor has developed a system for conducting
business. The system has been found to be successful. The franchisor wishing to emulate the
success of that business system, usually in a different geographic area, establishes a blueprint
for others also wishing to emulate this success to operate the same business using the same
name and same systems.
DEFINITION OF FRANCHISING:
The Indian law does not define franchising. However, simplistically put, franchising is a
method of distributing products or services. In a normal franchise agreement, there are at
least two parties involved:
(a) the franchisor, who lends his trademark or trade name (or other intellectual property
rights) and the business system; and
(b) the franchisee, who pays a royalty and often an initial fee for the right to do business
under the franchisor’s name and business system.
Franchising may be defined as a business arrangement which allows for the reputation,
(goodwill) innovation, technical know-how and expertise of the innovator (franchisor) to be
combined with the energy, industry and investment of another party (franchisee) to conduct
the business of providing and selling of goods and services.
A franchise is the agreement or license between two legally independent parties which gives:
For a company wishing to expand to other locations, franchising offers the opportunity to have
branch locations operated by "dedicated" managers rather than company employees. A
franchisee is dedicated because it's his business (operating under the franchisor's name and
rules) and he's made an investment. A franchisee will sell more, service customers better, and
control costs more tightly than a company employee.
The franchising model works because it provides a formula for operating a successful business
by delivering a uniform product and service to customers. It provides franchisors with the
capital they need, creates distribution channels, and gives consumers a recognized standard of
what to expect and a higher perceived value. Done right, it's a model that benefits business
owners, operators, and customers alike. As the French might say, "Vive La Franche!"
HISTORY OF FRANCHISING:
Franchising developed over time as an efficient way to do business and there were versions of
franchising employed in Europe centuries ago. The origin of the word franchise goes back to
Anglo-French, meaning freedom, liberty, and from Middle French, franchir, to free, and earlier
from Old French franc, free.
The franchise model has been called the greatest business model ever invented. It’s allowed
people all over the world who’ve wanted to own their own businesses do just that. But, how
did it begin? How did franchising start?
The 1840s
The 1880s
Isaac Singer was the founder of I.M. Singer & Company. He was the first person to patent a
practical, widely-used sewing machine. Singer’s sewing machines could sew 900 stitches per
minute, a lot more than any other sewing machines in existence at the time.
Because everything was stitched together by hand in the mid-1880’s, a faster sewing machine
was really big deal. At $120 each, Singer sewing machines were out of reach for most
Americans. But one of Singer’s partners
fixed that. He came up with what would
turn out to be the first-ever installment
plan. That’s right—everyday people
could purchase Singer’s sewing machines
and pay for it in installments. With this
plan in place, Singer was able to sell a lot
more machines. He just needed a better distribution method. And being the entrepreneur that
he was, he figured out just how to do it.
Singer and his partners would find businesspeople who were interested in owning the rights to
sell Singer’s sewing machines in specific geographical areas. Once they found parties that
wanted to become licensees, they would charge them an up-front fee—a licensing fee, for the
right to sell the machines. In addition, Singer required licensees to teach consumers how to use
the machines that they had just purchased. This arrangement was a win-win. The partners now
had money coming in from the licensing fees which enabled them to fund more
manufacturing. The licensees had businesses of their own, and were selling a product that
most households wanted.
Automobiles were sold through mail-order catalogs! Some were even sold by salesmen who
traveled around the USA trying to find buyers. Those two distribution methods weren’t cutting
it, so Ford and other automobile manufacturers worked on other ways to distribute their
product.
In 1896, William Metzger built and opened the first independent automobile dealership in
Detroit, Michigan. He actually sold an electric automobile called a Waverly for around $1,000.
The second businessman to get involved was H.O. Kohller. He opened the first automobile
dealership in Pennsylvania. He sold Winton automobiles.
Those men were actually the first auto franchise owners. Henry Ford and the other
businessmen who were producing automobiles now had a distribution system. They had an
automobile franchise network. And soon, automobile franchises were appearing everywhere.
The 1960s
Kroc had quite an epiphany after seeing the McDonald brothers’ restaurant. He envisioned
restaurants like theirs opening and operating all over the country. Coincidentally, the McDonald
brothers happened to be looking for a “franchising agent” to sell franchises across the
country—and as someone who’d been a salesman for the past 30 years, Ray Kroc was the right
guy for the job.
Kroc cemented a deal to be the McDonald brothers’ exclusive agent, and started selling
franchises. At the same time, he also opened the first duplicate of the McDonald brothers’
California restaurant in Des Plains, Illinois. Ray saw something big in the making, and tried to
convince the brothers that they should start thinking bigger also. A few years later, the three
By 1963, McDonald’s had 500 restaurants up and running. Today, there are approximately
34,000 McDonald’s restaurants open. 80 percent of them are franchises. 1.8 million people are
employed by McDonald’s in 118 different countries. I’d say that Kroc succeeded in building an
empire.
FRANCHISING TODAY
Franchising is one of the world’s fastest growing and most lucrative industries. Franchise
businesses will be turning over an estimated $1 trillion (which is roughly 1/10 th the size of
India’s current GDP).
Franchising has since flourished into an industry which now has nearly 1,000 brands in a
multitude of different sectors.
In the USA, almost a third of the retail sales come from franchised outlets, with sales of
trillion of dollars while in India, the industry is few million. India is a multi ethnic country
with the second largest population in the world. Indian consumers have experienced the
standard of services offered overseas and have sufficient exposure through media, which
has further fuelled their expectations.
There are approximately 1150 national and international business format franchise
systems in India in 2007.
Around 8 to 10 per cent Indian franchise systems have entered international
markets.
There are an estimated 70, 000 units operating in business format franchises.
The growth rate in franchised units from 2005-06 to 2006-07 was 30 to 35 per cent
for the last 4-5 years.
Some 500000 persons are employed in business format franchise organizations.
Franchising contributed less than 4 per cent to India’s Gross Domestic Product (GDP)
in 2007.
Annual turnover is approximately us$ 4 billion.
Almost every product or service has a market in India but sometimes, innovative strategies
like “Indianisation” of its products and marketing techniques must be employed by a foreign
franchisor to further access the sizable market of India. In a franchised business, over 90 per
cent succeed. This success rate usually lures entrepreneurs with no experience but with a
surplus capital and a will to succeed towards franchising. The franchisee benefits from a
tried tested and proven business concept, which can dramatically reduce the chances of
failure.
Both demand and supply side factors are expected to contribute to this growth.
Though the Franchising in India is at a very nascent stage, but this industry has clocked the
growth rate of 25-30 per cent, the second fastest growing industry.
There is scope for Franchising industry to contribute almost 4% of India GDP in 2017
(assuming 6% Y-o-Y GDP growth between 2012 and 2017), growing from a current estimated
contribution of 1.4 percent of GDP.
This is also expected to create job opportunities (including both direct and indirect) for an
additional 11 million people by 2017. While increasing consumption, willingness to spend,
growing preference for branded products, global exposure and use of international brands is
driving the demand side of franchising, increasing set of opportunity-driven competent
entrepreneurs, growing awareness of Franchising as a business opportunity and its relative
low risk profile are driving the supply of new franchisee units.
Services sector which includes Consumer services such as Financial Services, Courier
KPMG India estimates’ suggest that franchisees in these areas are expected to form around
55 percent of total estimated Franchisees in 2017. Franchising in Health & Wellness sub-
segment is expected to grow to almost 6 times the current penetration. Retail (which
includes sectors such as Apparel, Jewelry, Neighborhood stores, Food & Grocery) and
Education are expected to be the other major areas where there is huge scope for
franchising to succeed.
Allowing Foreign Direct Investment (FDI) in single brand & multi-brand retail is expected to
generate interest among large international players to adopt the franchising route to enter
and expand in the country.
While certain operating models with-in franchising – such as Area development and Regional
Master Franchisee - appear more attractive than others, diversity in Indian consumer
preferences and degree of localization are expected to impact the choice of final model to
be adopted.
Today, India does not have any franchising specific laws; however various generic Indian
India has rapidly emerged as an attractive market for international brands as is evident from
the number of launches in the last few years.
While there is surely an active interest in India by international brands, there is immense potential for
Indian brands to go global. Not only can Indian brands look at leveraging the Indian Diaspora present
across the world but also use this as an opportunity to spread Brand India.
However it is critical for Indian brands going global to note the differences in local competition,
demographics, price points, pay structures, labor laws etc before taking a strategic decision.
Industry associations such as Franchising Association of India and other such bodies could leverage their
relationships with global franchising councils in assisting such companies for a soft landing into other
countries.
The many advantages and disadvantages of owning a franchise should be carefully evaluated
before deciding to purchase one.
Advantages:
“Owning a franchise allows you to go into business for yourself, but not by yourself.”
A franchise provides franchisees with a certain level of independence where they can
operate their business.
A franchise provides an established product or service which already enjoys widespread
brand- name recognition. This gives the franchisee the benefits of customer awareness
which would ordinarily take years to establish.
A franchise increases your chances of business success because you are associating
with proven products and methods.
Franchises may offer consumers the attraction of a certain level of quality and
consistency because it is mandated by the franchise agreement.
Franchises offer important pre-opening support:
o site selection
o design and construction
o financing (in some cases)
o training
o grand-opening program
Franchises offer ongoing support
o training
o national and regional advertising
o operating procedures and operational assistance
o ongoing supervision and management support
o increased spending power and access to bulk purchasing (in some cases)
Disadvantages:
The franchisee is not completely independent. Franchisees are required to operate their
businesses according to the procedures and restrictions set forth by the franchisor in the
franchise agreement. These restrictions usually include the products or services which
can be offered, pricing and geographic territory. For some people, this is the most
serious disadvantage to becoming a franchisee.
This section aims at highlighting some of the benefits and assessing some of the risks that
could arise in franchising. The following tables briefly summarize the pros and cons from the
franchisor and franchisee’s viewpoints.
FRANCHISOR’S VIEWPOINT
PROS CONS
Financial investment and commitment is Difficulty in finding a suitable person as a
limited. franchisee
Reasonable (sometimes, high) profits and Loss of goodwill / dilution of brand, if the
exponential growth of brand equity, without franchisee acts independently and does not
high-capital risks. adhere to certain basic standards
Exploitation of a wider territorial area, not Breakdown of a trust-based relationship
typically within his/its scope. between the parties or difficulty in receiving
co-operation from franchisees
Manpower resources looked after by the Franchisee may not disclose complete and
Franchisee. Consequently, fewer labour accurate income for calculation of franchise
problems to cope with. fees
FRANCHISEE’S VIEWPOINT
PROS CONS
Capitalizing and benefiting from the
Franchisor’s invention / brand / business Imposition of controls and supervision by the
systems / know-how. franchisor.
Heavy initial capital investment, in addition to
consideration for using the franchisor’s
Elimination of unnecessary expenses due to invention / brand / business systems / know-
franchisor’s experience and pilot operations how and receiving the franchisor’s services.
While Franchisors believe franchising as a good option to grow, many entrepreneurs are opting
for the franchising route primarily due to it offering a safe and easy way of establishing business
and offering higher than market levels of profitability.
Franchising is also seen as a less-riskier option given that the business concept has already been
pre-tested in the market and the entrepreneurs get to see the results of the franchisors as well
as other franchisees.
By drawing from the definitions ascribed to franchising by the British Franchise Association,
the International Franchising Association and the Federal Trade Commission of the United
States, the following characteristic traits of franchising emerge:
FRANCHISOR FRANCHISEE
Product distribution franchises simply sell the franchisor’s products and are supplier-dealer
relation- ships. In product distribution franchising, the franchisor licenses its trademark and
logo to the franchisees but typically does not provide them with an entire system for running
their business.
In this relationship the dealer requires the trade name, trademark, and /or product from the
supplier or manufacturer. The franchisee identifies with the supplier through the product line. This
method primarily consists of distribution by a single supplier of manufactured products to dealers
who in turn would resell this to the end consumer.
The industries where you most often find this type of franchising are soft drink distributors,
automobile dealers and gas stations.
Although product distribution franchising represents the largest percentage of total retail
sales, most franchises available today are business format opportunities.
Business format franchises, on the other hand, not only use a franchisor’s product, service
and trade- mark, but also the complete method to conduct the business itself, such as the
marketing plan and operations manuals. Business format franchises are the most common
type of franchise.
Berlitz International
Sylvan Learning Systems
Because so many franchisors, industries and range of investments are possible, there are
different types of franchise arrangements available to a business owner.
In several cases the franchisor opens a subsidiary company in the foreign country to service
the direct franchisees in that market.
Pizza Hut restaurants in India are the direct franchisee that are serviced by Yum! Restaurants
(India). Today many brand such as HiFi, Talwarkar’s , Lakme , VLCC offer this model.
However, a potential franchisor should consider several strategic issues pertaining to this
mode of franchising:
1. The basic issue that may confront a potential franchisor is the problems associated with
the kind of control a franchisor would like to exercise over the franchisees in another
country.
3. Issue could pertain to taxation. The incidence of tax would depend on how the agreement
has been structured and also on the international treaties existing between the countries.
4. Franchisors may have a tendency to see their home countries law apply even if the
franchise exists in another country.
Under an area development franchise, a franchisee has the right to open more than one unit
during a specific time, within a specified area. For example, a franchisee may agree to open 5
units over a five year period in a specified territory.
Franchisor grants exclusive rights to a company obliging it to open more than one unit in a
specified area and to operate them. Development agents provide expertise on how to make
the business profitable.
Many companies offer this type of franchise models within their home country including brands
such as Maui Tacos and Salad Creations.
The franchisor grants a person in another country, the sub franchisor, the exclusive right within
a certain territory to open franchise outlets itself and /or to grant franchises to sub franchisees.
The franchisor transfers all its rights and duties to the master franchisor.
The master franchisor on the strength of the legal agreement, takes the responsibility of
enforcing the sub-franchising agreement and also of developing the franchise network in that
country.
Franchisor grants exclusive rights for a large territory to a franchisee, which in turn has the right
to sub franchise. Usually the franchisor's brand equity in the foreign markets is low. As the
franchisee fee is considered payment for the brand, the potential franchisees are reluctant to
pay the normal franchise fee demanded by the franchisor.
The franchisees will have to spend substantially to create brand awareness in their markets and
would like their territories to be protected from future exploitation by the franchisor. In such
cases master franchising is a suitable solution. Herein the franchisee gets the benefit when new
outlets are opened as sub-franchisee in that market. As the royalties from sub franchisees are
shared between the franchisor and the master franchisee the franchisee is rewarded for the
investment in building a weak or non-existing brand.
Below is a table that compares the relative degrees of attractiveness of each model.
Business format franchise – this type of franchise includes not only a product, service and
trademark, but also the complete method to conduct the business itself, such as the
marketing plan and operations manuals
Disclosure statement – also known as the UFOC, or Uniform Franchise Offering Circular, the
disclosure document provides information about the franchisor and franchise system
Franchise – a license that describes the relationship between the franchisor and franchisee
including use of trademarks, fees, support and control
Franchise agreement – the legal, written contract between the franchisor and franchisee
which tells each party what each is supposed to do
Franchisee – the person or company that gets the right from the franchisor to do business
under the franchisor’s trademark or trade name
Franchisor – the person or company that grants the franchisee the right to do business
under their trade- mark or trade name
Product distribution franchise – a franchise where the franchisee simply sells the
franchisor’s products without using the franchisor’s method of conducting business
Royalty – the regular payment made by the franchisee to the franchisor, usually based on a
percentage of the franchisee’s gross sales
Trademark – the franchisor’s identifying marks, brand name and logo that are licensed to the
franchisee
UFOC – the Uniform Franchise Offering Circular, UFOC, is one format for the disclosure
document which provides information about the franchisor and franchise system to the
prospective franchisee
In addition to franchising, there are two other popular methods by which businesses expand
their market and distribution channels:
• distributorships
• licensing
A distributor may be subject to many controls by the supplier/producer and begin to resemble
a franchise. Some popular distributorship includes:
• Amway
• Color Me Beautiful Cosmetics
• Mountain Life Spring Water
• Knorr Soup Vendor
• Campbell’s Soup Vending Machines
Before implementing a franchise program, a company must evaluate itself on several criteria
including the success of initial or pilot operations. It has to ensure that products or services
offered have found reasonable acceptance and the same are readily adaptable to other areas in
the country, and the market potential for the franchisee is good. The level and type of
competition is to be studied so as to focus advertising and promotion to the targeted
customers.
Distinctness
A franchise may be distinctive in terms of its products, services, operating and delivery systems
or marketing. If the business is to be successfully expanded by franchising, its success must be
attributable to its products or services, business format, operating or management systems
and/or marketing. It cannot be attributable merely to the unique character of its founder, its
management or its location.
Profitable Prototype
It is essential to setup a prototype outlet to test and refine the concept of the franchise
business before embarking upon franchising network. The prototype outlet is used to test the
systems relating to operations, marketing, customer service, staff management, accounting and
record keeping. The prototype outlet is used to perfect the product and service, decor, design,
layout and equipments.
Besides developing suitable advertising campaigns it also tests the marketing strategies and
plans. If the franchisor is planning an all India franchising network, it is considered essential to
Revenue Generation
The franchise business must be capable of providing sufficient return to the franchisee to take
care of not only his investments but also for his time and effort in running the franchise.
The business must also be able to generate sufficient revenue for the franchisor at least in the
long run. Till the business is able to generate sufficient return on franchisee's investment and
labour and also sufficient revenue to support franchisor's services and his profit, it is not fit for
franchising.
Experienced Personnel
A company wanting to expand by franchising has to recruit; train and support franchisees. For
this it needs experienced staff with specialized talent and abilities. The staff should have
specific skills in planning, leading and organising a franchise network.
Protractible Trademark
Trademark is a type of intellectual property that is used only by its owner to identify the
products produced by a firm. Now it is also a symbol indicating a specific type of product and
level of quality that is used by the owner and its licensee. Even the foreign nationals and/or
companies can protect their trademarks in India under the Trade and Merchandise Mark Act
1958 (TM Act) by registering them under the prescribed class Internationally trademarks
include service mark, however, service marks as yet are not registered in India.
The registered owners of trademark can assign to third parties the right to use the mark and are
not mandated to use the marks personally. The assignment agreement must be registered at
the office of Trade Marks Registry. By registering a user agreement, the owner prevents the
The licensed trademarks are common trade identity of franchise networks. The franchisor
acquires the goodwill value created by its franchisees' usage of the franchisor's trademark. Even
though this asset does not show up in the balance sheet yet it is an extremely valuable asset.
A franchisor must have sufficient funds to develop and implement its franchising program and
solving operational problems. At the onset capital is required for the essential elements of a
franchising network. The product development, that include the layout, design, outlook and the
ambiance of the outlet and service norms involve a lot of sunk cost Funds are also locked up in
developing the marketing wheel where brand building is a costly affair. The franchising wheel
that is developing the systems, training programme and motivating the staff and franchisee
consumes a lot of funds.
Expansion capital is needed for development and modification of model to suit franchising in
the light of experience gained at prototype outlets. The prototyping of the outlet in turn
consumes a major chunk of franchisor’s capital as it involves a number of trials resulting in
delayed payback from these outlets.
Although the franchisor receives initial franchise fees from the franchisees that substantially
offsets it operating costs, yet the franchisor should not depend upon the initial fees paid by the
franchisee to cover its operating cost. Without adequate operating capital the franchisor is
under pressure to sell the franchises for its survival. This greatly offsets the franchisor's ability
to select the best and most qualified franchise candidates. Due to shortage of funds the
network is often not able to expand to remote areas as the franchisor is unable to effectively
support and monitor franchisees.
STEPS IN FRANCHISING
Anyone planning to franchise his business should develop a concrete plan for supporting the
franchise operations, communication with franchisees and marketing the franchise. In this
respect the following steps are recommended.
1) Develop a Franchise Program and Prioritize the Package of Services Required by the
Franchisee to Succeed.
The services needed by the franchisee vary from business to business and are to be selected
depending upon the characteristics that control the success of that business. The support
services are developed considering the capabilities and limitations of the franchisor, keeping in
mind the cost involved in these services, and the type of support required - consultative,
instructive or directive. A study reveals that the franchisors normally offer the following support
services for setting up the franchise.
• Market surveys
• Layout and design of facility
• Assistance in negotiation of lease
• Operations manual
• Training of franchisee and his staff
• Financial assistance
In addition the franchisor has to provide certain services as a part of an ongoing program. These
include
Important components of delivering the support services which need specific preparation
before starting franchising are:
1. Operations Manual
The manual should be a living document and it is the responsibility of the franchisor to
constantly update them as and when any new system is introduced or any procedure or control
modified. A well-documented operation manual increases the profit potential of the franchise
system through
Franchisors should protect their manuals containing the entire technique of establishing and
running the business, videos relating to the use of the product etc. under the Copyright Act,
1957.
Infringement of copyright provides the franchisor with civil remedies like injection, damages
and accounts of profits made by the defendant by violating the copyright. In addition, a criminal
remedy such as imprisonment for six months to three years is also available.
2. Training Program
The training helps creating an enthusiasm for the franchise program and a strong allegiance to
the franchisor company, thus laying the foundation for cooperative future relationship. More
often the franchise is offered only to those who successfully complete the pre operative
training.
This pre operative training gives the franchisee a chance to reconsider joining the franchise
network and the franchisor is able to judge the commitment and suitability of the potential
franchisee. The training helps the franchisor and the franchisee to consciously choose each
'other. The franchisor also uses the training to mould the franchisee.
Two separate sets of training programs, for the franchisee, their managers and their
operational staff are to be designed and developed. Besides operational training the staff needs
to be trained in developing ability to meet the service norms of the franchise system and
bringing suitable changes in the attitude towards the customers. The training programs ought
to be appropriately systematic and highly structured.
The franchise systems are formulated so as to ensure uniformity of all the franchisees and
compliance with the standards in the network. The systems are required to assist the franchisor
to monitor, control and guide the activities of all the franchisees. It is important to exercise
controls in the process to monitor sales, operations, completion of tasks, and financial matters.
The control systems and procedures are useful in not only monitoring the franchisee's
performance but are also used to monitor their adherence to the standards. The franchisor has
to develop these controls and of the same time, set up a strong corporate office with a good
product management, legal, R & D and sales department to provide support to the network of
outlets and monitor their operations.
In the absence of such a system and well defined procedures, different franchisees will report
their progress, achievements and other data in varying forms and formats, sometimes making it
impossible to compare the progress of different franchisee and compile the overall progress of
the network. A uniform procedure and reporting system is especially helpful in auditing the
franchisee's operations.
Such control mechanism ought to be build into the franchise management system right from
the outset. These controls can trap deviations at an early stage and nip problems in the bud,
thereby preventing small deviations from becoming major issues.
To ensure the healthy growth and development of the franchise network, a franchisor has to
communicate not only with the existing franchisee but is required to establish effective
communication links with the prospective franchisees. There are two dimensions to the
communication system:
to establish a communication network for the franchisor and the franchisee and
amongst the franchisees, which are the member of the franchise network,
to communicate with the prospective franchisee so as to solicit new franchise.
Newsletters have been found effective in explaining various activities within the network,
recognising the top sale franchisee, expressing opinions of franchise managements, announcing
new members of the franchise network with their territories and presenting other information
to the franchisees and their staff. Besides the personal visits by the field supervisor for normal
supervision, the visits by the general manager, chiefs of operations or training and other senior
executives of the franchisor company assist in good public relations and boost the morale of
the franchisee and their staff.
Franchise group meetings that encourage sharing of experience, techniques and advise by the
stronger franchisee are beneficial to all members of the network, especially the newer and the
weaker franchisees. Peer group influence is always a strong force on people's attitude and
behaviour.
An informal atmosphere encouraged through dinners and social gatherings make such
meetings and conventions useful for the franchisor in bringing together the franchisees on a
regular basis to share information and provide training.
The information about the business, that is the brand and the
business system with the benefits of the support system offered and
the earning potential along with the framework of a franchise
agreement and initial and continuing fees are made available through
a /'prospectus" called Offer Document.
Marketing is key both to the success of the franchise program and to the success of the
franchisee's business. Franchisors must address a number of marketing issues.
I. The business' image: The business' image established by the franchisor is an important factor
in inducing a franchisee to buy into the franchisor's program. Distinctive and appealing
'packaging', that is the identification strategy is important to the success of the franchised
business and franchising program. The franchisor should develop store layout, colours,
furnishings, decor, designs, uniforms, graphics etc. to establish a distinctive image.
II. Marketing direction: The franchisor should establish a direction for expansion of the
franchise network. Some franchisor prefer cluster locations within the established markets
because these markets have been successful and adding more franchisees in these established
markets are likely to generate addition revenue and market share. This in turn can lead to
sealing out the competition. Computer education institutes have used this approach in metro
cities often the run-off value of the franchisor's trademark and reputation precedes the
franchisee in the new locale. Herein the other option is to enter newer areas where there are
no existing outlets. In such a case the franchisor should evaluate and develop the ability to
service the franchisees in new location area. He should also consider the sales potential of new
market area, the level of competition that exist in the new-markets and evaluate the
population, income, retail sales, and other factors likely to influence the success in newer
markets
III. Recruiting the franchisees: A franchisor must determine the profile of its likely franchisee,
particularly the skills and talents required. The characteristics of the franchise business dictate
the kind of person that is likely to succeed as a franchisee. A franchisor should select and accept
as individual franchisee only those who, upon reasonable investigation, appear to possess the
basic skills, education, personal and financial resources sufficient to carry on the franchise
business. After the franchisor has established the profile, it must determine the most effective
place to advertise. He has to choose between the business magazines and newspapers and
select the most suitable one Direct mail, trade shows, business seminars, internet and
broadcast media can also be tapped to obtain an Interview with a qualified prospective
franchisee.
It is essential for a prospective franchisee to study the franchise system, various franchise
options available, their costs and benefits and match the same with his strengths and
weaknesses and thus choose the right one for him.
Most buyers look at franchise ownership as a means to achieve financial goals. Ultimately, in
making any investment decision, two most important factors are risk and return, but a
franchise investment can be difficult to assess in these terms. Everyone wants a no risk
franchise that offers high return, but such franchise simply does not exist. They key lies in
finding the franchise that offers the highest return for an amount of risk one is willing to
assume.
Buying a franchise is just the same as buying into any business. The purchase needs to be made
in the cold light of day and not on impulse. Balance sheets need to be looked at and bottom
lines investigated. The franchise should also be compared with similar franchises in similar
areas so that pears are compared with pears and realistic expectations and incomes
ascertained.
The most overlooked aspect of franchising and one that is invariably taken for granted is the
Intellectual Property owned by the franchisor – or in some cases not owned by him. An
essential factor of a franchise is its name. This is how franchises products and services are
brought, sold and marketed. It is how its customers know the business. Particularly when
entering into a new franchise system, or into a new area it is imperative that the monopoly
position encompassed in the name of the franchise is investigated thoroughly.
About costs:
✔ What is the total investment required to own a franchise?
• franchise fee
• furniture, fixtures and equipment
• leasehold improvements
• lease deposits
• other deposits
• franchise training
• travel expense
• supplies
• advertising and brochures
• grand-opening advertising
• inventory
• pre-opening staff costs
• working capital until breakeven
• working capital – living expenses
• other
About training:
✔ What are the location, duration and additional costs of
initial training?
✔ Who must attend the training?
✔ What is the cost of additional staff attending training?
✔ What is the training curriculum?
✔ Who conducts the training and what are their
backgrounds?
✔ Who pays for transportation, room and living expenses?
✔ Does the franchisor provide training materials for training
new staff in addition to the operations manuals?
✔ Does the franchisor provide hands-on assistance
during the pre-opening, grand opening and initial period?
Of what type, duration and cost?
About operations:
✔ What are the roles and responsibilities of the field
staff?
✔ How many locations does each franchise
consultant work?
✔ What is the background of the franchise consultant
I will be working with?
Can I meet that person before purchasing the
franchise?
✔ How often does the field staff visit a franchisee’s
location?
Financial statements are the track record of the franchise. They are provided for the
franhisee in the UFOC and contain important information about the franchisor’s financial
status and strength.
Before an entrepreneur selects a franchise he should ensure that he wants to be a franchisee rather
than setting up his independent business from the scratch. He should seriously view the pros and cons
of a franchisee vis a vis an independent business. He should collect the relevant information about
franchising He must equip himself with the knowledge of philosophy, working and limitations of
franchising as a business.
After ascertaining the market potential for the same he should choose the product or the service he is
interested in and search for a Suitable franchisor. The information about the franchisors can be
obtained from various business and trade journals. Many directories can be searched. Now specialised
magazines on franchising are available that have sections devoted to businesses open for franchising.
This is the first step that involves a market survey of various businesses that have a potential in a given
area/ region. It should always be remembered that the best of the franchise can only be evaluated in
terms of its market potential in the community where the outlet is proposed to be opened. Following
aspects are to be considered about the market viability of the product.
• Longevity of product: To protect the investment the franchise should have long-term staying
power. The product or service should not be faddish. It is necessary to look past ones enthusiasm
and be objective in the choice of product/ service. It is better to talk to friends who would be
typical of the future customers and if necessary seek professional advice. The combined opinion
helps predict the product's longevity.
• Population & stability: Find out the population projections of the area where the franchise outlet
is proposed to be located. This data can be obtained from Indian Statistical Organization and
publications of Census of India. The growth of population will have a significant effect on
franchise's potential success
• Competition: Study the competition that will compete directly against the franchise. Then also
study the indirect competition. For example a pizza franchise may compete not only with Pizza
Corner but also with Narulas and Mc'donalds.
• Price: The price of the product or service should be consistent with the average income of the-
people in the geographic area. A high priced product will sell where the income is high but would
probably be a looser in an area with low income households.
• Risk: Evaluate the risk of various franchise options. The technique is to assign numerical value to
each element risk for each franchise being considered. Pay attention to which candidate has lowest
It is important to obtain through information from franchisor about the franchise. Many countries
have stipulating the information that a franchisor is required to provide. The following list contains the
twenty items of information that must be supplied by the franchisor. In India there is no such law, yet
the prospective franchisee must seek the following information from the franchisor.
• Information identifying the franchisor and its affiliates and describing their business experience
• Information identifying and describing the business experience of each of the franchisor's officer,
directors and management personal responsible for franchise services, training etc.
• A description of the lawsuits in which the franchisor and its directors, officers and managerial
persons have been involved
• Information about any previous bankruptcies in which the franchisor and its directors, officers and
managerial persons have been involved
• Information about the initial franchise fee and other initial payments, required to buy the franchise
• A description of continuous payments the franchisee is required to make after the franchise opens
• Information about any restriction on quality of goods and services used in the franchise and where
they may be purchased, from including restrictions requiring purchases only from the franchisor or its
affiliates
• A description of any assistance available from the franchisor or its affiliates in financing the purchase
of the franchise.
• A description of any restrictions on the customers with whom franchise may deal
• A description of the training programs provided to the franchisee and its staff.
• A description of any assistance in selecting a site (location) for the franchise to be provided by the
franchisor
• Statistical information about the present number of - franchises, number of franchises projected for
the future, the number of franchises terminated, the number of franchises that the franchisor has not
renewed and number of franchises repurchased in the past.
• A description to the extent to which the franchisees must participate. in the operation of the
franchise.
• A complete statement of the basis for any earnings claims- made to the franchisees, including the
percentage of existing franchisees that have already achieved the results claimed.
The prospective franchisee must get a chance to review this information without interference from the
franchisor. The franchisee should try to get these documents as early as possible to start their
screening. It is better if the franchisor knows that the documents supplied are being screened and
compared with the information provided by his competitors. Franchisors that dislike independent
evaluation and comparison of the information are generally not worth doing; business with and -
should be avoided.
Information provided by the franchisor provides a basis for thorough analysis of the potential for the
franchise. However it is necessary to investigate the franchisor to ensure that the information provided
is true and accurate. The analysis should not only cover various aspects about the franchisor but also
aspects related to the personal needs of the franchisee.
iii. Number of franchises in operation- The number of running franchises provides a measure of
stability and experience of the franchisor. The franchisee has a reduced risk when he buys into a
franchise having a large number of franchise outlets. Each franchise adds to the experience of starting
a new outlet and refines the training skills of the franchisor's team. This combined experience can
prove highly useful in starting a new franchise.
iv. Number of franchises no longer in operation- It is important to know the number of franchises that
have been closed, gone out of business or repurchased by the franchisor. This information, at times, is
more important than the number of franchises presently running. Franchisors often buy out or close
franchise outlets to remove problems. Larger the number of such occasions higher is the risk in buying
such a franchise.
V. Reputation amongst franchisees- The franchisor's customers are its franchisees. The best way to
know how the franchisor treats its franchisees is to talk to the existing franchisees. It may be better to
talk to a past franchisee, who is no longer in business. Such persons can offer a unique insight into
franchisor's treatment and service.
vi. Financial stability- The financial health of the franchisor can easily be inferred from the audited
financial statements of the franchisor. The financial statements provided by the franchisor should be
studied carefully with special reference to the auditor's qualifications if any. Any type of questionable
financial problems should result in caution about developing an association with the franchisor.
vii. Type of training- The type and duration of the training-provided by the franchisor determines the
likely success of the new franchise. A. good training program includes classroom teaching
viii. Assistance in financing- Find out the type of assistance the franchisor is to provide in arranging
finance for buying and setting up the franchise. Franchisors normally have a better clout with the
banks and institutions. They can assist in negotiating a loan. Nationalised banks like State Bank of India
and Canara Bank are providing debt finance to VLCC and Archie Franchisees. ICICI Bank also extends
loan to reputed franchise if the franchisor agrees to be.
ix. Type of management assistance provided- There should be a large amount of assistance to be
provided during the start-up of the business. Initial period of time is normally the most difficult and
requires the maximum assistance. It is better if a franchisor provides continued assistance on a regular
basis as it helps meet unexpected crises.
x. Assistance in locating the site- For any retail business 'location' is the most important contributor to
its success. An experienced franchisor should be able to help in selecting a location that is ideally
suitable for the franchise. Besides the assistance in constructing a building can help save a great deal of
money. Find out the type of help the franchisor is going to provide in planning, construction or
renovation of the building and whether there is any additional fee for this assistance.
xi. Potential profits and break even point- A crucial element in deciding about a franchise is the
amount of annual profits one can expect. Undertake a cost analysis to determine if the projected profit
is sufficient to ensure a reasonable return on the investment. It is better to confirm from other
franchisees if their profits are near the figure projected by the franchisor. Estimate the payback period
for the initial investment.
It should be remembered that like any other business a franchise is not going to generate profits from
day one. The truth is most new businesses take at least six months to a year before they start
generating significant income for the owner.
b) Points to consider about personal needs: Several things must go into prospective franchisee's
personal buying decision. How one feels about what one will be doing? Does it seem like fun? Does
one believes to be good at it and would like to do the same for next ten to twenty years. Major points
include:
i. Funds required. The capital investments requirement including the franchise fee is the biggest
obstacle for most potential franchisees. So, firstly determine the funds one can invest oneself in the
franchise and discuss with the bankers the amount of debt that can be provided. This information can
be used to screen those franchises which fall outside the scope of funds that can be marshalled.
iii. Interest in the product. The franchise owner will be associated with franchise for many years and
needs enthusiasm for motivation. The customers and employees sense his attitude towards the
franchise. The customers are more likely to patronise the business when they observe the owner/
manager's enthusiasm. Similarly employees work hard when inspired by the franchisee's excitement.
Thus franchisee needs to have an interest in the franchisor's product / service.
It is important to thoroughly investigate the franchisor before joining a franchise network. It has been
stated earlier that buying a franchise is a long-term relationship and franchising can be considered as a
partnership between the franchisor and a franchisee. One should be aware of the franchisors who
want you to rush through the decision making so fast that it leaves no time for you to go through a
detailed investigation process. A three stage investigation process as given below is recommended.
i). Investigate the credibility and reliability of the franchisor. This is particularly critical with
franchisors that do not have a long history and have been in operation for a short time. Try to find a
person or a company who will run a credit check on the organisation. It is recommended to conduct a
background check on the management and the promoters of smaller and lesser-known franchisors.
ii). Collect information and experiences from other franchisees: You should ask the franchisor to give
you complete list of other franchisees with their addresses. A discussion with a few of them selected
randomly provides important information. If you ask franchisees how much profit they made last year,
you might not get an accurate answer because of embarrassment over low earnings or concern about
tax liabilities.
iii) Seek professional advice: Three professionals have been identified that one should consult at the
time of buying a franchise. They are:- an attorney, a chartered accountant and a banker.
5. Make a Decision
We see here that a decision to buy a particular franchise is not an easy one. Many questions have been
presented which need to be investigated. In the process one is required to discover some positive and
some negative facts about the franchisor. If the positive and negative facts are one sided it is easier to
make a decision. However the facts must be organised to take a decision keeping the risk factor in
mind.
The franchise agreement is the legal, written document t hat governs the relationship and specifies
the terms of the franchise purchase.
A master franchise agreement gives the franchisee more rights than an area development agreement.
In addition to having the right and obligation to open and operate a certain number of units in a
defined area, the master franchisee also has the right to sell franchises to other people within the
territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks,
duties and benefits of the franchisor, such as providing support and training, as well as receiving fees
and royalties.
The object of a franchise agreement is either to promote a product or a business format. Historically,
franchising developed as a means of distributing products.
Franchise agreement should lay down the nature of the business or project that the parties have in
mind, the geographical scope, the subject matter and the term of the franchise. The subject matter
could either by a product or a business format or system. Based upon the subject matter, the
agreement will need necessary tailoring. For example, the franchisor is a well-known computer
institute in India who wishes to start a chain of computer education centers throughout the country. In
that case, this section must set out the basis for the agreement by outlining the intention of both the
parties to start the chain of computer centers, the areas in which these centers would be commenced,
the term for which they will operate under this agreement, and whether the agreement is an exclusive
or non-exclusive arrangement.
Intellectual property rights are the core of any franchising agreement. Therefore, it becomes necessary
to determine the intellectual property (such trademark, service mark, trade name, copyright, patent,
trade secrets or know-how) associated with the franchisor and the exact and specific intellectual
property he/it is licensing to the franchisee. All such licensing must confirm to the particular
intellectual property legislations in India.
The franchisor must limit the manner and circumstances in which the intellectual property is to be
used and should ensure that it is not misused by the franchisee in a manner to cause damage to the
brand and goodwill of the franchisor. In the event the franchisor has transferred or may transfer some
trade secrets or confidential information to the franchisee, the agreement could stipulate that such
information be kept privileged, during and post-termination of the agreement.
Every agreement contains certain activities that each party must perform or refrain from performing
during the term of the agreement. These activities are obligations on the concerned party and they
must be adhered to, or else it could lead to a breach of the agreement. While drafting these
regulations, the franchisor must try and incorporate all conditions necessary to protect his brand and
also to ensure that the franchise is successful and profitable. Some of these obligations are stated
hereunder.
(a) Services to be rendered: The agreement must clearly outline the duties and services to be rendered
by the franchisee. If necessary, a separate schedule could be attached to the agreement for clarity.
The franchisee may also want the franchisor to act in a certain manner during the term of the
agreement and thereby impose some obligations mentioned below on the franchisor.
(a) Finalization of location: The franchisor may be obligated in assisting the franchisee in locating and
The agreement must specify the royalty or a license fee and any continuing fee to be paid by the
franchisee to the franchisor for the license obtained and the services rendered by the franchisor on an
ongoing basis. The manner in which and the times at which such payments are to be made must also
be addressed. In the event, such payments are to be made outside India, it should be specified as to
who must obtain the necessary regulatory and legal approvals.
Generally, payments could be on a percentage of the total earnings of the franchisee. However, at
times the franchisor may also stipulate a minimum amount to be provided to the franchisor,
irrespective of the total earnings. While this may provide an incentive to the franchisee to take active
The franchisor may also want that the franchisee contribute a certain fixed amount towards
advertising and promotional expenditure. Depending on the expected success of the business, such
terms could be included in the arrangement.
6. Taxation
It goes without saying that any business transaction must be made to work satisfactorily from a tax
point of view, and this will be a major consideration in devising a suitable structure for the franchising
arrangement.
A provision must always be made to terminate the franchise agreement. Grounds for
termination could include a material breach of the agreement, legal incapacity of any party to
perform the agreement and changes in the legal and regulatory framework in the country. As a
consequence of the termination, the franchisee should be constrained from using the
intellectual property rights and/or the business format of the franchisor. The franchisee must
also be asked to return all confidential information obtained during the term of the agreement
and completely de-identify itself with the franchisor. The franchisor may also covenant that the
franchisee should not open a competing business within the same location.
8. Notice Provisions
In order to make the franchise contract equitable, a provision should be made for notifying
either party before making any changes to the agreement or before rescinding or terminating
the agreement. The notice must also be given for a reasonable period. While this provision
may seem inconsequential, if the contract does not have this provision, the courts could hold
the contract as inequitable.
9. Negative Covenants
10. Indemnification
A franchising arrangement could give rise to several liabilities as outlined in the section on legal
issues. The franchise agreement must therefore provide adequate provisions for
indemnification of the parties for any liabilities arising out of the other party’s breach of
contract. The contract can also lay down an inclusive list of situations in which parties would be
liable for indemnification.
11. Arbitration
Many a times, agreements have an arbitration clause, wherein all disputes arising out of the
agreement are subject to arbitration. The arbitration clause would normally stipulate the
manner in which the arbitration is carried out. For example, in case both the parties are
Indian, the clause could stipulate that the Indian Arbitration and Conciliation Act, 1996 would
apply. However, in the event one party is foreign, the parties may wish to choose an
international arbitration forum such as the International Chamber of Commerce or the
American Arbitration Association to adjudicate upon any disputes.
The problem of ascertaining the governing law is more perplexing in the case of agreements
than in almost any other topic, as in the case of an agreement there may be a multiplicity of
connecting factors such as the place where it is made; the place of performance; the domicile,
nationality or business center of the parties; the situation of the subject matter and so on.
Jurisdiction is another issue that must be carefully thought upon before being documented.
Jurisdiction refers to the authority of a court to adjudicate upon a dispute. Generally
jurisdiction is of three types:
A good relationship between the franchisor and franchisee is critical for the success of both
parties. Since franchising establishes a business relationship for years, the foundation must be
carefully built by having a clear understanding of the franchise program. Unfortunately,
understanding the legal language of franchising can be daunting. The advice of an
experienced franchise attorney should be sought to help a prospective franchisee
understand the legal issues and to protect them from making costly mistakes.
The UFOC
The purpose of the UFOC is to provide prospective franchisees with information about the
franchisor, the franchise system and the agreements they will need to sign so that they can
make an informed decision. In addition to the disclosure part of the document, the UFOC
includes the actual franchise agreement as well as other agreements the franchisee will be
required to sign, along with the franchisor’s financial statements. The UFOC is designed to give
you some of the information you need in order to make an informed decision about investing
in a particular franchise. By law, a franchisor cannot offer a franchise until the franchisor has
presented the prospective franchisee with a Disclosure Document.
The purpose of the UFOC is to provide prospective franchisees with information about the
franchisor, the franchise system and the agreements they will need to sign so that they can
make an informed decision.
✔ Item 1: The franchisor, its predecessor and affiliate. This section provides a description of
the company.
✔ Item 2: Business experience. This section provides biographical and professional
information about the franchisors and its officers, directors and executives.
✔ Item 3: Litigation. This section provides relevant current and past criminal and civil
litigation for the franchisor and its management.
✔ Item 4: Bankruptcy. This section provides information about the franchisor and any
management who have gone through a bankruptcy.
✔ Item 5: Initial franchise fee. This section provides information about the initial fees and the
range and factors that determine the amount of the fees.
✔ Item 6: Other fees. This item provides a description of all other recurring fees or payments
that must be made.
✔ Item 7: Initial investment. This item is presented in table format and includes all the
expenditures required by the franchisee to make to establish the franchise.
✔ Item 8: Restriction on sources of products and services. This section includes the
restrictions that franchisor has established regarding the source of products or services.
✔ Item 9: Franchisee’s obligations. This item provides a reference table that indicates where
in the franchise agreement franchisees can find the obligations they have agreed to.
✔ Item 10: Financing Available. This item describes the terms and conditions of any financing
arrangements offered by the franchisor.
Consumer
Protection Competition
Franchise and Liability Law and
MRTPIssues
Validity of Weights
the contract and
Measures
E- Tortious
commerce Issues
Corporate
Insurance
and
LEGAL
Labour
ISSUES Exchange
Securities Intellectual
Agency Property
Property Control
Tax
While the Contract Act does not stipulate that a contract has to be in writing, it is advisable to
have a formal and written franchising agreement to precisely lay down the rights and
obligations of the franchisor and the franchisee. This would assist in resolving any future
deadlocks and disputes.
2. Constitution of an Agency
In the event the franchising agreement creates an agency, the franchisor (the principal) could
be liable for acts performed by the franchisee (the agent) in the ordinary course of business.
Similarly, as per the Contract Act, the franchisee could also be liable to compensate the
franchisor for liabilities arising due to acts performed outside the course of the business or
contrary to the franchisor’s directions. If a third party acts upon the representation of an agent
and suffers any losses, it might create some issues for the franchisor. Further, any limitation on
the authority of the franchisee will not bind any third party unless he is or is made aware of
such limitation.
All franchising agreements involve the transfer of some form of intellectual property, either an
invention or a patent for the invention or a design (in the case of a manufacturing agreement),
or a trademark or trade name (eg. Bata shoes) or a business format / know-how / trade secret
(eg. McDonalds and Barista coffee chain) or copyright (in the case of character merchandising
agreements). Since the intellectual property license lies at the core of a franchise, the laws
governing licensing of intellectual property constitute the heart and arteries of franchise laws.
Trademark
Know-how Copyright
IPR
Patents Designs
Trade
Secrets
(a) Due Diligence: Before entering into a franchising agreement, the franchisee must ensure
that any intellectual property rights being licensed under the agreement exist and that the
franchisor has the authority to license those rights. Moreover, the franchisee would also
need to ensure that the rights being licensed do not in any way violate the intellectual
property rights of any third party.
(b) Licensing: While licensing an intellectual property right, both the parties must follow the
necessary provisions of the law. For example, in the case of character merchandising, if the
copyright in a graphical or fictional character is being licensed, the license must confirm to
certain parameters namely, it must be in writing, signed by both the parties, specifying the
rights licensed, the royalty payable if any, the term of the license and the territory for the
rights are licensed. The license must always specify the exact nature of rights granted and
the extent to which such rights are granted.
(c) Misuse of rights: The franchisor must also ensure that the intellectual property rights
licensed to the franchisee are not misused in any manner. For example, the franchisor
needs to ensure that the franchisee does not use the franchisor’s trademark for purposes
outside the purview of the franchise agreement.
(d) Post-term use of trademarks: Disputes involving post-term use of the franchisor’s mark by
the franchisee are potential litigious issues in franchising. Often the franchisee may also use
the trademark pendent lite, or even after the termination for reference purposes or as part
of a corporate name. Careful drafting the franchise agreement could minimize the risks
Complaints and legal action from consumers is a potential issue that both the parties must bear
in mind. Such lawsuits are not uncommon in the United States, and can definitely arise in the
Indian context.
Under the Consumer Protection Act, 1986, a consumer can file a complaint with the consumer
forums for unfair or restrictive trade practices adopted by a trader or for any defects /
deficiencies in the goods or services supplied by the trader or if the goods being offered for sale
are hazardous to life or do not confirm to certain provisions of the law. In case of a franchise,
the franchiser and the franchisee could be held liable for any defective goods or services
supplied by the franchisee. On another level, it may be possible for the franchisee or sub-
franchisee, as a consumer, to sue the franchiser on the above-mentioned grounds. Provisions
to minimize liabilities arising due to such risks should be properly documented in the franchise
agreement.
Anti-Trust or restrictive trade practice, whereby the agreement between the franchiser and
franchisee tends to snub market competition is another issue. In India, the Monopolies and
Restrictive Trade Practices Act, 1969 (“MRTP Act”) has been enacted to prevent concentration
of economic power, control monopolies and prohibit monopolistic trade practices and
restrictive trade practices. The franchisor or franchisee must ensure that their practices do not
classify as monopolistic or restrictive, or else the Commission under the MRTP Act can grant an
injunction to prevent such trade practices and may also award compensation for any losses or
For example, if the franchisor demands that the franchisee must not sell goods below a
particular price, or if the franchisee makes a false representation about his services or products,
or if the franchise manipulates, distorts, contrives or embellishes the intellectual property of
the franchisee, it could give rise to action under the MRTP Act.
6. Tortuous Liability
A tort is a civil wrong independent of contract for which the appropriate remedy is an action for
un-liquidated damages. Tortuous liability could arise in a franchise relationship in the following
situations:
(a) Negligence: Negligence is a breach of duty caused by an act or omission, which results in
damage. In a franchising arrangement, the breach of any duty by the franchisor or
franchisee, which causes a loss or damage to the franchisee or franchisor, respectively or to
any third party, could lead to a civil action for negligence.
However, if the franchisee has acted outside his capacity or contrary to the instructions of
the franchisor, the franchisor may be able to recover any damages from the franchisee. If
the franchisee is an independent contractor, the franchisor may not be liable for the
tortuous acts of the franchisee.
Royalties paid by the franchisee to the franchisor for the use of the franchisor’s intellectual
property rights, would be subject to tax at 20% on gross amount paid. In case of an
international franchise agreement, this rate could be reduced depending upon the provisions
in any double taxation avoidance agreement.
9. Property Law
Laws affecting real estate and leasehold property form an important part of franchising. A
careful evaluation of the property laws would be required in order to determine whether the
franchising scheme is possible. If the scheme not possible, necessary adjustments would have
to be made and possibly fundamental rethinking may have to be engaged in.
Depending on the nature of the franchise arrangement and the amount of control the
franchisor has over the franchisee’s business operations, different labour law issues could
arise. These issues could be based on:
In the event a franchising operation is set up on the Internet, besides complying with the
regular business and commercial laws relevant to franchising, the franchise would also have to
deal with various issues specific to e-commerce. Some of the potential issues are outlined
hereunder.
(a) Security: All sensitive and customer information on the websites should be adequately
(b) Privacy: The franchisor’s website may have cookies that store personal information of the
users, which they fill in while placing the order. This is a threat to the privacy rights of
people. However, presently there exists no legislation in India that upholds the privacy
rights of an individual or organisation against private parties. Moreover, when the
franchising business caters to consumers in foreign jurisdictions, the foreign jurisdictions
may have laws that could make the franchisor/franchisee liable for violating the foreign
consumer’s privacy rights.
(c) Liability: Franchisors should also guard against the potential sources of contractual,
statutory and tortuous liability arising from the website, which could lead to legal claims
against them. Since the Internet knows no boundaries, the owner of a website could be
confronted with legal liability for non-compliance or violation of laws of almost any
country.
Different issues may emerge out of a franchising agreement depending upon the industry and
sector to which it caters. Some of the promising sectors for franchising include:
(f) Hotels;
(g) Retailing; and
Depending upon the sector to which the franchising agreement relates, trade and sector-
specific legislations will need to be followed.
Though the business and commercial laws in India can protect and govern a franchise
arrangement, there is a growing need to improve this regulatory and legal framework. In 1999,
a firm step was taken towards consolidating the franchising industry in India, by establishing
the Franchising Association of India (“FAI”), through the efforts of the Indo-American Chamber
of Commerce. FAI represents the interests of franchisors, franchisees, vendors, consultants and
other interested individuals and bodies.
With the growing popularity of franchising, it has become a preferred method of global
expansion for many companies throughout various industries from food chains to courier
services and education. The trademarks and signage of franchise chains are becoming popular
in all parts of the world - from Beijing to Buenos Aires.
As franchising is penetrating new and exotic markets, it is the right time for Indian franchisors
to expand their business internationally. Simultaneously with multi-nationals having stronghold
in the markets of Thailand, Singapore and Malaysia, India is being observed as the next big and
important South East Asian market for expansion. Many foreign franchisors have already
entered India, especially in the apparel and food categories, multiplying their outlets and
opening more franchisees.
The answer lies in the impact of franchising on global economy. It helps in the accelerated
economic and social growth of the nations involved in international franchising. Major
economic benefits are employment generation, increase in private sector investment,
availability of uniform product and services and simulation of the economy itself. It helps the
developing economies in their effort of integration with the global economy, creating
entrepreneurial culture, opening entrepreneurial opportunities and developing entrepreneurs.
Besides it helps solving unemployment problem by creating new and productive jobs. The
developed economies are benefited by increased investments through public and private
offerings, creation of low risk entrepreneurial opportunities and growth of related sectors
through suppliers, advertisers etc.
Moving into international market is neither ‘easy nor exotic' . It even cannot it be considered as
a passport for the pleasure trips for the franchisor and his family. It is a complex process that is
not only costly but also carries sufficient risk. To be successful in foreign markets the franchisor
has to be flexible enough to adapt certain changes in the structure of the franchise network,
standardized operating system as well as cope with legal changes required for international
agreements.
Franchisors are becoming more and more aware of the attractiveness and potential inherent in
international expansion. Moving away from the home base is not without risk. The franchise
Working in foreign in requires sensitivity to social and cultural aspects that are peculiar to every
country. Most people are sensitive to their culture and social norms and the franchisor has to
take special care not to offend the cultural mooring of the host country. One wrong step can be
very damaging and can force the franchisor to pack up from a highly potential market.
Franchisor should fully understand the cultural and social history of the host country and the
response to local culture may require various visible business changes to be introduced. Only, a
local citizen can fully understand these aspects and their help should be sought for identifying
such issues.
The master franchisee, development agent or the joint venture partner proves helpful in this.
While the' most obvious changes take place in the food and service sector, flexibility is required
in 'other sectors as well keeping in view the local cultural norms and religious sentiments.
In addition employment norms, service conditions and salary levels are affected by the social
considerations that are particular to a given foreign market. Many times it is important to judge
the sentiments of the local people towards a specific industry or a product. A popular ,
sentiment against these can wreak a mob frenzy on the outlet .As a large section of people in
Karnatakà were against the entry of multinationals in Agri-business, in India, there was an
attack by violent mob against KFC restaurant in Bangalore. Finally Pepsico had to close down
KFC restaurants In India.
PRODUCT CHANGES
One of the benefit of franchising lies in Iocalisation. The franchisee being the local person has
better knowledge of the area to help develop the local market. Thus localisation is a must in
international franchising as the franchisor usually has only limited knowledge of local demand
and prevailing competition.
The product localisation is often an issue of survival for a franchisee in the foreign market. As a
result they keep innovating on their products to better serve the local markets. The franchisor
cannot have the same yardstick in approving the innovative changes suggested by the foreign
franchisee as it uses for the domestic franchisees. Franchisor has to give a greater leeway to
allow the franchisees to adapt the local innovation in a controlled manner. The changes
brought should not be franchisee specific but country or region specific.
Peppy Paneer and Chicken Chittined pizza toppings have been introduced only in India by
Domino's Pizza. Franchisor should introduce a formal system of not only encouraging local
product innovations but also a formal procedure for screening and approving these
innovations. The modified new products need to be standardised and uniformly introduced at
all franchise outlets.
Franchisors are often required to develop specific mechanisms to monitor and approve the
changes in the products being offered by its foreign franchises. It is required to ensure
uniformity of product and service at all franchises.
MARKETING:
We have already discussed the cultural differences in different foreign market. Marketing mix
may need changes to suit local requirement. The franchisor will have to provide the foreign
franchisee flexibility in terms of pricing, advertising and local marketing activity. But in doing so
it is to be ensured that the strategic positioning of the product is not compromised and the
integrity of the business format is maintained. This requires regular field visits and a detailed
and through performance audit of the franchisees.
Pricing is a sensitive decision, on one hand it effects the royalty income of the franchisor, on the
other the growth and sometimes even the survival of the franchisee hinges on the product
price. Franchisor may be interested in having uniform international prices at par with the home
market for all its international franchises.
The buying power or local competition may not support the same. Further the cost structure,
that is, the costs of inputs, wage level, productivity and taxes may vary from market to market.
Hence pricing is normally a local decision and be best fixed in consultation with the local
The franchisor's interest is normally protected by charging royalty per unit sold rather than a
fixed percentage of sales revenue. This frees the franchisor's revenue from the product prices
thus permitting decentralisation of pricing. Decentralisation of pricing helps the franchisees to
have a faster response to the pricing moves of local competitors.
Normally the marketing literature is provided by the franchisor who has a common advertising
policy for all its Franchises. The same may not hold for international franchising. All promotional
campaigns need a prior approval by the franchisor. This creates unnecessary hurdles in
decision-making and causes delay in responding to market requirement. The franchisors are
required to adapt their advertising and promotional schemes to meet the local requirements.
Most of the times advertisements and other promotional literature will require translation in
the language of that country. Sometimes the translated material may look crude and the whole
literature may have to be designed afresh especially using local models and colloquial language
with due regards to customs and cultural norms of the host country. Franchisors are
recommended to consult the local franchisees and use the services of local agencies from the
target countries as they have better understanding of people's needs and sensitivities.
FRANCHISE POLICIES
Franchise policies are normally tailored to suit the domestic laws and competition
requirements. While considering expansion into international franchising the franchisor cannot
afford to have rigid policies relating to franchise network. Franchisor is required to have
flexibility in its policies so as to suit the legal requirements of the target country.
A franchisor may have a policy of charging, say, a royalty of 6 percent on the sales revenue but
government of India does not permit payment of royalty exceeding 5 percent. Royalty structure
of the competitors is to an important consideration for royalty policy. Royalty should not put
such a burden of high cost on the product or service so as to make it uncompetitive in the
target market. Thus the royalty policy is affected by the competition.
Franchisor may be supplying certain materials to all the franchisees in the home market but it
may not be possible to supply the same materials to its franchisees in different countries. The
local taxes on imports and the logistic constraint including freight costs may be unfavourable in
certain countries. Some materials may cost much less in some countries. Thus it will be
profitable for the franchisees to buy these materials locally.
The tax laws and other legal requirements and accounting norms of the target country often
require suitable alterations in the standardised accounting practices of the franchisor.
Here are some basic guidelines for franchisors who may consider developing franchising
programs in foreign lands.
1. Strengths and Weaknesses. Before expanding to another country, be sure to have a secure
domestic foundation from which the international program can be launched. Make sure that
adequate capital, resources, personnel, support systems and training programs are in place to
assist your franchisees abroad. Be sure to make a strong resolve to commit resources to
compete in the foreign markets and allocate these resources in a manner which will not overly
distract from the current domestic or other already-established overseas markets.
2. Target Market. Going into a new market blindly can be costly and lead to disputes. Market
studies and research should be conducted to measure market demand and competition of the
products and services in the international market.
Take the pulse of each targeted country where one plans to establish international franchise
operations and gather data on: economic trends; political stability, currency exchange rates;
foreign investment and approval procedures; restrictions on termination and non-renewal
(where applicable); regulatory requirements; access to resources and raw materials; availability
of transportation and communication channels, labour and employment laws, technology
transfer regulations; language and cultural differences; access to affordable capital and suitable
sites for the development of units, governmental assistance programs; customs laws and
import restrictions, tax laws and applicable treaties; repatriation and immigration laws;
trademark registration requirements, availability and protection policies; the costs and
3. Partners: Experienced international franchising executives around the world believe that the
ultimate success or failure of international franchising depends upon the choice of a right
partner. Regardless of the specific legal structure selected for international expansion into a
particular market the master developer or sub franchisor candidates in each of the region
should always be philosophically and strategically viewed as a "partner".
An international partner should be chosen after a proper due diligence. The most promising
candidates are those with proven financial resources who have business and management
experience and which may already have established a successful business in the host, country.
Before embarking on overseas franchising, the franchisor and franchisee both have to consider
certain critical issues. These include the systems for recruiting and selecting the right
candidates, and procedures for reviewing their qualifications.
4. The Value. Many franchisors entering overseas markets for the first time have grandiose
ideas about the structure of the master license fee and the sharing of single-unit fees and
royalties. Reality and patience are the two key buzzwords here. If the franchise is overpriced, it
will scare away qualified candidates and / or possibly leave your partner with insufficient capital
to develop the market.
If it is underpriced, the franchisor will be lacking the resources and incentive to provide quality
training and ongoing support. The fee structure should fairly and realistically reflect the division
of responsibility between the franchisor and the franchisee. Other factors influencing the
structure will be currency exchange rates and tax issues, pricing strategies, market trends, the
availability of resources and personnel with franchisor to provide on-site support and the party
(franchisor/ franchisee) that will bear responsibility for translation of the manuals and
marketing materials as well as adaptation of the system, products and services to meet local
demand trends and cultural differences.
In structuring the actual master franchise agreement, the franchisor should carefully consider
the structure of the relationship, the term of the agreement and' the scope and extent of non-
disclosure and non-competing clauses. The provisions and their enforceability will have an
increased importance when complicated by distance and differences in legal systems.
5. Trademark: As a general matter, trademark laws and rights are based on actual (or a bona
fide intent to) use in a given country. Unlike international copyright laws, a properly- registered
domestic trademark does not automatically confer any trademark rights in other countries. The
Also be sure that your trademark translates effectively in the targeted country and its native
language. Many franchisors have to modify their names, designs or slogans because of
translation or, pirating problems in new targeted markets.
6. Product and Service: The format of the proprietary products or services, which have been
successful in the home country, may or may not be successful in another country. The
franchisor has to be sensitive to differences in tastes, cultures, norms, traditions, and habits
within a country before making final decisions on prices, sizes or other characteristics of its
products or services.
7. The Resources: Access to resources and experienced advice is a major factor in the success of
an international franchising program. It requires the help of advisors and market research
studies. National and regional franchise associations can be an excellent starting point for
gathering data about a targeted market.
8. The Rationale: Franchisors often have widely varying reasons for selecting a targeted country
or market. Sometimes they are "pulled" into a market by an interested prospect who is familiar
with their concept (often as a result of being a temporary resident, tourist or student in the
franchisor's home country).
It can be dangerous if the franchisor relies solely on the assurances of the interested candidate
to ascertain the demand for its products and services. Often franchisors "push" their way into a
targeted foreign market (sometimes due to market saturation or a lack of opportunity in their
domestic market) by ranking the likelihood of their success by measuring certain factors of
overseas markets. These factors include language and cultural similarities, geographical
proximity, market and economic growth trends, risk level, cooperative attitude and potential
return on investment.
The setting and operations of territories is one of the most complicated components within
franchise systems. Territories are potentially the most contentious issue for franchise networks.
The second emerging issue is co- branding especially in master franchising when aligning with
strong franchisees.
STRUCTURING TERRITORIES
In fact, there are many possible options to set franchise territories. Once one fully understands
the options and their implications, it soon becomes apparent which structures will work for a
given franchise network.
It is also worth remembering that all franchise systems are individual. Although a structure
might have worked well for one system in a similar industry, that does not guarantee that it is
the best structure possible and works for all networks. Often the structure that is individually
designed leans on a combination of factors or elements that are used in a number of different
systems or system types.
DEFINING A TERRITORY
No territory
Regional territory
Non exclusive territory
Exclusive territory
No Territory
In some circumstances, a franchise will not be granted any territory. There will be no
geographical restrictions or protections on the franchisee's business. This may apply either to
service or retail-based franchise systems.
(i) Where a franchisee is likely to get a considerable amount of their business from existing
contacts and word of mouth. For example, a mortgage broker who can sell products to any
potential person and moreover can do some or all of the work from home (therefore not being
hampered as much by geographical constraints). They are typically franchises with an active
sales role where franchisees build their own customer base, especially via contacts or referrals,
and then continue to service their customer base thereafter.
(ii) Within contract franchises, that is franchisees where, instead of being licensed a territory,
the franchise gets the right service a specified set of contracts (i.e. customers). Example of
these types of franchises are many home service business where the franchisor or master area
franchisees get most the clients and then pass them on to be serviced by franchisee once there
is enough business, to sustain the franchise.
Further contracts can be added either by the franchisee taking on more from the master or
area franchisee, or by the franchisee securing more contracts itself Sometimes contracts
sourced by franchisees themselves can be 'sold' at a pre-agreed rate to another franchisee or
It is quite common that no territory is granted where a retail outlet (such as a coffee shop or
fast food outlet) has the right to operate from a specific location only. This generally only works
where the individual units can operate successfully in close proximity. It can lead to potential
conflict with the franchisor if franchisees feel that the franchisor is selling the outlets too
closely.
The risks can be minimised for a franchisee if the franchisee has a first option to establish
nearby outlets themselves or where in order to help the franchisee get established, the
franchisor limits the number of franchisees to be established in a specific area or, over a
specified period of time.
Regional Territories
For instance, in a house building franchise someone in the industry may have an existing range
of clients or contacts spread out across an entire region or major urban area. Both the
franchisor and franchisee want those customers to be serviced personally rather than being
passed on to another franchisee or possibly not serviced at all. It allows the franchise to
operate equitably while retaining the all-important franchisee / client relationship and saves
any squabbles between franchisees. They know the position when they sign up and there is
usually no need for referral fees between individual franchisees.
The difficulty with this structure can come when franchisees start targeting new clients, as
potentially two franchisees could pitch for the same client at the same time. Sometimes this is
not a major issue, but other times it may be depending up on the amount of new business
sought and the value of the transaction.
Non-Exclusive Territories
Non-exclusive territories are nominal territories allocated to a franchisee where in besides that
franchisee other franchisees and franchisors outlets may also conduct business. Depending on
the franchise agreement, there will normally be restrictions of some sort (or perhaps
commissions payable to franchise whom the territory is allocated) if someone else operates in
the designated territory, or vice-versa.
A good example of this is where a milk distribution franchisee has a defined territory in which
he / she can service all homes and standard retail outlets, but the franchisor services
supermarkets or other major chains directly. To carry and distribute the necessary level of stock
to service such chains would be beyond the ability of many franchisees, and would inevitably
distract them from the brand-building work of growing the home and standard retail business.
Another example is where a training franchisee trains all customers in his or her territory
except for a nominated list of clients that are serviced directly by the franchisor - perhaps a
national company requiring specialist consistent training.
A non-exclusive territory can also operate where a franchisee is permitted to secure a client in
another franchisee's territory but then has to pay a commission or 'out-of-territory' free for
doing this work. However, this is difficult to monitor.
There can also be the situation where a franchisees operate with an 'area of primary
responsibility' where as they cannot actively solicit for business outside of their specified area,
but can be referred clients outside their territory, normally no fee is payable to the franchisee
whose territory it is.
Exclusive Territory
An exclusive territory is one where no other franchise of the same system can be established or
operate in a given territory, and also the franchisor cannot establish a company owned business
or operate in the specified territory.
If the territory initially granted is too big then the franchisee will not be able to service all the
customers in his or her territory. If that happens then there will be a gap in the market,
encouraging more competitive outlets who may then be able to get the upper hand in a region.
This is clearly not in the interests of either the franchisee or
the franchisor.
CO- BRANDING
The unique feature of franchising is the way it is developing with changing times. What was
once traditional is moving rapidly to the non-traditional. Both franchisors and franchisees are
constantly seeking new ways to maximize facilities, human resources and competitive
positioning. One manner of breaking the traditional model is through co-branding. This concept
is normally considered as a formal or loose association of two or more different brands having
separate owners.
Co-branding is the best way to get the prime locations, which otherwise are to cost
prohibitively high. However in co-branding one has to be cautious and look for a synergy
between the brands as well as franchising concept. If the brands are too similar in nature then
the second brand may dilute the franchisor's brand. Thus a franchisor must be careful and
conduct a proper research before going for co-branding and selecting the brands.
In addition, franchisors, before embarking into co-branding are advised to ensure that the
franchisor's brand and system are fully protected. Franchisors should explore implementing a
master agreement with the owner of the co-brand and tailor each franchise agreement for co-
brand operation.
The concept of co-branding is evolving swiftly but before one leaps into the arena make sure
that one has fully researched the concept and is satisfied of the synergy with one's system.
Websites:
1. www.wikinvest.com/concept/Franchising
2. www.franchising.com
3. www.entrepreneur.com/encyclopedia/franchising
4. www.franchiseindia.com
5. www.aboutmcdonalds.com/mcd/franchising.html
6. www.franchise.org
7. www.franchise.org/uploadedfiles/.../introtofranchising_final.pdf
8. online.wsj.com/public/page/news-small-business-franchising.html
9. money.howstuffworks.com/franchising.htm
10. www.the-icsf.org/
11. www.qsrmagazine.com/expansion/franchising
12. www.franchisingusamagazine.com/
13. www.eff-franchise.com/spip.php?rubrique13
14. www.cnbc.com/id/45108356
15. www.franchise.org.au/what-is-franchising-.html
16. www.franchise.net.au
17. www.comlaw.gov.au/Details/F2010C00457
18. franchises.about.com
19. www.forbes.com/sites/.../2013/10/31/the-biggest-trends-in-franchising/
20. www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Collaborating_for_Growth.
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