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The general concept
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In simple terms it is the granting of cert f certain rights by one Party (the franchisor) to another (the franchisee) in return for a sum of money. The franchisee then exercises r those rights under the guidance of the fran e franchisor. The consumer's perception should be th that, save for any express statement to the contrary, there is no difference between on of the franchisor's corporate outlets and a en one p premises, the livery of vehicles, the selection of franchised one. The decor of the shop prem the goods or services and uniforms of the staff should be identical to the franchisor's ing the own outlets. The franchisor is renting th franchisee the right to use its business ormat format; hence the name 'business format franchising'. However that right to use the d time. The franchisee gains no interest in the business format is for a limited period of ti ociated actual ownership of the format or associate marks. The rights he enjoys are similar to se. During the period of the lease the tenant has those of a tenant when leasing a house. D after the expiry of the lease he has no rights full enjoyment of the demise, but the day a over the property at all.

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The commercial bargain
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In crude commercial terms the re reason for both the franchisor and franchisee entering into a contractu relationship with each other is to tractual make a profit. The franchisee make a profit from supplying the goods makes or services to the customer. The fra franchisor makes it from allowing the franchisee to use its package of k e know-how and intellectual property rights. The bargain is struck betwee two independent legal entities of between supposedly equal bargaining pow g power. In reality however, the more successful and established the fra franchise becomes, the more eager the franchisee and the wider the choice of potential franchisees the r franchisor enjoys. To obtain a Mc McDonald's franchise for example is nowadays a major achievement. ent.

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Creation of a new business specifically for franchisors ors € An entirely new product or service can be created specifically for franchising. This has been done with eated businesses such as Snappy Snaps in the UK - whic provides 1 hour film processing services and retails which associated products such as picture frames and the like in the high street. Dublcheck is another example, nd it operates a contract cleaning business. Very often a local businessman identifies a successful franchised concept in another market such as the USA, and decides to create a similar concept in his s own jurisdiction. Development of an existing business € This is perhaps the most usual way of evolving a franchise. An existing product or service is further ving developed by use of the franchising method. Su d. Such businesses include the Dyno-rod drain cleaning business, the restaurant businesses and so on. . Conversion of existing business to the franchise format rmat € Sometimes an established business can decide to c de convert its managed outlets to franchised outlets. The Thresher off-licence chain in the UK is a good exam example of this. Such decisions are usually taken because erheads of a desire to accelerate growth and reduce overhea without sacrificing quality control. Importation € This is a very common method of evolving a franc franchise in the specific territory. The United States is the great exporter of franchise concepts around the wo he world. Brands such as KFC, Holiday Inns, Hilton Hotels, Pizza Hut and McDonalds are all American exports Body Shop is an example of a British franchise that xports. has established itself around the world.

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Automotive products and services € Automotive supplies, tyres, parts, tools, etc., ax alignment, car valeting, engine tuning, exhaust tc., axle systems, rust proofing, sun-roofing fitting, tax h hire, transmission repairs, tyre remoulding, vehicle cleaning, vehicle rental, vehicle repair, vehicle security, windscreen replacement, windscreen repair, chauffeur hire. Business aids and services € Accountancy, bookkeeping, advertising servic services, information bureaux, display cards, postal centres, business brokerage, business counsell unselling, computer bureaux, data processing, financial and debt counselling, job recruitment, tempo temporary staff, office communications, photographic services, tax services, word processing bureaux reaux. Construction, home improvement and maintenance p ance products and services € Air conditioning services, bathrooms and bath renovations, brick and stone pointing, ceiling d cleaning, chimney lining, heat and energy con y conservation, condensation control, damp proofing, domestic boiler servicing, double glazing, drau , draught exclusion, drain cleaning, electrical services, environmental cleaning, fireplaces, fitted kitchen flooring materials and laying, garage doors and itchens, other doors, gutters, insulation, loft conversion, pavement surface repairs, plumbing, ready-mixed rsion, concrete, roof insulation and repair, tiles, timber preservations, water softening equipment. imber
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Education services € Educational tuition, kindergartens, management skil training, secretarial training. nt skill Entertainment, recreation, etc. € Hotels, whirlpools, adventure games indoors and ou nd outdoors. Fast foods, restaurants and takeaways € Chicken, coffee, croissants, hamburgers, ice cream orange juice, pancakes, pizzas, popcorn, potatoes, cream, sandwiches, steaks, general restaurants. Food stalls € Baked goods, confectionery, convenience stores, d res, dairy produce, eggs, fish, grocery stores, health foods, fresh juices. Health, medical and beauty care € Acupuncture and hypnotherapy, ambulance servic beauty centre, fitness health clubs and studios, service, hairdressing, optical goods, skin care, fitness equipm equipment. Household services € Carpet cleaning, curtain design and fitting, dome domestic cleaning services, furniture and fabric cleaning, furniture stripping and restoration, upholstery and vin repair. vinyl
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Retailing (products and services not sp specified elsewhere) € Aquatic centres, bag stores and luggage, batteries, bridal wear, s maternity wear, fashion wear, spor wear, ties, formal wear for sale r, sports and for hire, computer hardware a software, cosmetics and beauty are and products, dry cleaning, giftware, ho re, housewares and furnishings, knitting wools, instant print and copying sho ng shops, linen, original art, personalised badges, picture framing, photogra tographic development, family histories, sewing machines, telephones and car telephone services, video films s and equipment, window blinds. s. Miscellaneous € Driving schools, equipment leas t leasing and hire, estate agencies, publishing, local newspapers, etc. security equipment services, tent , etc., hire and instant accommodation hire, travel agencies, veterinary ation support services, wholesaling of ca carpets, biscuits, electrical and video equipment, will writing and storage. orage.
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Very well accepted Entrenched deeply within USA & Western Europe ithin Fairly well structured in ter terms of framework In USA:
¾ $1 Trillion is spent each year on goods bought at franchised

outlets ¾ One out of every 12 bu 2 business establishments is a franchised business ¾ A new franchise busines opens every 8 minutes of every usiness business day ¾ 50% of retail trade is throu franchised outlets through

High growth areas are Sou re South-East Asia, Latin America & the Middle East € US franchisors lead the wa in International expansion way
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International soft drink and hotel fra tel franchises arrived in India as early as in the 1960s, but in 1977 the Government of the day had expelled e Go foreign brands from India. The foreign brands started returning gradually from the mid µ80s. In the 1990¶s as the market opened, t . foreign franchises started comin in gradually, and faced many coming hiccups along the way especially K ially KFC, Schweppes etc. The well-known franchises relating to soft drinks, ice-cream parlours elating or restaurants include Pepsi, Coke, Baskin Robbins, Movenpick, si, Co Subway, McDonalds, TGIF, Geoff Geoffry¶s, Taco Bell, Pizza Hut, Pizza Piazza, Dominos Pizza, O¶Brian¶s Sandwich Bar, Ruby Tuesdays and rian¶s Barrista. Retail franchises include M lude Marks & Spencer, West Side, Evita Peroni, Pepe Jeans and Adams. Courier companies like Air Action ams. and DHL are there along with computer and software related franchises. The Government has li liberalised the rules and regulations in relation to the retail industry and a boom in this sector is on its way. y

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Acceptability growing by the day y Fairly conventional industry s ustry spread Approximately 600 franchi ranchisors spread across industries like education, retailing, professi ofessional services, healthcare etc Over 40,000 franchisees es Annual turnover from Franc Franchising ± anywhere between Rs.8000Rs.10,000 crores Total investments made by F e Franchisees ± over Rs.5000 crores Over 300,000 people directly employed by franchised businesses irectly Variety of hybrid formats in p ts practice Number of International fran al franchises already existing, more coming in

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

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Positive Factors
¾ Huge consuming class ss ¾ Fast-growing consumerism merism ¾ Shift towards Manufacturing

Service ervices

from

Agriculture

&

¾ Franchising has already proven to be successful in eady several sectors ¾ Large entrepreneurial poo al pool

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Negative Factors
¾ Lack of regulatory framew amework ¾ Financing mechanisms no in place ms not ¾ Skewed real estate marke markets

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The Education sector domin dominates the Indian franchising scenario, although Retail is fast catching up ail f Most of the franchisors are re relatively new and small Several large Indian co n corporates also going the franchising way Newer & innovative concepts being introduced ncepts Substantial interest from inte m international franchisors as well as Indian business houses fo master franchises ses for Franchising is now spread across the country, thereby read providing opportunities to en entrepreneurs everywhere

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Franchising allows the fra franchisor to:
¾ Have greater access to ca capital ¾ Expand rapidly ¾ Save operating costs s ¾ Capitalise on entrepreneurs

the he

a abilities

of

independent

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Franchisees joining a fra franchise system enjoy the following benefits:
¾ ¾ ¾ ¾ ¾ ¾ ¾

Backing of a bigger organ organisation Shorter learning curve ve Established trade mark or service mark ark Economies of scale Joint advertising and prom promotion Transfer of management e ent expertise Training & support from th franchisor om the

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Grew initially in the apparel & footwear sectors parel Has gradually grown to cov a wide variety of sectors including o cover food, consumer durables, jew les, jewelry, books, home décor etc Two varieties of Retailers: ers:
¾ the manufacturer-retailers ± typically Product Distribution Franchises ± ers

have been around for a while ¾ the aggregators ± typically Business Format Franchises ± only now ically beginning to show up
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Existent & likely to be succes successful only in smaller formats Substantial action also happ happening in non metro locations
¾ Thereby spreading organised retailing over a larger footprint anised

Has had to contend with the peculiarities of the Indian real estate ith markets
¾ Result ± MG (Minimum Guara Guarantee) has become the key driver

Model Player Input Premises Interiors Equipment Stocks Management Franchisee s Returns

Pure Franchise Franchisee Franchisor

Management Contract Franchisee Franchisor Franchisee

Hybrid* Franchisor

D    

U U U U U 

  U U

U U U   

(50%) (50%) U  

U (50%) (50%)  U

(Consignment)

Margin on Sales

Rent + %age of Sales

Higher of Minimum Guarantee or Margin on Sales

*many more varieties of the hybrid model exist.

Comprises of sectors lik Education, Health & ors like Beauty and Professional Services ional € Is widely practiced and accepted across the d country € Differs from Retail franc l franchising in terms of the importance given to the lo location € Pure franchises / M Management contracts followed
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IT Education ± Down for the moment but surely not out; or likely to re-emerge through IT Enabled Services ugh Retail ± Going strong but g getting hurt because of the real estate markets Vocational / Preparatory E ory Education ± Fundamentally strong because of huge population base and high uge competition in public examin xaminations F&B ± Low level of activity c tivity currently but attractive longterm potential Professional Services ± Lo level of activity currently Low but attractive long-term poten potential

Ranking 1 2 3

Value Proposit sition (Franchisors View) sV Brand Name Economies of Sc f Scale Proven Business Format ess

Value Proposition (Franchisees View) Brand Name Economies of Scale Proven Business Format

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

Ranking 1 2 3

Value Proposit sition (Franchisors View) sV Local Market Kn Knowledge Business Experie erience / Background Investment / Real Estate

Value Proposition (Franchisees View) Investment / Real Estate Business Experience / Background Local Market Knowledge

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

Ranking 1 2 3 4 5 6

Factors A Well Establishe Business Network ished Constant New Pr Product Development Innovative Produ oducts / Services Quality of Franch nchisees Transparency Return on Invest estment to Franchisees

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

Ranking 1 2 3 4

Causes of Fric riction Transparency Training and Support Su Revenue Sharin ring Product / Servic Delivery vice

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

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Herd mentality ± both franchisor as well as franchisees chisors Several wrong precedents of fra franchisors as well as franchisees To an extent:
¾ many franchisee¶s commitment to service quality is missing ent ¾ many franchisor¶s commitment to provide the promised support to ent

their franchisees is in doubt

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Result ± a tense relationship, wh ip, which doesn¶t help anyone

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Financing for franchises is a problem area with financial s institutions
¾ soft expenses not recognised as part of project cost by many nised

institutions

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Legal & disclosure framewo for franchises is not in mework place
¾ increases chances of fraud by fly-by-night franchisors ud ¾ makes it difficult to resolve disp ve disputes

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Real Estate unrealistic

markets ts

co completely

unstructured

&

¾ make Franchising unviable for start-up entrepreneurs le

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Need for a Working Grou / Regulatory Body on Group Franchising to identify corr fy correct priorities and lobby for them Need for disclosure norms & legal framework on the regulatory side Most importantly, Fran Franchisors as well as Franchisees need to und understand & honour their commitments & responsibi onsibilities towards each other

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