METHODS OF RETAIL EXPANSION

Learning Objectives
• Know the concept of foreign direct investment
• Recognise the need for foreign direct investment in
Indian retail
• Understand the concept of franchising and its evolution
• Discuss the advantages and disadvantages of franchising
• Review franchising in the international and domestic
market
• Analyse the motives of retailers for internationalization
• Outline the reasons for failure in international retail
 CONCEPT OF FOREIGN DIRECT
According
INVESTMENTto the International Monetary Fund (IMF) and
OECD definitions, direct investment reflects the aim of
obtaining a lasting interest by a resident entity of one
economy (direct investor) in an enterprise that is resident
in another economy (the direct investment enterprise).
As per the Consolidated FDI Policy document released by
the Department of Industrial Policy and Promotion,
Ministry of Commerce and Industry, Government of India,
‘FDI’ means investment by non-resident entity/person
resident outside India in the capital of the Indian company
under Schedule 1 of FEM (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000.
THE CONCEPT
oTwo routes through whichOFa foreign
FOREIGN
direct
DIRECT
investment isINVESTMENT
possible in India:
 Automatic route
 Prior Government approval route

Continued…
The Two Routes to FDI in India

Foreign Direct
Investment

Automatic
Prior government
Route approval (FIPB

No prior permission By Exception

required
Inform Reserve Bank of
India within 30 days of
inflow/issue of shares
Govt. approval required
Decision usually within
4-6 weeks
NEED FOR experience
oInternational FDI IN INDIAN RETAIL that the only
has demonstrated
way that farmers can get better prices for their products is
through improvement of the value added food chain.
oTo support the development of organized retail trade, it is
believed that a substantial investment would be required
in infrastructure.
oThere also exists multiplicity of the intermediaries in the
value chain, especially in food and vegetables.
oThe development of organized retailing would generate
employment, both direct and indirect, as notwithstanding
the capital intensity of modern retail business, it
continues to be labour intensive as well.

Continued…
oIt is further believed that far from leading to an influx
of imported goods, foreign companies would source
most of their items domestically and would, in fact,
use quality Indian products to stock thousands of
their outlets in foreign countries, thus giving a fillip to
our manufacturing as well as export.
oThus, FDI can be a powerful catalyst to spur
competition in the retail industry, and in the current
context can encourage firms to bring about:
 Improvements in the supply chain
 Investment in technology
 Manpower and skill development
 Greater sourcing from India
 Benefits to government
oCONCEPT
A franchise isOF FRANCHISING
the agreement or license between two
legally independent parties which gives:
 A person or group of people (franchisee) the right to market a
product or service using the trademark or trade name of another
business (franchisor)
 The franchisee the right to market a product or service using the
operating methods of the franchisor
 The franchisee the obligation to pay the franchisor fee for these
rights
 The franchisor the obligation to provide rights and support to
franchisees
 o Franchisor: the provider of the franchise
PARTIES TO FRANCHISING
o Franchisee: the purchaser of the franchise
EVOLUTION OF FRANCHISING
o Franchising – ‘franchise’ (fr) means to
grant powers to a peasant or serf.
o Evolution:
 Ale brewers
 Singer sewing machine
 Oil refinery companies
 Modern era of franchising – Ray Kroc –
McDonald’s
TYPES OF FRANCHISING
o Product/ trade name franchise: a franchisor owns the right
to a name or trademark and sells or licenses the right to
use that name or trademark

o Business format franchise: the franchisor provides

franchisees with a full range of services and support, and
franchisees sign an agreement to conduct operations in
conformity with specific rules laid out by the franchisor
Advantages and Disadvantages of Franchising
Advantages of Franchising
Low Risk
Growth
Ease of financing and operational support
Advertising

Disadvantage of Franchising
Royalty/Fees
Lack of control
FRANCHISE RELATIONS
METHODS OF RETAIL EXPANSION:
FRANCHISING
 Low Risk
 Growth
 Ease of financing &
operational support
 Advertising

Advantages
of Disadvantages
of Franchising
Franchising  Royalty/Fees
 Lack of Control
THE INTERNATIONAL FRANCHISING SCENE
FRANCHISING IN INDIA

In India, International franchising is an

interesting phase as global
organizations like Pizza Hut, Marks and
Spencer, McDonald’s, SubWay, HP,
Holiday Inn, Medicine Shoppe,
Domino’s, Gold’s Gym, Kentucky Fried
Chicken have set up franchises in India
What It Takes for Franchising in India
LEGAL ISSUES
o The time IN FRANCHISING
span/duration of the agreement
INo INDIA
Obligations/duties of the franchisor
o Obligations/duties of the franchisee
o The territory under which the franchisee will operate
o The franchise fee and the right to use the franchisor’s
trademark/brand/patent and signage’s
o The training or support that will be provided by the
franchisor
o Royalties as may be payable
o Support as in terms of advertising and other promotions
o Terms of renewal and termination/cancellation policies
INTERNATIONALISATION AS A MODE OF EXPANSION

• The era after World War II saw the emergence of

manufacturing dominance, after which the need
was felt to tap new markets where products
could be sold
• Sourcing products from various markets is fast
emerging as a source of competitive advantage
• European retailers have long been at the
forefront of international expansion
• Internationalization of retailing thus can be
viewed from different perspectives
• Various academics have attempted to define the
concept of internationalization of retail
Five Parameters of International Retailing and Four Kinds
of International Retailers
DETERMINING THE MARKET
OF ENTRY

oThe classical approach to the analysis of

international expansion in retailing has been to
discuss “push” and “pull” factors.
oRetailers may adopt different modes to enter a
foreign market. Some of the commonly adopted
methods of entry are:
 Supply of goods
 Franchising
 Joint ventures
 Acquisition of stake (major/minor) in existing retailers
 Organic growth
Continued…
FACTORS AFFECTING RETAILER’S CHOICE OF MARKET

o Proximity to the domestic market

o Similarity in culture
o The size of the market
o The laws and the regulation of the land
o Trade relations between the countries
o Strength of the local players in the market
 Entry Mode Advantage Disadvantage
Wholly  Enables global strategic  High costs and risks
owned coordination  Requires overseas
subsidiaries  Protects technology management skills
 Realizes (potentially) location  May be slower to implement
and experience economies
International  Gives access to local partner's  Loss of control over
Joint knowledge technology and ma nagerial
Ventures  Allows sharing of development know-how
costs and risks  May impede global
 May be more politically coordination
acceptable than 100% foreign  May make realization of
ownership location and experience
 Allows foreign parent do economies more difficult
deploy resources across more  Sharing of profit "pie"
national markets at once
International  Similar to international joint  May be more difficult to
Strategic ventures manage than international
Alliances joint ventures
Entry Mode Advantage Disadvantage
Franchising  Low financial risk  Lack of direct control over quality
 Relatively low  Successful international franchising
developmen t costs requires considerable start-up and
ongoing pre sence overseas (cost)
 Is likely to impede, make global
coordination costlier than ownership
 Growth may be slower depending
on franchisee's intentions
 Sharing of profit "pie"
 Possible loss of know-how to
potential competitor
Licensing  Similar to franchising  Similar to franchising
 Fewer "maintenance"
costs than franchising
Exporting  Ability to realize  Transport costs
experience curve  Trade barriers
economies  Motivation of local agents a
challenge
REASONS FOR FAILURE IN INTERNATIONAL RETAIL

o While entering a foreign market, a strategy must be

based on a complete understanding of the consumers
in the market of entry.
o Retailers also need to understand that they have to
deliver the product/service under the considerations
and constraints of the local environment.
o Cultural distinctions among neighboring countries can
have a tremendous impact on what customers in each
will buy.
o It is the retailer’s understanding of the customer and
the customer himself who decides who will succeed.