RETAIL FRANCHISING

The word "franchise" is of Anglo-French derivation—

from franc, meaning free.
Introduction
 One of the major business model in the present business era.
 It is an integral part of the strategy of many retail companies
like McDonald’s, Subway, Pizza hut etc.
 It acts as catalyst for growth and survival of the companies.
 Franchising is creating new business life forms, building new
partnership and relationships and creating job opportunities
and economic growth.
 Franchising is a method used by businesses for the marketing
and distribution of their products/services.
 Franchising began in US in 1851, when Singer Sewing
Machine first franchised dealers.
Concept…
 Authorisation granted by a manufacturer to a distributor or
dealer to sell his product.
 As per International Franchise Association - a franchise is the
agreement or license between two legally independent parties
which gives –
 A person or group of people (franchisee) the right to market a
product/service using the trademark or trade name of another
business (franchisor)
 The franchisee uses the operating methods of the franchisor.
 The obligation of franchisee is to pay the franchisor a fee for these
rights.
 The obligation of franchisor is to provide rights and support to
franchisee.
Types of Franchising
 Franchising can be divided into two formats
 Product/Trade name Franchise
 Business Format Franchise
 Product/Trade name Franchise
 It concentrates on one manufacture’s product and thereby acquires the
manufacturer’s identity to some extent.
 Examples :- Automobile dealership & Gas Service Stations

 Business Format Franchise

 It has been defined as the granting of a license for a predetermined
financial return, by a franchising company (the franchisor) to its
franchisees, entitling them to make use of a complete business
package, including training, support and corporate name and enabling
them to operate in exactly same standard and style as other units.
Types of Franchising
 A franchising system may be
 A Single Unit Franchise: Right is being granted to operate
one unit or outlet of the franchised business. Single
franchisor may have more than one unit franchisee.
 A Master Franchise: The franchisee is granted the rights to a
substantial territory – usually a whole country. Then the
master franchisee may set up unit franchises.
 A Regional Franchise: In a geographically large area, a
franchisor or master franchisee may decide to divide the
territory up into separate region and grant master franchise
for each separate region; it is then known as regional
franchise
Franchise Relations

FRANCHISOR

MASTER

REGIONAL

UNIT FRANCHISE UNIT FRANCHISE

The Roles of Franchisor and Franchisee
Function Franchisor Franchisee
Site selection Oversees Owns or selects with approval

Design Provides prototype Incurs the cost

design
Employees Training Hires, supervises, pays

Products to be sold Decides Stocks on consignment or buys and can

change the product mix only with
approval
Prices Sets/recommends Follows

Advertising/ Determine at national Suggests local requirements

promotions level
Brand building Build at national level Follows requirements
Forms of Franchise
 Manufacturer – Retailers:
 Manufacturer gives rights to franchise to sell goods through
licensing agreement.
 Conditions imposed on retailers like exclusively stocking the
manufacturer’s brands, standardization of store décor,
reimbursement of Ad and promotion expenses.
 Examples: Liberty, Raymonds etc
 Wholesaler – Retailers:
 It is voluntary system operated under cooperative system.
 Service Sponsor – Retailers:
 When service provider offers license to retailer like in the case
of VLCC, Habib’s etc.
Advantages of Franchising
 Low risk
 As franchisor has not entering the market complete newly.
 Growth
 As franchisee grows, the parent company will also grow. The franchisee
is also grow depending upon good brand name of franchisor.
 Ease of Financing & Operation Support
 Franchisor assists franchisee in obtaining financing for setting up of the
business.
 Location, interior & exterior of business, training and consultancy etc are
provided by the franchisor to the franchisee.
 Advertising
 Ad costs are shared by both franchisor and franchisee.
 National exposure can be attained at an affordable price by the franchisee.
Disadvantages of Franchising
 Royalty/Fees
 Relatively higher royalty/franchisee fees have been charged by
the reputed brand.
 The franchisee fee is one time required at the time of starting or
renewing the franchise agreement.
 Royalty is a recurring cost which has to be paid to the
franchisor at a predefined frequency.
 Short duration of agreement
 Lack of Control
 Franchisee required adherence to the terms and conditions as
laid down by the franchisor
Franchising in India
 As per industry sources, franchising in India has been
clocking a 60% year on year growth and is likely to
accelerate to 100% over next five year.
 There are close to over 40,000 franchisees with an annual
turnover between Rs8000 – Rs10000 crores.
 Total investment made by the franchisees is over Rs5000
crores and over 300000 people are directly employed in
the business.
The Economics Times, 24 Feb 2008
th
Franchising in India
 The franchise showrooms of various categories
 Readymade garments – Colour Plus, Koutons, Gini & Jony
 Accessories – Titans, Tanisque, Himalaya Opticals, Fastrack
 Beauty & Saloon – Shahnaz Hussain Parlour, Habib’s, Lakme
 Education – NIIT, Aptech, Eurokidz, Bachpan Play School,
IMS
 Restaurants – Mc Donald’s, Pizza Hut, Subway, Domino’s, Mr
& Mrs Idli etc.
 Health & Fitness – VLCC, Lakme Saloon, Green Trends,
Naturals
 Others – Ferns n Petals, Shaadi.com,
Legal Issues in Franchising in India
 The franchise agreement is a legal document which governs
the relationship between the two parties.
 The key elements mentioned in this legal documents are
 The duration of the agreement
 Obligation/duties of the franchisor
 Obligation/duties of the franchisee
 The territory of operation
 The franchise fee & the right to use the franchisor’s
trademark/brand/patent
 Training & support that will provided by the franchisor
 Royalties payable
 Support in terms of advertising and other promotions.
 Terms of renewal & termination/cancellation policies
Legal Issues in Franchising in India
 As franchising relationship is a contractual one in India, the
Indian Contract Act 1872 is applicable.
 Consumer complaints and legal action would fall under the
purview of Consumer Protection Act 1986.
 The rules under Standard of Weights and Measures Act 1976
would be applicable.
 Foreign Exchange Mgmt Act 1999 would be applicable
incase of international and domestic franchise arrangement.
 Royalties for Intellectual Property Right is taxable.
 Leasing of real estate, labour laws, Internet franchising are
also coming under the purview of different laws in India.
 More than 80% of Mc Donalds’ restaurants worldwide are
owned and operated by their Franchisees.
 Isaac M. Singer (1811-1875) gets credit for starting the
modern use of franchising in the U.S. During the early 1850s,
Singer, who had improved an existing sewing machine model,
wanted to find a wider distribution for his product but lacked
the money to increase manufacturing. Another problem was
that people wouldn’t buy his machines without training, a
service retailers weren’t able to provide. Singer's solution, to
charge licensing fees to people who would own the rights to
sell his machines in certain geographical areas, provided
money for manufacturing. These licensees became responsible
for teaching people how to use his machines, which created
opportunities to bring the first commercially successful sewing
machine to the public.
 It was Ray Kroc (1902-1984), a milk shake mixer salesman
who discovered the McDonald brothers' small San Bernardino,
California hamburger stand in 1954, who is credited with
unleashing the wave of franchising we know today. He found
they were buying so many of his mixers because they had
developed a high-volume production system which enabled
them to provide fast service with consistent results and low
cost. Kroc became their licensing agent and recruited
franchisees, starting in the Chicago area. In 1961 he bought
out the McDonald brothers’ interest and took the tile of senior
chairman. By 1988, McDonald’s had opened its ten thousandth
restaurant and today there are over 30,000 McDonald’s
restaurants worldwide.