You’ve opened a store and have established a clientele. You’re making profits, investing in the correct technology and attracting more consumers – growing much more than anticipated in the first month. Now you must expand, but is sole proprietorship always the way forward?
Sole proprietorships have a number of risks involved – a business owner must come up with a location, strategy, hire workers and market his wares a several times over, as many times as he plans on opening a new store. Each store then has to face the risks of failure, demanding the complete attention of the owner. This divided attention between stores is not for everyone.
For those who want to open more stores but are at a loss of how to do it, there are several ways to own and operate a successful business – the most popular of them being the franchise model.
According to Shopify.in, in its most basic terms, franchising is a model for expanding a business and distributing goods and services through a licensing relationship. A franchisee (the location owner) pays an initial fee and ongoing royalties to a franchisor (the brand or corporate) in order to use an existing company’s trademark, logo, and system of business, as well as the right to sell its products and have constant support from the franchisor.India is one of the world’s largest and fastest emerging markets, and its vast population size and cultural diversity have made it a prime environment in which franchising can thrive. Despite the economic slowdown and the gross domestic product (GDP) at its slowest stage in the last six years, the franchising model continues to witness growth in both urban and rural regions.
The franchise industry is growing at a rate of 30-35 percent per annum and the sales turnover of the sector was recently valued at over US$7 billion.
The popularity and achievement of retail stores and brands like Big Bazaar, More, Reliance is one of the key reasons why Indian retailers are looking towards this model of retailing as one of the most successful and favorable models today. Brands like Raymond’s, Nike, Titan, Archie’s, Kurl-On, The Mobile Store, Peter England etc. are today successfully running on the franchising formulae.
Another reason why franchising is thriving in India is the huge growth in interest in entrepreneurship. Franchises provide the perfect solution for budding entrepreneurs who wish to invest in the security of an established brand, whilst enjoying the freedom offered by franchise models. As a result, entrepreneurs, local and small businessmen today are not hesitating to start a franchise business, be it in form of departmental store, online retail store or any small retail franchise opportunity.
Major Franchise Prone Retail Categories - Departmental stores - Footwear brands - Furniture stores - Accessories (watches, belts and purse) - Bookstores - Candy Stores mainly chocolate franchises - Baby products franchises - Coffee franchise - Cosmetics stores franchises - Gift, Hobby, Cards, Candle, Souvenir Shops - Food marts and grocery stores - Home Appliances, Interiors & Furnishing - Jewelry Franchise - Pharmacies Franchises - Real Estate Services, Portals, Online& Marketing - Sports Shops - Stationery Stores - Toy Shops
What Research Says
As per Franchise Asia, the Food & Beverage sector dominates India’s franchise sector. Franchise Asia reports, one-third of new food outlets in India are established through franchise systems. Quick Service Restaurants and fast food outlets are the most popular, pointing to a shift in the pace of consumer lifestyles. By 2022 it is estimated that the F&B industry will have doubled its work force, providing plentiful employment within India. Retail, beauty, healthcare and education are also attractive markets for franchising. USA is a key player in India’s franchise boom as their brands are identifying the Indian market as a huge opportunity for expansion. Indians demand products and services of good quality, which is delivered by US franchises at ease.
Several foreign companies with strong brands have established a presence in India through franchising. In the hospitality and foodservice industries, this has been the preferred method for starting operations in India. The key to the success of international brands within India is an accommodation of the market. India’s culture is richly diverse, and this is reflected in the population. The needs and tastes of India’s consumers are unique, and international brands who have adapted their franchise model specifically to suit the particularities of the Indian market have experienced notable success. The most successful franchise sectors in India are F&B, the hotel industry, the retail industry, beauty & fitness, health care, medical services, and education.
Why Franchising is Important
Franchising protects a company by spreading some of the risk of opening new locations to the franchisees who operate those locations. Franchisees go along with it because of the profit potential, as they stand to share in the profits. However, franchising is not a sure shot formula for success and requires proper strategies to take it to next level. If not taken care of properly, it can go wrong in many different ways. To make it a sound investment, one must understand the scenario to be an ideal franchise. The right franchisee gives the brand market insights and a deeper understanding of what will and won’t work in that particular region.
Most individuals seek three basic fundamentals when choosing a franchised business. The fundamentals are flexibility, money and status. These three elements are important for a variety of reasons and seem to be common denominators when people seek a new business as a career path.
Flexibility has always been most exciting perspective for the entrepreneurs who exchange the stability of a “real job” for the freedom that comes with being their own boss. Money, or income, is always a factor, as business if run successfully generates huge amount of money in comparison to the monthly salaried prospect of any individual. Status is an all-encompassing category that includes not only titles and position, but more important, the feeling of purpose one has and being a part of something significant.
Owning a franchise can provide you with all three of these elements if you operate the business successfully and manage your time and resources properly.
What Experts Say
“India is the second highest market for the Franchising Industry globally. Indians have a great entrepreneurial streak, and this is not only the business community but also for the first timers doing business. The new generations of entrepreneurs are not only looking at Indian franchises but also multiple international brands that they can get to India. Buoyed by India’s economic growth, franchising is not only helping create employment opportunities, as well as improving reach of brands across geographies. Several foreign companies with strong brands have established a presence in India through franchising. The potential markets which are going to see growth is travel and tourism, business/ financial services and apparel,” explains Vinay Chatlani, Director, Soch.
“The failure of a franchisee in India is much less as it is started after deliberating on the regional tastes that the brand is going to cater. The growth of franchisee in India has been phenomenal as there are more than 1.5 lakh franchisees operating in the country and the model is witnessing a growth of 30 percent annually. In other European markets or western markets, the franchisee model has more to do with taking your taste to every part of the country as against India where living up to the regional tastes is a must. For example, many pizza franchisees altered their products according to the local tastes and thus made the franchisee a successful model in different part of the country,” says Rajesh Jain, Managing Director and CEO, Lacoste India.
Nidhi Yadav, Founder & Creative Head AKS Clothings explains, “In today’s fast changing retail eco-system, one has to be present at the right place to tap the target audience. One of the major benefits of running a franchise model is that franchisees bring an extensive knowledge of their local markets that can help a brand to understand the audience behaviour faster. Second, the franchisees have a better control in terms of handling the local operations. Therefore, with the help of a franchisee, a brand can experience ease of operations n day-to-day life while operating in different regions. Third, a brand can speed up its expansion through franchisee business model.”
“Country’s franchising sector has been witnessing a stable growth since 2008 and is now more than $50 billion. The system fits well in India as the country is diverse and with this comes the need to cater to different tastes. With increasing disposable income even in smaller cities, the consumption of products/services has also increased, and this gives an opportunity for companies to tailor made their products keeping in mind the regional tastes. And to do that they get into this model which helps them spread their wings by creating new market niches,” states Puneet Jain, Director, ODHNI.
Apeksha Patel, Founder, E2O Fashion adds, “In an ever-changing and increasingly demanding global marketplace, franchising has showed great resilience and sustained continued growth despite the economic and political challenges presented over the past decades. Franchising has historically proven to be a rather efficient way of expanding the market penetration and consumer basis of retail brands, both locally and internationally. This is so because it allows the brand owner, the franchisor, to expand its business faster and with less financial and human resource investments, while at the same time ensuring the maintenance of the quality and operational standards of the brand, especially when compared to other structures such as trademark licensing, agency and setting up a local legal entity or joint venture with a local partner.”
T Sudhakar Pai, CMD, Kurlon Enterprise Limited stated, “Franchising is an opportunity to create job at grass root level and we firmly believes in the idea of franchising.”
The Franchising Model
- The following points are necessary to be looked into before understanding the concept and model of franchising. - Knowing the expenditure involved in setting up the store and maintaining it for a long period. - Research is crucial element and should be done very carefully before finalising a retail partner. - Integrity and past experience (track record) also plays an important role. - Relationship building along with the business. - Brand pedigree.
Elements of Franchising
The major elements of franchising are:
- Corporate Communication: Franchisees are nothing without the brand. They benefit from the corporate brand and product, and therefore they are also indebted to the corporate compliance guidelines. They have to work with the corporate office both strategically and financially. An ideal franchise has to have good communications with the corporate office. This means the corporate office must provide relevant, thorough information in a timely manner and must be attentive to a franchisee’s needs and concerns. Without good communication, franchisees are stuck with the corporate office’s policies but don’t have any support to carry out their obligations.
- Effective Guidelines: Compliance guidelines are very important in making good and successful franchisee. The franchise model totally depends on consistency. Taking business to a new unknown location is not an easy task. One needs to be ahead of expectation and consumer habits. One also needs to have the right menu for the right consumer. Many people are creatures of habit, so when it comes time for them to decide where to eat or where to shop, they’re likely to go with what they know. Compliance guidelines are the magic that make this happen. They force franchisees to maintain an environment conducive to a consistent experience for the customer. Companies with more variety between their franchises aren’t guaranteed to fail by any means, but they’re not as safe of a bet.
- Financials & Market Opportunity: For a franchise to succeed to its full potential it needs the support of an efficient, ethical company that isn’t wasting money or violating the law. Study a company’s financials closely before buying in. Many companies won’t share all of their financial documents with a franchisee, but review what they’re willing to offer and make a note of anything obvious that they refuse to provide. Many companies continue to sell franchises even when they’re in bad shape, using franchise fees to help keep themselves above water artificially. Similarly, even if a company itself is doing just fine, a franchise can still fail if there isn’t enough space in the local market.
- A Popular Brand: The best franchises have a popular, familiar corporate brand with which to affiliate. This requires a company that takes its reputation seriously by running tasteful ads, being a good corporate citizen, treating its workers and franchisees well, participating in community service and engaging with the community through social media and on a local level. A popular brand translates to a good profit potential, and that’s an essential part of any ideal franchise.
The Right Combination
Franchises provide a way for an entrepreneur to open a business with an established brand and a fixed way of doing business. Some decisions are made for the franchisees, but many entrepreneurs find the mix of structure and their ownership flexibility to be ideal. Choosing the right franchise is about matching your personality, skills, experience and motivation to a particular franchise. It’s about getting a good fit between the franchisee and the business. There are certain points which are very important for both parties to agree on and be on the same page on. It is a two way-street; the franchiser needs to be as enthusiastic about the brand as the franchisee is. The key pointers are:
- Being able to work independently - Being well organised and proud of one’s personal presentation - Being able to organize and motivate others to get things done - Working effectively as part of a group - Being attracted to continuous improvement - Being trustworthy in giving accurate information Having a realistic understanding of the franchise relationship and background in retail business - Drive and passion along with great organizational skills
What Entrepreneurs Should Look For
Budget/ Capital: Capital is the most essential factor. One should search and invest in company as per its capacity and match. Franchise opportunities come in many sizes and costs, ranging from the low thousands to the hundreds of thousands to get your franchise up and running. An under capitalised franchise is not only risking failure but may not even be able to open its doors. Many franchisors have strict minimums on the entrepreneur’s starting capital before they’re willing to sign the franchise contract.
Research After-Sales Support: A good franchisor will support the franchisee both in starting their business and maintaining the growth of the business in the long run. However, many franchisors are in the business of making money off their franchisees, selling fly-by-night opportunities for as much as the market will bear, and not caring if their franchisees fail. The franchisee should avoid these situations.
Determine Your Management Style: Most entrepreneurs start their own businesses for the personal freedom, and they think it will provide them the ultimate authority. In truth, entrepreneurship is much more complicated than this, and that kind of freedom doesn’t come automatically or easily.
How to Run a Franchise
A franchise is a business structure that allows an investor to buy into an established business and obtain the right of use of that company’s business model, including signage, product and operation standards. Running it successfully requires lots of planning and market research. One needs to select a profitable and accessible franchise and get many other things in place to achieve certain goals.
- Select a Proven Franchise: It is not wise to run after any brand for the sake of getting a franchising. Franchising is a tricky module and most brands struggle to get right franchisee and vice versa. People are ready to pay and invest capital in the business but don’t actually know how to run it. Most franchisers struggle or falter in making their model available to entice new franchisees. Request information such as a prospectus and carefully review it to determine how profitable and sustainable the business is. The franchise prospectus should contain the franchise’s history, costs to invest and run a location and expected returns on your investment.
- Obtain Purchasing Financing: In most cases, financing can often be obtained directly through the franchiser (known as in-house financing), but some brands do not off er this and wants the franchisee to invest in the partnership. Ultimately, franchisee has to look upon banks or lending institutions offering lower interest rates which require lot of paperwork and formalities. So, the franchisee should be ready with a business plan and other legal formalities related to it.
- Skilled Team: A core team is a group of individual employees that have a proven background in a particular industry or product and are trusted to run the operation in the absence of the owner. Core team members not only bring experience to the operation, they should be able to train and mentor new employees as well as be able to think creatively. A common practice in the restaurant industry to find core team members is to visit local like businesses in the area and ascertain which employees are the most valuable to the operation, and then extended an offer of employment.
- Vision: Establishing realistic, reachable goals for the franchise is a must for staying interested in the business and being able to assess and reassess its profitability and growth potential. One should not be excited for the overnight success and take quick decisions on basis of that. Every step should be executed with a proper plan.
How Franchising Works in India
India offers mainly four types of entry points for franchises, which includes:
- Direct franchising - Master franchising - Regional franchising - Local incorporation
Master Franchising is where a company awards exclusive rights to develop a foreign brand to a local entity, often accompanied with a large investment made by the franchisor. The owner recruits a specific person or a company to provide services to franchisees in a specified territory which can typically be a major market or even one or more states. The master franchisee is then in charge of developing the company’s brand either through cultivating a sub-franchised network or opening outlets owned by the master franchisee (though the two are not mutually exclusive). A master franchise can own a number of individual franchisees in a certain area, however, the same is not applicable for a direct franchise. Generally, master franchise model is adopted by fast food restaurants, real estate agencies, and convenience food stores.
Regional Franchising operates in the same way as master franchising but covers only a specific regional area as opposed to the entire country. Given India’s diversity along with the complexity of state-specific laws, many franchisors choose a regional franchising approach.
Local Incorporation is when a foreign franchisor forms a subsidiary company and awards it franchising rights in India. The American fast food chain Subway, for example, has established a subsidiary in India, which handles their franchising network.
Happy Franchise Owners Make Money
If the franchisee can collaborate or align themselves with a franchise that really clicks, it will result in higher productivity and more profit for both the parties. This is a simple philosophy that’s often overlooked. Some franchise organisations have suffered because they lost sight of this reality during the fast growth stages.
Sometimes companies are so successful and grow so fast that they seemingly forget about the little things that made them successful in the first place. In this case, their initial success can lead to their ultimate failure. A franchise that forgets that their franchise-owner community is in fact their ‘customer’ base doesn’t succeed. If the franchisor understands that its franchisees are the heart and soul of its success and to keep them happy will ultimately generate more revenue. To achieve the common goal of success and profit is the prime agenda and this makes things work.
“As franchisers we expect ‘Complete Transparency’ and a ‘Two-way continuous channel of communication’ with the franchisees. This is extremely crucial for the initial 3 years of the association. We at Soch truly believe that our Franchisees are an extension of the company and not an external partner in anyway. We spend enormous amount of time, money and energy to help them absorb the brand DNA and help them in every step to carve out their own success journey. Soch recognizes that starting a franchise goes beyond the initial training that you’ll off er to the managers/owners of your franchise. The Management team of Soch meets the Franchisees personally prior to signing and is constantly available to off er the support they need before coming into their own,” states Chatlani.
“Ensuring that the Franchisee partner by investing in the Brand not only retains his/her identity as an individual owner but also belongs to a bigger team held together by a common goal. Brand also ensures that other company or franchisee operated units are not in direct competition and there is no cannibalization of sales,” he further explains.
“For ODHNI, we believe in move together and grow together. We do not want to succeed individually. Our team and all our associates are very important to us. We are the franchisers and as a franchiser we expect the franchisee to be dedicated to living up to the brand positioning that we want and the brand image that we are constantly working on. The synergy of two minds can work well when there is a common motto or goal,” says Yatin Jain, Director, ODHNI.
“First thing as a franchiser, we expect them to align their goals with our goals. Then they should have a sound plan to popularise the brand which will convert into good sales. We make it a point to hold regular meetings with our franchisees and keep them upgraded about the latest developments taking place at our end. This helps us informed about each other, the challenges that we are facing and the solutions that are best for both of us. For us, it is a relationship of mutual admiration,” says Yadav.
Advantages & Challenges of Owning a Franchise
For an entrepreneur, buying a well-known franchise might seem as a one- shot success formulae, getting an opportunity to run a well set business. It offers instant brand recognition, a trusted product and inclusion in nation-wide advertising campaigns. While owning a franchise has its perks, there is a lot more to it than sitting back and raking in the cash. Certain points highlight the pros and cons of franchise ownership:
Brand Recognition: The biggest benefit of owning a franchise is brand recognition. Most if not all franchises are well-known companies with established customer bases. Owning a franchise instead of starting up a new business saves you the time and effort of building a reputation and attracting customers.
- Corporate Support: Franchisees receive support from corporate headquarters in a number of areas including marketing, training and even financing. Corporate headquarters of large franchises are ready with advice and expertise for making your business the best it can be.
- Costing and Payments: Startup investments required of franchisees can be higher than the amount you’d need to start an independent business, although it varies depending on the company. While one may have the luxury of acting as a boss, he still has to pay a percentage of the sales to the corporation. Additionally, some companies require franchisees to pay marketing fees for nationwide advertising.
- Corporate Policy Enforcement: Despite being an independent business, the franchisee needs to follow the complete company guidelines. This includes using company uniforms, packaging and marketing materials. Franchisee cannot introduce regional discounts or offers and has to move as per brand’s nationwide promotional strategies to take his business forward.
- Corporate Problems: Despite the fact that franchise owners have a customer base, brand recognition and upper management support, there is still risk involved. Any problems the larger company encounters, whether in terms of reputation, finances or something else, becomes franchisee problems as well. One must consider the company’s track record before signing the contract.
Franchising & Legislation
As per Dezan Shira & Associates, unlike western countries, India does not have comprehensive legislation related to franchising. There are no direct, potentially restrictive regulations on franchisors. However, this lack of direct regulation creates tremendous confusion as a patchwork of national and regional laws arbitrarily governs franchisor-franchisee relationships.
The following laws impact franchisorfranchisee relations in India: - The Indian Contract Act, 1982; - The Trademarks Act, 1999; - The Designs Act, 2000; - The Patents Act, 1970; - The Copyright Act, 1957; - The Competition Act, 2002; - The Foreign Exchange - Management Act, 1999 - Income Tax Act, 1961 - The Consumer Protection Act, 1986 - The Arbitration and Conciliation Act, 1996