Franchising is gaining popularity among retailers in India, more particularly in the areas of fashion and lifestyle, food products and beverages, restaurant chains, consumer goods and computer training centres. Franchising is one way in which a company can take advantage of India’s vast market with a degree of control that other traditional forms of distribution can’t match.
In emerging economies, millions of new consumers are being created as jobs in manufacturing and service businesses are increasing average incomes. This growing middle-class is creating a boom in retail activity and retail franchising opportunities are being established to service these emerging markets. Retail, food and service businesses are feeling the benefit of this economic momentum and franchising is surfing this wave as the need for motivated owner-operators grow.
The 21st century will see the evolution of the franchised owner-operator as the most efficient last-mile-to-market business model yet developed, combining the service ethics of an individual who understands that the centre-piece of his or her goodwill is the lifetime value of each customer, with the strategic planning capability, buying power and marketing muscle of bigger networks and brands.
Franchising business in India is expected to witness CAGR of 30 per cent over the next two years. This is also expected that franchising industry will create job opportunities (including both direct and indirect) for an additional 11 million people by 2017. So, franchising is indeed a game changer policy which assures growth not only for franchisors but franchisees as well.
Key Parameters to be Considered
There are some key parameters which the franchisees should consider before selecting a particular franchise model.
Check for Proven Systems: Always opt for a proven business model. There should be systems for everything from payroll and marketing to client services.
Examine Earnings Potential: It can be tricky to evaluate the profitability of a franchise, because profitability from other franchise locations can’t be relied on. Get a comprehensive list of the financials from other franchises, investigate how the successful ones became profitable, and find out whether other franchises have recently failed.
Acquire Territory Exclusivity: If that’s not possible for whatever reason, it makes it much tougher to build and defend a profitable niche.
Know the True Costs of Being a Franchisee: Carefully review franchise agreements. There are often hidden fees in addition to the royalty payments, such as required marketing fees or training. Be sure to know the true cost of being a franchisee to make sure the franchise opportunity is the best one.
Analyse Market Opportunity: Check whether that particular model has potential to be a successful one. The geographical factor has to be considered as well.
Get Comfortable With Company Operations: Quite often, franchises have strict rules on how to operate the business — often not allowing innovative franchisees to explore new marketing strategies or product positioning.
Franchising: Market Potential
The franchising industry is expected to quadruple between 2012 and 2017. There is scope for franchising industry to contribute almost 4 per cent of India GDP in 2017 growing from a current estimated contribution of 1.4 per cent of GDP. While increasing consumption, willingness to spend, growing preference for branded products, global exposure and use of international brands are 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 Services, Health and Wellness and Food Service sub-segments, is expected to contribute to majority of the growth in franchising in the next half decade. Franchising in Health and Wellness sub-segment is expected to grow to almost 6 times the current penetration.
Retail (which includes sectors such as Apparel, Jewellery and Food and Grocery) and Education are expected to be the other major areas where there is huge scope for franchising to succeed. Though Indian Government has modified FDI regulations in single and multi-brand retail, but that will not affect the booming franchising market in India, as most of the international brands are still preferring to operate through franchise mode, rather than opening their own company outlets.
Growth Drivers of Franchising in India
Burgeoning consumer class with an increasing appetite is considered as the biggest growth driver, both by the franchisors and the franchisees. Franchising based business models are preferred by people with strong entrepreneurial drive and risk taking abilities, especially from the no-specific business backgrounds.
This model is readily accepted because it helps increase the scale of operations while reducing the time to market. This also aids in brand building process through value creation. It is often the uniqueness of the concept and value of the brand of the franchisor business that attracts franchisees to invest in them. Besides these, availability of investments and increased investment capability has also been a key factor driving the growth of the industry, especially when investment support from franchisors is minimal.
Regulatory Scenario
While franchising sector in India, per se is not regulated, there are multiple laws which have an impact on franchise operations. Any future regulations in this area should allow conducive growth of franchise systems along with protection of franchisee rights. The regulatory parameters should include,
Specific franchising laws: Rules and regulations focusing on this industry are expected to send a positive message to both national and global franchising community about the seriousness of Government promoting this concept as a mainstream sector
Pre-contractual disclosure norms: This will ensure that only serious players consider franchising as a business model
Control on royalty payments and franchisee fees: Free market pricing should be encouraged while ensuring royalty and fee payments as per industry standard
Conflicts resolution and intellectual property protection: Intellectual property rights of all the franchisors should be protected to discourage counterfeiting brands
India, Attractive Market for Global Franchisors
Many international brands have already entered India and are adopting the Franchise route towards growth. Global F&B brands such as Domino’s, KFC, Pizza Hut etc and apparel brands like Louis Philippe, Adidas, Reebok, Nike, UCB, Allen Solly etc have adopted variations of the franchise models to grow in India.
However, India’s growing but fragmented market can seem chaotic and difficult to deal with. Due to no specific rules or laws promulgated in India to address the functioning of franchisors and franchisees, international players perceive a higher risk to business continuity. It also becomes a challenge for an international franchisor to understand all diversified tastes and preferences, to establish and expand business in India.
Key Industry Highlights
While every other study by different market research analysts has shown favourable pictures about the franchising model of business expansion in the country, there are some findings which need to be discussed in this regard, which will help both the franchisors and franchisees to understand the pros and cons of this expansion model in a better way.
Franchisors believe that they are providing adequate support to their franchisees; however the latter are expecting more support particularly in the post launch phase of operations. Survey reports show that the existing franchisees are not willing to take additional franchisees because they are somehow dissatisfied with the franchisors. Many entrepreneurs are opting for the franchising route as it primarily offers a safe and relatively easy way of establishing business and is expected to offer higher than market levels of profitability.
However sectors such as jewellery where payback periods could range between a minimum of four to five years are particularly vulnerable to such mismatch in outlook. Franchisors have to educate the franchisees beforehand on potential profitability and investment returns from the business.
Conclusion
Franchising is clearly a rapidly growing model for business expansion in the retail sector and is going to be an increasingly important part of the growing services sector of the Indian economy in the years to come. Changing dynamics in franchising industry would warrant a mindset change as well. To summarise, a collaborative approach involving Franchisees, Franchisors, Financial institutions and industry associations is the need of the hour.
