White Paper On Franchising In India : A Macro Perspective
At Franchising Association of India we have entrusted KPMG with a white paper on franchising in India as we believed strongly that a collaborated neutral effort from the industry was important to understand the past, present and future of Indian franchising. Over the last couple of months we have been discussing several components that the white paper must have and am glad that the framework has shaped up well. we need a comprehensive approach to this subject and create a document that could set a bench mark of sorts on understanding what Indian franchising is all about. It becomes important in the context of several 1000 businesses that are about to get franchised, including international franchisors who want to get into India or understand Indian franchising and several million entrepreneurs or prospective franchisees who would look at taking up franchise opportunities in India. Yesterday we went into the next layer, as Pravin from KPMG got to understand from our 15 years of franchise consultancy experience in India across several segments and clients. I am glad to bring the highlights of that discussion along with my after thoughts that goes deeper into what we discussed. It is in-fact a privilege to have a global consultancy like KPMG doing this activity which we believe will go a long way in promoting franchising in India, which is the core motto of FAI. I am sure franchisors who want to franchise in india or entrepreneurs who want to start a franchise in India will benefit from this.
Trends of Franchising In India:
We began the discussion with the overall franchising trends in India, what were some of the key growth drivers, how many franchisors and franchisees operated sector wise, how much of it was organized versus unorganized and what proportion of total revenues was each of these segments contributing, sector wise. We certainly believed that food, retail, education, services formed the core of Indian franchising while elaborating on how the entrepreneurial spirit in the country, coupled with the huge consumer class, availability of investment capital and the growth of several new concepts has been fuelling the growth of franchising in India. The consumers, franchisees, franchise consultants, government agencies and franchisors becoming important stake holders of the franchise model in India.
Is India configured culturally and demographically for Franchising Success?
Franchising in India is more successful now than ever before because companies have begun understanding that selling a franchisee is just not sufficient, supporting them and ensuring that they carry forward the delivery of the product/service in the way it is defined, is crucial for its success. When I began my career 15 years ago, I did see a lot of franchise companies failing, but now the failure rate has come down considerably. The failure I could see clearly was attributed to not understanding the far reaching effects of franchising not the franchise model itself as is generally the misconception. I believe that we have begun learning from the mistakes that have been committed. In-fact out of every 10 companies whom we guide on to franchise Sparkleminds, I have seen that as many as 8 succeed, whereas there is this occasional failure which we are able to anticipate but cannot do much as the franchisor is not willing to put in the resources or do things they are supposed to do to be successful. Outside (I mean clients who do not use reputed franchise consultants in India), where clients franchise themselves, we see a very good chance today of very second business that is franchised succeeding, which means that every second business is susceptible to failure...and that needs to be corrected as early as possible for franchising to grow organically, because as a democratic set up and the way india is culturally and geographically diverse there is no alternative business route which can be as comprehensive, relevant and as scalable as franchising is. We have several examples of different Indian companies like Titan, NIIT, Eurokids, Lakme and many others who have literally worked very successfully across the diverse land scape of india and have become role models for their specific industry around which several other players have come into existence and are now growing at a rapid pace. Hence most of the established segments in franchising have role models or the top 2-3 players paving the way for smaller companies to learn from their peers and create their own niches and deal with the diversity of the indian customer through a franchise strategy that gets them to their goals.
Franchising In Indian Towns and Villages:
I also have a strong view that franchising could possibly be very successful in TIER II and III cities and towns of India, simply because, you get a local entrepreneur to connect with the consumer. The franchisee on the ground is able to relate to customers more closely and build a better connect with the society and when the ground realities are relayed to the franchisor and the models adapted accordingly they are set for phenomenal success. The challenge to this being the training and skill set of this franchisee. If this can be tackled effectively Indian villages and towns are set for major franchisees making inroads. A case in point here could be of what the Kishore Biyani Fair Price Shop models or the Sahara Q shops who are both looking at the last mile connectivity through the kirana shop franchise model that works with the local franchise entrepreneur being the company interface with the customer.
Franchising Beyond Caste, Communities, and Blood Relationships:
Franchising also cuts across communities and cultures in India. I am a strong believer of this practice that growing because otherwise you have to belong to a certain community or a background to be able to get into a business. Any new business that you want to start has to be an extension of the family business or the learning have to come from a relative or a known source. Franchising needs nothing of that sort. You dont need to come from a family of restaurateurs to start a food business, you need to from a trading background to begin selling products, you need to be connected with the medical fraternity to own a pharmacy or a hospital or have retail connections to get into the retail business. You can be fresh, have any kind of back-ground and choose a business that matches your interest, while the franchisor will train you on the business despite the fact that you are neither a blood relative nor a friend.
that can we learn from international franchising?
Praveen was also very keen to understand the key learning in the international context that can be mapped onto India or Indian businesses. Since we have been working with several international franchise brands and franchise consultants across the globe, I see that the emphasis on documentation, operations, training and support is very crucial for us to understand and adopt. Most matured franchise nations or companies focus heavily on manuals, audits, regular up gradation of franchisee and their team skills and work consistently in ensuring that the franchisee is trained, motivated and are delivering consistently as per the defined standards. The franchisee on the other side is also more prepared to work vis-vis our franchisee mindset here that once we invest, our work is done, it is for the franchisor to run our franchise and ensure that we get our returns. Hence franchisee profiles have to be screened more deeply, initially they have to be given absolute clarity on their role and ensure that they agree to perform that role and only after that should the selling or marketing of the franchise begins, not the other way round, where you have already sold the franchisee and now have begun defining the franchisee role.
Government, Financial, FAI role on growth of franchising In India:
An important part of our discussion was what role the government should play in promoting the success of franchising business model in India. We then moved on to how can financial institutions in India provide impetus to the franchising model in India and what can organizations like FAI do to develop franchising in India. Here again I strongly believe that the government should grant franchising a specific segment status like it has done for say industries or agriculture. Today there is no pure franchise related funding assistance provided despite the fact that banks and bodies like SBI, SIDBI etc. say that they provide loan for franchising, but in effect it is all done on the basis of the person applying for the loan rather than the merit of the business itself or a combination of both. We cannot go to a bank saying that here is a credible profile, and this is the business that he or she wants to pursue, please sanction the loan for the same, as the business has a track record of success and this will ensure that your chances of recovery will be very good instead of the institution just merely looking at the repayment capability of the profile irrespective of what the franchise is. Being not very regulated has its own advantages as it provides an ecosystem for smaller companies with lesser resources to grow and cuts off the red tapism and other government interventions. However, the flip side is, there could be unscrupulous players taking advantage of this situation. Today several international companies who look at India feel that there is not enough regulation in India to support the growth of their business and when we help them understand that corporate india definitely has a very good legal framework, which when used properly from a franchising perspective, can ensure that they are able to operate very efficiently. Infact having a local master franchise who understands very well can only translate into running the business efficiently. See the case of Dominos or McDonalds in India, with their master franchises being local and from a corporate background, helping the franchisor to scale up the business to such high levels within a very short time.
Franchising In India for Ex-Service Men and Senior Citizens:
was also of the view of defining a Vet Fran program, where servicemen who were returning from their deployments across the world, are given an opportunity to transition into the civilian society. These military personal have discipline, leadership, team playing qualities and other traits that are important for franchises to succeed and hence if we had a similar program in India it would be very ideal to include a very large base of ex-servicemen to join the franchise pool. In addition, if we can get a safe certification in place for senior citizen to invest in certain opportunities that are rated very safe by a very credible agency or a mechanism and provide a security cover, as senior citizens could end up investing their retirement funds into these businesses. They could pass through a special array of scrutinizations after which they are certified safer than most other opportunities. We could also see a lot of senior citizens taking up franchisees in India if they are given such assurance.
Franchise With Women Entrepreneurs in India:
Women entrepreneurs in India have also started participating in the franchise growth of India. There are several segments in India where these entrepreneurs are increasingly participating. Over the last couple of years we have seen a spurt in franchising of preschools in India, while women entrepreneurs have fuelled this growth as they find this very accommodating to their time schedule and comfort of the consumer audience (children) which they end up interacting. The beauty salon franchises and fitness franchises and several other segments are getting continued interest from women entrepreneurs in India as they increasingly find a packaged business that flexi-works, very attractive for their participation.
What is the right India franchise model/strategy/development plan?
What is the right franchise model for your business in India? Will you follow a FoFo model (franchise owned- franchise operated) or a CoFo (Company Owned Franchise Operated) or a FoCo (Franchise Owned- Company Operated) or a Joint venture? Once you define this, will it then be a master franchise model or a simple unit franchise model or a multiple unit ownership model or any other hybrid franchise format? Well, we have always been working with several hybrid franchise models for clients depending upon how they believe their business works. The choice of the models has to be done with utmost care, as the entire scalability and efficiency of the franchise business will come from this while ensuring that it is absolutely simple and easy to follow, market and operate.
Draft Franchise Agreement for India:Are franchise agreements different in India than what they are internationally?
How do clients within an industry draft franchise agreements in India? Do they copy paste a competitor franchise agreement? Well we have always ensured that all our international franchisors have created separate agreements for franchising in India. We ensure that the core remains the same, but we also ensure that the entire business is redone to fall within the framework of Indian legalities coupled with practicalities of how the business operates in India. A standard international franchise agreement draft may not be enough for a franchisor who wants to enforce the agreement in India. Also every franchise agreement has to be customized depending upon the variability of the model and the different components that go into defining your roles, responsibilities, functions and merging that with your franchises and ensuring that you are able to achieve your objectives. Your competitors may have different goals, different resources, back end and business configuration, which may not match your organization or the way you would want to grow or conduct business. Hence it is always advisable, as more and more franchisors realize, it is better to get your franchise agreement perfectly in place. Investing a few thousands initially than losing several millions in the future is akin to prevention being better than cure.
Key Parameters of Franchise Recruitment in India:
What are the key parameters that companies follow for recruitment of franchises? Is it technical capabilities, financial resources, prior experience, enthusiasm for new business, entrepreneur long term vision and compliance with franchisor strategy? To my mind most franchisors begin with financial resources and as they mature they realize that it is equally or slightly more important to focus on the skill set and attitude of the franchisee. Once they get the profile match right, they are bound to succeed. Hence it is important to evaluate the age, educational background, the risk taking capability, management skills, the motivation levels, family support, and family history with relevance to business, entrepreneurship and success.
How to Franchise In India? Why Should You Opt for the Franchise Model? What are the alternatives?
We also discussed as to what are the key reasons for any business to opt for the franchise route in India, with the possible answers for most franchisors being brand building, scalability, quality consistency, higher profitability, value creation, quicker time to market and reach customers, higher return on capital expenditure for the franchisor, overcoming capital constraints, talent acquisition.
We then moved on to specific return on investment models where franchisors followed an incentive or return linked to performance model, a minimum guarantee model or a loss protection model. We bought out the relevance of the minimum guarantee model which evolved in India due to the high street retail demand. Retailers of prime properties started demanding a minimum revenue guarantee to put a franchisors sign board on their prime high street location. This model had several disadvantages where there was no motivation from the franchisee to perform as is the case where you provide a loss protection cover. While your franchise sales team or franchise recruitment agency will find it easier to recruit franchises, it has to be used very sparingly to ensure that you dont spoon feed the franchisee to a level where they are completely spoilt. Hence I was of the opinion that a franchisee in most cases has to be incentivized on the efforts he/she puts to ensure that they maintain the operations of the business, performed as per company guidelines and increased sales due to their time and effort skills. Also, there were several companies who would customize their models slightly to suit the franchisee and the local markets without tinkering 99% of their franchising.
Certain industries could find it very challenging to cope up with franchising in India. A classic example was how the world top pharmacy retailer, medicine shop franchise had a very difficult time in India. Their model did not factor the local Pharma associations networking, the low margins high volume value additions that distributors where churning out at every layer and how strongly the local pharmacist was deeply rooted with the customer in his area. Hence their franchise model in India failed while local Pharma retail franchisors are still trying to figure a way of succeeding in India.
Franchisor Franchisee Collaboration:
Collaboration between the franchisor and the franchisee in marketing and promotions, employee training, revenue management, cost management, risk management and other areas were discussed at length. I bought out the relevance of how certain franchisors in the education industry are used to getting the maximum revenues in the beginning of the academic year or their course and how they are trained on using those revenues for the whole year, ensuring that they last the whole term. Such learning and collaboration between the franchisor and franchisee was critical to success of the business model.
A special focus on how a franchisor supports a franchisee on Project Start Up Support that included demographic analysis of the location, site evaluation and survey, facility planning and architectural design of the store and store opening (retail clients). Then came the human resource support function where the franchisor have to clearly define who they would help in employee recruitment and selection, continuous training and up gradation of skills to the technical, operational, sales teams. Operational Support functions that a franchisor must be clear from the beginning would include managing employee relationships, product/service pricing guidelines, trouble-shooting techniques, and bulk buying support while leveraging the existing infrastructure. Marketing support functions would include advertising and promotions, regional and local publicity, event based promotion schemes.
Franchise Relationship Management in India:
The topic of Franchisor Franchisee Relationship Management and life cycle of the said relationship? We discussed the advantages and disadvantages of collaboration of various franchisees with each other in the system? How one bad fish could be very dangerous for the entire franchise chain and how one good performer could lift the entire morale of all the franchisees? How the annual franchise meets in India ought to be conducted? How franchises are given options to scale up and the benefits of taking up more franchises or becoming master franchises from unit franchises. How franchises could be heard, understood and involved in strategic and policy making and new product/service development. Are star performing franchises offered shareholding, is the sales data and success of other franchises relayed to the entire system effectively and are franchises aware about the company growth plans. Is there a comprehensive strategy that a franchisor follows to ensure that the franchise relationship management is carefully followed and nurtured at all levels of franchisor franchisee interaction.
Franchising Challenges in India:
How difficult is it for franchisors to convince franchisees of business viability, returns and the brand and its quality. For me all these 3 things are co-related. It is extremely difficult to make the first few franchises. Once you make these franchises; their success then moves your franchising system from tier 1 to tier 2. Having a proper franchise marketing strategy which is focused not at getting the desired numbers but equally focused on getting the right profiles is critical for most franchisors to succeed and this is where most of them fail. They generally compromise on their initial franchise marketing budgets, are always relying on somebody to take up their franchise and put the money on the table, irrespective of where they came from or what their profile was. From there we chatted on how franchisors found it difficult to maintain the brand and quality standards, maintaining stock at agreed levels, payment related concerns, royalty receipts, disclosure of sales and business and recruitment of skilled employees by the franchisees. We then discussed how franchises faced challenges on location, rentals, recruitment of the right talent, retaining employees and the capital constraints they face when businesses had a down cycle and how that impacted the franchise brand in the long term.
Finally we discussed why franchisees leave a franchise system? It is most commonly observed that the most obvious reason for franchises to quit is they do not get the expected financial returns. When they see that they are not getting the required marketing, operational, technical and other support they switch off. At times it is also observed that some franchises have to leave due to personal problems or their relationship with the franchisor has soured or there has been a change in regulations or ownership/possession of properties where the business operates or their ownership patterns itself changing, which impacts the business. At times franchises also leave when they have found something more lucrative or have got themselves a better franchise. It is also seen at times, that franchises become franchisors, when they believe that they can create a similar business and earn more from being a franchisor, hence planning an exit to re-enter the same business as a franchisor.
We ended our conversation with a clear need of more accurate statistical data of the different components needed to franchise in India. The white paper on franchising would clearly attempt at getting to the closest numbers possible, while bringing out distinct learning of how franchising has evolved in india, where it stands today and how it will shape up in the coming years. Please stay connected for more on when we will release this (tentatively planned for July 2013) and what is my overall assessment of the said document.
Legal Disclaimer: The above comments are all personal choices of Amit Nahar, a reputed and sought after International Franchise Consultant. If you happen to take any advise listed above or choose either of the above companies, before making any commitment, or paying any money, it is essential that prospective buyers franchisees make their own judgement, discuss the franchise opportunity with their financial and legal consultants along with appropriate professional advice from experienced franchise consultants based on their individual profiles. We or any of our sponsors or endorsers or related companies will not be responsible or liable for any direct or indirect losses, costs and expenses, including consequential losses and any failure of business which may result from the use of this information or the use of or reliance on data contained in it.
Written by Sanskriti ...
Written by Sanskriti ...
Written by Sansriti ...
Written by Shakti ...