Advisory Apr, 29 2011

Balanced expansion: a route to success

Having successfully established a business enterprise, an entrepreneur seeks a national footprint for his business. The two most popular routes for expansion are via opening company-owned outlets and/or take the franchise route. Read on to know which one

By Ramanjit Kaur
Feature Writer
Balanced expansion: a route to success

At the initial stage entrepreneurs are always advised to expand by opening their company owned outlets. However, at the later stage when expansion needs speed and investors an entrepreneur can go in for franchise route. Both the formats have their own advantages and disadvantages and contribute equally well in the growth and expansion of an organisation.

Though there is no magical formula to ensure the success of both the formats, yet a careful analysis of both company owned and franchised outlets, their pros and cons help you take the call of your bright future. As per Deepanshu Khurana, CEO, Thinking Monkeys (who served as a CEO of i360 earlier), “While franchised outlets let a company grow rapidly and horizontally, company owned outlets serve as a role model for the potential franchisees and add value to the entire brand.”

Value of company owned outlets

During the initial phase of the business expansion, company introduces new policies, experiments with new theories and procedures to improve the system, and prepares new strategies in introducing their products and services in the new markets. A company usually chooses their own outlets to experiment with the new practices and strategies to ensure the elimination of obstacles from its system before rolling out franchise outlets. It is due to the fact that no one else can know and understand the system better than its founder/ entrepreneur and then supervise accordingly. Besides this, there are many other points that raise the value of company owned outlets in the network, which includes:

To leverage business experience: Company owned outlets are the perfect place to provide classroom and in-field training to the new franchisees in order to help them understand the work culture and gain the know-how of the business and its operations. As Rimy Oberoi, Founder and Chief Learning Officer, Oyster Learning says, “Company owned outlets provide a ground explanation to the aspirants, helps in figuring out the best suitable model to run the business, offer help and share operational experience with the franchisees to ensure success.”

Testing ground for innovations: The outlets owned by the company also provide testing ground for new innovations, which can be a product, service, equipments, marketing or promotional activities, layout and infrastructure of the outlet and so on.

Ideal point of reference: The company owned outlets can prove to be a great help in penetrating the markets and creating brand awareness there to facilitate the entry of franchisees thereafter. The success of the company owned outlet in the local market can serve as a point of reference for the aspiring franchisees to prove that the business concept works and has demand in the particular market. As Khurana says, “Company owned outlets ensure that whatever a franchisor is offering to the franchisees is a success, be it a product, service or the business model. It is a visible example of the franchisor’s success”

Quality maintenance and sustenance: Companies avoid the dilution of their brands through their own outlets by maintaining the quality of the products and services. As Khurana states, “The best quality, control over quality products and services, their delivery and outcome is possible only through the company owned outlets. The owned outlets also let you have a complete control on your team or staff to get and offer the best.

There are many companies that are running successfully via their company owned outlets such as Barista, Coffee Café Day, Dabur (who recently has opted for franchise route), Hyatt Hotels India, McDonald, Future Group and so on. Whereas there are few brands whose company owned ventures failed because of the lack of the market knowledge and improper execution of their business plan. One classic example is Subhiksha Trading Services, a chain of retail outlets whose stores have been closed for more than a year for lack of money. Early this year, the company has announced to reopen its outlets via franchising.

Value of franchise outlets

“It is always useful to have company owned outlets but to scale up the business, franchising is the best way to move forward,” says Oberoi. Despite the advantages, the company owned outlets are not the preferable choice of majority of the companies today because of the motivational problems that perpetuates with the operational company run outlet. Franchising usually resolves these kind of motivational problems as the franchisee remains the owner of the store and his discretion enables him to better adapt to the local circumstances and use of his local market knowledge. Here are enlisted the advantages of taking up the franchise route for expanding a business:

Easy and Quick expansion: Franchising is the only lucrative mode to successfully expand across the distant geographies in no time and cost-effectively. As Oberoi says, “Franchise outlets help you build your business empire in minimum time span, and in the financial set up of the business.” Being the franchisor, you need not to invest that much in launching a franchise outlet as a company owned outlet requires as the franchisee funds the franchise business and lease acquisition.

Franchisee ownership and management: When offering franchises, a franchisor is selecting franchise owners of his brand outlets who have the local knowledge and a passion to make the franchise endeavour a success. As Oberoi says, “Bringing the local knowledge of the franchisees is a big time help for the franchisor to leverage their capability and enthusiasm to make the franchise venture a success.” Similarly, Khurana says, “Franchise outlets gives you an ownership that helps you recruiting the right kind of manpower, thereby leading to fast and profitable geographical reach.” Unlike the manager of a company owned outlet, the earnings of a franchisee depends solely on the profits of the franchised outlet.

ROI and ongoing revenues: The franchised outlets also serve as a source of revenue for the franchisors in terms of the franchise fee and royalties or a part of the net profits. Franchising helps the franchisor in cutting out the overhead expenses, staffing and administration issues.

Mix n Match

But the best approach for expansion is ‘dual distribution’, which is a term used to denote the mix of company owned and franchised outlets. This is because both the formats serve certain objectives that are necessary for the successful expansion of any business. This dual distribution helps the company in testing new ideas, creating brand awareness, and developing a standard and uniform system via company owned outlets whereas franchising shows the way to rapid spread of the business across various geographies around the globe. In other words, success of an enterprise depends solely on the right mix of company owned and franchise outlets. To which Khurana says, “The right mix should be one company owned outlet over 10 franchised outlets though the ideal ratio is 50:50.” Whereas Oberoi says, “It depends from company to company and for our kind of business, we prefer one company owned outlet over seven to eight franchised outlets.”

“For a company who does not have a chain of successful company owned outlets, just cannot enjoy the success of it franchised outlets,” says Khurana. In nut shell, if the franchised outlets help the business grow rapidly, the company owned outlets are the strong foundation to support and build a profitable business empire.

Related: Big smile begets grinning profits

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