franchising aspects Dec, 01 2010

Think Before You Leap into Franchising Business

Franchising may be the best route if you want to expand quickly but know some quick facts of the business before taking that plunge.

By Sunil Gandhi
Think Before You Leap into Franchising Business

Brands want to expand at the cost of smaller entrepreneurs who cannot afford to create their own brand. In recent times, its importance and popularity has increased and it has penetrated all business segments be it FMCG, Apparels, Pre School, Saloon or Footwear etc. Everyone is out to capitalize on their so called BRAND. If I open 10 stores in my name, I can also become a Franchise BRAND. But it is not that simple. BRAND is not just a name; it’s about what it does to its CUSTOMERS.

Entrepreneurs are investing heavily in expanding quickly. Accordingly, they may plan their first store in Month 1 and next 10 stores in next 10 months and so on or maybe much sooner depending on the urgency or capital strength.

You will make two quick observations while visiting Malls and Retailers:

  • Cost of Survival i.e achieving Break Even is difficult for many of them.
  • Hardly any Differentiation between two BRANDS in any segments.

While the small brands crumble under the weight of the above, big brands, on the other hand, enjoy the advantage of calling the shots. For e.g. Pantaloon Group, due to their sheer size can negotiate rental the way they want. Gitanjali is not paying any rental as they have profit share or revenue share plan with the real estate owners.  So, if you see, not all share the same advantage like the two.

I am a regular visitor of a Mall in Mumbai in western suburb. Unfortunately most businesses are not doing well here, not even the food court even though it is situated in one of the highly populated western suburbs. I have also seen many big brands closing down their shops here.  30 to 40 per cent mall space is still empty even after 5 years of its commencement which people are buying for office purpose. The situation is worse in Ahmedabad, which I visited a few times in the last few months. Here, Malls are either failing or are for sale, closed down or witnessing a change of use.

And what applies to Malls applies to retailers as well, whether in Malls or somewhere else. Unless your operating cost is low, customer acquisition is low cost and quick; no retailer or franchisor will survive. They will fall down far quicker. We have seen Subhiksha and Vishal stores fail. Though, the ownership model of the two may be different. But if the business model can’t survive then investor hardly matters. So, when franchising fails, there is failure of one big and many small companies.

You will observe that getting franchisee entrepreneurs is easier. This can be done with many excel sheet working and passion of entrepreneurs. But the biggest challenge lies in keeping them passionate and making them earn. Even IPL franchisee is finding it difficult to survive though we are cricket loving country of plus 100 bn and IPL as a game is a successful BRAND. This is the first challenge: Financial viability.

The second challenge is also worrisome. It has part bearing in the above. Viability largely relates to the BRAND customer is buying. I hardly see any clear distinction between two Indian Brands in any particular segment. Entrepreneurs are in so much hurry to expand that their drawing board work is half baked. Their focus on BRAND means logo, stationery, sign board, uniform of employees etc. etc. Nothing really impresses the CUSTOMER.

How many entrepreneurs have their customer touch points handy? How many of them have designed exactly what will happen to customers at each of the touch points? How many have elements of surprise for customers in their business processes? How many have powerful customer focused feedback system? How many proactively talk to customer about their experience and expectation from the brand and whether it was fulfilled or not?

We see lot many advertisement about franchise offers but hardly any story of franchise companies of their innovativeness or the way they treat their customers, employees. No stories worth telling and that mean COMMODATISED brands.

Take for example, McDonalds. Now, tell me, how many burger makers do we see around us???? NONE. And why so many sandwich and pizza makers but no burger makers?? Just two cafes: Baristas and CCDs? Even brands like Nestle and Amul is going steadily on their retail expansion plans.

Post IPO debacle of mid 90s, many merchant bankers have gone out of business. This overnight rush of expansion through franchising without proper system, business processes, feasibility, market research, man power, training will lead us to one more debacle. Here eco system of entrepreneurship will take a hit, both at franchise level and franchisee level.

Any franchise company MUST focus their energy on key and clear differentiators from customer perspectives. They MUST have stories of their brand to tell. They must have TALK OF THE TOWN offerings. The way they do their business should deserve media and customer attention. Starbucks have number of stories about the way they have treated their customers. They share it extensively. Author duo of book “The Experience Economy”, say, “Work is Theatre and Every Business a Stage.”

In the business of staging an experience, how many of you have put your best foot forward? High infrastructure cost is making companies go Franchise business route to expand. However, remember, if your franchisee is losing money then the day when even your company will start losing money is not far. The only way to survive is to create delightful, memorable, remarkable, talk of the town experience for the customers. How different are you with your nearest competitor and with all other players in your industry? Unless you have this answer, Do Not Enter The Business. Do you think business media will report about you (of course without you paying or buying them) ? Do you think your customers will refer you to their known circle of influence & why?

Answer these without any prejudice and then think of the next step for your business. Long live franchising model but not without answering the last two questions.

Related: Procuring the funds

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