Advisory Dec, 11 2009

To be or not to be in franchising

Owing and developing a business is what every aspiring entrepreneur dreams about. Once the brand is established the next step forward for an ambitious entrepreneur is to expand his business to new horizons. Under prevailing market conditions, almost every

By Pallavi Majha
Chief Sub Editor
To be or not to be in franchising

Indian business market appears to be quite ripe for the big brands to expand. This can be attributed to the fact that lots of international brands have made their presence felt in Indian markets and Indian brands are also graduating to their next level to match the standards of international brands. To add to these are the factors like increased awareness and brand consciousness of the middle class, rising entrepreneurial culture, transforming lifestyles and increasing working class.

Large numbers of options are available to expand a business today, like expanding through, via franchise route, by following shop-in-shop formats, by authorised distributor and dealer outlets. The significant players who have expanded successfully via franchise route are Raymonds, Titan, Barista, Koutons and the best examples of the companies which are expanding via non franchised route may include Future Group and Subhiksha.

Why franchising?

Over the years franchising has grown as most successful expansion model with numerous companies opting for franchise route to expand. However, still there are companies who are not in favour of franchising. Through this article we are trying to find the reasons for why and why not companies are in favour of franchising.

Let us discuss these reasons:

Well defined operating system: Franchising provides a well defined operating system and a brand built in carefully over several years. The aspiring franchisees do not need to go through the painful learning curve of starting a fresh business.

Twin strength: Franchising gives an opportunity to both the franchisors and franchisees to gain from each other’s strength and grow the business.

Manpower solution: Franchising is a solution to the manpower problem that retail industry is facing.

Apt for speedy growth: Franchising has emerged as an apt business model for those looking at speedy growth through partnerships with prospective partners.

Effective way to reach the local masses: Franchising is an excellent mode of expansion. It converts a shop owner to an entrepreneur. Franchisee, being aware of the locality understands the demands of the people of a particular area thus helping the company to reach local masses.

Dependency on work force: Franchisee having invested a huge amount of money in the franchised store is more responsible for the performance of the store, as compared to the manager of a company-owned store who is a salaried employee.

Why not franchising?

  • Dilution of the business: Some companies who are not following franchise route for expansion believe that following a franchise route for expansion will dilute the business strategy that they have developed over the years.
  • Costly affair: Organised retail involves lot of technologies, mechanism, and strategies. The training required for these requires huge investments which is a costly affair from a franchising perspective.
  • Time consuming process: Expansion through franchising needs lot of time and patience. However considering huge expansion announcements by various companies need fast pace expansion, quick decision-making, constant adaptation to changing requirements of customers, managing unexpected challenges in different markets and steady-flow of funds to finance this expansion. All these factors are best addressed through a business model based on company-owned stores then franchising.
  • Suitable for small formats: Majority of the retail companies believe that franchising is successful for small format stores, as it is easy to manage and organise them via franchise route where as in case of large format stores company owned and company operated route is best suited.

The best way forward

Franchising, is a great option for people who want to own their business with a lower risk and assured minimum returns. For a company with a product or service to sell, franchising provides an excellent opportunity for rapid expansion without an enormous outlay of capital. For expansion through franchising factors like land backup, capitalist ability, rapid expansion and co-opting support plays a significant role.  However, the best way forward would be to initially test the company owned model in order to understand the basics of the business model itself before you considering franchising.

Related: Why invest in a two wheeler business for faster returns?

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