The underlying reasons and principles were broadly similar: a company branded store provided a focussed visibility to the company’s brand, and was an opportunity to display a more complete range of products than could be shown in a multi-brand store.
Though the term “franchising” possibly first came to India in the late-1980s, the concept was already well-established much before that. In 1950s, Delhi Cloth Mills (DCM), a leading textile company, grew through a network of DCM branded “authorised dealer” retail stores across the country. In 1960s, Bombay Dyeing grew through its branded retail network, and so did brands like Raymond, Digjam, OCM and Mafatlal. This helped them establish a better brand connection in the market.
The evolution of retail franchising in independent India can be placed in four phases:
The hard to the core shopkeeper
At the same time, importantly, the branded retail store was owned and operated by its owner, whose overall success in business and his standing in the local society, was often tied to the success of this store. Certainly, the retailer invested in the store, with limited financial support from the company other than the credit for the inventory, occasional marketing spends and, rarely, some participation in the capex. The entrepreneur-franchisee had more at stake in ensuring success of the store than an employee running a store for a large company would have. The speed and the quality of the local decisions hugely impact any retail store, and during the days of slower communication and transportation an entrepreneur/owner/franchisee was, perhaps, best placed to make those critical decisions.
In another product category, footwear, Bata – an international brand – took a mixed approach, with several marquee locations being operated by the company but the majority being operated by franchisees.
The ‘Gold-rush’ of Franchising
The market environment started changing in the 1980s and 1990s, during which many Indian and a few international apparel brands were launched. The fashion brands needed to create environments where the customer could have the full experience of the brand, in terms of product, look-feel and service. The traditional fragmented multi-brand store environment serviced by distributors failing to achieve it paved way for the exclusive branded stores.
Alongside, with changes in the financial and regulatory environment in 1991, as the economy opened, branded fashion stores became a vehicle for individual investors in property to diversify their business. Lacking the capability and desire to develop their own brands, they were happy to ride on the image of a well-known or emerging brand. Their readiness to invest capital and real estate created an environment conducive for growth of franchising.
During this time India began attracting international fashion brands. Unlike western markets where brands have sizable networks of large-format store as a launch and growth platform, in India there were still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Therefore, many international brands chose the franchise for entering India. Over time, the reduction in import duties and the easy of sourcing products from other countries at competitive prices helped international brands to create a consistent product offering with greater control on the supply chain.
The gap in the mind set
The business now demanded more entrepreneurial approach rather than an investor’s mindset who were rather reluctant in the operations. In fact, minimum guarantees provided by the brand reduced the incentive for them to take an active interest in making the store successful.
On the other hand, while enthusiastic investor-franchisees provided cheap capital and a way to rapidly expand their brand’s footprint, most of the brands themselves failed to either create a robust retail model that could be emulated by the franchisees, or build enough support infrastructure internally to constantly train and support the franchise owners and staff.
Thus – as with any gold rush – there were some successes, but many failures as well. Many brands churned through their franchisees and even resulted in a shut down.
A shift towards a more organised franchising
After 2000, several significant shifts occurred. The individual site franchise model sans the entrepreneurial involvement was increasingly becoming cumbersome for brands. International brands started taking a more direct route to market, including ownership of the local operations and retail stores. By then, restrictive regulation were implemented on foreign direct investment in retail. However, large companies started showing interest in the retail sector. For them a master franchise was perceived to be the short-cut to retail success without having to spend time or investment required to create their own brand.
Based on this trend, during the last decade or so, a handful of large corporate groups have emerged as the preferred master franchise partners for international fashion brands wanting to enter India. The situation reminds me of the West Asian markets in the 1990s, where large portfolios of master franchises were created from scratch and to this day, due to regulatory conditions, remain the only way brands can enter those markets.
In India, however, some master franchise relationships have broken due to expectations on investment, performance and strategic direction being different among the principal brand and the Indian partner.
Franchising go viral
Liberalisation of foreign investment led many brands to transitioning their strategy. Some chose to invest directly in the Indian business. Marks & Spencer and Zara have chosen majority holdings in their joint-ventures, while H&M has chosen to enter with a 100% subsidiary. Others, such as Benetton, Levi Strauss, Adidas and Nike had already transitioned to fully owned business earlier, but given the regulations retained their retail presence through single site or multi-site franchisees. The brands now consider operation of retail stores to have a more direct impact on their end consumer.
Meanwhile, for Indian brands, franchising has been the best way to grow in the smaller cities. For the Indian companies, in that sense, the market has only being evolving organically, through occasional fits and starts of temporary economic slow-downs.
For many international brands, direct investment does also increase their risk. Therefore, many brands such as Gap have adopted a master franchisee or site-specific franchise along with a direct wholesale presence in India.
Crux of the matter
To me, this blended development of large corporate master franchisees and individual entrepreneurial site franchisees as well as company-operated stores, truly represents India’s uniqueness as a market and the organic, local nature of the retail business.
What is important is that, alongside, what will also grow is the rigour and the discipline that is brought to the business of franchising.
Author: Devangshu Dutta is chief executive of Third Eyesight (www.thirdeyesight.in), a specialist management consulting firm in consumer, retail and related sectors.