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Apr, 01 2005

MOST FRANCHISED COUNTRY

3 times the system per head of population than the US

MOST Indians identify Australia with its cricketing prowess rather than for its business accomplishments. For, as I travel around India I see that the people know more about the exploits of Ricky Ponting and Adam Gilchrist than any Australian politician or businessman.

This, our countries have in common - we love our cricket.

Yes, the world acknowledges the fact that today Australians are the leaders in cricket. However, there is another factor that most might not be aware of, and that is, we are the most franchised country on the globe as well. That’s right, per head of population, Australia has more franchised operations than any other country, and three times as many franchise systems per head of population than the United States, and all this in a short period of 20 to 30 years.

Franchising started in Australia in the early 1970s with large US-based food franchises, like KFC, Pizza Hut and McDonald’s, entering the market and changing the way we looked at food retail forever. Over the last two decades franchising in Australia in its contemporary “business format” mode has developed into a highly significant and dynamic business activity which has expanded to include virtually every product and service business. In North America the tremendous growth and popularity of business format franchising has transformed franchising from a specialised marketing technique into a highly competitive and innovative vehicle for expansion of retail product and service industries.

In India, I see franchising developing over the next decade from being simply observed as an innovative method of business expansion, to being a major force in how India does business. What I am trying to imply is that in which other format can you grow your brand with as little of your own money like you can with franchising?

Tracking franchise growth

One of the great benefits of a developed and mature franchise market like Australia is the availability of statistical growth indicators. Australia has been tracking the growth of the franchising industry over recent years. The latest survey undertaken by the Franchise Council of Australia, in 2004, indicates that there are some 850 franchise chains operating in the Australian market, with 95 per cent of these as business format franchises.

Besides the 850 franchisors, there are over 54,000 franchise outlets with only 3,400 being company-owned and the balance being individual franchisees. In addition, there are over 8,000 franchised fuel outlets and over 2,400 motor vehicle retail outlets. The franchise industry in Australia employs 5,07,180 persons. In a population of just two crore that is quite an impact on the Australian economy.

Some other interesting statistics that come out of the Franchise Council of Australia research include:

Industries: The majority of franchising takes place in the retail non-food industry with 30 per cent of franchisors and 18 per cent of franchise units. Next, the property and business services sector accounts for 24 per cent of franchisors and some 21 per cent of franchise units.

Compare these statistics to that in India, and you get a completely different picture. But, with the increase in retail facilities, I see a similar trend in franchising, that of a shift towards the major franchised industry which is in the retail non-food industry.

Age of systems: Franchisors have been operating their businesses for an average of 14 years, and franchising for 11 years, demonstrating the level of maturity in the sector. On an average, franchisors tried their systems for two years prior to franchising, indicating that most ensured the concept was viable before using franchising to expand. This is crucial to the ongoing success of a franchise brand.

Size of systems: The average number of franchised units in 2001 were 20, rising to 26 in 2004. The majority of franchise systems are of small to medium size, with 60 per cent of systems holding fewer than 30 franchised units. In contrast, some 15 per cent of systems are large operations with more than 100 units.

In a country of just two crore people, Australia has averaged 26 franchised units per franchise system. So, it begs the question: What can a successful Indian franchisor accomplish in franchised outlets with a population of over 100 crore?

Geographical distribution: The majority of franchising activity occurs in New South Wales with 31 per cent of total units. Both Queensland and Victoria hold 22 per cent of total units. Generally, the degree of franchising activity is related to the population distribution across the states.

Obviously, India’s franchise industry will thrive mostly in major metros and A class cities, but as the market matures, I am sure, we will see franchise systems extend down to lower population areas. In fact, we are seeing many franchise brands already targeting these cities with success.

System structure: Most franchise systems operate from specific commercial sites (69 per cent), but some are home-based (24 per cent) or mobile operations (25 per cent), including combinations of these. Almost one-third of franchisors use master franchising arrangements in their domestic operations.

As the franchise industry in India matures, it makes sense to split franchise brands up into designated territories and offer master franchise opportunities to investors within those regions. It certainly is an excellent strategy to offer franchisee support at a localized level.

Franchise operations in malls

The impact of franchising on the Australian economy has been significant. In fact, many malls now are full with franchised operations. This is mainly due to the high rate of success of Business Format Franchise systems. The Franchise Council of Australia (FCA), recently, released figures stating that each year only 1 per cent of the franchisees leave their business. So, mall operators target franchised operations for their malls because their success rate in business is substantially higher than stand alone businesses. In other words, they know that even if the franchisee fails for whatever reason, the franchisor will invariably step into the business and bring the business back to profitability, or on-sell the franchised business to a new franchisee.

Astute mall developers and investors know that the fundamental underpinning of a franchised business is that the business is a reproduction of a proven profitable business, so, the likelihood of failure is diminished.

Eyes on overseas market

Recently, Franchise India Holdings Ltd. sponsored the International Day of the Franchise Council of Australia's annual convention on the Gold Coast. The CEO, Mr Gaurav Marya, presented a workshop paper on franchising in India. We did this in conjunction with the Queensland government to give some exposure to the fast developing franchise business here in India. We found at that conference that there was a huge interest in Australian companies wanting to come to India.

The FCA estimates that 24 per cent of Australian franchisors are currently operating overseas, with a further 27 per cent of systems planning to commence foreign operations within the next three years. That equates to over 200 Australian franchisors who are eyeing off shore markets to take their proven business system into international markets.

So, where does an Australian franchisor go to? Yes, the US and UK markets are very attractive, but to be honest, these markets are already saturated with very successful franchise models. That is not saying that no opportunities are available there, but that the franchise opportunity needs to fit into niche markets to compete in a competitive and mature marketplace.

The most logical market for Australian companies is their neighbours here in Asia, and we have already seen many franchisors enter the South-East Asian markets with success.

The Indian connection

But no market competes with the attraction of India. With a growing middle class population with disposable income, mixed with increasing retail infrastructure, many franchisors are looking very closely at the Indian market.

Deterrents and solutions: The struggle that many Australian franchisors face is that India is a very price-sensitive market, so franchise fees that are charged in Australia will not be substantiated here in India. On the flip side of that coin, we tell Australian franchisors that although you may need to lower your sites on franchise fees, India is a volume market, so, if done right, the returns will come out of multiple franchised outlets across country.

Several areas that scare many Australian franchise systems from entering the market are the diversity of the country, the lack of specific franchising laws, finding the right local partners, and a reputation of being a developing country. Notwithstanding this, the astute franchisors are entering the market now. They understand that the best time to enter is not when the market is mature but when the market is developing.

At FIHL we see Australian franchise opportunities as good value for an international franchise. The Australian currency, compared to the US and UK markets, is more favorable, and our experience has shown us that Australian franchise chains are more flexible to meet the Indian market.

The Australian High Commission in New Delhi recognizes the opportunities here in franchising. They have designated employees specifically to handle Australian franchisors desirous to enter the Indian market, and have been working closely with FIHL at promoting the vast franchise opportunities here in India for Australian franchise brands.

Opportunities through Licensing: By far the best opportunities we see will not always be in the form of fully developed Business Format Franchises, but through Licensing arrangements, where Indian investors can buy the rights to the “system” of successful international brands. This also gives them the opportunity to contextualize the product or service for the Indian market using the proven business systems of an international franchise brand.

Look at McDonald’s here in India, their menu has the widest variation from any other McDonald’s markets, proving that what works is the system, not the product. McDonald’s have adapted the McDonald’s product, but have not compromised on the McDonald’s system. Serious international brands should take a leaf out of McDonald’s India’s book and adapt their product to meet the Indian market whilst keeping close to the proven business system that drives the business.

Licensing allows this type of business system to develop in India. At FIHL we are focused on providing “value for money” for Indian investors. Licensing allows us to offer this value with confidence.

Yes, Australia has many opportunities for the astute Indian investor, be it franchise systems or licensing opportunities. So, hopefully in years to come you will know Australia not just by cricketing legends, but also household brands that develop successful franchise networks across India..

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