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Apr, 01 2005

THE MONEY MARKETS

Complying with international trends and standards, the Indian franchising market is undergoing rapid transformation in business formats and growth, with newer business categories being added and older ones seeing swings.

FRANCHISING in India has recently witnessed an encouraging forward movement, with almost all categories of businesses willing to adapt, or having already adapted to this system of business development. Initiated by a few daring companies that ventured into franchising in the early 90s, viz, NIIT, Aptech, and Shahnaz, the concept is now willingly being seen as an ideal way of business growth. This is good news as it propounds that India is on the right track towards growth in franchising, and in a few years, in all probabilities, it will be at par with other countries around the world in experience and adaptability.

Franchising is not a stagnant system, it is developing around the world to make it more profitable and efficient. Countries like the USA, the pioneers in franchising, the UK, European countries, Australia and others that have adapted to this business format, are proof of what India will be headed for in the near future. These countries also faced similar problems that Indian businesses are facing today. The advantage that India has is that the format is already tried and tested with all loose ends tied up. In such a global franchising scenario, India has everything to gain.

India’s retail industry is reviving up for its most exciting phase ever, and is the second largest untapped market after China. With a contribution of 14 per cent to the national GDP and employing 7 per cent of the total workforce, or 4 crore in the country, the retail industry is the largest component of the services sector, and an important pillar of the Indian economy.

With the concept of franchising in retailing and the service sector taking off well, what trends and changes do we witness in India and the world? What is the shift in the format and business categories? What needs to be actively looked into? What are the caution areas? What is the international scenario with respect to India? To answer all these questions we invited both national and international experts to comment on the emerging Indian scenario. Their answers are based on their experience and working knowledge in the areas of franchising and retailing.

“On the outset,” explains Mr. K.S Ghai, Head, Retailing, Titan Industries, “a visible change will be the sudden spurt in mall development in India, with customers enjoying the new retail experience. Huge amount of retail real estate is due to be available in the coming three years.” The current trends in malls that are operational have been very encouraging to both retailers and developers, thus, adding to the mall mania. A series of glitzy malls has already begun to redefine the shopping habits of urban Indians.

Similar views are echoed by Mr Anurag Dixit, senior vice president, Trak Services. He states, “With the high quality retail space available, and which is inclusive of all basic amenities (air-conditioning, power back-up, security, kids play area, etc.), customers prefer to shop here as it is a more comfortable experience than to shop at the regular, crowded, hot and humid markets which lack cleanliness.”

“In the current year”, says Mr Rajeev Dayal, GM, retail marketing & business development, Omaxe “ we would witness new trends of organised retail formats in B class towns like Amritsar, Patiala, Nagpur, Kanpur as well as Jaipur, Chandigarh, Lucknow and Cochin.”

Making his observations on the Indian organised retail scenario, Mr Tony White, director, FIHL, says, “Over recent years we have observed Indian metros developing a mall culture where consumers are attracted to the diversity of choices and quality of facilities that malls have to offer. This will continue to grow and malls will increasingly become destination points in and of themselves rather than just seen as shopping centres.”

Consequently, the sudden ramp up in retail real estate could create over-supply. Presumably, not every mall owner will find it easy to seek tenants. That, in turn, could bring down property prices. And then, experts reckon, the new economics could make it attractive for a new set of players to join the party, especially retail formats like furniture and consumer durables, which need a lot of space.

All these developments will definitely give a boost to the franchising industry that is also witnessing a boom period. Says Mr. Nitin Passi, director, marketing and sales, Lotus Herbals Ltd, “Keeping in view these latest developments, franchising will expand as an industry with more Indian and international companies setting up franchise businesses.”

“Franchising continues to dominate in established markets with longstanding established companies consolidating their position, and new service-based companies emerging, using the franchise model to expand their business model”, says Mr Tony White, adding, “in developed countries we are seeing consumers that are cash-rich and time-poor, which has resulted in a flood of service-based industries emerging to cater to the home consumer.”

Expressing a positive note Mr Dixit states, “Franchising as an industry is booming and is poised to grow manifold over the next few years as more and more international brands foray into the Indian markets. These brands recognize India as a market with huge potential because of its sheer size in terms of population.”

It is self explanatory that economic developments play a major role in the formation and success of franchising. The franchising concept has been maturing with the development and rapid success of the business format or package-type franchises. The parallel growth in the service sector and in franchising is not accidental, for it represents a practical business marriage. When the economy is strong and growing, franchising does well, surviving even in a downturn.

“In the last four years, international economic and social trends have led to a change in India's retail business from roadside stalls to organised chains and shopping malls”, says Mr Rajeev Dayal.

Indian retailing and real estate industry is now getting the best intellectual property from overseas. This will ultimately add value to the industry which is still at a nascent stage. Furthermore single product category developments also known as speciality malls are being created which goes to show that the market is indeed maturing and developing at the same time, says Mr. Aditya Sikri, CEO, Noida Entertainment Center.

Suggesting on ways to sustain business in growing competition, Mr. Ghai asserts, “Companies now need to invest in merchandising, design and customer contact personnel to be able to set up better outlets, with better product mix and better people to man their stores when compared to competition. This will see more retail professionals being born, who will cater to the need to design ‘different’ stores, train and manage people, manage stores and so on.” The definition of competition has also enlarged. “Retailers now have to fight with other retailers for their share of the profits, even though they may not be in similar product categories. This is due to the fact that the share of impulse purchase is increasing day by day,” he avers.

International trends

To understand the retail and franchise developments in the country, we need to assess the developments that are taking place in the larger part of the world. Globally, economic integration is taking place as a result of lowering of trade barriers in the European Community.

The franchise segments that are expected to come up in 2005 are fitness and weight-loss franchises. Technology will be in greater demand than ever and eBay mania drop-off stores will spread rapidly. Besides these `prominent franchise sectors, food and beverages would form one of the lesser ones. Franchises serving coffee, ice cream and smoothies will be successful in luring customers back for more with their vast selection of espresso-based beverages, mix-ins and frozen concoctions. There will be an increasing trend towards new investors getting into health care, food, spas etc.

“Service-based franchise models are growing fast in international markets, and they will be here in India as well. The difference and advantage in India is that the labour is still very cheap, which makes for huge opportunity in professionally-managed service-based franchises,” feels Mr Tony White. “In addition,” he continues, “we are seeing many franchise companies in developed markets reaching saturation levels in their home countries, and so are looking internationally to develop their business expansion model. This augers well for developing markets like China and India that have very steep growth curves in retail and franchised systems.

“The increased infrastructure and GDP growth means that an international franchisor cannot continue to ignore markets like China and India. So, for many, it is not a question of if they will enter these markets, but, who to enter them with, and, when to enter the market,” he elaborates. “So I see a lot more established franchise chains looking closer at markets like Asia to drive the expansion of their franchise business model,” Mr Tony White concludes.

Substantiating this views Mr Brian Duckett, managing director, Horwath Franchising, UK, says that there is no doubt that cross-border franchising is building up a great head of steam all around the world as entrepreneurs see the benefits of importing ready-made systems to shortcut the process of building businesses.

Trends redefining the year 2005

Many new developments are expected to redefine the year 2005, which promise better business, hence sound profits. Here is what the experts have to say.

“In India, the increasing development of available retail space will see a huge increase in retail-based franchises on offer,” says Mr Tony White. In most developed markets retail is the most dominant franchise business, whereas in India, it has not been a dominant player mainly due to the lack of facilities, and of course the FDI restrictions. The mix of increased world-class facilities and progressive relaxation of FDI restrictions will see a sleeping giant awaken in retail in India, he perceives.

Mr. Ghai presages retail spaces getting more expensive, a lot of brands expanding the number of company-run stores, and a new set of people running stores for companies as ‘management agents’. The year 2005 will see the distribution and expansion of retail brands and chains being largely limited to organised retail spaces, like malls, rather than stand-alone high street spaces, he believes.

Mr Passi believes that there will be more focus on client delivery and experiential buying this year, and hence, the training and retention of franchise staff will gain prominence. Low investment formats will gain market share due to the size of our country and the demographics.

Reviewing the franchising concept, Mr. Duckett foresees both parties (the franchisor and the franchisee) taking a prudent and pragmatic view on upfront fees, which he feels should be sufficient to cover the franchisor’s costs of recruiting and training the country franchisee, and to fairly reflect the value of the brand and system. At the same time, he warns, it should not be so high so as to load the dice against the local operator from the beginning. Those who have succeeded long-term in several markets have learned that this is not the right attitude.

“The MNC brands are exploring various franchise models to suit their needs and requirements. Gone are the days when a company would invest in buying real estate space, interior decoration, their own staff, stocks, and then sell to customers,” explains Mr. Dixit. MNC brands are launching all sorts of franchise partnership models, which facilitate rapid expansion and setting up of more and more retail stores of their brands within a very short span of time. These models may require less investment from a franchisee, and may involve more than one franchisee as a partner in setting-up one unit, he opines.

There could be, in some cases, a shift of current stores from traditional high streets to malls. The year 2005 will definitely be the one where retail will see a lot of action. The customer is a definite winner with options multiplying every day, and companies gearing up to keep up with the changes in retailing, sums up Mr. Tony White.

Emerging sectors in franchising

With franchising gaining footholds, many new sectors are set to emerge. Clothing, personal accessories, consumer goods, home improvement, automobiles, will see a lot of action in terms of new brands, more retail stores, visualises Mr. Ghai, expressing confidence that fashion brands in all categories are definitely poised for growth.

One sector which is not addressed directly, but is intimately connected to retailing, comprises the services sector, which is poised for a tremendous growth. The sector include architects, interior designers, people management, training agencies, space management, and housekeeping. The growth of these sectors will vary from country to country, depending on local economic conditions, maturity of the franchising sector in that country, and even those local peculiarities which crop up every time you enter a new market, says Mr. Duckett.

According to Mr. Sikri, “The sectors that will stand out are apparel, departmental store formats and organised food retailing (Hypermarkets & Supermarkets). New entrants are developing brands and are adding innovation and value to the tried and tested formats.”

Comparing the UK with India and the Middle East, Mr. Duckett perceives that franchising in retail fashion, and even food service, is relatively low-key in the UK, largely due to the fact that the sectors are dominated by large company-owned chains which are much better-equipped to cope with the difficulties presented by institutional landlords and long-established real estate protocols. The Middle East has had, and India appears to be ready for, a retail boom fuelled by development of shopping centres needing to bring in brands from overseas to be run by master franchisees or developers.

Mr Passi is of the view that food and beverages, retailing, beauty services sector is all set to reach new heights as can be seen from the developments in these sectors. Similarly, says Mr Rajeev Dayal, “With every indication pointing to the opening of FDI in the retail industry, it is expected that the F&B industry would be one of the biggest beneficiaries both for companies coming to India directly as well as through the franchise route. Apart from that apparel led formats could also see an upswing in business.”

Going further, Mr Dixit says, “Branded retail stores, branded entertainment centres viz. movie theatres and cineplexes, branded restaurants, branded health care and diagnostic centres, branded gyms will be the sectors to watch out for.”

The basic reasons for these sectors to do well are the increased customer awareness, the culture of working parents (both father and mother) leading to increased “eating-out” and shopping habits, increased bilateral trade with western countries, increased interest of global investors to invest in the Indian economy, clear-cut intent of the government to attract FDI in India in various industries, all time high reserves of foreign exchange and weak dollar and liberal foreign exchange out-flow policies of RBI.

Mr. Tony White observes retail franchising as the major growth sector in Indian franchising. “In particular I see enormous growth in the food and beverage sector as well as retail franchise models that target the growing middle class consumer who has disposable income to spend on goods such as food, fashion apparel, FMCG goods, electronics, etc,” he states.

Challenges faced by the industry

According to a report prepared by McKinsey and Company and the Confederation of Indian Industry (CII), global retail giants such as Tesco, Kingfisher, Carrefour and Ahold are waiting in the wings to enter the retail arena. The Indian market holds the potential of becoming a $300 billion per year market by 2010, provided the sector is opened up, says the study. Though the numbers are alluring, there’s a caveat here. There are still many challenges faced by the retailers and franchisors. Only a minuscule proportion of this market is organised.

Despite the huge size of the industry, only 8 per cent of the country’s population is engaged in retailing compared to 20 per cent in the US. The per capita retailing space is about 2 sq.ft. compared to 16 sq.ft. in the US.

The Indian retail market is not easy to conquer. The competition from the unorganised sector is formidable. As in any other industry, unorganised retailers enjoy higher margins due to lower operational costs. For organised retailers, retail space rentals constitute a major proportion of the total costs. The specific requirements of the Indian market, different consumer, complex logistics, un-organised support channels, high capital outlays compared to other developing economies, are some of the challenges that plague the industry today, according to Mr Passi.

Apart from this there are expenses from offline offerings like manpower costs, air-conditioning, parking space etc. On the other hand, a small grocery store runs on a limited area with family labour. Consequently, the margins for organised retailers are abysmally low as compared to that for unorganised retailers.

The perception of customers that the new style retail stores are expensive poses a significant challenge for the retailers. Many customers do not enter these stores, as they are not sure whether they will get a fair deal. Retailers need to correct this perception by assuring the customers that they will get value for money. Some of the leading chains have succeeded to some extent in convincing consumers that their quality products come at equal, if not lower, prices.

Lack of adequate infrastructure is another factor inhibiting the growth of organised retail. Prime retail space is prohibitively expensive, transportation infrastructure is not geared up for speedy and reliable deliveries and penetration of information technology tools is abysmally low. Due to these constraints, organised retailers are unable to reap the benefits of efficiencies in the supply chain.

India is still to open its retail sector to FDI, though this has not stopped many international brands and companies making forays into the market through joint ventures and the franchise route.

Barriers to international franchisors

“The major barrier for international franchisors today”, perceives Mr. Ghai, “is restrictions on FDI in retailing, which, he adds, is set to change this year.”

“Apart from FDI ownership issues, the biggest challenge”, says Mr. Tony White, “is the need for international franchisors to drastically reduce their pricing to fit the Indian market.” India is a very price-sensitive market, and yet, it is a potential volume market that few other markets can rival. So, changing that mindset of lowering price and going after volume is always a challenge with international franchise chains.

Mr. Dixit also feels regulatory mechanisms are not in place for enabling smooth set-up and operations of MNC brands in India. RBI permission is required for entry into retail space and for remitting one-time franchise rights fee payments and on-going royalties to international partners. “Bureaucracy hurdles at various stages for statutory compliance and obtaining various licences and permits is also a matter of concern,” he laments.

“Real estate norms, lack of quality mall developments, multiple permission to set up a retail format, lack of experienced retail professionals are some of the barriers that are acting a determent to retailer/franchisors from entering the Indian market”, feels Mr Rajeev Dayal.

Explaining the reasons for the UK franchisors’ cautionary approach, Mr. Duckett says, “most of our clients are nervous about India simply because franchising is relatively new there, and there is consequently a lack of franchising infrastructure. Much as we all complain about lawyers and other professionals there needs to be a clear franchising ‘establishment’ with experienced consultants, lawyers, accountants, bankers, and, of course, established franchisors, forming a recognised and effective body to guide the development of an ethical franchising sector.”

But, these barriers have not deterred the players in the organised retail industry. They are banking on the growth fuelled by the consumer pull. To woo the customers to the store, retailers are providing a wide product range, quality and value for money, apart from creating a memorable shopping experience. Over 40 per cent of India’s high-income urban population is concentrated in the cities of Mumbai, Delhi, Calcutta, Chennai, and Bangalore. The organised retail markets in these cities are far from saturated, therefore, most of the retail chains are focusing primarily on these markets. Says Mr. Ghai, “with India blooming as a retail market, we will see several international brands making their foray into the Indian market this year.

Suggestions to overcome these barriers

Attributing the nervousness of foreign franchisors in coming to India partly due to ignorance, Mr Duckett suggests that it would greatly benefit the Indian franchising sector if overseas franchisors could have some guidelines, explaining how best to approach the Indian market, what the benefits are, and of course the pitfalls, with notes as to how they could be overcome. “Until all the parties understand the basic principles, franchisees will be prey to unscrupulous, or at best ignorant, franchisors who will separate them from their money but provide little, if any, service or support,” he warns.

What both Indian franchisees and the franchisor, have to be sure of, is that the system will adapt to the host country and that the required level of support will be available. Rushing headlong into franchise arrangements before a clear set of ethical practices and procedures is in place will result in both franchisors and their franchisees failing, and that will harm the sector irrevocably.

Advises Mr. Tony White, “Focus on developing home grown franchise success stories, and when facilities and the market matures, international franchise brands will beat a path to your door rather than having to chase after them.”

Annotation

Retailing, undoubtedly, has emerged as one of the most dynamic and fast-paced industries globally with several players entering the Indian market. The future is promising as the industry is getting more organised and offering quality products at competitive prices. The organised sector is also set to jump from 2 per cent to 6 per cent by 2010. The market format is undergoing substantial changes, making way for mall culture across the country, thereby offering the customer a combined range of products, services and entertainment under one roof.

Though initially the cost of retailing space in malls is likely to be high, but gradually due to over supply the costs will see affordable range for the retailers, with some mall owners even shifting to revenue sharing models. The end result will be customer-friendly malls, both in price and shopping experience. Retailers, who understand their customers and know how to attract and retain them, will be able to leverage these opportunities and emerge as winners

On the other hand, government policies are becoming more favorable for the international players with FDI in retailing almost certain to become a reality, and foreign equity set to increase in Indian companies.

Cautionary advice: Before we conclude this article, we would like to share with you some of Mr Duckett’s valid points on the misapplication of franchising practices.

“One of the trends that I hope will become apparent is that both parties (the franchisor and the franchisee) take a prudent and pragmatic view on upfront fees which should be sufficient to cover the franchisor’s costs of recruiting and training the country franchisee, and to fairly reflect the value of the brand and system, but not be so high as to load the dice against the local operator from the beginning.”

“For too long there has been a “get as much as possible upfront; any ongoing fees are a bonus” attitude amongst some international franchisors whose motivation was short-term gain rather than true development of an international brand. Those who have succeeded long-term in several markets have learnt that this is not the right attitude.

“As one of the potentially biggest markets in the world for franchising, but also one of the least developed, it would be easy to get carried away with the perception that lots of people can make lots of money very quickly. But India needs to look back 20 years to see where franchising was in the UK then, and learn the lessons which will show that steady development of the sector will bring long-term stability.

“The Indian franchise community has it in its own hands to decide whether it becomes a global exemplar of good franchising practice, or a morass of get-rich-quick merchants and swindlers,”.

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