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Apr, 01 2007

FRANCHISING IN RETAILING

FRANCHISING, today, is the buzzword with plenty of options available in the market in the form of numerous formats. Most of the retailers are seeking the franchise model in order to reduce the risks and also expand nationally and globally.

FRANCHISING, today, is the buzzword with plenty of options available in the market in the form of numerous formats. Most of the retailers are seeking the franchise model in order to reduce the risks and also expand nationally and globally. Besides a number of promising franchise sectors emerging in franchising like education, healthcare, and service industry, retail is fast catching up and is adopting the franchise route for expansion. Retail (apparel/footwear) was one of the few sectors to start franchising in India. Raymond in apparel and Bata in footwear segment were the first few brands to kick-start franchising in India. Gradually, franchising moved towards variety of other sectors like Food & Beverages and beauty saloons. Today, sectors where retail franchising is growing in India includes apparel, food, consumer durables, jewellery, books, and home décor.

Indian franchise system can be divided into retail and non-retail franchising. Retail franchising differs from non-retail franchising in terms of the importance given to real estate. Non-retail franchising is dominated by 'Pure franchise' and 'Management contract'format whereas, in retail franchising various types of hybrid formats are found.

With the entry of speciality retailers in the Indian market, franchising is becoming the appropriate method for most of the retailers for expansion.

Franchise models existing in retailing

Retail franchising is existent in India for quite sometime now, and today, its expansion can be seen in full swing. Various formats are available depending upon the requirements of a particular sector and location. Basically, we have three franchise formats available for retail franchising i.e, pure franchise format, management contract and hybrid.

Pure franchise format: In the pure franchise format, the franchisee contributes in terms of store, stocks, premises, interiors, and equipment and also manages the store on a day-to-day basis. The returns for the franchisee in this format comes from the margin on sales that he is able to achieve from his store. Sectors like home furnishing, telecom, education and professional services like insurance, consultancy and courier have typically followed the pure franchise models and have seen a huge growth. The primary objective of adopting pure format for these sectors is to make franchisee involvement as the main objective.

Management contract format: In the management contract format, the franchisee makes substantial contribution in the form of interiors, equipment and premises, while the stocks and management is handled by the franchisor. The franchisee gets some assured returns plus some variable returns. Beauty services, health care and skin care and plumbing repair services typically follow the management contract format because here the franchisee is only expected to market and manage the business while the trained staff carries out the actual business.

Hybrid format: In the Hybrid format, the franchisee makes investment in terms of premises, interiors and equipment, while stocks and management is done by the franchisor. In this format, the franchisor makes all the upfront investment, provides stocks on consignment basis and also offers minimum guarantee to the franchisee. In this format, no sacrosanct rules are followed as the structure depends on the negotiating power of the franchisor and the franchisee.

Is Hybrid format suitable for retail franchising?

Variety of hybrid formats is in practice in retail franchising. Soaring real estate prices and market competition have actually made the franchise model more difficult. The hybrid format usually gives access to the franchisor to take his brand to the best locations in metro cities. With the Minimum Guarantees (MG) and other benefits given to the franchisees, the real sense of franchising has actually fallen from the roost. When MG is provided in the franchise format, it actually makes the franchisee involvement lesser.

We take the opinion of the industry experts to get the real picture of the kind of franchising model being followed in retail.

In the franchise format of ITC's retail division, the franchisee picks up the stock based on his selection, which he thinks is appropriate for the customer and apart from the stock, assistance is provided in doing up the outlet and the fixtures. According to Chitranjan Dar, CEO, Wills Lifestyle, "Our company also offers Minimum Guarantee (MG) in a few cases e.g. in a mall store. MG assures certain fixed returns to the franchisee."

In Adidas a pure franchise format is followed where no MG is given.

Raymond follows a mix of company-owned stores as well as franchised stores. How well the franchised stores can contribute for the expansion of a company cannot be proved well by other than Raymond for which franchised stores form a huge chunk of 85 per cent of stores being franchised. Raymond follows a pure franchise format where there is no management contract or minimum guarantee. According to Anirudh Deshmukh, President Retail, Raymond India, "It's an outright buy and sell."

At Provogue, the entire business process is transferred to the franchisee and he is responsible for the management of the inventories. So the franchisee is responsible for running the entire showroom. In certain cases Provogue also gives MG as and when required. But the company doesn't encourage MG as it is as good as rentals. Opines Akhil Chaturvedi, Chairman, Provogue, "According to me the pure franchise model works the best as the franchisee should be the one who partakes the risk."

Components of franchising

There are three basic components for the franchising business model i.e., Entrepreneurship, resources or local know-how and real estate. When we asked the top retailers to prioritise these three components in the order of preference this is what we found.

According to Andreas Gellner, MD, Adidas, "It's difficult to be successful if you don't have any of them but at times we have franchisees who come up with either good financial backing but with no retail knowledge."

As per giving the due importance to the spirit of entrepreneurship in franchising in retail, Dar says, "Our aim is to appoint those people as our franchise partners who are already in the business and are passionate about it. So I would give prominence to an entrepreneur than to a real estate owner."

According to Chaturvedi, "We can't compromise even on one thing because if any of these is not there the whole business will collapse."

Real estate getting prominence over entrepreneurial skills

Rentals have started to play a very prominent role in retail sector and so it plays a significant role in the franchised stores as well. Real estate market in India is very disproportionate which is further making it difficult for start-up entrepreneurs. The unrealistic prices are acting as a roadblock to fulfil the dream of becoming an entrepreneur.

If given a choice between good real estate space and an entrepreneurial spirit, Gellner says, "I would definitely go in for an outstanding location and try to compensate for the lack of knowledge with internal training and support that we provide."

However, he cautions that this happens only in a few cases and also opines that it only adds for the benefit of the franchisee whose time and effort is saved in finding the right location.

Talking about the importance given to real estate in retail Dar says, "We help franchisees in procuring real estate wherever we have a buying leverage for that. We are also aware of the kind of real estate cost involved in it and it gives us an idea as to what is to be given as MG."

According to Anirudh Deshmukh, President Retail, Raymond India, "If a franchisee owns the property it solves half the problem otherwise he would be concentrating on two things i.e. renting a property and running the store."

To this Chaturvedi says, "We will give a franchise only to an entrepreneur who understands the business and who is wiling to go along in the business with us."

Further he says, "When a person buys a property he has different calculations and he will be more interested in the property's value appreciation. If the person doesn't have the requisite skills, which are required for the business he should not get into the franchise business. The person who is willing to partake the risk should become a partner otherwise it will become a purely rental format."

Varied formats for smaller and metro citiess

The prominence given to entrepreneurship or real estate differs from place to place, as franchisors might give importance to real estate owners, but for smaller towns entrepreneurial spirit and the local know-how actually helps him in getting the franchise.

As for giving out the franchise to only real estate owners, Deshmukh says, "We are aggressively not following a franchise model in metro cities wherein real estate costs are high and it is tier III and IV cities where we follow a franchise model, and where rentals are not an issue."

Chaturvedi also says, "Franchising is essentially for moving towards tier III & IV towns."

Given the thought by most of the retailers that they might give an edge to a real estate owner in a Metro city where real estate prices are soaring higher, the future for franchising in retailing seems bright in smaller towns as the local know-how truly makes a difference for the success of the store. Most companies are also following franchising aggressively in smaller towns where their retail networks are not well established.

To sum up

Though franchising is being defamed by retail as entrepreneurial skills are less preferred over location and to lead their way upwards, most of the franchisors have started looking for those franchisees who have the best retail space as this might have added to the number of franchised stores in the kitty of the company. Today a franchisee in retail world is not considered anymore than a real estate owner who has the right space in an upmarket. The kind of format being followed in retail is nothing more than a dealership format. But if retail has to truly benefit from franchising then it must follow the franchise model in its true sense. Franchising is surely the right way for every company to mark its presence everywhere and a franchisee further helps in establishing a brand further. To take complete advantage from the franchisee his skills must be given prominence than to the space he owns.

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