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THE term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. Franchising allows the franchisors to have greater excess to capital, expand rapidly, save operating
THE term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. Franchising allows the franchisors to have greater excess to capital, expand rapidly, save operating cost and capitalise on the abilities of independent entrepreneurs. Every year in USA and in European countries $1 trillion is spent on goods bought at franchised outlets, one out of every 12 business establishments is a franchised business, a new franchise unit opens every 8 minutes of a business day and over 60 per cent of retail trade is through franchised outlets.
There are various reasons for franchising the business as companies do not want to take much risk spreading their business globally on their own. Franchising is the right tool for this as the burden of capital is shifted to the new franchisee when a franchise unit is opened. A franchise can be opened after paying a fee to the franchisor. For the franchisor; it is the fastest and cheapest method to put his product to millions of people wherein otherwise he would have to invest huge capital, time and resources on a daily basis. For the franchisee; he gets a business system which is proven to be successful over a period of time across locations, gets a bigger share of profits rather than sitting on his rental income and of course social recognition.
Franchise systems are commonly classified into two types: product-name and business format. In product-name systems, the franchisee serves as an authorised distributor of a product and in business format franchising, the franchisor provides the franchisee with a trademark, guidance, and a specific format for running the business.
Franchising in India
After the liberalisation and globalisation of Indian economy in 1990s, around 6,000 franchise systems are in the business worldwide, and many more are being established every year. There are many factors responsible for the rapid growth of franchising in India such as huge consuming class, fast economic growth and large entrepreneurial pool.
Though the concept of franchising has been new in India but the Indian entrepreneurs and companies have woken up to explore the franchising route for some time now with the arrival of multinational companies in the country. Franchising in India contributes a very small percentage at present.
Most of the franchisors are relatively new and small, several large Indian corporates are also going the franchising way, newer and innovative concepts are being introduced and substantial interest from international franchisors as well as Indian business houses for master franchises is increasing. Franchising is now spread across the country, thereby providing opportunities to entrepreneurs everywhere.
There are instances aplenty of brands that have eschewed franchising as a means to growth. Such brands do not put up franchises for sale, or even engage in sub-franchising; although there are certain agreements that interested parties can seek. That's because the company manages its stores directly, or via subsidiaries, it also develops business relations with other corporations, companies or groups of persons and this body is then allowed to build up and manage stores in the prearranged area of business.
In India, the education sector actually pioneered the concept of franchising, with the initial outburst of the IT companies. Typically, in the education sector franchise model, the franchisee makes all the investments and handles all day-to-day operations of the business. The desired franchisee profile is someone from the education background so that the franchisee understands the system in a better way and can double up as the faculty also.
Explosion of coffee shops, the growing numbers of pubs and bars, the success of the South Indian cuisine restaurants, the crowds at the local food joints, beauty and slimming, healthcare and home furnishing prove the fact that the Indian consumer is willing to spend money. The increased acceptability of eating out even within conservative families is demonstrative of the changes in our socio-cultural behavioural patterns. Gradually, the Indian consumer is also becoming adventurous and is trying out a variety of cuisines. After a fair amount of success, a large number of brands have come into existence and adopted the franchise route for a faster market penetration.
Recently, we have seen growth in the Convenience store business but in spite of the positive signs, franchising is way too far for the sector. Today, the convenience store business is at the experimental stage, the Seven Dollar stores operating in India are representative of the early days of convenience discount formats. Although this model has proved to be highly successful franchise format across the world, in India what is needed is a business model that takes into account the nuances of the Indian market and be localised. In times to come the convenience store business would certainly become franchiseable and surely have something to look forward to.
The Indian health market is estimated to be around
Rs 8,000 crore annually and growing at a rate of 10 per cent per annum, with the entry of several private players in the healthcare business in the last decade, things seem to be improving, shifting from the age-old run clinics/hospitals to state-of-the-art health clinics/hospitals. Besides these players in the healthcare services sector, there are many other players who have come up in allied services like diagnostic centres and pharmacies. As the sector grows and matures, franchising is likely to play a greater role in ensuring geographic coverage for various service providers. However, franchisors need to take immense care in the selection of franchisee as service quality is critical in this sector.
Despite this, franchising in the catering services industry has never really taken off in India. Typically, internationally the F&B industry involves sub-segmenting within various categories so for someone who wants to take up a franchise, would have hundreds of options available while evaluating a franchise.
The growth has been restricted to metros and other big cities and have not taken a pan-India presence. The growth in the F&B industry in India till date has been through company owned and operated outlets, which involves a huge amount of capital investment. Companies like Barista Coffee Co. have preferred to retain control over the standardisation of their format, in the absence of assured logistical support and human resource skills.
Several companies have already started to experiment the franchise route to grow aggressively in the Indian market. Additionally, the interest from overseas F&B franchisors to enter the Indian market through the Master Franchise route is a positive sign for the F&B industry graph.
Location, no doubt plays an important role in the success or failure of the brand but the cost of acquiring the best real estate is sometimes even higher than the kind of revenues a brand can ever generate. All said and done, a location although can be prime but can never be superior to a brand. A location never makes a brand bigger; it is the other way round. It can make a brand visible but not bigger.
What the future holds
The acceptability of franchising in India has started growing rapidly. Over 600 franchisors spread across industries like education, retailing, professional services and healthcare and at present around 50,000 franchisees are engaged in this business. According to an estimate, over 6,000 crore investment is made by the franchisees while annual turnover is touching around Rs 10,000 crore. Many international franchisors are entering Indian market and franchising is proving successful in various fields.
With the liberalization and globalisation of Indian economy, the franchising industry has received a fillip. Since, then, sales from franchised business have grown at an average rate of 20-30 per cent compared to an economic growth rate of 7-8 per cent. But prospective franchisors need to take care to evaluate whether they should expand their business by franchising or by opening company owned outlets.