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Jan, 01 2007

Riding High On Foreign Franchising Wave

INDIA houses over a billion people and the urban consumer segment, with enhanced disposable income, is contributing significantly to the country's booming economy. Foreign franchisors are now highly attuned to the opportunities in India and have become ad

INDIA houses over a billion people and the urban consumer segment, with enhanced disposable income, is contributing significantly to the country's booming economy. Foreign franchisors are now highly attuned to the opportunities in India and have become adept at isolating and acting upon favorable phases in the business environment.

The results are for all to see. India now has an enviable ranking of second place among the world's most profitable retail destinations (the first being North America). The overall value orders of Rs. 10,000 crores and the sector is growing at the rate of 25 to 30 per cent annually. We are witnessing a universal franchising boom in virtually all sectors, including lifestyle, food, entertainment, business services, communication, education, retail, travel and healthcare.

Though the government's current foreign investment regulations are far from being the most supportive (foreign investments in the retail sector are not allowed) foreign franchisors are able to structure their business and reap immense profits in India by virtue of certain provisions:

  • Foreign franchisors can charge royalties for the use of their brand names and trademarks up to 1 per cent for domestic sales and 2 per cent on exports. In the process, they are not bound to transfer technology.
  • Indian franchisees pay their foreign counterparts lump sum royalty payments for use of foreign technology, including manuals and systems. In this, foreign franchisors can receive lump sum payments of up to US$ 2 million and royalties of 5 per cent on domestic sales and 8 per cent on exports.
  • If a foreign company opts for a consulting agreement with an Indian franchisee, it can earn up to US$ 1 million (or more with the permission of the government) per project.

Foreign franchisors are now entering the Indian arena with enthusiasm, secure in the knowledge that their interests are protected and their success assured. Though officially still a 'developing' country, India is a signatory to the international conventions on intellectual property rights. This offers a high level of security to foreign franchisors that previously balked at the possibility of compromising their trademarks, brand names and copyrights and designs. It is now evident that foreign brands such as McDonalds can customize its international franchising model to suit the Indian mentality. Many other brands have internalized and capitalized on the fact that the Indian consumer, though fascinated by foreign brands, nevertheless retains a predilection for the traditional. The fact that globally established brands are at pains to adapt themselves to the Indian environment stands as a towering testimony to its standing on the international franchise market.

However, this does not mean that all is well as it should be in the Indian franchising world. The sector shares many drawbacks faced by the retail sector. There is a marked deficit in knowledge and it is subject to archaic legislation. Yet another worrisome aspect is the unwillingness of local franchisors to share best practices in order to boost the sector as a whole. In the local franchising context, we also see a spillover of an outdated attitude inherent in Indian retail the inability to discard obsolete formulas.

All this said, franchising in India both in the local and international context - is definitely rising on a growth wave. Judging by the current trends, it is evident that the sector is all set to take categories like food services, niche mall retailing, convenience stores/hypermarkets, education, entertainment, business services and travel to the next level.

The author is M D, Trammell Crow Meghraj Property Consultants. He can be contacted at anuj.puri@tcmindia.net

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