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Aug, 01 2008

Fuelling biz growth through franchising

Franchising in India has come a long way. From merely being an expansion tool, it now plays a major role in fuelling global growth. This change of role has catapulted the small business`s growth scenario in India.

The contribution of franchising towards economic development in various countries across the world is well-known. In India, franchising was being used as a business format since the 90s, but it was between 2004 and 2007 that the franchised business systems grew in the country by almost 100 per cent. Due to the increased level of entrepreneurship spirit among Indians, a lot of companies started getting into business with a special focus on franchising.

But a lot of work still remains to be done. Industry status to franchising, a regulatory body dealing with franchise issues and proper incentives for this business can further lead to better attainment of businesses in India.

Minimising risks with franchising

The increased success in a franchise business than a start-up gives extra confidence to franchisees to get into this business. As a lot of opportunities are created by the franchisor to further empower the entrepreneurial abilities of a nation, it contributes a lot in the development of a nation.

Product consistency in all the franchised stores, regular checks at franchise stores to ensure quality and proper agreements helps in giving best services to consumers, thereby, attracting many towards this format of business. For example, a food franchised outlet would serve the same level of quality and consistency in all its outlets. The practice of replicating a business model in all the stores is considered as creating a positive outlook towards franchising.

Foreign trade is also increasing as a result of increased relations and government`s openness to foreign countries. A lot of companies are willing to enter India due to the increased level of development in the Indian market. International companies set up trade relation activities to increase the level of foreign trade with other countries. Still, the government`s assistance is required in India so that companies enjoy full support even in a foreign land while expanding.

Govt support across globe

In most of the developed nations, the governments fully support franchising as they believe that it`s a tool to boost the economic growth and development of a nation. In every nation, the department of trade and commerce is generally responsible for taking care of franchise relations between countries. Many nations fully recognise this sector for its potential and provide training and support to encourage people to get aware of this format of business.

The Malaysian Franchise Development Cell has a special office in the Prime Minister`s house to deal with companies, who want to expand outside. This not only leads to a better relationship with neighbouring countries but also gives foreign exchange to the home country.

The Philippines President was recently quoted while appreciating franchising as an “economy booster.” The Department of Trade and Industry also fully supports franchising.

Countries like Australia host shows with the help of Trade Commissions in foreign nations to showcase different opportunities that can be exported. 27 per cent of the foreign trade, which Australia acquires, is through franchising. In US and Australia, the trade commissions always have a franchise head to lead the delegation to other nation. The world over, governments allocate special funds for various franchise development programmes.

Sustaining SMEs through franchising

SMEs play a major role in the social economic growth of a nation. The development of SMEs is the development of a nation. Their importance can be assessed by the fact that they help in employment generation, contribute to more equitable distribution of income and contribute to local and regional development and promoting a culture of entrepreneurship. However, there are many entry barriers and blocks faced by SMEs. One such model that can break these is franchising. Franchising can be a major development tool for SMEs, leading to the growth of a nation. Private businesses are mostly held by SMEs. Growth in small businesses leads to growth of the state revenue further leading to retail growth in the country.

SMEs are also major employment generators in any country, contributing a culture of entrepreneurship. Due to their low-entry barriers, they could well contribute to local and regional development. But SMEs generally lack managerial and technical capacities leading to high failure rate, though franchising has a significantly higher rate of success than independently-run SMEs. Franchising can well be regarded an SME development tool. As much as 85 per cent of franchises in India have been successful, while 90 per cent of individual businesses have failed.

Internationally, governments have recognised franchising as a successful way of growing SMEs. India being an emerging market can very well undertake this tool for business development. In Australia, the rate of success is 2.5 times higher for franchised SMEs. In South Africa, the rate of success is 80 per cent for franchisees, compared to 15 per cent for independent SMEs. Globally, growth of SMEs is considered to be a national agenda, which can very well be served through franchising.

Small business administration is a body which a state government funds to empower small businesses. Small businesses are the biggest contributor to state revenue.

Major employment contributor

Franchising also generates jobs for many people. Directly or indirectly, franchising employs a large number of people. Globally, franchising acts as a major job provider. Countries like Arizona, Florida, Mississippi, New Mexico, Oklahoma and Tennessee have witnessed the contribution of franchising in creating job opportunities for people leading to increased levels of investment.

From expansion to global growth

India has seen a lot of economic growth in the past several years leading to the emergence of franchising as a business model to expand. Earlier, it was considered only a way of business for developed nations. The expansion of franchising is not only a way of creating self-empowerment but also of making nation a global power. The entrepreneurial capability of each individual turns an entrepreneurial nation into a global power and franchising has a major role to play in this regard.

Till now, only international brands have made a foray into India. Indian brands are still to make a major foray in a foreign country. In India, there is no specific law to deal with franchising nor is franchising recognised as an industry. But with the increase in retail, Indian companies have also started going abroad. To steep up economic ties with developed nations, franchising can act as a major tool. Besides creating a lot many opportunities, it also leads to transfer of technology and know-how. Recently, franchising experienced rapid development in the country as a new mode of expanding enterprise scale. Franchising also helps in the development of small and medium-sized enterprises. But because of no specific law ruling franchising in India, it has still been kept under wraps. Franchising has still not attained the industry status.

The franchise industry is relatively young in India. It started growing only in the early 1990s. Now, it is growing exponentially at the rate of 30-35 per cent annually and has more than 1,500 franchisors at present. The franchising sector spans through various sectors, comprising health, beauty, speciality services, hotels, food and beverages. The franchise model today is not restricted to fast food chains or beauty, it has moved beyond the conventional types. Over the past 10 years, the time when franchising had actually made a mark, has seen a real upsurge in the past five years of its existence. This progress is further expected to boost the growth of SMEs.

The Indian government should also take notice of the foreign trade, which Indian companies can provide due to increased level of participation in other countries. The government needs to provide special subsidies to companies, which want to set up business outside. It is important that lawmakers understand the franchise sector and the impact that certain laws can have on this important segment of our economy. Franchising can have a positive development effect in India, given its long-term potential is assessed by the Government of India. Franchise associations can play a major role in this regard.

Examples of home-grown franchisors are aplenty. Even international franchisors have given a major boost to Indian franchising. Through franchising, government allows international franchisors to invest in the growing economy in a risk-free manner. India has already been recognised high on the international expansion radar of many international companies. However, a lot is required on part of Indian entrepreneurs and the government`s to help international companies expand easily in the country.

Providing incentives to develop franchising in India could be a viable and worthwhile policy the government could undertake.

Recession a boon

Though rising costs should actually lead to less buying from consumers, but strangely, inflation is helping organised retailers, as consumers act bullish to buy more products in lesser span of time, fearing prices might become higher in the future. During such moments, when a company finds it difficult to keep pace with its expansion plans with rising prices, it makes sense to share those costs by appointing franchisees.

Globally, it has been stated that franchising boosts well even in the time of recession. In the time of inflation, people are reluctant to start a business on their own while franchisors, on their part, can`t do any major expansion on their own. This is the best time when franchising can see a major leap. This also acts as a time to move towards stable economies leading to global foray of companies.

During the Asian crisis of 1997 Philippines, the failure rate for franchisees was 5 per cent as compared to 75 per cent for independent SMEs. Franchising not only acts as an opportunity but as a strategy for SMEs to grow manifolds.

The time of recession also sees a lot of moves from big corporations, who would look out for a better opportunity.

Franchising can provide the right channel to harness their entrepreneurial capability. Given one`s entrepreneurial aptitude, one can benefit from the brand name and support of the franchisor.

Tapping unlocked potential

Many countries and economies have widely acknowledged the impact of franchising towards their GDP growth, retail sales and job contribution, increase in technical know-how and more. By employing franchising as a model, many companies have grown into large corporations. Franchise India estimates show that there are approximately 1,150 established franchisers, 75,000 franchisees with an annual turnover of around Rs 12,000 crore. The business employs around 3.50 lakh people.

Franchising in any country can reach its peak only when the government recognises its potential and plays a contributory role in establishing a system between the government and the franchising industry. Though the implementation of such a system may not be an easy task, the franchising industry is ready to offer its services in directions that will assist in recognising franchising in the country, thereby, giving the industry credence and overcoming problems it may be facing.

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