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Jan, 01 2008

Franchise business A comparison - India and international

Franchising is in demand in today`s economy. Though in India the concept of franchising was introduced almost a decade ago, its franchise industry is still in a nascent stage compared to that in the US and Australia. Here the focus is on various aspects o

Developing countries like India have realized that by adopting the franchise model of doing business, it is possible to create relationships between their own economy and other developed economies. They have understood that franchising helps them to promote sharing of technologies, trademarks, marketing, intellectual property and even architectural designs with foreign countries.

Franchising, as a business model, has been known in India for decades, though the country has made very little progress in this field in comparison to other nations like the US and France. International soft drink and hotel franchises arrived in India as early as the1960s, but in 1977 the government barred foreign brands from entering or investing in India.

Later, during the early 90s, the government realized that to compete with global economies it had to allow foreign companies to start their operations on Indian soil. As the markets expanded, foreign franchises started coming in. However, during the initial years, these companies faced many hiccups along the way.

However, industry experts feel that the franchise market is not developed as compared to other international markets and that that there is a wide scope for improvement. The Indian franchise market is still many years behind other developed markets like the US and Australia.

Surviving on foreign soil

There is no doubt that the franchise industry in India has a great future owing to the economic boom. Add to that the fact that India is home to 16 per cent of the global population, with urban Indian consumers having a considerable amount of disposable income. Many amongst these consumers have been to foreign lands and experienced the great services provided by foreign franchisers. Having been exposed to foreign franchises, they are now ready to extend their arms to foreign soils.

From a quiet supplier of low-value components to the domestic aftermarket, the industry has transformed itself into a global hub for sourcing a range of high-value customer products and services. Some of the Indian companies that have entered foreign lands through franchising are Café Coffee Day, Titan, Arvind Mills, Sagar Ratna, etc.

Mr Bannan, Chairman, Sagar Ratna Hotels Pvt Ltd, opines, “The future of the Indian franchise industry is very bright. The growth too has been commendable. Now, many leading brands try to venture out abroad to capture international markets and global recognition.”

Studies show that the franchise industry in India is one of the frontrunners for grabbing opportunities in global lands. However, the journey is not smooth. The industry accounts for only 0.4 per cent of the US franchise industry. It is up against challenges such as lack of good infrastructure, increasing input costs, etc, that impede its growth.

Mr Arun K. Khetan, CEO of Zee Interactive Learning Systems Ltd, feels: “The main problem faced by the franchisees abroad is the restriction in obtaining a work permit. Due to the restrictions, sending the right person for the right job becomes difficult. This indirectly affects the brand image.”

Mr Bannan adds: “The franchise operation abroad is tough due to various restrictions and rules. Corruption in government agencies is almost nil, unlike in India, wherein each and every license is being obtained by shelling out huge amounts of money to the department concerned.”

Way to go

Franchising is one of the world`s fastest growing and the most lucrative business. Statistics reveal that the franchise business will grow to about $ 1 trillion in the next 10 years.

According to the data available, franchising contributes 17 per cent of the world`s business turnover, which is more than twice of India`s Gross Domestic Product. If we compare the global franchise market with the Indian franchise industry, we will see that even though the GDP is growing at 6 to 7 per cent per annum, only 3 per cent of India`s business turnover is through franchising. Franchising in India is currently regarded as a form of marketing arrangement rather than an industry in itself.

Total franchise sales in India are estimated at $ 2 billion (Rs 80 billion), which is growing at a rate of 40 per cent per annum. When compared to the international franchise market, this figure is very less. If we look at the developed markets of France and the US, we can see that France alone is generating an income of more than $ 50 billion (Rs 200 billion), while America`s total sales from its franchise industry are more than $ 70 billion (Rs 280, billion). Studies show that a franchise business opens every 20 minutes in the world, whereas in India it takes 20 hours to two days to open a single franchise business.

One of the key differences between the Indian and the international franchise markets today is their respective financial institutions and systems. While the system in India is still in the process of modernizing, in countries like the US and Australia the financial institutions are already mature.

Explains Mr Khetan, “The franchise market is very mature and developed in countries like the US, Europe and Japan. In the US, it contributes almost $ 1.50 trillion. The number of products and services franchised are very high and the US has one of the most developed regulations and legal systems on franchising. In the US, if the concept is approved, you can avail approximately 95 per cent of the project cost finance through institutions or public funds.”

He adds that franchising in India is still in its nascent stage. However, the last three years have shown some bright signs. It is expanding at a very fast rate, with almost 1800 local brands; a few of them have got an entry into the overseas market as well.

Franchising creates a lot of employment opportunities. But as the franchise concept is quite new in India, the employment generation is also very less. The total manpower directly employed by franchise businesses is around 3 lakh. If one looks at the international scene, franchising provides direct employment to more than 12 billion people all over the world.

Mr Manpreet Gulri, Operations Head, Subway, points out: “Due to the maturity of the market overseas and presence of an appropriate legal structure, the expansion of franchising has generated huge employment, which in the US alone is about 14 per cent of all private sector employment. The scene in India is not that mature but the signs are very positive and franchising is expanding at a very fast rate. The awareness of the benefits attached to franchising has helped in its fast proliferation and is obviously creating a huge job pool across the country for almost all profiles of people.”

As franchising has been in existence in the US for quite some time now, an extensive body of franchising laws and regulations is in force. For instance, US franchisees rely on disclosure documents called the UFOCs (Uniform Franchise Offer Circulars) that were later renamed as the Prohibitions Concerning Franchising and Business Opportunity Ventures.

The Indian regulatory structure pertaining specifically to franchising is still in a stage of infancy. Though there are many laws for franchising, these laws are not much in practice. In India, personal friendships, family ties and even oral agreements are often used as a substitute for formal legal contracts.

Mr Bannan says: “The franchising laws in India are also stringent. However, they are not being followed. Due to widespread corruption, laws are normally ignored and not followed in letter and spirit.”

Bright future

Though with a population of a billion people, organized franchising has still not reached a state of maturity in India, experts feel that the wealth of the Indian middle class will make the country one of the largest consumer markets of the world.

Even statistics show that by the year 2010, 65 per cent of the Indian population will be in the age group of 10-49 years, which will make its franchise scenario more attractive.

The Indian market is opening up and as of now there is no saturation in the market, with the result that more and more foreign companies are investing in India. This is one of biggest advantages that India possesses over other international markets. Studies reveal that India has moved up to the No. 5 position in terms of attractiveness to global players, whereas other developed markets like those of the UK and Germany are losing ground.

Mr Gulri sums up the scenario: “The growth of the Indian franchise industry is rapid and Indian companies are realizing that the only way to grow quickly and make your product reachable and accessible to a large part of your target group is through franchising. As a result, the franchising industry has a very bright future in India.”

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