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Jan, 01 2008

Services retail franchising : Opportunities & challenges

Services retailing is on its way to becoming the next boom industry in India. The margins and profitability is high in services retailing and there are quick turnaround times in terms of breakevens and returns on investments. Since offering in services re

Services retailing refers to the activity of selling services to the final consumer of the services. Services include all economic activities whose output is not a physical product or construction, is generally consumed at the time it is produced, and provides value in forms (such as travel agency, financial advice, haircut, amusement, comfort or health) that are essentially intangible concerns of its first purchaser. Intangibility is a key determinant of whether an offering is a service or not.

However, services retailing sector has been getting mixed up with customer services sector. So, it is important to understand the distinction between services and customer service. Customer service is the service provided in support of a company`s core products. Typically there is no charge for a customer service and it is essential to building customer relationships. It should not be confused with the services provided for sale of products by a company.

Key services in retailing sectors

The sectors that are predominant in retail industry can be broadly classified as:

• Health & fitness

• Beauty

• Eating out

• Education & training

• Finance & insurance

• Telecom

• Hospitality

Drivers for services retailing

India is one of the fastest-growing economies and the place to be in. With an ability to spend more than $ 30,000 a year (PPP) on conspicuous consumption, by just about 2.8 per cent (3 crore people) of total population, as a market India is just next to US, Japan and China.

Gradually progressing, retail has become most predominant and fastest growing sectors in Indian economy. Organised retail is witnessing a growth trend of 20 to 25 per cent every year. There has been hectic activities in terms of expansion by international players eying India for both product and services sector.

Retailing in India is gradually inching its way toward becoming the next boom industry. The whole concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retail has entered India as seen in sprawling shopping centres, multi-storied malls and huge complexes offer shopping, entertainment and food all under one roof. The Indian retailing sector is at an inflexion point where the growth of organized retailing and growth in the consumption by the Indian population is going to take a higher growth trajectory.

The Indian population is witnessing a significant change in its demographics and emerging opportunities in the services sector are going to be the key growth drivers of the organized retail sector in India. Service retailing is expected to follow the growth pattern of organized retail boom in India. It is and will be driven further by the following factors:

Economic growth: This has meant greater disposable incomes for the booming Indian middle class, which currently comprises 22 per cent of the total population. This figure is expected to increase to 32 per cent by 2010. Disposable incomes are expected to rise at an average of 8.5 per cent per annum till 2015. This will drive consumption and retail growth in the country.

Shifting Demographics: More than 50 per cent of the population is less than 25 years of age and strong growth is expected to continue in this age bracket. A large young working population with median age of 24 years, increasing nuclear families in urban areas, along with increasing working women population will drive retail growth with demand for lifestyle products and services.

Urbanization: The Indian urban population is projected to increase from 28 per cent to 40 per cent of the total population by 2020 and incomes are simultaneously expected to grow in these segments leading to greater awareness and consumption of lifestyle products and services.

Credit availability: Retail loans have more than doubled in the last three years. This will increase consumption of products and services which were otherwise not-affordable, therefore leading to a shift in lifestyle patterns.

Shift in consumerism: The lifestyle and profile of Indian consumers is witnessing change rapidly. Consumer spending is changing from basic to discretionary categories. An economy driven by private consumption with an increasing urban share will witness increase in share of spending on lifestyle products and services such as mobile phones, home improvement, travelling, eating out, etc. Spendings on health and beauty will be up on items such as cosmetics, medicines, health services, wellness centres etc.

Business characteristics, opportunities

Here are some of the business characteristics and opportunities in the field.

Relative financial attractiveness: As compared to any retail business, margins and profitability is high in services retailing. There are quick turnaround times in terms of breakevens and returns on investments. Given the nature of business, inventory holdings are negligible so there is no pressure of stock ins and stock outs. Since the nature of business is such, in most of the services retailing business (except for gymnasiums) space required is less as compared to product retail (supermarket/hypermarket). Thus it favorably impacts the business financials of the retailer since rentals are considered as high fixed costs for any retail business.

Relative low complexity: In product retail, sourcing of products and vendor management has been given significant importance as there are lots of complexities involved. But in services retail such complexities are minimal and the business thrives on Below the Line activities.

Increasing international exposure: More and more Indian consumers are traveling abroad and getting increased international exposure through media and internet. Thereby, Indian consumer is witnessing an evident gap between Indian and International service offerings. There is a potential to bridge this need gap by offering state of the art services.

Untapped latent consumer needs: Despite increasing international exposure, a large Indian population is unaware of their need of such services. Thus, this presents a big opportunity to expand the market by educating the consumer and creating awareness for their untapped needs for retailed services.

Low Penetration of organized services retailing: This is especially more so in Tier II and Tier III cities in India, implying a tremendous growth opportunity in reaching out to more and more consumers.

Fast changing consumer habits and increasing disposable incomes: This serves both an opportunity for introducing newer offerings as well as a driver for existing sectors.

Challenges

Some of the challenges faced in this sector are as follows:

Real estate prices: Real estate rates are on its all time high in India and are expected to increase further. This further hits the profitability of the retail business, either service or product. For any retailer, be it product or service, location is critical. Unseen is Unsold is relevant to service industry also especially for new entrants. The pressure for excellent/strategic location in services retailing relaxes once the brand becomes well known and is identified more as a destination brand.

Availability of expert and skilled manpower: Services retailing dwells on expertise. It needs skilled manpower for delivering of high standards of services. The industry is facing a severe shortage of talented professionals, especially at the middle-management level. Areas gradually becoming critical are technology, supply chain, business development, marketing, product development and research. High number of specialized institutes and diploma courses are mushrooming up across the country. This will bridge the gap in availability of talented professionals at the middle and lower levels. However, talented professionals will put increased pressure on wage costs. Therefore, operating margins, especially for mid-sized companies will shrink.

Quality of delivery and standardization: Since offering in services retailing is intangible, there is a lot of focus on quality of delivery and standardization of such offering across all retail chains. This comes across as a key challenge to services retailers. There are standard operating procedures and mystery buys concept that are developed at store levels. There is a lot of investment made in training staff for such services. For example in beauty industry lot of investment in terms of money and time is required in training staff for example Kaya Skin Clinic and VLCC. Once trained, most of the service companies find it a challenge to retain staff for a long time. They adhere to various options of retaining employees like retention bonus payable after an employee completes a certain time period with the company etc.

Customer Retention: Since customer wants to experiment new things, a continual effort goes in retaining a customer, as 60 per cent revenues come from repeat business.

Role of franchising in services retailing

Though several forms of retail ownership exists- like Franchising, Independent Retailing (build/ buy/ inherit), Dealership, Network Marketing etc.- in terms of services retailing franchising has an important role to play because of the nature of the final output – which is intangible.

The key advantages in favor of franchising over other options in services retailing is:

Offer global services locally: It helps bring best practices and services across the globe (and India) to the consumer – which would otherwise take significant time and resources if developed independently by each services retailer. In most cases, these services can be customized to the local tastes and preferences giving the consumer the best of both worlds.

Standardization: The biggest challenge in services retailing is that of quality and standardization - a high degree of which can be achieved through franchising.

Geographical coverage: Indian market is very diverse in tastes and preferences across regions. Regional/city wise know-how is critical to a services retailing. The size, spread coupled with local variance of consumer preferences in India implies that expansion through appointment of local franchisees is a more attractive way to expand, since franchisee would help customizing the offering based on the preferred trends of each region/state/city.

High commitment/ownership of Franchisee: Franchisee investments in retail outlet make him more committed to the business operations. This translates into better customer service builds on brand equity and helps in quicker turnarounds in terms of returns.

Quicker roll-out: Franchising is an excellent way to build scale of operation relatively quickly without having to risk large investments.

Regulatory compliance: Till Indian retail does not open its door to FDI, franchising gives global retailers an entry route to Indian market.

Summary

In summary, services retailing has arrived in India and over the next few years, this sector is poised to witness tremendous growth. Franchising will play key role in the spread of services retailing because of the lower investment and risk, quicker roll-out and standardization ease relative to other options.

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