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Mar, 01 2008

Target India - International brands eyeing the country for franchising

The ground is ripe and the conditions congenial for the global brands to set a foothold in the booming Indian franchise market. The open economy, the 9 per cent GDP, the stable democracy, the emerging educated, brand conscious middleclass with deeper pock

After being successful in their own countries and various other developed countries a large number of international brands are keen to set their base in developing countries. These brands see India as a potential market. There are a lot of factors that have contributed to making India the most favoured destination for international brands. The rising retail opportunity with a huge potential in the untapped market and the growing Indian franchise industry are some of these factors.

Even though hundreds of international franchisors are already operating in India, there is scope for many more to step in. As a result, a sudden spurt in the number of international franchisors setting foot in India has been noticed.

As per industry sources, ten per cent of the current franchise operations in India are owned by international companies. With the growth rate of 35 per cent of franchising industry in India there is a massive potential for international franchisors to tap. At present, US firms rule the roost in international franchise systems operating in India followed by Europe, UK and Australia. Other international franchisors are also following suit. If the trend continues, the day is not far when international brands will become a household word even in the farthest corners of the country.

Box Consumer market in India

  • Huge population to serve
  • Brand consciousness
  • Massive emerging middleclass
  • Young target consumer
  • Price consciousness
  • Deeper pay pockets
  • English speaking populace
  • Growing retail environment
  • Growing publicity media
  • Familiarity with international brands

Box ends

Indians are very receptive in nature. New concepts and services are very well received in this market. When a company wants to test the waters, it gives first preference to India due to the large number of youth who openly welcome new concepts. Whether it is coffee, or a large format retail store, most of these concepts owe their inception to international brands. What can be a better deal than the brands themselves setting foot in India!

The changing lifestyle of the Indian consumer has opened doors for the international franchisor to enter the Indian shores. The country`s vast acceptance of new brands has spurred international franchising on.

The Indian economy never had it better whether it is the growing number of malls, retail sector riding on a boom or franchising benefiting its growth. It is a win-win situation. The Indian consumer can get the best of deals in India from the best of international brands and the brands can capitalise on the huge consumer population and the rising economic curve.

Emergence of the young middle-class with better purchasing power, the tech savvy educated entrepreneur and a huge section of the rural youth settling down in urban areas have all accelerated this growth. India, which has a growing middle-class of over one billion, is now positioned as a major force in the global economy and a fertile ground for investment in retail and business development.

Enter global franchisors

Conditions for the take off of the franchise model of business in India rapidly started falling into place in the late 90s. International franchisors had by now hard evidence of successful Indian franchise businesses. Home -grown franchisees were very few initially led by IT companies but all were doing well. Soon there was a turn around and the young urban entrepreneur was drawn to franchise business for the goods it delivered. Currently India is poised for an imminent explosion in the growth of franchisees across a wide range of product and service sectors. Healthcare, education and food, to name a few, have both domestic and international franchisors.

Today, the country has become an attractive retail destination and the number of franchise operated businesses is bound to grow exponentially since so far the penetration has been low, leaving a huge arena to be brought into the franchise fold. In markets like the United States, franchise businesses constitute almost half of all retail units. The franchising industry in India is expected to grow at an annual rate of 30 per cent, and the country`s current $330 billion (approx. Rs 13,200 billion ) retail sector is poised to grow even faster.

In 1995, Reebok started operations in India through its 100 per cent subsidiary. In 1993, Baskin Robbins came into existence with a joint venture between its parent company Allied Domecq Quick Service Restaurant and the Ghai group. It introduced franchised model in 1994, just a year after opening its first store in Mumbai.

In the 90s global companies started making in roads as competition was less in Quick Service Restaurants (QSR) and fast food segment. Those years saw major international entrants in India. Today the food market in India can boast of international standards, thanks to the entry of many international players.

Talking about the entry of International brand GAS in India, Zohair Officewalla, COO, GAS India says,“Indians, especially youth are travelling around the world for business and for pleasure more than ever before. They meet new people, new cultures and are drawing new aesthetical inspirations and they feel the need of bringing them in their everyday life. They want to create their own personal style reinterpreting the best international fashion, mixing it with their unique taste and their cultural background. This is why we believe that there is a big market for GAS in India.”

In the words of Gautam Sahni, Director, US Dollar Store, “Today`s India is seeing increasing disposable income leading to impulse buy for fulfilment of aspirational needs.”

Corporates like Ravi Jaipuria Group brought the Costa coffee brand through a franchisee tie-up. The Sachdev Group recently took the Master Franchise of Moschino, Jean Paul Gaultier and Alberta Ferretti for India. They have very recently tied-up with Lanvin (the oldest fashion house in the world) owned by a private investor group Harmonie, S.A.

Among Asian countries India already holds a much higher position in this regard than other countries.

Officewala observes, “I definitely see India as a place where a brand like GAS can sell and develop its business thanks to the creativity and the quality of our collections.”

Today, India is the only market where GAS has maximum number of new retail concept stores.

The potential market

In the words of Officewala, “This is a country with 1.3 billion people and one of the youngest populations in the world. In a few years the sub-continent will be home to hundreds of millions of young people under the age of 30. But most importantly, India`s economy is on the rise and booming. And GAS fully intends to make the most of that development.”

Talking about the Indian entry for Gloria Jeans, Ravi Saxena, Managing Director, Citymax India says, “India is one of the fastest growing economies in the world. The organised food retail sector in India is a whopping $655 million dollars and growing. Indian customers are not shying away from spending on quality and products which offer value for their money. All major countries are eyeing India for their products and services.”

Sahni thinks that reasons for the impulse buying are increasing disposable incomes and craze for imported merchandise. US dollar Store is a single price concept store having its a few thousand stores in USA.

Modes for entering India

Owing to diverse cultures in India, the nation can give a better deal to international franchisors. Franchising seems to be the right option for such a culture. An international company can either select a master franchisee for the whole nation or for a certain area. Many companies prefer signing a master franchisee who then takes care of further expansion in India. Companies like Subway operate in India through Area Developers who take care of franchising the outlets to individual franchisees.

Another option adopted by many companies to enter India is the Joint Venture route. In November 2006, Raymond signed a 50/50 JV with Grotto S.P.A, to introduce GAS, the premium, international, youth fashion & lifestyle brand in India.

Talking about the modes of entering Indian market, Saxena feels, “To enter the highly regulated Indian economy, companies need to adopt the strategy which best suits their business growth in India. Whether its joint partnership or 100 per cent subsidiary or franchising, it all depends on the strategy of growth.”

Before and after FDI

Franchising is contract driven i.e. through an agreement with the Indian counterpart. Prior approval of the RBI is required by the Indian partner for remitting money for acquisition of franchise in India. Many companies such as Mc Donald`s, Pizza Hut, Subway, Kentucky Fried Chicken have entered India through the franchising route.

The Reserve Bank of India has allowed royalty payment up to two per cent for exports and one per cent for domestic sales on the use of foreign trade mark and brand name without any transfer of technology. Further, for use of trade mark, a company is required to obtain licence from the trade mark authorities. There is no fixed term for the grant of license and the same is dependent on the terms of license agreement entered into between the would be licensor and the licensee.

Earlier, when FDI was not allowed many companies preferred to take the franchise route. Even though 51 per cent FDI in single- brand retail has been permitted, many companies still prefer franchising as an entry route to test the market, till further control is allowed.

Opportunities for global firms

With the coming of international brands in the Indian market opportunities are also expected to increase many fold for the franchisees. Many companies after taking the JV route to enter India expand in the market by offering individual franchisees.

Talking about the expansion plans for Gloria Jeans in India, Saxena says, “We will open in total 50 outlets in next 5 years”.

As of now US Dollar Store has around 35 outlets spread over tier-I to tier-III cities and would soon be achieving its target for 2008 i.e. 100 stores.

Gas expects to launch two more franchise stores in Mumbai by the end of the current financial year, that is March 2008 and one store in Hyderabad in the first quarter of next year. Through the franchise route, it expects to be present in metros and tier 1 and 2 cities such as Jaipur, Indore, Chandigarh, Ahmedabad and Pune. The first GAS franchise store was launched in India in December 2007. Today, it has 180 stores under franchise agreement and shop-in-shop concessions located throughout the world.

Skill brought in

Even though Indian companies are becoming more professional and trying to adopt international standards, international brands offer higher quality products and service due to professoinalism. Better Experience and improved services are some of the basics that international brands stand for in the global market. Having to compete with them, it is very obvious that the indigenous companies will imitate their work culture and skills.

Established 30 years ago, Gloria Jean`s Coffees has become a global con, committed to delivering the ultimate coffee experience. With 770 outlets in over 30 countries, including 435 in Australia, Gloria Jean`s Coffee is soon entering the Indian market, having tied up with hospitality major Citymax. It has flourished in Asia since the first coffee house was opened in Japan in 1995. Today there are 77 stores across Asia, Singapore, Malaysia, the Philippines, Thailand Vietnam, Indonesia, Korea and Japan.

Emerging market sectors

International franchising has already shown a major upsurge in Food & Beverages sector. In the coming years, opportunities are increasing many folds in retail, services sector, health & beauty and various new fields new for the Indian market. Given the huge potential in various sectors which are now moving from unorganised to organised sector international companies have a huge populace to serve.

Looking at the great response given by Indian consumers many international luxury brands are also looking at India for expansion. Indian investors are also keen to tie-up in the area and taking master franchise rights for further expansion.

Do`s and Don`ts

Tying up with an Indian partner who can help them sail through is the strategy adopted by many international franchisors. Officewala believes that Raymond`s expertise in apparel brand building and retailing and its vast distribution network will help them give Indian consumers a new fashion experience through GAS.

Talking about India operations, Saxena says, “Today, India offers a great possibility for international brands to enter the booming Indian market. It is essential that the positioning of the brand and its business goals are in line with the entry strategy.”

Before signing the agreement with the coffee major Gloria Jeans, CityMax on its part conducted an extensive research through KSA Technopak to understand the potential of the market and opportunity.

Citymax is also in the process of setting up a Gloria Jean`s Coffees University in Mumbai which will offer extensive training to every partner.

Some of the dos and don`ts for Indian market will include considering cultural vastness, different tastes and flavours, consumer spending, recognising customers and preferences.

Expanding into a new market is easier said than done. US based Yum Restaurants launched two of its brands Pizza Hut and KFC in India. While Pizza Hut did well in the international market the company has to rely on KFC after a gap of seven years. Now Yum is all set to bring its brand Taco Bell on the Indian shores. When the Indian market for hungry for pizzas it was the right decision on the company`s part to make an India entry in India. Today Pizza Hut acts as the major revenue earner for Yum Restaurants.

Top international franchisor McDonald`s which has been honoured with popularising the franchise concept everywhere has still not been able to franchise in India. The company is in the stage of studying the market and setting its operations before it starts franchising in India.

Indian market is very vast and offers a lot of consumers of different tastes. This calls for proper research to be done by parent company or the master franchisee before the brand can see the light of the day.

Once the decision has been taken to launch a brand it might take a few more years for a proper roll out as brand launching is not an easy task. Proper understanding of consumers is a key for success. Even the best of brands which have been successful overseas cannot guarantee success in the new market as every market is different with different set of consumers.

Talking about the Indian franchisee, Saxena, says, “Careful choice of the franchisee is a must who can support a nationwide development through not only sub franchising but also his/her own outlet.”

Initially when you launch any new product/brand, one has to advertise and let people get accustomed to the brand name, observes Sahni.

He further concludes this with saying “For success, it should be flexible enough to adopt to the Indian customers needs.”

Box Issues to be considered

India is a complex market. There are various issues to be considered before planning entry into the country. Some of these are:

  • Understanding government policies which relate to foreign investment in India
  • Making representations to the concerned government authorities that issue permissions to allow such investments
  • Tax and financial structuring to maximise business growth
  • Other related legalities and procedures

Also factors like demographics, consumer preferences, political issues towards certain brands/products/services should also be considered.

Box End

Global brands` future in India

The concept of international franchisors setting foot in India started by McDonald`s, Subway, Pizza Hut has shown a way for other international franchisor to set foot in the country. This is the start of a trend to be followed by many others to leverage on the potential in India. International franchising in India is an exciting opportunity. Looking at the successful growth of international brands in India, it gives better mileage for other brands to expand in India.

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