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Nov, 01 2008

Unscathed in a slowdown

Slowdown has become a worldwide disease and has infected the Indian economy as well. In order to keep afloat during times of downturn, businesses are clutching at every straw that could save them from sinking. Since franchising is an integral format of an

It comes as no surprise that franchising continues to ride out the economic turmoil that has caused many less-resilient types of businesses to fail. The franchising industry`s growth over the past few years has been credited to its ability to identify and respond to rapidly changing consumer and market changes, no matter how subtle or small. With the slowdown affecting all sectors of the economy, this is one industry that is bound to flourish even in a downturn.

With tough times ahead, consumers are cautious about spending and companies run a cost-cutting process. Despite this, there are still a few businesses that are bound to succeed even in tough times. Franchise companies that succeed during recession are those that are resolutely focused, deliver the product or service to the home and offer an inexpensive luxury to the consumer or provide services at attractive prices. Industries like convenience stores, value retail stores, food & beverages, education and training and business services fall into this category. In addition, some companies have highly specialised tactics for prospering during recession, e.g. capitalising on consumers` love of nostalgia and hobbies.

Talking about his business concept during the slowdown, Lalit Agrawal, MD, V Mart Retail says, “Though the economy has affected much, the fear of the situation worsening will affect the buying patterns of consumers as they can be seen spending more on necessities than luxury products.”

Business on your own

An economic downturn often brings the much anguished job crunch; a safe option is to make an informed decision of getting into a business on your own. Taking the franchise of a well-known and reputed brand helps entrepreneurs in generating success faster and in an easier manner. Running a business during recession requires you to adapt to a changing market, finding creative solutions to problems, take risks cautiously, and demonstrate the courage to move forward. If you have never run a business before, chances are you will find the situation overwhelming; however, taking a franchising ensures you are not alone and both you and the franchisor and other franchisees in the group can devise means to beat the recession.

A franchisee can easily keep his costs at a bare minimum. Some of these could be in the initial stages as being a small business his/her family can participate in the running of the business when he cannot spend much on the employees. Secondly, a franchise is already a popular brand name that comes with instant recall. In such stages, it further reduces the extra spend on advertising and marketing.

Why take a franchise?

It has been proven that a franchise business scores much higher over an individual start-up business. Running a franchise is also straightforward because the learning curve has already been made easier by the franchisor. The family of the franchisee also becomes a part of operation support, making surviving in tough times painless.

Franchisors always operate in an increasingly competitive market and quality is central to what they do even in bright economic times. Most franchisors become all the more cautious during a downturn, focusing more on attaining bottom-line results than on conforming to restrictive company policies. Attention to detail is a trend throughout franchising - one that appears to enhance a business`s chances for survival and success in an economic downturn. Behind each franchisee`s effort to attract and retain customers, is increased attention by the franchisor to programmes aimed at helping franchisees in meeting their goals.

Believing in franchising which has better chances of performing even in a downturn, Arun Khetan, President, Educomp says, “I believe franchising will have a good future and will offer ready success to those who want to participate in this. With the impact of the financial industry on IT and other related services, there will be a lot of layoff and sacking of employees but these employees who have good amount of savings will look for a reliable option of investing their money, i.e., franchise.”

Promoting entrepreneurship

As Orson Scott Card said, “Unemployment is capitalism`s way of getting you to plant a garden.”

Franchising, whose innate aim is creating entrepreneurship can act as a stimulant in a slowing economy, giving a ray of hope to many who might have at some point of time considered starting their own business. During slowdown, people are willing to make changes in their lives as the slowdown has already changed a lot. If there is a recession-proof mechanism within this economy, it is entrepreneurship, because entrepreneurs embrace the philosophy of customer service, high quality and fair price.

Recession always brings the best out of us as it is the time where only the tough can survive. In today`s time many educated and skilled professionals are finding it difficult to keep jobs, as the fear of being jobless looms large owing to market conditions. These youngsters can look at setting up their own businesses which will harness the spirit of entrepreneurship; it can cross all barriers if they possess the right attitude to make it big.

The franchisor advantage

With expansion being on the cards of a lot many companies, investing in opening new formats or stores in a new unknown territory is not entirely feasible. However, granting a franchise right can be considered, as one doesn`t have to be too anxious about the operations, daily costs and bearings of the business. In turn, it would lead to royalty and fees on a regular basis from the franchisee to the franchisor, apart from assuring 100 per cent dedication and commitment to the business.

To this, Lalit Agarwal, MD, V Mart Retail says, “Franchising is surely a cost-cutting concept. As the franchisee takes over the charge of managing the outlet, taking the land, managing people and investing money, it makes franchising a cheaper option.”

For franchisors, it is a good time to expand through franchising as they can find befitting candidates who are serious about taking up a franchise, not those who want to put their money just anywhere. Executives with honed work skills from years of job experience make ideal candidates who can truly ensure a franchise success, no matter what phase of economy is it.

In the crucial time of slowdown, Motilal Oswal Securities Ltd (MOSL) is offering its remisier franchise to professionals. Elaborating on this further Raajiv Sharma, Sr VP & Head Business Associate Group, MOSL says, “A remisier is one who is a franchisee and doesn`t want to own his own office- so they can sit in our office and work.”

He adds, “We actually prefer giving franchise to professionals as they already know the market and the customers but don`t have large capital to invest in the outlet.”

Experts feel that laid-off professionals make for better partners as they have better understanding and knowledge of the business. Moreover, these professionals come with their savings for investing in the business or good credit history that makes them eligible for a franchise. They believe that these tough times actually bring in qualified applicants.

Even the franchisors are ready to join hands with the professionals who are seeking the right options. As Khetan says, “We are willing to partner with these professionals as they are qualified and the best partners to join hands with.”

With the US sub-prime crisis setting in and the dip in the financial markets, many expatriates who have good savings, plan to return to India, though they might not get many opportunities to work or be offered only those which might not suit their credentials. In such a case they will look for starting their own business. It will drive them towards investing in a franchise business.

Till recently, franchisors had to join hands with franchisees that didn`t come up to the mark. However, the current boom will lead to better prospects in terms of people applying for a franchise. With the current market situation, people who are serious about getting into business will only apply for a franchise and the level of commitment will also be high from the franchisee`s side, as he will make every effort in making it a success, as he is investing his life savings in this venture. This will lead to qualified franchisees joining hands with the franchisor.

Banks` support to brands

Despite economic downturn, the Indian Government pumps in more liquidity into the market by decreasing the cash reserve ratio and therefore the bank lending rates will gradually come down. However, banks are also more cautious in extending business loans, given the unhealthy business climate. Nevertheless, it is easy to find a business loan when banks are assured of a well known brand backing, as compared to going into a business on one`s own.

Reaffirming franchisees about the financial support, Avijit Saha, Joint General Manager, ICICI Bank Limited says, “Recession or no recession, the business should be backed by a strong business model to be eligible for a bank loan. If the credibility is there with the right business fundamentals, the business is bound to succeed.”

Talking about buying a franchise during the tight crunch period Col. Upendra Sachdev, Executive Director, Indian Franchise Association recommends, “Franchise consultants will always advise in favour of purchasing a franchise opportunity that best fits the buyer, but what if funds are not available for the `perfect business`? Then logic dictates that `you do what you have to do` and often that means buying the best franchise you can afford.”

Buying business in recession

Experts believe that anytime is a good time for starting a business, as the best lessons of life are learned the hard way.

Talking about the right time to start a business, Col. Sachdev says, “The best time to start a business is at the bottom of the business cycle, just as things start to take off. It would be hard to deny that we are at the bottom of a business cycle right now. So, this would be a perfect time to get ready, sign the deal, build out the location and start the business, right? Well, if the actual business model is viable and has potential in the years ahead then the answer is- yes.”

Further advising franchisees, Col. Sachdev adds, “In franchising, timing is important and if you buy a franchise at the bottom of the business cycle, you can get a good deal on a location, lease, new equipment and you will find people eager to work hard and help work alongside of you to build your company.”

To this Sharma says, “If you start a business during a downturn, you are able to learn the business better and are able to work on your customer service and processes.”

Making the choice

Buying a franchise could be your choice but weigh all the pros and cons before you make this choice. Any decision taken in a hurry might lead to you parting ways with your hard earned money and getting into such businesses which are not fruitful.

Taking a franchise is running your own business- if you plan to take it up, put in your best efforts to make it successful. As anything worth doing, is worth doing whole heartedly.

Where to invest

The current market slowdown has created a strong sentiment where everyone is looking for a safer and successful place to invest their money. After the stock market crashed, investors had their favourite option of fixed deposits, but that only keeps your money safe, not your intellect, which needs to be harnessed.

With the current market situation where many professionals are dizzy about their future of whether the present job will last longer or not, gives them another boost of getting into business on their own.

But the task of getting into a business on your own is easier said then done. If we look at the current market facts, the success rate of small businesses which last even after five years is hardly 5 to 10 per cent. And devising a successful way of running a business is not everyone`s cup of tea. What to do and what not to do is the question of the hour.

The current condition gives a person with an entrepreneurial strength, an option of getting into a franchise. A franchise is a successful way taking the rights of successful business format and sharing its know-how.

Three very important aspects required to run a franchise business are money, land and entrepreneurial bend of mind.

Many professionals who seek a franchise are professionals who have saved a good amount of their hard-earned money can invest in buying a franchise. With the current slowdown founding the right real estate will also not be a problem.

With these options being fulfilled, the franchisee stands at a much better chance of running a successful business that will remain his own.

Franchise industry set to thrive

The franchising sector`s positive history and healthy growth rate and host of new opportunities in India promise a great future for this industry. Experts believe that the Indian franchise segment will continue to witness impressive growth for the next five years and beyond. In the past five years, the Indian franchise market has seen a steady growth of 30 to 35 per cent per annum. Giving facts about the flourishing franchise industry, Col. Sachdev says, “The annual turnover of the Indian franchise industry is $3.3 billion, and is projected to grow higher in the coming years.”

Talking about recession and its impact on franchising, Khetan says, “There are sentiments all around abut the current slowdown but if we look at the nature of franchising and its past trends, it creates individual entrepreneurs.”

While talking about the attractiveness of the US Dollar Store which a value retail format, Gautam Sahni, Director, US Dollar Store says, “Many corporate executives and middle managers are now looking to start their own business, as US Dollar Stores are a relatively low investment and are part of discount format retail stores generating even more customer traffic during times of recession. These days we have more enquiries coming in from working couples, as probably one of them (mostly working ladies) wants to opt for our Dollar Store franchise.”

Industry experts also believe that the condition of slowdown is a situation of caution not only for franchisees but for franchisors as well. As Gopinath Nair, CEO, Travel Tours Pvt. Ltd says, “I see prospective franchisees becoming choosier and more guarded before they take a call to take on a franchise. Franchisors will have to continue to add value to the proposition and use creative channels in acquiring franchisees.”

Talking about the impact of the slowdown on the franchise industry Sumeet Mehta, CEO, Zee Interactive Learning Systems says, “Credible and established franchisee brands will be able to ride this situation with ease and advantage to themselves, as investors will find better value for money and sense of security with them.”

Talking about the impact of the slowdown on a franchise company, Sahni says, “As far as US Dollar Store franchising in concerned, we would say that this short term situ of crisis is a blessing in disguise for us, as we are able to negotiate better rentals for our respected franchisees and more working people are opting for safer franchised businesses.”

To this, Sharma says, “A franchisee will think twice before taking a franchise as the break-even point may increase owing to market conditions.”

Experts believe that the recession is actually a testing time when only the companies which have the right systems and procedures will survive and those who were riding on a boom will have to move out of the market.

Again, companies are very much confident of expanding through franchise. Gopinath says, “Most of our network growth will come through the franchise route as we are sure that it is the way to go.”

According to Sahni, the present situation of slowdown is predominantly seen in metros. His company is now more inclined towards tier II and tier III cities, where people aspire to consume imported American merchandise at affordable rates.

Another value retail concept, V Mart, is also keen to cash in on the tier II and III town customers.

Going in the same direction for expansion of Kidzee, Mehta says, “Being the largest pre-school chain spread over 262 cities, we will be looking at expanding across India, mainly in tier I and tier II towns.”

Agarwal adds that the franchise industry will also undergo many changes as those who are here for just brand loyalty or minimum guarantee will have to forego that.

The slowdown will also see companies moving towards franchise mode or converting company owned outlets into franchised ones. With the slowdown, many of their plans will not go as expected, so expansion would be a little difficult as the market will not see as much funding as expected, so expanding through a franchise seems like the right option.

With the above discussion, it is clear that the only impact recession will have on franchising will be a positive one, the former giving a major push to the latter.

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