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Sep, 01 2008

Losing way

In Australia the average tenure of a franchisee is 7.2 years which is significantly longer than the employee model. Do we witness the same in India?

Commitment, motivation, desire to increase sales might sound like an employee`s key traits but can these turn into profitability for a store? Yes, but less performance, longer time period and an increased support structure to be given by the corporates are some of the tags attached with it. Many companies are frequenting their way towards franchising. Let`s find out why.

Any MNE that wishes to enter India would be well-advised to look at the failures in the organized retail sector. One of the earliest players to enter the field over 15 years ago is up for sale. Many have simply closed down. Among the reasons are poor inventory management, insensitivity to customer expectations and reluctance to invest in human capital. In any service oriented facility, the interface with the customer is critical. One would be appalled at the level of ignorance and the almost total absence of a customer focus among sales personnel who need to interact directly with customers. Organized retail, to be successful, has to invest significantly in training the personnel and sensitizing them towards providing a great shopping experience for customers.

Some of the key benefits of franchising

There has been a constant debate going on; who serves better- company owned stores or franchised stores?

A lot of gap builds up when a company moves from being a brand. Establishing a powerful brand and running value stores is a different game altogether. In a franchised business while the company can keep on continuing building the brand and its image with various other means the franchisee on the other end continues with the operation of the store while taking into account actual and everyday needs of the customers. Though in many such cases a company will favour opening its own stores but studies reveal that an employee might not be honest with feedback as he is also worried about his monthly salary being at stake. A franchisee on the other hand, has to serve the customer everyday and his earnings depend on him. Given such a situation, a franchisee would be more willing to be up front given any such dilution in the brand. There is a lot of difference between the brand and the store that it operates. A brand might have global appeal but the store has to cater to local, regional as well global masses. Once a brand has been established in place it`s not easy to maintain the values in all its stores. Though the number might be high at that moment, the daily operation of all the stores becomes difficult. The question that pops up here is, why? Franchisee being the operator of the store has invested his hard earned money in the business where his earnings are at stake and he makes it a point to ensure that the store is run carefully. Franchisees work longer and harder to make the store run better. Facts show that franchisees stay longer with the brand than any of the store managers and develop a longer presence in the community.

Given the human nature of dealing with a known face while buying anything we always prefer a shop where the owner remembers us by name and greets us with a smile than bumping into a store where the sales persons change every few months due to the talent crunch. The owner`s gesture to greet everyone and welcome customers in the store is half the job done of converting the footfall into purchase.

For the owner of a large corporate it`s impossible to be present in all his stores. Though given an option every owner would like to visit each of his stores at least once. But in today`s environment where the store numbers are increasing in the race to grab the largest chunk of retail, it is more of a number game to reach the highest position. Given such kind of competitive environment a store manager also keeps on looking for better job prospects. Here the issue arises of dealing with the customer, retaining him and knowing his likes and dislikes. Whether we all agree to this or not- every employee is concerned about his monthly salary. But a franchisee who is the owner and operator of the store has to rely on the customers for his monthly earnings as he is running a business of his own.

Every retail company today is thinking about being the leader in this $320 billion industry. Everyone has funds to reach a certain scale to count higher, each one of them has got land or has the ability to buy it but everyone is also dealing with talent crunch and the problem of how to keep each retail unit profitable.

The way an owner can understand the running, upkeep, maintenance, customer satisfaction and service can`t be replicated at any given moment. A franchisee is accountable to his daily customers for his sales and profits which make him run the store better. Though in a corporate owned chain the employee would be taking care of the store, in a franchised business the investor/operator is at the helm of affairs.

While investment and location are all available to a retailer these days to reach scale what he requires at this point in time is the person who can run the outlet and be accountable for the store. The investor here plays a key role in managing the people, making the investment, taking care of the upkeep and running day-to-day operations, in all covering the entire gamut of operations pertaining to the running of the store.

To run a successful business a retailer requires operator, location, investment and HR which are all easily made available and managed in the case of a franchise. In retail franchising the company can take care of backend operations while the front end is taken care of by the franchisee.

Turning Company owned outlets into franchise ones

Converting corporate owned chains into franchised ones has also become a key trend for many corporates to make their outlets profitable. Several large Indian corporate houses are going the franchising way and newer and innovative concepts are being introduced.

The way Indian retail chains are growing in India it might sound all hunky-dory but in their race to grab the retail share they might very quickly lose their way in between. And the small retailers who have some advantageous points like personalised service, customer ease etc will have higher impact on making their way ahead. However, a franchised store can guarantee specialised service from the franchisees ensuring a bright future for the corporate chain.

As per the results of a few companies the profits started declining after a few years of operation when the number of stores increased to a certain level. Compounding to this problem is the fact that these companies lose control over managerial operations of the store. Turning these stores into operator run stores is the solution to this problem. The move is also considered to be a sales improvement plan where a franchisee takes due care of the operations, training, upkeep and maintenance of the store. In a franchised business each and every store is run independently, making the owner, the sole operator of the store. Given the long duration incurred by the franchisee in running the business in comparison to store managers, a humble base is touched upon by the owner with the consumers leading to consumers knowing the owner by name and vice versa.

A lot of people known as the frontrunners of company-owned chains argue that franchising their brand might dilute their brand proposition. Haven`t such entrepreneurs realised that franchising is actually a way of protecting your brand`s focus and keeping its identity intact even in crucial times? Even after years of operation the brand will offer the same services keeping its valued customers in mind.

Harnessing commitment of operators

Of late, India has witnessed an increase in the number of corporate groups considering franchising as one of their important strategies. Opting for the franchise model is moving from just being a way of cashing in on the franchisee`s capital and land as these are two important factors already available with the companies. The crucial aspect driving corporates towards franchising is the operations that are taken care of by the franchisee. Industries witnessing a talent crunch find it difficult to keep the operations going smoothly in their stores. Such situations are giving rise to an increase in the franchise format adopted by companies. Rising talent crunch and increasing competition are providing room for franchising in the strategies of corporates. The desire to develop a relationship with the consumer which is hard to find in an employee and customer is reason enough for these chains to move towards franchising.

A lot many companies are looking for motivated self starters for their store operations but given the talent crunch it is hard to keep the store operations viable. Given such conditions corporate chains are moving for better profitability towards franchising their operations.

Franchising also works as the best HR strategy in sourcing and retaining people in various parts of the region. In a big corporate it is not possible for the management to be in touch with even the store managers leave aside the sales personnel. On the other hand, in a franchised store the owner-operator makes sure that everyone is motivated and it is easy for him to look after a few employees.

One of the greatest challenges the corporates face is to manage all the operations while keeping the values high in all its stores. In turn, a franchisee offers replication of the business model with quality assurance. The leadership qualities of a franchisee are far above those shown by an employee. The best service and commitment can be secured in an employee but for better returns over a longer period of time a franchisee can outperform him.

With increasing competition one can buy products from anywhere but what attracts the customer is the personalised service offered by the store and this can very well be conveyed in case of franchised store where the owner- operator is present making a difference to the store sales. The support in making a business a success and motivation in taking it to newer heights can be found in franchisees.

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