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May, 01 2009

Franchising in fashion industry

Fashion industry has been the front runner in bringing the organized retail boom in India. Fashion forms a large section for both of the branded as well as the total retail market. Fashion industry encompasses the entire gamut of brands in clothing and te

Fashion industry has been the front runner in bringing the organized retail boom in India. Fashion forms a large section for both of the branded as well as the total retail market. Fashion industry encompasses the entire gamut of brands in clothing and textiles, footwear, fashion accessories, jewellery, beauty care products and salons, which together constitute a business of approximately Rs.50,000 crore, and is also responsible for majority percentage of leasing at malls & high streets.

Clothing and textiles make up for the largest portion of organized retailing, and putting together segments like jewellery, watches, health & beauty care services, fashion industry would constitute about 60 per cent of the organized retail.

The fashion industry is one of the first industries to appreciate the franchising potential.The fastest growing sector in fashion, in terms of turnover, has been clothing & apparel, followed by health & beauty and footwear.

Evolution of fashion franchising

Traditionally fashion brands used to appoint distributors who supplied goods at retail points, mainly at MBOs or departmental stores, where products were placed category-wise on racks and the store staff took the responsibility to display products according to the needs of a consumer. While the business model brought customer value, brand promise could not be delivered at the point of sale because of the dominance of products over labels.

Taking a cue from the earlier success of Bata stores, a handful of brands in apparel, like United Colors of Benetton, Weekender, and in footwear industry, Liberty shoes, arrived with exclusive store models where the brand proposition was very strong and brand worth was clearly differentiated. These brands short listed channel partners who could create loyalty for the brand with the customers, thus creating a large market share and an articulate delivery in terms of brand promise.

As the concept for selling product gave way to brand matter, an era of exclusive branded stores gradually evolved, which promoted more dealer loyalty than MBOs, greater sales support, a higher degree of control over the retail market, better forecasting, and better inventory and merchandising control. But these image stores could not compete on grounds of location, experience, value and change in addition to its characteristics of high price, high margin, and low volume where the MBO models were far superior to exclusive stores. Also, business sustainability was fast becoming a challenge.

To overcome these challenges, a unique model came into practice which was product franchising with minimum guarantee. It was based on the evaluation that retailing was transforming and once customer got attuned to shopping at exclusive or image stores, which may take a few years, businesses would become viable in the marketplace. Thus a franchise model in fashion stores was introduced in exchange of minimum guarantee to a franchisee who had a great location as an advantage. In this way, product franchising in EBO evolved as a way to increase retail size, establishing brand positioning or to create an image as a Category-1 brand. These image stores brought great positioning to a brand which was otherwise not getting the right visibility.

In today`s competitive times, product has to be offered to a customer with a high level of customer service, which has bought the Brand to a dilemma, whether to add franchise channel or convert the existing dealer/distributor into a franchise channel.

Moreover, a systematic control adopted in franchising may lead to improved unit performance. In a country like Australia, there is the documented evidence that having converted to franchise, the corporate stores achieve a sales kick of 20–30%. This indeed proves the franchisees` sincere and dedicated involvement in the business and the franchise as the superior business tool.

As we move further into an experienced economy, Product Distribution Franchising in India is also fast giving way to Business Format Franchising with the advent of malls and retail companies looking to get faster penetration. Organized retail revolution is still in its early days and retail companies, both domestic and international, are feverishly scouting for the right real estate and channels for product distribution alongside quality HR to manage stores at the unit level. But in the process, the realization that has dawned on many early moving brands is the need to have a more profitable network as opposed to only having a network. Retail franchise development tends to be driven by consumer demand and more and more companies are finding Minimum Assurance Models redundant and are switching over to Business Format Franchising. Given the diversity and the sheer size of India, franchising is the only viable model, for both small companies and large corporations, to penetrate the tier II and tier III cities in India.

Challenges in franchising

The lack of a regulatory framework and formal franchise laws sometimes acts as a mind block for a business investor or a prospective franchisee looking to invest in a new franchise system.

Secondly, the real estate prices have reached to a point where franchisees fear burning their hands because of unrealistic lease rentals, though corrections are soon coming in many markets. The escalation of real estate price has become an impediment to the rapid growth of franchising and franchisors are concerned about this particular hitch.

While there may be a possibility of channel conflict, franchising is viable business development tool as it provides two important elements that dealer channels may lack: increased control of unit operations (and the brand association) and an ability to generate fees for the services that many dealers are forced to give away.

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