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Sep, 16 2009

India penetration route

The smoothest road that leads to successful penetration of international brands on any scale could either happen through the Master Franchising or Area Development business models. An analysis into who enjoys the rights of being a Master Franchisee or an

Without leaving any chance to miss out this grand opportunity of making their brand extension successful, global brands from worldwide countries have now started swirling into India’s potential market.  With the rising per capita income and increasing urbanization, more and more people have started moving towards organised retail and accepting branded products. Recession in advanced economies of the world and rapid growth of franchise industry are some of the factors paving way for entry of many global brands into India.  Many successful Indian investors are forging deals with foreign partners and bringing in global brands to their own market. International brands are extensively penetrating into Indian market by means of Master Franchising and Area Development models.

Franchisor’s role

The franchisor’s role is to provide training, support and technological know-how to the master franchisee after the master franchisee pays franchise fee for using franchisor’s brand name.

The franchisor has the right to terminate the agreement if the master franchisee or regional franchisee fails to open, sell, develop and maintain the defined geographic area of a country as per the set targets.

Commenting on the franchisor’s role in crafting the business plan at the master franchisee level Mike Fuller, Director Master Development, Cartridge World, Australia Pty Ltd suggests, “The Franchisor should only point to areas that they would like to see covered in the business plan – the business plan is a critical document in the franchisor’s understanding. If this does not match then the Master is not the one that should be appointed. The franchisor needs to know that the potential Master understands the business model and what is required of them to ensure the success of the franchise.” In a franchise agreement, the right of providing Master Franchise or Area Developer rights remain in the hands of the franchisor.

Master franchisee’s role

The franchisor grants the rights to the Master franchisee (investor) to sub franchise its brand in the given geographical area (whole city or whole country). The master franchisee has the rights to operate, sell and develop the franchise business in that specific area/territory under the franchisor’s brand name and trademark. The master franchisee gets the franchisee fee and royalty fee in return. To expand one’s brand in a new market/country, the franchisor uses this form of franchising.

In the last decade, many Indian investors forged master franchise deals for expansion of international brands in India. For instance, Australia’s Cartridge World appointed AFL Pvt Ltd as its Master Franchisee for six countries in the Indian sub-continent. Commenting on the master franchise agreements, Fuller explains, “As a franchisor you look to expand your franchise operation into new countries;  the only way this can be done is by appointing Master Franchisees within the chosen country, as they have local knowledge in marketing, culture and traditions which enables the franchisor to adjust the model to go well with the local conditions.” Operating as a mini franchisor in his own country, he has the right to open single-unit, multi-unit and area developer franchisees to the franchisees in the defined territory.

Types of franchises:

Here are some types of franchises in vogue:

Single unit franchise: In this form of franchising, a single unit franchisee buys the rights to operate and maintain a single location either from the franchisor directly or from the master franchisee.

Multi unit franchise: When a single unit franchisee, is performing fabulously at one location, the franchisor allows such franchisee to start another unit in the same area. The franchisor allows franchisee to open one or more units within the defined geographical limits. The franchisee hires competent managers to run the units.

Area Developer: When a franchisor grants rights of development of his business to an Investor or a corporate body, allowing latter to open a specific number of units in the designated territory while also seeking to know from the latter the names of  prospective franchisees willing to foray in business, the party assigned the charge is called Area Developer.  Unlike the Master Franchisee, the Area Developer does not actually appoint or award the new franchisees. That remains the exclusive domain of the franchisor.

Testing waters: According to Fuller, the franchisor faces difficulty in number of areas, such as,“Is the country suitable for franchising, what are the franchise laws, will the product be competitive in the market, how much is the master franchise worth product supply, visas for entry into and out of the country and moreover where can the training be held?”

There are other difficulties in terms of selecting the right business partners, like, Master Franchisee or Area Developer, who have the potential to take the brand towards success. After taking the master franchise rights of US based realty major RE/MAX International for the Indian market, Samir Chopra, CMD of RE/MAX recalls, “The biggest challenge and also the biggest area of opportunity for RE/MAX India is the unorganised shape of the Real Estate Brokerage Industry in India. There is utter lack of professionalism in the industry and there is no regulatory authority to safeguard the interests of both the brokers and the consumers.”

Other challenges could be the expansion of brand in the new market. At times, it becomes extremely important for the brand to modify as per the tastes and preferences of the consumers of that particular market where the franchisor looks to expand.

Selecting suitable MF or AD: While selecting MF or AD, it is important to select an individual or a company who have the local knowledge of the market, of consumers’ tastes and preferences, of competition in the market, and of financial capability of wannabe entrepreneurs. If the franchisor is ready to penetrate into a new country, then he can hire the consultants to do the specific research about the market, appoint MFs or ADs and render them necessary assistance in appointing promising franchisees who in turn can popularise the proven concept in their territories. Expanding one’s operations in a new market is not an easy task, but an extremely careful exercise.

Roles & responsibilities of MF, AD: The master franchisee receives the royalty fee and franchisee fee from the franchisee operating either a single or multi units franchise. The master franchisee helps franchisee net-work to build-up potential by closely working with the franchisees, conducts regular meetings with the franchisees to keep them informed of developments on local and global front and reports to the franchisor on a regular basis.

Anoop Sequeria, CEO of Brand Calculus says, “As Master Franchisee, our roles and responsibilities are – to grow the brand pan India through a mix of company owned and sub-franchised outlets, to identify and sign up locations that will place the brand on the map of each major city in India, to build a strong operations team to manage and operate the outlets and ensure compliance to the international standards as defined by Booster Juice International.” Exploring further, he says, “Developing a strong management structure to support the growth of the brand in India, build and develop a strong supply chain to service the outlets pan India and to develop new products that would appeal to the Indian consumers and moreover implementing strong marketing programmes to build the awareness of the brand and the products.”

In 2007, Citymax part of Dubai based Landmark Group took the master franchise rights of Australia based Gloria Jeans Coffee. Sundararajan Rajagopal, President, Citymax Hospitality India Pvt says, “We own and operate outlets in the country under Gloria Jeans Coffee brand, meet the development targets that have been mutually agreed upon and conduct marketing and public relations support to establish the brand in the country.”

Acquiring either the Master Franchisee rights or the Area Development rights of any international brand, the investors can expect plenty of returns. For example, RE/MAX follows an Area Development franchising model. As Master Franchisee the company recruits Regional Franchisees who also recruit Broker Offices, these Broker Offices recruit Broker Associates who are the line function of the company and do transactions. Through Area Development Franchising, RE/MAX intends to leverage the local expertise of the regional franchisees and couple it with its global brand name. Chopra adds, “Every franchise business operates upon its inherent strengths and weaknesses. In our case, Area Development Franchising has worked for us, all over the globe and we are extremely confident that it will prove to be successful even in India.” Force Fitness India Pvt Ltd was appointed as the Area Development licensee for US based Snap Fitness in India. Talking of responsibilities Srilekha Reddy, Director, Marketing, Force Fitness informs, “As Area Developers, our responsibility is to protect and promote the Snap brand name in India apart from providing full project support from start to finish to all the franchisees. We help franchisees in location selection, interiors, presales, recruitment and training of staff and procurement of equipment. Even after the centre is opened, we provide operations, marketing and sales support.”

The responsibilities of Area Developers are not as broad as of Master franchisees, and as per the agreement, they sometimes do not receive or share with the franchisor any of the royalty fees generated by each unit opened in that territory. The Area Developer receives the initial franchise fee as a compensation for recruiting the franchisees. To maximise the franchise network, both Master Franchisees and Area Developers work closely with the franchisees by offering them training and support in relation to running the outlet; they conduct regular meetings with the franchisees to keep them informed of latest developments on local and global front, implementing marketing campaigns to create the awareness about the brand.

It is important to note that minimum investment required for taking the master franchise or area developer rights of any international brand varies from country to country, product offering and development obligation. According to Reddy, 25,000 dollars is the minimum capital required for taking AD rights of an international brand. The investment is similar to taking the master franchise of an international brand.

Pros & cons of franchise holdings:

Being a Master Franchisee or an Area Developer of any brand, one enjoys numerous advantages and disadvantages. Both of them enjoy being part of a well established proven concept that is operating in multiple countries. Sequeria clarifies, “A well managed international brand brings on board a high level of expertise and capabilities that are required for the concept to be successful in local markets. This includes high degree of professionalism, an experienced team, well documented standard operating procedures and manuals, world class training methodology and most importantly, a global perspective of how the concept and the brand have faired in other international markets.”

On the other side, Rod Young, Executive Director at DC strategy clarifies, “Most international entry strategies by franchising companies involve master franchising. However DC Strategy believes that this may not be the best strategy for a market such as India where there is enormous growth prospects.” Adding further to it, he says, “Each company needs to have its entry strategy tailored to suit its structure and its concept. It may be more appropriate to make a direct entry, a JV, grant single unit franchise or license or offer an area development agreement. Outward bound development by Indian franchisors needs to be addressed in the same way.”

Care and caution in forging deal:

Before taking the franchise rights of any international brand, either master franchisee or area developer, take the initiative and conduct a thorough market research about the brand’s performance in other international markets where it is operating on the business models viz., master franchisee or area development franchise. They can talk to the established MFs or ADs about the kind of challenges they confront after taking the rights of the brand within the country. If possible, it is also advisable to visit the outlets so as get the view how much sales and footfalls are coming in.

Commenting on other factors to be considered Sequeria enlightens, “Study the financial implications and draw out a detailed business model. Store level profitability inputs will be required from the brand owners and it will help if one can obtain actual store level profit and loss statements of existing successful units in other markets; be clear on the support that one will receive from the brand owners especially support related to pre opening, vendor development, product development, training and launch of initial outlets.”

It is also pertinent to ensure that the period of master franchise agreement is adequately long to provide for a successful business model. Reddy points out, “It is very important to safeguard your interests while signing and formalizing all documents. A lot of documentation and legal issues could be specific to the country from which you are taking the area development. It is crucial to adapt it to India and make sure that the parent company is flexible to understand that each market is different.”

It is also imperative to read thoroughly the terms of the Master Franchise Agreement and amend any clauses that one may find not favourable. It is better to sort these out prior to the agreement being signed rather than getting into a relationship with a level of ambiguity. Working with an international brand always adds different experience; it will also be of help if one could take the initiative and connect with existing franchisees of the brand to understand the level of support they receive for the success of the brand.

Consultants can help:

Many international companies are looking to expand in India’s productive market through master franchise agreements. Talking of her brand’s foray in the Indian market, Diana Williams, Founder of Fernwood Fitness informs, “We are now at the stage of looking for interested investors who are interested in a master franchise of our brand throughout India. Once we have signed up our Master Franchisee, we will then assist them in locating sites and suitable franchisees to operate them. Other brands like Boost Juice, Viva Fit, Fernwood Fitness, Action Coach and Abrakadoodle have plans to look to expand in the Indian market soon. On taking the brand extension further, Rajagopal declares, “Till now, the company has six outlets. The company is planning to open 20 company owned stores by end of March 2010.”

Talking of his brand’s presence in India, Sequeria informs, “At present, Brand Calculus is managing and operating company owned outlets of Jus Booster Juice and will continue to do so until the business model is ready to be sub-franchised in select territories in India. The decision to sub franchise will be based on certain pre set parameters that will influence the success of the brand in other territories.” On the other side Reddy adds, “India has four centers up and running and 15 signed up which will be operational by the end of this year. Thirty-five centers will be opened by end of this financial year.”

For selecting the right franchise partners, both the franchisor and the interested investors can hire consultants and ask for bespoke services in addition they can provide assistance in selecting the right business partner and helping them in negotiating the franchise deal and expand in that particular area, city and state within the country. Any of the Indian investors looking to forge deals with the international companies must conduct proper research about the brand, its presence in other markets, find out its competitors, and most importantly consider the right entry strategy for its success in the market.

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