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Sep, 10 2010

Multiple growth Avenues

THERE are two ways of starting a business, either you start on your own or avail the benefits of franchising, where you partner with others to be entrepreneurs. In franchising, there are people for whom running one shop or centre is the only growth they s

THERE are two ways of starting a business, either you start on your own or avail the benefits of franchising, where you partner with others to be entrepreneurs. In franchising, there are people for whom running one shop or centre is the only growth they see. Then there are others, who see no restrictions even in a franchise set-up. For those whose appetite for growth is ever increasing and passion towards the brand is never ending, multi-unit franchising is the answer. We ask the best franchisors of all times on how multi-units add to their business value and how a franchisee can develop a whole enterprise through franchise business.

Empirical growth

Multi-unit franchise strategy is favoured by established franchisors, seeking operational advantages through reducing recruitment and training expenses. Chain franchisees are typically more sophisticated business people and add value to the franchise by leveraging their existing knowledge in areas such as staff recruitment and unit-level supervision. Single-unit and multi-unit franchise strategy is looked upon as separate segment of growth, as it depends on the business level of your company.

Yum International operates through multi-unit franchise in India. This offers easier management to the franchisor, though even a franchisee's interest in business is much larger and for a longer term as compared to a single-unit operator.

Counting on the advantages of multi-unit, Vinod Mehboobani, Vice-President, Business Development and Legal, Yum! Restaurants, India, says, “It is easier to manage one franchisee who has 10-15 stores than to manage 10 franchisees who own one store each.”

Another major advantage supplemented by multi-unit operators is consistency in operations. If you have one multi-unit franchisee, very often you will find that he has an organisation, he will have operations head and therefore, execution at the store level will be consistent, which is very important.

A multi-unit franchisee will have a larger organisation and will have deeper pockets for investment. Larger investment means they will be more sustainable and have a larger appetite for risks. Mehboobani feels, “Giving them a bigger portfolio makes prioritise their development accordingly.” So, operational management is a plus for both the sides, as they can plan better and build an organisation based on it. An organised multi-unit franchisee will have separate training and operations team, as the onus is to deliver results on a bigger and larger scale.

From the point of view of career management also, if someone is working for a multi-unit franchisee and builds more stores within the organisation while working for that company, he will also provide someone with a better career path.

A multi-unit franchisee has a long-term vision of business. He looks at the business for more than 23 years where while working with a single-unit franchisee, you can't be sure at the start about their long-term goal. But as it is said, all big things start small, because, the one who shares the same vision know they will have the scale of growing the business. Building an organisation is a key trait in a multi-unit franchisee. A single unit franchisee might be more hands-on where as a multi-unit franchisee would get more into supervision and managerial roles.

On the menu:

Food cos thrive on it

Internationally, food has seen maximum number of multiple-unit operators. There are several examples of people from the western world who started from a small level but broke free all the boundations and grew an entire enterprise around the franchise structure.

In the international market, companies like Burger King and Church's Chicken have thrived on the multi-unit franchise strategy and today, more than 100 to 200 units are run by single franchisees. Yum! follows multi-unit franchise strategy globally too. Quips Mehboobani, “You pick any country in Asia, it is likely to be one franchisee per brand. Clearly, there it has worked very well. If we look at the countries in Middle East, they are also operated by multi-unit franchisees. If you were to go to the UK, the franchisees there are quite big in size. So, if we look at KFC or Pizza Hut, there are multi-unit franchise success stories.”

Partner right

The more profitable and advantageous a multi-unit franchising is, more risky it seems. Rakhsit Hargave, Business Head, Beauty and Wellness Services, HUL, says, “Multi-unit franchising works well for the business if the other party manages it well. But if you don't have the right business partner, it will be problematic for you. If you have hired the partner for a number of locations and things don't work out, then it would be problematic. So we are keen on expansion but will go an extra mile to find the right kind of business partner.”

On selecting the franchisees, Mehboobani maintains, “Firstly, we look at brand passion, finding how much interest does that party has in growing the brand. How keen is he to grow the brand, how much is he associated with the brand. Then, what is his organisational set-up, what is the organisation that he currently has in place to take up the franchise and what is the organisation capability to best invest in the system to scale it up. After that we see his vision to grow. If our vision is to be number one restaurant company and we wish to have 230 KFCs by 2012 in India, what is the vision that this party has to be a part of that equation. So he might commit that I will contribute X number of stores to the 230 figure. After that, comes his course operations capability. It is very important how they run the store, the food quality, cleanliness, how the customers are treated, etc. And lastly, the financial capability, which is needed to put up the stores. These are the five factors, amongst others, which form the basis of our selection criteria.”

A pioneer in health and beauty retail, Lakme Beauty salon is keen to explore multi-unit franchise strategy for faster expansion. In its present franchise structure, half of its salons are managed by single unit and the other half by multi-unit operators.

Talking about the criteria for granting more number of units, Hargave says, “To grant another location to a single unit franchisee is simple. We take into consideration a number of reasons like customer services and customer experience. So, if the stores are performing well, we are comfortable offering another franchise.”

Though multi-unit franchising is the right way to grow, not every business is suited for this business strategy. For example, a start-up cannot put all its eggs in one basket, relying on one operator to own multiple units. However, an established franchisor can seek from his system the best performing franchisees with the right aptitude for growth to partner with them for further expansion. At times, single-unit franchisees can be found easily but choosing a multi-unit operator on whom you can rely for bigger growth is a bit difficult.

Straight to the business

Having a multi-unit franchisee, a company saves a lot of cost as the franchisee is well-versed with the system and you don't need to teach him the basics. The franchisee, on his own, hires a team to take care of operations across all its stores.

Elaborates Hargave on partnering with multi-unit operators, “What we are expecting from multi-unit franchisees is to bring in good back-end support, get us scale, be able to run the business like a corporate, be able to invest in people and be involved in marketing. And it all comes when they look at things from a larger perspective, as the multi-unit franchisee has to work like an enterprise.” When the franchisors work with a multi-unit operator, the support also becomes growth-specific, as basic issues are already dealt with by the franchisee himself. For example, Lakme would supportably work with the franchisee for business development in the marked territory. The franchisee can have a lot of collaboration in growing his customer/dealer base and he will be served in terms of supply chain, in terms of marketing content, etc.

Counting on the advantages, Rishab Soni, Managing Director, Sports Station, and multi-unit franchisee of Levi's and Nike, says, “For a partner like us, they don't need to do the basic training, since we have been in the business for the past 12-13 years. We are sort of well-established as a franchisee. There are a lot of big stuff, which we take care of ourselves, which is required when you partner with a new franchisee.”

He says there are various things like getting the staff and developing PR activities, so there is a whole bunch of it which is offered, as and when required, for the business and the location.

The difference is, a multi-unit franchisee will develop a system where there are certain processes to be built in, there are certain issues to be taken care of so that the franchisee is able to manage the locations. So developing good managers, having somebody who can take care of back-end are some attributes a multi-unit franchisee possesses.

Stress on strategy

Sharing expansion modes of Yum India, Mehoboobani states, “We are looking at our equation to have 500 KFCs by 2015. We are going to look at several avenues for growth, hence, multi-unit franchising. We are also looking at exploring what we call owner-operator for the delivery model.”

Yum presently has three brands operational in India, Pizza Hut, KFC and the recently introduced Taco Bell. Pizza Hut is run in the Indian market on a pure franchise model whereas KFC is 50 per cent franchised and the rest 50 per cent is built by the company itself. Taco Bell, whose first store was recently opened, is company-owned so far. The company is soon to finalise its second city of operation other than Bangalore.

There are 160 Pizza Huts in 37 cities and by the end of this year, the company hopes to add another 10 stores. KFC's 75 stores are present in 14 cities and by this year end, it will have 120 KFCs in about 25-30 cities, which is the fastest developing out of the three brands prevalent in India for Yum! A KFC store requires Rs 2 crore of investment to build a store size of 3,000 sq.ft.

Lakme will keep the same ratio of half single unit and half multi-unit franchisees in its system. Detailing expansion, Hargave shares, “We are already present pan India, so we will be looking at most of these major cities where we already are. We would be looking at going deeper into states where we don't have locations like Delhi, Madhya Pradesh, Pune and Rajasthan.”

Lakme helps the multi-unit operator to develop systems, to develop his own training team, thereby making him capable of doing things on his own. A Lakme Salon with a 1,000 sq.ft area entails Rs 30 to 50 lakh investment.

The right mix

The way companies are eyeing growth via multi-unit, corporates are also jumping into the fray to deliver growth plans. Whether it is Subway, Yum or Levi's, all brands benefited from corporates who have become their multi-unit operators.

According to Mehboobani, “Multi-unit franchisees can be divided into two parts. One is corporate, the other entrepreneur. It doesn't mean all multi-unit franchisees are big corporates and all entrepreneurs multi-unit franchisees. They are a mix of both.”

For Lakme, its present franchisees are by and large entrepreneurs, though it would be keen to explore multi-unit strategy with corporates in the future.

Big risks, bigger profits

Devyani International Limited (DIL), an associate company of RJ Corp, is the largest and fastest growing franchisee partner of Yum! Restaurants International. DIL owns and operates about 80 Pizza Hut and KFC Restaurants in India and Nepal. It had recently entered into Nigeria, one of the fastest growing economies in the continent of Africa, with the KFC's restaurant business.

Today Dabur’s Vice-Chairman, Amit Burman’s Lite Bit Foods is Subway’s largest India franchisee. The company operates 40 Subway outlets in India besides an array of other food brands under the Lite Bite umbrella. Taking franchise and building it through is locking as the right investment option for Indian entrepreneurs.

Rishab Soni, MD, Sports Station, is a proud owner of 35 Levi's and 110 Nike franchise stores in India. Rishab's partnership with Levi's started in 2000 as a small shop-in-shop and has grown to a bigger number and bigger share of profits.

Rishab calls himself a strategic partner to both the brands with whom his relationship started with one store and has grown to being a profitable partner to them. Rishab looks at opening 10-15 more stores for Levi's.

Being a franchisee himself, Soni understands the pulse of the market. On international brands keen to explore this route, he says, “For a lot of international brands, growth strategy for India is franchise-favoured. So they don't have to come up with their own stores and for a market like India, where every region, every state, every area has its own nodalities to deal with, it makes a lot of sense for brands to tie-up with local partners other than trying to do it themselves.” So a franchisee brings to the table the location, knowledge, customer understanding and much more.

On being asked did he ever thought of growing his own brand, Soni quips, “The fact that we are working for some of the largest brands in the world definitely is a big boost. I think being a franchisee and running the store has a different skill set vis a vis building a brand on your own. These are brands which have a much larger recall. It's a fantastic opportunity to grow.”

Sharing his close association with both the brands, Soni states, “We have closely been associated with them right from developing strategies, finding the right locations, building up store as well as the marketing campaign and everything to do with the stores.”

Being a strategic partner, a multi-unit franchisee has a larger say in the business. “Our inputs are taken in right from planning to marketing to expansion. We have worked very closely with the brand to help them achieve success in business and help them in expansion,” informs Soni.

Funding the franchise

At the outset, one can fund the franchise set-up with internal accruals. As the business further builds scale, one can look at other funding options. These days, as the franchisee is building a larger portfolio, one can attract PE (Private Equity) fund for further growth.

RJ Corp is currently in talks with various private equity players to dilute 10-12 per cent from one of its subsidiaries to further fund its expansion. Soni of Sports Station will also look at PE options as business requires more money for expansion.

Beauty of the set-up

Food sector has already seen success through multi-unit franchising. Now, it's time for beauty and retail business to adopt this model.

Talking about multi-unit franchising in retail, Soni states, “I think retail per se is a business that needs lot of in-depth understanding about consumer behaviour, layout, planning and as a corporate multi-unit franchisees bring in that synergy.”

In franchise business, there is much more than what meets the eye. If as a franchise owner, you would like to rake in more moolah, franchising offers a way.

The Indian market has seen a number of seasoned franchise owners enjoying the benefits of franchise growth. In an upward economy like India, multi-unit franchising can further be helpful in taking the franchise business to its next level of growth.

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