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Nov, 08 2010

LOW-COST BRANDS RIDING HIGH ON SUCCESS

The biggest franchisor in Brazil is a low-cost franchise from Japan. Candy Bouquet that catapulted into a highly successful brand in the US started off as a low-cost homemade business. If you think low-cost businesses are not profitable, think again!

The biggest franchisor in Brazil is a low-cost franchise from Japan. Candy Bouquet that catapulted into a highly successful brand in the US started off as a low-cost homemade business. If you think low-cost businesses are not profitable, think again!

ACCORDING to a report released by the International Franchising Association (IFA) in 2008, almost four per cent of the small businesses in the US are franchised.

The IFA states that low-cost franchise business opportunities account for about 11.5 per cent of the entire US economy. A business website states that the total number of low-cost franchise business opportunities located across the US exceeds 9 lakh, creating 21 million jobs and $2.3 trillion in total economic output. “The market in the US is strong, especially given the current difficult economy. Franchise concepts that require large capital outlays are suffering. But low-cost franchises continue to do quite well,” says Thomas Bunchman, President and CEO, Jumpbunch, US.

The mood for low-cost format is also upbeat in Europe. As per the Natwest /British Franchise Association (BFA) - Franchise Survey 2010, the average cost of opening is 46,700 British pounds. Brazil, an emerging power amongst the BRIC nations, has also witnessed quintessential rise in low-cost franchises along with the emergence of hundreds of fresh concepts. Paulo C. Mauro, President, Global Franchise Net, Brazil, an international alliance of franchise experts, is hopeful that the low-cost franchise businesses are heading towards a positive growth. “Our experience with low-cost franchise businesses in Brazil has been great. We have worked with some small business franchisors and they are growing. The biggest franchisor in Brazil is KUMON, a low-cost franchise from Japan, that has 4,700 units in Brazil,” he states.

Similarly, businesses across Australia and India have been garnering growth via the low-cost franchise format. Explains, Rod Young, Executive Director, DC Strategy, a renowned Australian company involved in consulting, research and legal work for building networks and brands, Australia,  “In Australia, we have seen an increased movement by franchisees towards medium cost ($50,000 to $250,000 initial investment) franchises. Low-cost franchises (primarily services-based and mobile businesses) are definitely part of this upswing and the opportunities exist both for established international brands and home-grown local businesses. If the global market for franchising is growing, then franchising in Asia-Pacific, especially in India and China, is booming.”

Elaborating further he says, “Low-cost franchises offer an accessible entry point into business for would-be entrepreneurs, who do not have the financial backing to invest in a capital intensive franchise such as a premises-based retail business. Besides, debt financing can be minimised or avoided. Low-cost franchises can often be funded purely or primarily by equity, allowing the owner to avoid ongoing debt finance service obligations, making low-cost franchises appealing.”

Describing low-cost franchise formats as ideal for entrepreneurs, Bunchman remarks “The franchise model is ideal for low-cost businesses. Franchising provides a proven roadmap for aspiring entrepreneurs.”

Best performing segments

Over the years, low-cost franchise businesses have seen the emergence of several fresh concepts while the established brands have emerged as money spinners. Explicating some of the best performing segments, Carl J. Kosnar, Managing Partner, The Kosnar Group, one of the leading franchise consultancy firms in the US, states, “My experience has been that manual labour or maintenance franchises do the best. Examples regarding this include janitorial, plumbing, painting, lawn maintenance, automobile detailing and pet services. Other segments doing well are children's learning programmes and low-cost fitness programmes.” While Young explains, “Food service has inculcated growing prosperity in the Asia-Pacific region. While there has been a demand for capital-intensive premises-based restaurants and food outlets, great opportunities also exist in low-cost kiosks and mobile operations such as small food service vendors. Besides, childhood education and development services are expected to present an increasingly large franchising opportunity in Asia-Pacific.”

Since low-cost franchise businesses dish out a plethora of opportunities for first-time entrepreneurs, the low risk options in this format have undergone exponential growth. Mauro points out, “There are several low-risk bets in the education and personal services industry. There are several franchises in these industries with a very low start-up investment. And these industries will grow together with emerging markets like India.”

There are several success stories in the low-cost franchise format. What started off as a purely homemade business has catapulted into a national brand. For instance, the unique concept of Candy Bouquet is based on a floral type arrangement made from candy and chocolates. The company has been a recognised brand in the candy franchise business in the US and has experienced exponential growth. Informs Margaret McEntire, Founder and Owner, Candy Bouquet, “We are in over 35 countries and have recently added a master franchise in Brazil, Pakistan and Puerto Rico as well as several other smaller countries. We are looking for a master franchisor in India too.” To get started in a single home-based business, Candy Bouquet franchise operation would cost less than $10,000. The company does not charge a royalty. About the huge success rates in the low-cost format, McEntire says, “There is a vast market for low-cost franchises in the US and in that realm, the success rate is not as high as it is in a high investment franchise, simply because there is not much to lose. There is a lot of freedom in this franchise, letting the franchisee decide to be home-based or store front and also they have much freedom of design.”

In a similar way, the low-cost concept of kids' fitness segment is riding high. Confirms Bunchman, “The success rate for mobile kids' fitness segment is very high. Our success rate is in the 90th percentile.” The company has already forayed into the Indian market and is mooting expansion in the Middle East, Asia, Europe and Australia.

Abrakadoodle, a low-cost children's art franchise business with programmes in US, Singapore, Malaysia, Japan and China, is planning India expansion.  States Mary Rogers, Co founder & CEO, “Abrakadoodle is an affordable business with entry costs that are modest. This and the quality of Abrakadoodle programming makes it particularly attractive to those interested in the children's education marketplace.”

On the success of low-cost franchise, Mauro enlightens, “The low-cost franchise may provide profit much better than the average provide for the franchise industry. We can get an average from 20 per cent to 35 per cent of the gross sales. The reason being that most of the low-cost franchise systems are home-based, which reduces the fixed cost of the franchise. And the low-cost franchise has a pay back in less than one year.”

Positive growth in coming years

Going by the gains, industry experts have been predicting a positive and robust trend in the times ahead. Mauro foresees an upswing. “The low-cost franchise will grow a lot in the next few years, mainly in the developed countries like India, China, Brazil and Russia while thousands of small entrepreneurs will have the chance to set up their own business and grow with it.”

Young estimates, “In developing economies such as India and China, rapid growth in the number and size of low-cost franchises, particularly in the education and financial services sectors, will be seen.”As per Kosnar, the low-cost format is expected to witness a unique trend of industry segmentation. “The trend that will make a big impact is exploitation of industry segmentation in the fitness industry. Today, we no longer just have workout gyms. There are franchises devoted to pilates studios, spinning classes, jiu-jitsu and martial arts classes for adults and children.”

“In the cleaning business, there are residential cleaning franchises, office building cleaning, industrial cleaning, maid services and chimney cleaning services,” he elaborates.

Word of caution

Though risk is an inherent part of any business, yet first-time entrepreneurs should always see that initial capital cost should never be the sole determinant of whether or not to invest in a business. Cautions Young, “Investors should avoid making the conclusion that a low-cost franchise is automatically going to be a low-risk investment (and equally that a high-cost franchise will be a high-risk investment).” Mauro states, “The key factor is the franchisee profile. The low-cost investment franchise will depend a lot on the franchisee's managing quality.”

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