From benefits to breakdown

I did not think even once while paying Rs 24,000 as annual fee at Anytime Fitness last year. The day Gym Anytime Fitness bunged its operations in mid-May this year in Chandigarh without giving prior notice, I learnt the lesson,” says, Sachit Arora, Member of Anytime Fitness. Initially, it seemed just a rumour that the gym is being suddenly “temporarily” shut down. But a month-long delay made me realise the money has gone down the drain, he adds.

This puts a big question mark on the future of some franchise brands. Amidst the buzz of franchise success stories, there is a shrieking sound of franchise failure too.

Passing phase or strong sign?

Is it just a passing phase or have the brands actually succumbed to pressure? The fascinating world of franchising encompasses two kinds of franchisors. The first kind is the one where a company has established a successful system in executing a business strategy. The second kind comprises brands, who are looking at minting big bucks in no time, that too at someone else's expense. There is also another category of brands, the one who are established but fail just because of a wrong step in understanding the franchise business model.

When asked the reason behind temporarily shutting down the centres prior to termination of their master franchisee agreement, Chandan Lunawat, Ex- Master Franchisee, Anytime Fitness, India, said, “We have not shut down any of our centres. We have just temporarily closed them till the first week of June because of financial blunder committed by one of our management team members, who has now been sacked. The member, whose name would be disclosed soon, has drained crores of rupees and has not kept the promises. We are now reworking on some issues and will reopen all our centres in first week of June. SBI has also invested in this project along with us.” However, this statement lost its value when Anytime fitness, US, terminated its franchise and announced the change of their business partner for India operations in the first week of June 2011.

Reasons for failure

The franchise collapse is just not limited to a specific sector, it can happen to anyone, anytime. Similarly, dark clouds are hovering over a few fashion brands. Koutons, Cotton County and Priknit are among the ones in a bad shape. Brands who have witnessed failure attribute their closure to the following reasons:

Random expansion: Smart, strategic move and discipline crops up constantly when we talk about expansion for any brand. The brands in question (Koutons, Priknit, Cotton County, Anytime Fitness) witnessed sliding success. The brands faced failure, as most of them over-estimated their capabilities. Instead of crawling, they chose to run towards growth. Koutons grew from 500 stores to 1,400 and now the brand, in every nook and cranny, has its shutters shut down. As per Rinkesh Gupta, AVP, North, Cotton County, “ In the last year, we have shut around 35 of our stores but we have added 10 too. The expansion strategy has been revised. The main reason is the mistakes made in inventory management, poor choice of locations and human resources.”

Having nearly 50 Priknit stores in the beginning, the company is now just left with one store operational, that too in Sarojini Nagar. As per Atul Bablani, Franchisee, Priknit, New Delhi, “We are the only franchisee left in Delhi for the brand. In this September, we will complete three years with the brand. My association with the brand and location has played a major role in sustenance of this store.”

When asked about the store's response, Bablani avers, “Initially, the response was good but now the sales have actually dropped. We are facing a lot of problems regarding inventory and stock. If this continues, we might terminate our franchise relation with the brand.”

Weak research: It is significant for both franchisors and franchisees to do the groundwork prior to finalising the business partner. Speaking on the same, Gupta says, “I would not blame the expansion strategy for closing of our franchise stores but the team members of the management who were assigned to meet the targets just allocated the store without any research. The expansion is till happening but with proper research.”

Capital crunch: It takes a lot of money for a franchisor to get the ball rolling. Initially, the franchisor faces lot of hiccups, growth pains and cash flow issues. Most of the brands land safely and flow with the tide but a few who do not have a strategic business model, sink. Capital crunch is considered as the reason behind the termination of master franchisee agreement of Anytime Fitness, India.

Koutons also faced the similar problem. As per a recent report, Koutons' debt increased from Rs 209 crore in March 2007 to Rs 660 crore in March 2010. During this period, its store count increased from about 500 to 1,400.

Is there a solution?

Besides above factors, there could be a number of factors, most of which could be worked upon by due diligence as early as a franchisor or franchisee gets a clue of it. Caution is a word for those who are going through a bad phase and also for existing franchisors and franchisees. Bablani says, “We did not sign any franchise agreement with Priknit, the deal was finalised on a plain white sheet.”

Firstly, always take into account that you have to expand successfully and not blow out the money. After talking to franchisors who have already witnessed failure or are just on the verge of closure, recommend to take note of these points: expansion model to be used, funding options, location, management practices in place, suppliers, trademarks, franchise agreement, inventory and logistics management, partner and affiliate selections, branding and marketing strategies and intellectual property rights. If a brand expands successfully, franchisor takes the credit, but what if it fails? The smallest thing can make or break your business model.

Recently as per a report, BigFlix is planning to close 24 of its 33 outlets. Only nine franchise outlets will remain operational. They are doing this to boost the scalability and profitability of the business. “To bounce back in the market, we are revising a lot of things. We have redesigned our logo and also would be selling our premium product range at all Cotton County outlets pan India, says Gupta.

Comment