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Oct, 03 2011

Breaking-free from royalty fee

Wondering what’s so exciting about the ‘no royalty fee model’ in India which is casting its spell on new-age franchisors? Is it just a marketing gimmick to grab franchisees’ attention? Will it be successful? Let's feel the market pulse and see the future

Wondering what’s so exciting about the ‘no royalty fee model’ in India which is casting its spell on new-age franchisors? Is it just a marketing gimmick to grab franchisees’ attention? Will it be successful? Let's feel the market pulse and see the future of this business model.

JUST like any other person from a business family, Jaspreet Singh Ahluwalia, a graduate from IIT Delhi, too, dreamt of starting his own business. Building a business from the scratch is not everyone's forte, so he decided to cash in on a distinctive model of franchising owing to the benefits attached. And this proved as a win-win situation for him, as there was no royalty fee involved.

According to a traditional system of franchising, a royalty fee (your revenue share) in a franchise agreement has to be paid in the course of a franchise business contract. It is paid by a franchisee to a franchisor on a monthly, quarterly or an annual basis. Technically speaking, it is a franchisor's right and sharing some percentage of revenues with a franchisor is a part of a franchise package and is also regarded as every franchisee's biggest concern.

No royalty business model

Ever thought of a franchise model which is devoid of royalty fee? Well, no franchisee would ever believe in the said statement. However, this is true as GenNext franchisors believe that paying a royalty is a passé. To spread its footprint across India in no time, new-age franchisors have conceptualised a business model that doesn't include any royalty fee.

So, the key indicator responsible for the birth of no royalty fee model in India is franchisee's unwillingness to part with returns and considering royalty fee to be a burden. Sometimes, it is quite tricky for a franchisor to retain the existing franchisees because of high royalty fee they charge, which ultimately leads to termination of a franchise agreement. A perfect example of companies dealing with such a situation are Hello Kids, Multi link, IT Source, Vasari and Chhabra Triple Five Fashions Pvt. Ltd that render a royalty-free concept.

Also, there are a few renowned brands like Jawed Habib Hair & Beauty Ltd (JHHBL) and Veta, an academy for teaching spoken English, that charge royalty after a franchisee reaches its break-even.

Opposing the views of other franchisors related to paying a royalty to a franchisor for a lifetime, Hello Kids Education Inc's Director Pritam Agrawal says: “Considering the industry trend of the past six years, we have observed that majority of franchisees are either not paying royalty after some months or years or they don't continue with a brand. The reason being the support that they require is just for updated curriculum, material and marketing. But the royalty charged is a huge amount, between 40 and 45 per cent of franchisees profits.”

He further adds: “Initially, the marketing support is required, but in long run not many franchisees require this support, as they operate within a radius of 2-3 km. If a branch does its own marketing in the same radius then it turns out to be more cost effective than the royalty fee. In the long run a franchisee gets the brand name and materials. However, it is franchisees hard work that pays him a great deal.”

Agreeing to the same, Chirag Shah, CEO of Mumbai-based Multilink, says: “As we are into travel and utility business, we only focus on the number of transactions turnover revenue and its success in long run.” On the similar lines, Vasari, men's ethnic wear brand, has recently implemented a no royalty fee model. Talking about the benefits of this model, Mahesh Chand Mohnani, Director, Vasari India, says: “Being franchisors no royalty fee model is beneficial for us for quick expansion of the brand and steep increase in sales.” Besides, he also feels: “It's difficult to say that no royalty fee model will not be popular, as franchisors will always be interested in pure revenues.”

From a franchisors point of view, Asheeta Chhabra, Head - Business Development, Chhabra Triple Five Fashions Pvt. Ltd, feels: “The franchisor-franchisee relationship is marked by two significant financial transactions. One is the payment of franchise fee, which many franchisors charge for letting the franchisees use their brand name and business model. The other is the margin payment, which a franchisee is liable to make at regular intervals and it is calculated as a percentage of sales. More than a marketing gimmick, we, see our move of not charging royalty fee as a business decision. At the inception of any business, it's imperative to decide for the costs the company wants to bear and the costs that it wants to charge. In our company, we follow the former way of working.”

Every franchisor has a different approach when it comes to deciding on the royalty fee. A franchisor frames the fee structure and it can vary accordingly. On the other hand, Rohit Arora, Executive Director, Jawed Habib Hair & Beauty Ltd, says: “We have a straight royalty fee model that we offer to our franchisees. We take initial franchisee fee and concurrent sales percentage royalty fee from all our franchisees. In case of no royalty fee model, we believe any franchisor will need money to grow the business. He can't offer the brand name for free to a franchisee. So, how do they get the returns? There are some franchisors who have their own products and they have a margin on products for franchisees. There are many franchisors in the similar industry who don't charge any royalty from franchisees because it is mandatory that a franchisee has to take the products offered by a franchisor. For instance, if a product costs Rs 100 to a franchisor then it will cost Rs 50 to a franchisee. So there is no hidden cost, it's quite a transparent deal and that's why no royalty is charged by a franchisor.”

To target new franchisees, JHHBL has a different philosophy. In case of JHHBL, first six months of franchise operations act as a honeymoon period for franchisees, as the brand doesn't take any royalty fee in that duration.

Long-term benefits?

There is no denying that a lot of franchisors are not in the favour of no royalty fee business model. Paying a royalty fee to a franchisor sometimes haunts franchisees and gives them jitters when it comes to sharing profit. Since the right of taking royalty fee is clearly vested with franchisors only, hence majority of franchisors feel a royalty fee shouldn't be considered as a liability.

Hello Kids boasts of increased franchisee satisfaction. On this, Agrawal claims: “We have opened 135 branches in around two years. 90 per cent centres are renewing their contract after the initial agreement period.” No royalty fee model is an ideal business model for a franchisee, as he/she will get enhanced profit. Agarwal adds: “Even though royalties in the industry range between 15 and 18 per cent, in actual profit terms these turn out to be close to 40-45 per cent. By not paying a royalty fee, a franchisee gains savings.” A franchisee gets the sole reward for the efforts and risks it takes to operate a brand's franchise. Agreeing with him, Shah adds: “A franchisee will work freely and is able to generate more business.”

Certainly, this model is not in favour of franchisors, as they are likely to get lesser revenues as compared to their competitors. “The only disadvantage Vasari sees in the no royalty fee model is the loss of franchise fee and brand royalty revenue from franchisees, which is compensated by gains from higher sales and brand's presence,” adds Mohnani. Whereas, Kiran Kumar K, CEO, Laetus Education Private Limited, believes, “I think in the long-run quality sustains and models disappear. No royalty fee model needs commitment from an individual and a proper road map for the scalability of the business. Otherwise, a franchisor will lose the brand value.”

A hit or miss?

Diving deep into the psyche of franchisors it can be said that 95 per cent franchisors don't believe in this new theory, whereas only five per cent of franchisors use it as a tactic to spread their footprint in the competitive marketplace.

No royalty fee model in the present scenario has turned out to be a boon for franchisees. With changing times, new-age franchisors have started to explore new mantras and planning strategies to debut fresh business models to retain the current franchise investors and targeting the new ones. All in all, to strengthen one's position in this extremely competitive market, innovation in terms of existing business models is touted as the next big leap for franchisors.

No royalty fee model a win-win deal

=Useful in retaining existing franchisees

=Helps in targeting new franchisees

=Helps in minimising project cost and investment of a franchisee

=Helps in market penetration

=Less termination of franchise agreements

=Possibility of increased franchise renewal

=Increase in franchisee satisfaction level

=Hassle-free journey for franchisees

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