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Jun, 15 2012

Franchise, ideal for Indian biz

An international brand would like to select the best way to enter a new market. Given the pros and cons of doing business in emerging India, the brands prefer franchise route for expansion.

W HILE expanding into a new market, the international brands often form strategic collaborations with local partners through joint ventures (JV) and franchise agreements. Having a local partner helps them in minimising their risks related to capital, law, economy, management, marketing, etc., and increases the probability of success in the unknown territory. During 1990's when Indian economy opened up to foreign direct investment (FDI), several foreign brands were encouraged to foray into India via joint ventures. The large-sized Indian market, owing to its demographic, cultural, and economic diversity, allures international brands. However, even the most established multinational companies find the market quite challenging to take much risk. In the past few years, many entrants have established themselves in India through the franchise expansion model. Taking cue from their success many more brands are utilising the franchise route to have firm footing and sustainable growth in the Indian market.  One needs to explore what makes franchising the most convenient, secure and cost-effective expansion strategy to enter India vis-à-vis joint ventures.

 

Modes of entry

For companies seeking worldwide presence, franchising and joint ventures are the preferred modes of entry. A joint venture is a strategic partnership between a foreign entrant and the local company, which is formed to introduce a new product or service. It is the JV company which expands the brand in the new market. JVs are ascribed to high investment and high risk scenario.  Due to equity nature of the agreement, the foreign company shares the responsibility and risk pertaining to capital, operations, management, profits, and taxation, along with the local partner in proportion to its shareholding. On the other hand in franchising, the companies or franchisors allow local partners or franchisees to use their brand names and replicate the systems and business models for swift expansion across markets for exchange of fee and royalties. It is the local partner who brings capital and is responsible for developing the brand in the assigned territory.  Hence, franchising is typically a low-cost and low-risk model.

 

Franchisors, a growing creed

With many global brands getting into joint ventures in India, there are also a growing number of international franchised brands who are affirming their presence. It is estimated that out of 250 foreign brands from food and beverage, fashion and lifestyle segments currently operating in India, nearly half of them are franchising.  The world's most recognisable brands like Yum! Brands, Mango, Alcott, Domino's, Subway, United Colors of Benetton, Lee Cooper, etc., have used this model. Recently, brands like Thomas Pink, Dunkin' Donuts, Krispy Kreme, Frette, Clair's, Van Laack, and Pinkberry have entered the market through the franchise route. US-based yogurt retailer Pinkbery now has presence in nearly 18 countries, including India.  Sharing his views on the brand's entry into India, Ron Graves, CEO, Pinkberry, said: “Pinkberry's move into India underlines our commitment to globally expand and bring our unique yogurt experiences around the world. The company's dedication to find the right local partner is unparalleled.” He added: “The key to franchise model's success is to find partners that are equally committed to staying singularly focused on exceeding customer expectations. We seek partners having local and relevant experience and who share like-minded values.” The brand endeavours to overcome the hurdles and competition in new markets by providing ample support to its franchisees.

 

Franchising or JV? 

In today's global economy, not many companies will prefer standalone entries in new markets, including India. The choice of expansion strategy depends on their capacity, risk-appetite and business objectives. As Ankur Besin, AVP-Retail & Consumer Products, Technopak Advisors, explains: “The two models are mutually exclusive options.  Some brands will find comfort in JVs, others in franchising. The key differentiator is whether the brand's objective is scale or rapid expansion across geographies.” According to Besin, building scale is easier with joint ventures because the companies can work out various ways to raise capital and innovate in the market. However he cautions: “Sometimes the foreign company is apprehensive of sharing its proprietary knowledge, processes and skills with a local partner. Whereas in franchising, the brand owner is in complete control of business procedures and strategy. Hence, it is the issue of control that sometimes makes JV less attractive then franchising.” In a JV, the brand can protect the customer experience at the retail end or point of sale, but in the franchise model, the delivery of brand experience depends on the franchisee. However, now a days, the franchisors exercise quality control through operation manuals, stringent guidelines and inspections to boost the consumer’s brand experience at the franchisee’s end.

Moreover, exit strategy is integral to an optimum business expansion plan. Franchising is generally a long-term business arrangement which can be renewed after the expiry of the initial term. On the contrary, joint venture is mostly a one-time affair.          

 

Case for franchising

The model can be effectively utilised to enter a market or it can serve as a tool that can restructure the company's existing operations. Besides, a brand may choose to benefit from both simultaneously.  

India-entry strategy: Recently, Mahindra Retail, Indian franchise partner of Destination Maternity Corporation (DM), the world's largest maternity apparel company, has opened the brand's first store in India. Asserting that the model will be beneficial whenever the franchisor requires local expertise and the franchisee can provide the same, K. Venkataraman, CEO, Mahindra Retail Pvt. Ltd, said: “Destination Maternity, being a world market leader, understands this category and Mahindra Retail's Mom & Me stores offer the best selection of brands for the life stage of 9 months to 9-plus years. The synergy is apparent and the choice of franchising enables building the market, with optimal investment on both sides, to mutual advantage.  More specifically, the market is nascent for DM to enter directly and it requires Mahindra's expertise to develop ethnic products and market to a niche audience.”

Restructuring tool: Sometimes brands may restructure their existing operations either because their original arrangements could not provide them desired success or simply because it is practical and profitable at that point in time. It is said that last year Promod, a French women’s wear retailer reworked its franchise deal with Major Brands and converted its alliance to a JV. In 2011, McDonald's rejigged its joint venture in India. Hardcastle Restaurants, the brand's partner in South and West India, joined its franchise network and became a development licensee. This year, Italian fashion brand Armani ended its joint venture with DLF Brands and signed a multi-year franchisee deal with Genesis Luxury.

Model-mix: Some international brands have exploited both the models simultaneously to build market in India. Apparel and accessories brand Tommy Hilfiger has joint-ventured with Arvind Brands, whereas Canadian education brand Maple Bear is a part of Modi Group. These JVs operate through the franchise model and till now have no company-owned units.  Another education brand Etonhouse from Singapore has collaborated with Serra International and has spread its wings across the country via franchising.

 

FDI and franchising

The Indian government's recent move to allow 100 per cent foreign direct investment (FDI) in single brand retail is set to redefine the Indian retail scenario. It is speculated that the new policy will encourage foreign retailers to take full ownership of their Indian operations. However, given the pros and cons of doing business in the Indian market, how many foreign companies would like to do so?  With brands like TAG Heuer, Zenith and Dior in its portfolio, LVMH presently has seven TAG Heuer boutiques with franchisees in India. Says Franck Dardenne, GM, LVMH Watch & Jewellery India Pvt. Ltd: “The new FDI law is difficult for us to follow without a few clarifications. Our products, which are bought because they are 'Swiss made', cannot cope with the 30 per cent local sourcing requirement, while high precision products like watches require investments over what SME are allowed to do within this law.”  On franchising he says: “The franchise model is very light and flexible, not only because it does not require equity investments, but also because it helps in coping with different regulations in various Indian states. There is no reason to change a model which has proved successful.”  TAG Heuer aspires to be a leading watch brand in its category in India in the coming years. With the target of having a stronger mono-brand presence for the brand in the market, LVMH plans to open more TAG Heuer boutiques with franchisees.

 

Finally

Undoubtedly, the choice of business growth model is critical to a company's performance and success and there is no single expansion strategy that applies to one and all. International brands invariably do the necessary groundwork before foraying into an unknown territory. As the country's market is still developing, they look for safer ways to enter it. With franchising offering unmatched advantages, more and more foreign brands will continue to seek expansion and growth in India through this route.

 

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