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Oct, 16 2012

‘SHOE-BITE’ STINGS HAPLESS FRANCHISEES

Between two and 10 per cent of franchises close every year in India, for various reasons. Usually the raison d'être is the mistake of over saturating a given geographical area with too many franchisees or the closure may have been hastened as the aftereff

FRANCHISE failure is not new to the franchise industry but franchise failure of a renowned and established international brand has startled the entire nation. Yes we are talking about Reebok here. Reebok is one stark example of a franchise-gone-wrong in India. The brand opened its first store in Delhi in 1996, and after a stint of almost 15 years, it experienced a 'bad shoe-bite' leading to the closing of hundreds of its franchisees. Initially, when the brand forayed into India, it drove millions of its customers to its stores. But eventually, as a consequence of aggressive expansion by the brand, the number of Reebok franchisees exploded. Presently, Reebok is operational across 1000 retail points.

“We are not protestors, we are businessmen,” says Vivek Sood, Head, Rest of North Reebok Franchisee Association. “We still want to continue business with the brand but how can we do it as the brand is not settling our accounts, rather they are not ready to listen to any of our queries or mails regarding our account settlement,” adds Vivek. This has led to a catch-22 situation as brand Reebok has gone horribly wrong in its dealings with its franchisees.

According to recent media reports and statements from 20-odd franchisees across India, Reebok had sent a notice on August 17, 2012, in which the brand asked its franchisees to terminate the minimum guarantee  (MG)  model from August 31, 2012 and dictated us to liquidate the remaining stock on 50% off till  November 30, 2012. There are about 1,000 Reebok stores which are operated by franchisees in India and this figure will be reduced by one-third. Recently, the management announced that they would revise the growth plan by re-examining the franchise model.

From benefits to breakdown

One of the reasons behind the collapse of this renowned sportswear brand in India is its incredibly rapid growth.  In the beginning, the brand did extremely well, as it had hardly any competition. Capitalising on the popularity, Reebok embarked on a not-so-prudent-strategy to sell its brand almost everywhere. Everywhere would range from kiosks to stores to highway dhabas to malls to lanes of small towns to elite malls, which eventually diluted the brand. When asked if there was any objection to opening of another store in their vicinity, a Punjab-based franchisee, Rajbir Singh, says: “I was always concerned about the opening of another Reebok store in my vicinity, a store which was not even a few kilometres away. Upon questioning the brand's management about the same they told me that the other franchisee had insisted on taking the brand's franchise and they assured me the store would shut down soon as this franchisee didn't have any prior knowledge.”

Commenting on the brand's dilution and slump, Anupam Bansal, Director, Liberty Shoes, says: “I think brand Reebok spoilt its franchisees by giving unrealistic commitments and expectations. The minimum guarantee model adopted by the brand was not feasible as it was only ok at the entry level and not for long term because the franchisees considered themselves investors and not franchisees. In return, a majority of franchisees were only dependent on the MG model and were not ready to work hard.”

Supreet Singh, Regional Manager, Punjab, Sales and Operations, Nike, feels: “Reebok witnessed a breakdown because before giving their franchise they didn't analyse the potential of the market, rather they used to give their franchise to anyone. Their commitment of giving minimum guarantee plus commission was unrealistic. They used to consider their franchisees as investors and not franchisees.”

Another tactical error for Reebok's franchise failure is opening of multiple franchise stores in close proximity to one another. The brand didn't realise that a new store might offer additional revenue to the franchisor but would lead to less profit for each individual store owner. Reebok's unbelievable number of stores led to over saturation in the market, which further led to the collapse.

Franchisee Speak

After speaking to about 20 franchisees, there is little doubt that they are the victims of an imprudent business strategy. Says Rajbir Singh: “We took loan for this franchise, and what are we getting in return? We are in a situation where we have to spend from our own pockets and that too in lakhs.  The brand has given us time till November 31 to clear our stocks and for the remaining stocks they have told us that they will take these stocks on a mutually agreed price.  Why doesn't the brand understand about our commitments to banks and our employees?”

About the brand's training and support system, all franchisees unequivocally expressed dissatisfaction over the brand's lack of concern for a newly-opened store. They said the brand never cared to provide them the stock of their choice and as per their requirements. Only a few said their needs and requirements were fulfilled by the brand.

Conclusion

On what could have gone amiss, CK Kumaravel, MD, Naturals Beauty Salon, a health and beauty brand Franchisor, who is running 150 salons in India, says:  “The first reason could be that they overestimated the market size, opportunities and other aspects, which are essential for any business to succeed.  All stakeholders should benefit consistently from the business. However, if you rob 'Paul to pay Peter', somewhere the cycle would come to a halt. While I am not aware of the details, such a powerful brand like Reebok to fail is not good news for franchising and lifestyle retailing in India.”

For potential and existing franchisees, besides reasons discussed above, there could be other factors too that might pose a threat to their business, most of which ought to be taken care of by due diligence as early as a franchisor or a franchisee gets a sniff of trouble in the air. As of now caution is the word for those who are going through a bad phase and also for existing franchisors and franchisees. However, let's keep our fingers crossed even as we wait and watch how brand Reebok strives further to resolve the crisis as also whether the premium brand manages to retain its franchisees or loses them in the bargain.

MISSTEP THAT HURTS

Former Managing Director of Reebok India, Subhinder Singh Prem, and ex-Chief Operating Officer Vishnu Bhagat were arrested recently in connection with a fraud case. They have allegedly indulged in fictitious sales and fudging of company accounts. Reebok has claimed that such activities resulted in a loss of almost Rs 8.7 billion for the firm. The two former executives, who left the firm in March, have denied the charges. Three other people have also been arrested in connection with the case.

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