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Dec, 16 2013

FOCO vs FOFO, which suits you the best?

I truly agree with Morris Chang, CEO of TSMC. He said: “Without strategy, execution is aimless. Without execution, strategy is useless.” Whether you are a new entrant in the business or a growing brand, if you are looking at growing your business flawless

To survive in a fiercely competitive market, franchisors must create a business model that turns out to be a win-win situation for them and the franchisees too. The business models such as COCO, Franchisee-Owned Company-Operated (FOCO) and Franchisee-Owned Franchisee Operated (FOFO) are created to suit the specific requirements of the brand and enterprising franchisees. As we all know, with a proven business concept one tends to quickly multiply locations and achieve a nationwide footprint than establishing a brand via company-owned stores. So, in order to bring in models into play that will be blessing in disguise for franchisors, many industry players with years of expertise and market research  have now been able to create niche concepts under franchising that further allow them to control the brand's overall operations under their authority or by just solely relying on partners in business that replicate the brand's offerings and in return help them extend their brand's operation across a target market.

Franchising business in layman's language is a proven concept that can be easily replicated to further broaden a brand's network across any part of the country. Established franchisors today follow various business models under franchise system for granting the franchise rights of their brand which further involves FOCO and FOFO models.

Developing a right business module

Creating a winning franchise is never easy, but there are a few things that can be done so as to assure that the concept gets off the ground. In order to build a successful franchise, many brands are nowadays coming forward to build strategic business modules that are turning out to be boon for them in return.

From company to company and sector to sector, the business models under franchising always differ. Some support FOCO and while others strongly recommend FOFO for expanding their market reach.

LC Systems, a fast food chain, offers two management models that involve Franchise -Owned Company- Operated and Company -Owned Company- Operated. Whereas Florist Chain  Ferns N Petals is operated only through COCO and FOFO module. In case of Maya Jewels, they have Company-Owned Company Operated (COCO), FOCO and FOFO stores since all these formats have its own strengths and weaknesses. Commenting on which business model brings the maximum value, Ajay Nihalani, CEO, Gitanjali Lifestyle Limited, says: “The FOCO model for us is more enterprising and promising as the jewellery sector is at a what we would call a very interesting phase.”

In FOCO model, the franchisee owns the brand's store but it is managed by company itself. Commenting on what makes FOCO model more preferable, Aman Verma, LC Systems India Pvt Ltd, adds: “By shaking hands in Franchise-owned company-operated model, franchisee gets an opportunity to get financial freedom and real estate value hike due to numerous footfall, on the other hand, company gets brand life at prime areas where practically is not feasible to invest on property and open new outlet. Under financial terms of minimum guarantee (MG) model both ends are at a win-win situation.”

Whereas in FOFO model, the company grants the right to franchisee to further exercise control and manage the brand's outlet as per the guidelines given by the franchisor.

Gitanjali Jewels on other side offers FOFO and Franchisee-Invested Company-Operated (FICO) model. According to Santosh Srivastava, MD, Gitanjali Jewels, “The FOFO model has evolved because franchise has capital to invest and is looking for viable business, giving handsome ROI and also maintain the status in the society. In FOFO mode, ROI is higher. While in case of FICO mode, people who have capital but are occupied with current occupation/ business, and are unable to dedicate time to the new venture, opt for this model wherein company takes care of entire operations.”

Be it COCO, FOCO and FOFO model, almost every business model has its own share of strengths and weaknesses. Talking about which business model turns out to be profitable, Ajay says: “While we are open to both the formats, most of our stores are FOCO stores since this gives us more control over the day-to-day operations of the business.” As per Aman Verma of LC Systems, both ends are satisfied under FOCO model. Franchisee gets his/her MG or Revenue sharing part without taking part in operations, and on the other hand, company gets life to its brand by sustaining quality and other concerned parameters.

On the other side, Anil Sharma, VP-Retail & Franchise, Ferns N Petals, “FOFO model helps us to grow with the capital invested by the individual franchisee owners. Because of the FOFO Model, we have been able to open a new store every two weeks on an average which is helping us to expand our foothold across the length and breadth of the country.”

Talking about the major difference between both the modes, Santosh clarifies: “Both the models have their advantages as they are targeted to different segments. FICO is purely investment model and FOFO is entirely business model where there is lot of involvement in day to day operations from channel partners.” On further mentioning about upside and downside of each model, he says: “In FICO model, franchise gets descent returns and is not involved in daily operations as they are preoccupied with their existing business. FICO model gets lesser margins compared to FOFO.  While in FOFO, franchise gets higher margins. Downside is that they have to bear all operational expenses and get involved in day to day operations.”

Picking the best out of the rest

You're mistaken, if you think that any tom, dick and harry can be hired on board for operating brand's franchise. Franchising is not about just creating a right business plan but it's about tapping the right people who will further carry forward the brand's image to the target customers. So, whether it's FOCO or a FOFO model, in both cases, selection of right franchisee is a must if the brand wants to grow without any hiccups.  Enlightening on some parameters, Ajay of Maya Jewels says: “There are a lot of parameters to be considered before selecting a franchisee for FOCO or FOFO model. Primarily one condition that matters is the investors' interest in taking the business as a entrepreneur and not as a investor, this is essential for long term profitability of the business. Also parameters like location and business profitability have to be factored in.” Whereas, Aman thinks: “Franchisee who has good location and financial background, and who understands basic fundamentals of business and ethics.”

Gitanjali Jewels prefers to partner with pure investors for FICO model that are expecting high returns without getting involved in operations. While for FOFO, they look for aspiring entrepreneurs who have capital to invest and are looking to own and manage their own business.

Widening foothold

By next year, FNP would be adding 150 stores through FOFO model. Whereas; LC Systems is running 18 stores via FOCO model. Maya Jewels is operating 20 stores via FOCO concept. Moving ahead, Maya Jewels plans to open around 30 more stores by next year which would take their total number of stores to 50. Gitanjali Jewels is currently operating 93 stores via FOFO and 8 stores via FICO model. The brand further seeks to open 30 stores by next year.

Before coming over to conclusion, it can be said that choice of selecting the apt business model remains with the franchisee only.   Considering the fact that FOCO model allows the company to operate store's operations without franchisee's interference and FOFO, on other side allows franchisee to run the store independently by following the brand's guidelines, the industry's experts feel that FOCO is for time bound franchisees and FOFO model is apt choice for those who have both time, financial capability and patience to build the business flawlessly. So, before you invest into FOCO, FOFO or FICO mode, it's advisable that you put your thinking cap on researching about the sustainability of business model in longer run. Also figure out the amount of profit margins and return-on-investment you will be getting before investing money in a specific business model.

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