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Feb, 11 2013

MARKING AREAS OF BUSINESS SUCCESS

An area franchise model can fast track the growth of business systems in a vast geography like India. In recent times, many international franchisors have found it to be a winning strategy for spreading across India's huge landscape to tap its enormous ma

WHILE launching an international franchise development programme, a franchisor has to decide the best expansion strategy to break into a new land. Besides evaluating the country's economic, political, legal and socio-cultural aspects, he must consider factors like size of its demography and geography. There is no one franchising structure that fits all business systems. Typically, a master franchise or sub franchise for a country is appointed. However, one school of thought says that in large-sized geographies like China and India, an area franchise model is more suitable. The area relationships help franchisors to expand their systems rapidly and enable efficient delivery of training, support and services to far-flung unit franchisees.

Importantly in India, which is the one of the biggest international markets, several international brands or their master franchisees feel the need to divide the country's market into multiple territories for effective expansion of their franchise systems.  Usually, to begin with, a franchisor at first ties up with one area franchise to test market the brand performance in a limited region. This helps him to decide whether to embark on countrywide expansion or not.

Conquering vast landscape

The sheer size of Indian landscape has prompted some brands to settle on area franchise relationships for creating their presence. Pollo Tropical, an F&B brand from USA with 90 company owned restaurants in domestic market  and 35 international locations via licensees and franchisees,  has opted for area or regional  franchise partnerships in India.  When asked about the decisive factors, company's Senior Vice-President for international development Marc Mushkin quips: “India is one of the world's three or four biggest markets and is a vast geography with distinct regions, languages and cultures. We believe master franchise is a complex business model for our brand and we would like to have direct relation with our partners. We have signed our first area developer and as per our market research, we can have four or five more Area Developers.” “India is a huge country, both in terms of population and geography, with regional differences in customs and business practices,” observes Jeffery B. Welch, President-International, Krispy Kreme Doughnuts, Inc. The brand famed for its original glazed doughnuts has marked presence in 21 countries across the globe. It has awarded franchise development rights to two different partners in India. For the South and West regions, it has signed an 80 stores-deal with Citymax Hotels Pvt. Ltd. to be opened in the next five years.  Moreover, it has entered into another regional agreement with Bedrock Food Company Pvt. Ltd. that is committed   to opening 35 stores over the next five years in six states in Northern India.

Furthermore, some other brands like GFA, Sbarro, Quiznos, Yogurberry and Shwarma Xpress have also employed this model to accomplish their growth objectives in the Indian market.

Mechanism of area franchise

First, let's understand what area franchising is all about. It is not to be confused with area representation which is entirely a different legal and business arrangement, an area development is a direct agreement between a franchisor and a franchisee that gives the latter first rights to expansion or location within a geographic area that can be a region, a whole state, or a small area as in a defined section of a city. A variation to this franchise structure is area sub franchise agreement wherein an area partner is also licensed to sell franchisees in a defined territory, subject only to approvals from the franchisor.

Founded in 2001, Bahrain-based Shawarma Xpress, an innovative QSR franchise committed to producing a creative variety of Shawarma recipes has forayed into India via franchising. Spearheading its presence beyond the Middle East, the brand has selected area franchise model in India.  “Shawarma Xpress asks for an initial development fee based on the franchisee's development plan, the number of restaurants envisaged and the territory being negotiated,” informs Andrew H. McNair, the company's Head of Operations. Last year, it has signed an area franchisee for the North and East region of India with a 50 restaurant deal.

Impact on deal terms

An important point related to the structure of area franchise agreements is whether the terms of deal will be different for each partner. Yogurberry, a South Korean yogurt brand, was introduced in India by Dubai's Synergy Group which is the brand's master franchisee for India, Qatar, Bahrain and Oman. Aiming for 100 outlets in five years, it has appointed Raasha Leisure and Entertainment as the area franchisee for the Northern and Eastern region of India. Pawan Batavia, Director of Synergy Group explains: “Our agreements are standard with the only differential being the target number of stores an area franchisee is required to achieve within a set time frame. The legalities remain the same as the contracts for the various areas all fall under the jurisdiction of India. The VAT varies in each state and we adjust our selling prices accordingly. And since we are selling the same product across the country, there is no change in the training methods for different area franchisees.”

Having own stores and single unit franchise stores in Southern India, Global Franchise Architects (GFA) prefers to operate through master franchisees and area franchise route in rest of the country.  Joseph Cherian, CEO, GFA Global, says: “Other than the territories, the terms of agreement do not change with different area partners. The franchise fees, royalties, the support provided by the franchisor, training, etc., would also remain constant for all partners.”

Potential benefits

Apart from addressing the issue of a larger geographical area, the area franchise route underscores many other factors for an international franchisor. Pawan Batavia believes that there are many operational benefits in working through area franchisees. He counts: “It leads to a faster and more controlled expansion as the brand grows through several partners rather that one, provides better understanding of the local areas, offers a more defined control of operations. Moreover, multiple partners bring in larger number of thoughts and ideas on how to further enhance the brand and operations.”

This strategy helps the franchisor in comparing the performances of various partners besides avoiding dependence on any one of them for building the brand. It comes handy when its relation takes a beating with one partner. Then instead of winding up operations completely, it can continue with the others and scout for a new partner in the wronged territory.

From area franchisee's perspective

The ideal area franchise candidate should have prior franchising experience, ample financial resources and local market knowledge and expertise. In general comparison with countrywide   master franchise, the franchise fee for an area/region is significantly lower.  While for the brand, the revenues do not get impacted, for the area/region franchisee the revenues are also low compared to the earnings for a nationwide territory. However, one should not forget that stakes are much higher on a countrywide scale. Further, from taxation point of view, in case of certain brands or products, for e.g. alcohols and wines, as taxes and duties are state specific, they will be different for different area franchises.

Finally

Even though for all practical reasons , a number of foreign franchisors find area franchise model a more prudent strategy for expansion in India, its true that some franchise concepts  don't lend themselves to this model. In some cases, franchisors rely on combination of business models.   For e.g. McDonalds's has presence in India via both joint venture as well as area development licensee for separate territories. GFA India operates through a mix of ownership, single unit franchise, master franchise and area franchise models. Joseph Cherian stresses: “I do not think there is a perfect model I could say is the best. Hence we at GFA prefer a combination of all models for expansion. From a franchisor perspective area franchise is definitely a complex model but we do not have much choice but to put in a good control system.” However he reminds that an area franchisee brings in a lot of local expertise the brand might not have access to, adding tremendous value to the overall business.

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