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Jul, 29 2015

What is affecting the franchise financial model?

How is increase in taxes leaving an impact on the set-up cost of a franchisee? Are new-age technologies important to be incorporated to increase revenue generation for franchisees? Many novel trends have been influencing the franchise financial models, re

As we all know from the last two decades, franchising in India has shown a quite promising growth and will continue to rise because of overall growth in the ecosystem of entrepreneurship. As every coin has two sides, therefore, there are challenges too for entrepreneurs in franchising too. Below are the examples of challenges faced by the franchise fraternity.

Tax, taking a toll on franchisors

Government of India has increased the service tax from 12.36% to 14%, thus, it has increased the overall setup cost for franchisee.  Total royalty including tax paid to the franchisor by franchisee went up as a tax effect. Thus it has two effects, increase in the overall setup cost and increase in the payback. Even though low to mid level investment franchise formats may not have big impact, however, it's a countable factor in high investment franchise models.

How are the taxes effecting the MRP

Premium product companies from international market usually make India foray through Master Franchise rights. To determine the final product margin in India market, master franchisee owners dictate the final prices by considering the factors such as landing price, import duty, logistics cost, respective state taxes, etc and along with that they keep the buffering cost of about 5% to10%  to mitigate the business risk. Thus, the impact is overall MRP.  Even though the MRP increases, still consumer product choice has enhanced from domestic to international.

Expensive yet important innovations in business required

Franchisors both established and startups are bringing innovation in the overall machinery through technology transfer from international markets. The financial impact for these initial experiments may be high; however brand owners are ready to take risks by seeing the opportunities in India market. For example a few brand owners in the business of pizza want to bring international machines to reduce the pizza preparation time of about two to three minutes. Market like India, where quick service restaurants are at exponential growth and with this population, to serve the customer, bringing new innovation within the business make comparative advantage and better customer service. Thus, waiting time for bringing the right machine to India as increased along with overall setup cost. But after this gestation period, overall productivity will increase since more production in less time.

(Vinay Divra is a F inancial consultant, at Francorp, India)

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