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Oct, 16 2019

LOW COST, HIGH RETURN THE FRANCHISING FORMULA

While the return on investment is one of the prime triggers behind setting up any business venture, uncertain economic conditions or wrong choices and strategies could well push an entrepreneurial effort out of the game, especially if the initial costs are too high and difficult to recoup. Hence, low-cost franchise opportunities are getting more relevant than ever

Low-cost franchising opportunities have always been at the centre of attraction due to obvious capital savings. However, there is one more reason this time around: economic downturn. Experts opine that professional forecasters missed 148 out of 153 world recessions. This is not surprising – economic indicators very rarely flash any warnings before a recession actually arrive.

Economic downturns seem to come unexpectedly. While India consistently registered quarterly growth of 6% through the 12 months of global recession during 2008-09, the country’s growth pattern is different this time around. India’s GDP growth has slowed down to 5%—the lowest in six years, instantly triggering a gloomy mood across sectors.

These sectors were already under pressure due to weak consumer demand and a credit squeeze from 2018. The crisis brewing within the Indian economy has gained unanimous acceptance by now.

While India was well-cushioned to tackle recession in 2008 with strong foreign reserves and lower borrowings among corporates, the scenario has changed drastically in 2019 as several top companies are presently exposed to major crisis. Loan default at IL & FS last year was the biggest jolt to the NBFC sector, triggering an acute liquidity crunch. Foreign investments – considered as a stabilising force that worked in India’s favour during the 2008-09 recession – have also shrunk significantly in 2019.

LOOMING JOB LOSSES

Since 2009, India’s exposure to global economies has increased significantly; industry bigwigs from the West—from apparel to technology— enjoy a bigger bite of the Indian marketplace. A slowdown in their business could upset many aspects of the Indian economy, precisely leading to increased job losses. And the fact that unemployment in India is at a 45-decade high has already painted a worrisome picture. The spurt in instances of job losses from automobile manufacturers to biscuit makers has led to the general acceptance of the downturn.

For instance, the automotive sector which makes up for almost 7.5% of the country’s GDP and almost half the manufacturing GDP, has laid off 3.5 lakh employees as consumer demand shrunk dramatically over the last 10 months of sectoral slowdown. Many other sectors including real estate, banking and FMCG are feeling the heat as well, but haven’t yet sizzled completely under pressure. While economists feel that it would be an exaggeration to forecast recession, they add that the economic slowdown in India is much more than expected.

FRANCHISING MAKES SENSE

Past recessions have clearly shown that people turn to franchising in times when the economy is strained or could likely become strained. Why? People want more control of their future with a business that comes with proven systems and support. With the signs of a slowdown starting to show up again –– painting an even more uncertain picture of the future – franchising is expected to catch the senses of wannabe businessmen. “It is globally proven that during a slowdown franchising is the established format to fix the economic stress by giving people opportunities to start a small business without much knowhow. In fact, new franchises play an integral role in supporting the local economy through more job creation and the payment of taxes,” highlights Gaurav Marya, Chairman, Franchise India.

There has been a noticeable growth in the Indian franchising industry since 2008 and the industry has increased fourfold in size since 2012, creating 11 million job opportunities. Supports Meeta Gutgutia, Co-Founder, Ferns N Petals, “Economic downturn will definitely benefit the franchising industry as more people would take the plunge into entrepreneurship to safeguard their financial interests, prepare for the rainy days, and generate income to support their lifestyle.” Experts say that over the years franchising has proved itself as a dependable gateway for new entrepreneurs.

Besides people who lose jobs, it’s a perfectly viable option even for those executives who have a steady career but wish to add a second source of income. “I believe that there are more and more people who will continue to come in from diverse backgrounds to turn entrepreneurs. I don’t look at it from the narrow prism of the economic slowdown but within the larger context of available opportunities and the evolving socio-cultural contexts. The franchising industry will continue to prosper,” shares Mohit Khattar, CEO, Graviss Foods, which owns the brand Baskin Robbins.

SMALL IS BIG

A slowing down economy does reduce the customer’s confidence but this does not necessarily reduce the customer’s spending power. The good part of the franchise model is that even if there are inherent risks, these are not as high as in an independent business venture. In recent times, when investments have dried up to some extent and funding is difficult to find, the low investment franchises have taken the lead. Ankit Patel, CEO, The Belgian Waffle Co., explains that on one hand economic downturn could impact the risk appetite of people and therefore they may be averse to starting a business activity which calls for huge sums while on the other hand, low-cost franchise opportunities are obvious choice for many, especially for people who are pushed to a corner.

“In a low-cost franchising model the risk undertaken by a franchisee is mitigated to some extent and the potential of generating good returns is high. So this model de-risks them to some extent and it ensures that all their eggs are not in the same basket,” shares Patel. As per industry experts, low-cost franchise opportunities not only save the capital but also are more profitable as the operational expenses are considerably low. “We are seeing more traction towards low-cost franchise options due to several benefits they offer. The capital-efficient model saves your start-up investment significantly; a small format outlet can be started with just Rs 10-15 lakhs against more than Rs 35 lakhs in larger formats. As the rentals and manpower requirement is low, franchisees can expect 55-60% of margins. Breakeven usually happens in 3-6 months,” elaborates Krishnakant Thakur, Co- Founder and COO, Charcoal Eats.

RECESSION-PROOF SEGMENTS

While it’s impossible to say any segment is 100% recession-proof, many sectors continue to do well and even thrive during an economic slowdown. Segments like food and beverage, education, services, beauty and wellness, among others, prosper regardless of which economic cycle the country is in, simply because they offer goods and services that people need no matter what the economy is doing.

Food and Beverage: Once an introverted, home-driven consumer, the indulgent Indian is now waking up to an eating out culture. In fact, the increasing eating out frequency – an average of 6.6 times per month – is an impetus for food service players. Over the last few years, QSRs have seen major growth by tapping consumers’ convenience, increased appetite and between-the meals cravings clubbed with affordable and competitive pricing. “Small format QSRs are proving themselves as highly profitable ventures with low infrastructure and maintenance costs. While ‘biryani’ has emerged as an unlikely champion of India’s fast food scene, rolls, kebabs and desserts are also in high demand,” says Thakur.

In fact, dessert parlours thrive during economic slowdowns. As per experts, sweet consumption increases dramatically during recessions. Dessert brands are confident of continued business irrespective of the economic condition. “The Belgian Waffle Co. largely targets people in the age group of 3-30 years. Also, we have made our products extremely affordable with average price range of Rs 100-150. Hence, given our price points and the demographic profile we cater to, we are not seeing any impact on our business. We could safely say it is a recession-proof business,” highlights Patel.

Education: Experts opine that the Indian education sector is still largely unexplored with huge scope for franchising in pre-school, coaching institutes, vocational institutes, and after-schools. India has the world’s largest population of about 500 million in the age bracket of 5-24 years, which provides great opportunity in terms of a large addressable education market. Moreover, parents consider education as an essential element to secure their children’s future and hence don’t compromise on the same. “The education segment in my opinion has the potential to survive the difficult phase. Education is one thing that people do not compromise on as it’s a robust way through which you can create a sustainable future,” shares products extremely affordable with average price range of Rs 100-150. Hence, given our price points and the demographic profile we cater to, we are not seeing any impact on our business. We could safely say it is a recession-proof business,” highlights Patel.

Education: Experts opine that the Indian education sector is still largely unexplored with huge scope for franchising in pre-school, coaching institutes, vocational institutes, and after-schools. India has the world’s largest population of about 500 million in the age bracket of 5-24 years, which provides great opportunity in terms of a large addressable education market. Moreover, parents consider education as an essential element to secure their children’s future and hence don’t compromise on the same. “The education segment in my opinion has the potential to survive the difficult phase. Education is one thing that people do not compromise on as it’s a robust way through which you can create a sustainable future,” shares Debshankar Mukhopadhyay, CEO, Zee Learn.

Services: Under the current circumstances, investors are looking at businesses which have demonstrated success and a business model which can quickly become cash flow-positive so as to minimize initial losses. “That’s the reason why service-based franchise businesses are finding many takers. In fact, the concept of ‘roti, kapda aur makaan’ can never go out of style and hence businesses built around these concepts would continue to thrive and be recession-proof,” says Arunabh Sinha, Founder, UClean. The largest laundry chain in India has created a mini-format laundry store model with area requirement of just 150- 250 sq. feet and investment of Rs 15-20 lakhs.

Beauty and Wellness: Experts highlight that the beauty and wellness business will never cease to be in demand. Even in the midst of economic struggles, people still care about how they look. Most people are still willing to spend their hard earned cash on salon services, even if they have to tighten the budget in other areas like entertainment. Moreover, healthcare is an essential business that occupies top slot on the priority list of most people. “While healthcare is a recession proof business, the small format models are making the deal even sweeter. The initial investment may be Rs 3-5 lakhs as the space requirement is just 250-300 sq. feet. We have built our franchise model to be self-sustainable with RoI of over 24%,” informs Om Manchanda, CEO, Dr Lal PathLabs.

Retail: Small format retail including groceries and pharmacies are known to be recession-proof. Interestingly, the flower and gifting segment also remains unaffected by the economic turmoil. “Indian customers continue to celebrate various occasions and festivals, whatever the situation is. They give more mileage to emotional connect, expressing gratitude and good wishes over financial woes. While the ticket size per customer goes down, the number of customers increases,” explains Gutgutia of Ferns n Petals. The company offers franchises of Ferns n Petals and FNP Cakes ‘N’ More, a bakery shop model, with investment of Rs 8-10 lakhs and ensures breakeven within 12-15 months of operation.

NEW STRATEGIES

Despite being in the relatively safe zones, most of the brands are devising new strategies to increase customer footfall, conversion rate, and ticket sizes. Creating new business categories is one of the most prominent ways to create inquisitiveness among consumers. “The addition of new categories always results in more footfalls, better conversions, increased ticket size and thus the profitability of franchisees. This also empowers the customers with more choices so that loyalty and repeat purchases improve drastically,” says Gutgutia. The company has expanded its offerings from flowers and gifting to cakes and plants, and has recently entered into the personalized gifting category.

On the other hand, Zee Learn has introduced Ankurum preschools powered by Kidzee in order to attract entrepreneurs who are looking to start with low upfront investment. “The investment for Ankurum is less than the flagship Kidzee brand but does not compromise on the developmental outcomes. We have also introduced a program to turn our existing Kidzee centres into a day care facility. Kidzee Day Care enables our preschool partners to expand services and increase returns through optimum resource utilisation,” elaborates Mukhopadhyay. Further, many of the service focused brands are focusing on subscriptions to ensure steady income. “Laundry is an all-cash business with low fixed and operational costs. We largely focus on subscriptions, with monthly, quarterly or annual packages. This enables us to lower the customer acquisition cost and gives solid returns within 6-7 months,” states Sinha of UClean.

 In addition, many businesses are creating smaller formats with limited offerings in order to cut costs and enable better RoI. At a time when finding bigger spaces is a major challenge for small entrepreneurs, smaller format outlets are offering better brand visibility and quick access to customers. “Our studio model fits into a compact space of 300-400 sq. feet and subsequently the franchisee fees, cost of interiors, rent and operating costs become lesser. This encourages first-time entrepreneurs to easily invest and operate,” highlights Jawed Habib, celebrity hair stylist. Another trend taking the world by storm is that of service providers on the move. Home cleaners, dog groomers, hairstylists, chefs and many more are setting up their ventures in trucks or vans. It’s a move that gives them the ability to keep overheads as low as possible while offering a novel service to the client – a service that meets them at their doorstep.

WORD OF CAUTION

While a low-cost franchise offers a wonderful opportunity to start your entrepreneurial journey or to test the waters alongside a job or a business, there are certain pitfalls that you must avoid.

Here are some guidelines:

>> Do not get lured by the attractiveness of the cost but evaluate the long-term viability of the franchise business.

>> Before investing in a low-cost business, evaluate the hidden expenses, real estate and operational costs.

>> Spend time to learn the business and be involved in it if you wish it to be successful. Your personal involvement will go a long way in ensuring a more consumer centric approach and also help to plug operational irregularities.

>> Never compromise on the choice of location for your business. If the location is right, half the battle is won, even before it starts.

>> Associate with a brand which has proven record and specialises in a specific sector. Once associated, it is important to trust and believe in their vision.

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