By Devangshu Dutta <\/b> (Full version of a Guest Article \n that appeared in The Financial Express on 5 May 2006)<\/i> <\/p>\n
With the possibility of 51% foreign direct investment (FDI) \n in India opened up to foreign retailers, one of the questions \n arising frequently is whether this means the death (or at least \n a slow-down) of franchising in India. <\/p>\n
After all franchising, in most people’s mind, has these alternate \n images of unscrupulous franchisers ripping-off the life-savings \n of the small retailer on the one hand, and shady landlords in \n the guise of retail franchisees gouging at the pockets honest \n businessmen who are trying to build national brands. There also \n haven’t been too many sustained success models in India where \n both franchiser and franchisees have consistently won. <\/p>\n
Surely, with FDI opening up gradually, foreign retailers would \n want to set up joint ventures in which they have control, rather \n than go through the franchise route, where their brand is “at \n the mercy of another company”? So it is a legitimate question, \n whether FDI sounds the death knell for franchising. <\/p>\n
However, jumping to that conclusion would be to ignore the \n fundamentals of franchising as a business. If the barrier to \n FDI was the only factor in the growth of franchising, there \n would be no franchise businesses in countries such as the USA \n (the largest retail market) or Australia (again one of the most \n dynamic albeit small markets for franchising in the world), \n which have negligible barriers against foreign retailers or \n service providers setting up their own outlets. <\/p>\n
At its most basic, a franchise is an authorisation, granted \n to an individual or company by another company, to sell its \n goods or services in a specific territory. The motivations for \n entering such a relationship are as varied as the individuals \n involved in the business, but typically cover some common points. \n <\/p>\n
For the franchiser, franchising offers increase in the business \n footprint and scale that can help to reduce costs per unit of \n sales, improve business visibility and the brand, and make the \n business a more likely candidate for investment or listing. \n Franchisees become a source of finance and additional management \n to grow the business, which otherwise would need to be provided \n by the franchiser himself. Franchisers also gain from the franchisee’s \n local market knowledge, existing infrastructure and real estate, \n which they would otherwise take time, money and effort to build. \n What’s more, each franchisee is an entrepreneur and “business \n partner” who directly gains from helping the franchiser grow, \n unlike employee managers – thus, potentially there is more energy \n and enthusiasm available to drive the business. <\/p>\n
The big trade-offs for the franchisee are that the local (or \n regional) business ownership, topline (sales) and a chunk of \n the margin, are passed on to the franchisee. <\/p>\n
The biggest motivator from the franchisee’s point of view \n is that, despite operating under another company’s brand and \n selling another company’s products, he is not an employee but \n an independent business owner. This is as important to an individual \n store franchisee as to a regional or national master franchisee. \n The franchise relationship also offers the umbrella of a brand \n under which to operate his own outlet(s) – the time, efforts \n and investment put into the brand across the various territories \n all converge to the benefit of the individual franchisee when \n the customer walks in with a prior knowledge and confidence \n in the brand. The franchisee also benefits from previously defined \n processes and systems, as well as structured training and business \n coaching. <\/p>\n
However, if I were to identify two major hurdles in the path \n of growth of franchising, they would be the immaturity of the \n business model on the franchiser’s part, and lack of compliance \n on the franchisee’s. <\/p>\n
The franchiser must approach the market with a well-structured \n model that makes money and can be replicated across locations, \n and with a system of training and transferring knowledge to \n the franchisees. <\/p>\n
The franchiser must also have a clear control on the product \n stream, intellectual property or other key success factors without \n which the franchise reduces to a generic outlet. Given the overloaded \n courts in the country, litigation to stop a franchisee from \n misusing the Brand’s rights is only a very very remote last \n resort! <\/p>\n
There are no hard and fast rules that can be generalised about \n whether franchising, joint-venture or direct investment is the \n correct model to follow – each situation is unique to the specific \n companies involved, and it comes down to previous experience \n with franchising, the feasibility of franchising in that specific \n product or service mix, and the business attractiveness (risk \n and investment versus the return). Franchising offers an attractive \n model of business growth, certainly a more collaborative one \n which is in keeping with the changing and entrepreneurial environment. \n Now that both models, direct investment and franchise, are available, \n companies can actually make decisions based on a balanced analysis. \n <\/p>\n
India has literally millions of individuals who would prefer \n to be their own boss and run a business, rather than being an \n employee. There are joint-families, where resources may be available \n in the form of some real-estate and family members who can be \n part of the business. Personal loans are available from family \n and friends, in the close social fabric of our communities. \n Ideal ground for franchising to grow. <\/p>\n
To close, I must quote a conversation with an international \n Brand about 30 months ago. I put across the premise that given \n India’s potential size and strategic importance as a market, \n surely the brand would consider setting up its own company rather \n than a franchise relationship. The Brand’s head of internationalisation \n looked ambivalent because at that time FDI in retail was nowhere \n on the horizon, but thought that they might consider it if government \n regulations changed. Well, the government allowed FDI earlier \n this year. And yet, this brand recently launched in India through \n a franchise relationship, for many of the reasons listed above. \n <\/p>\n
Franchising lives!
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