An Industry Perspective

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An Industry Perspective

  1. 1. Franchising: An Industry Perspective Presented by Ritesh Vohra First Franchising Private Limited 16 th November 2002 / FICCI Footfalls 2002 / New Delhi
  2. 2. Agenda <ul><li>Franchising Internationally </li></ul><ul><li>Franchising in India </li></ul><ul><li>Retail & Non Retail Franchising in India </li></ul><ul><li>Franchisor-Franchisee Relationship </li></ul><ul><li>Summary </li></ul>
  3. 3. Franchising Internationally <ul><li>Very well accepted </li></ul><ul><li>Entrenched deeply within USA & Western Europe </li></ul><ul><li>Fairly well structured in terms of framework </li></ul><ul><li>In USA: </li></ul><ul><ul><li>$1 Trillion is spent each year on goods bought at franchised outlets </li></ul></ul><ul><ul><li>One out of every 12 business establishments is a franchised business </li></ul></ul><ul><ul><li>A new franchise business opens every 8 minutes of every business day </li></ul></ul><ul><ul><li>50% of retail trade is through franchised outlets </li></ul></ul><ul><li>High growth areas are South-East Asia, Latin America & the Middle East </li></ul><ul><li>US franchisors lead the way in International expansion </li></ul>
  4. 4. Franchising in India <ul><li>Acceptability growing by the day </li></ul><ul><li>Fairly conventional industry spread </li></ul><ul><li>Approximately 600 franchisors spread across industries like education, retailing, professional services, healthcare etc </li></ul><ul><li>Over 40,000 franchisees </li></ul><ul><li>Annual turnover from Franchising – anywhere between Rs.8000-Rs.10,000 crores </li></ul><ul><li>Total investments made by Franchisees – over Rs.5000 crores </li></ul><ul><li>Over 300,000 people directly employed by franchised businesses </li></ul><ul><li>Variety of hybrid formats in practice </li></ul><ul><li>Number of International franchises already existing, more coming in </li></ul>Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising
  5. 5. Factors Defining the Growth of Franchising in India <ul><li>Positive Factors </li></ul><ul><ul><li>Huge consuming class </li></ul></ul><ul><ul><li>Fast-growing consumerism </li></ul></ul><ul><ul><li>Shift towards Services from Agriculture & Manufacturing </li></ul></ul><ul><ul><li>Franchising has already proven to be successful in several sectors </li></ul></ul><ul><ul><li>Large entrepreneurial pool </li></ul></ul>
  6. 6. Factors Defining the Growth of Franchising in India <ul><li>Negative Factors </li></ul><ul><ul><li>Lack of regulatory framework </li></ul></ul><ul><ul><li>Financing mechanisms not in place </li></ul></ul><ul><ul><li>Skewed real estate markets </li></ul></ul>
  7. 7. Franchising Trends in India <ul><li>The Education sector dominates the Indian franchising scenario, although Retail is fast catching up </li></ul><ul><li>Most of the franchisors are relatively new and small </li></ul><ul><li>Several large Indian corporates also going the franchising way </li></ul><ul><li>Newer & innovative concepts being introduced </li></ul><ul><li>Substantial interest from international franchisors as well as Indian business houses for master franchises </li></ul><ul><li>Franchising is now spread across the country, thereby providing opportunities to entrepreneurs everywhere </li></ul>
  8. 8. Benefits of Franchising <ul><li>Franchising allows the franchisor to: </li></ul><ul><ul><li>Have greater access to capital </li></ul></ul><ul><ul><li>Expand rapidly </li></ul></ul><ul><ul><li>Save operating costs </li></ul></ul><ul><ul><li>Capitalise on the abilities of independent entrepreneurs </li></ul></ul>
  9. 9. Benefits of Franchising <ul><li>Franchisees joining a franchise system enjoy the following benefits: </li></ul><ul><ul><li>Backing of a bigger organisation </li></ul></ul><ul><ul><li>Shorter learning curve </li></ul></ul><ul><ul><li>Established trade mark or service mark </li></ul></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Joint advertising and promotion </li></ul></ul><ul><ul><li>Transfer of management expertise </li></ul></ul><ul><ul><li>Training & support from the franchisor </li></ul></ul>
  10. 10. Retail Franchising within India <ul><li>Grew initially in the apparel & footwear sectors </li></ul><ul><li>Has gradually grown to cover a wide variety of sectors including food, consumer durables, jewelry, books, home décor etc </li></ul><ul><li>Two varieties of Retailers: </li></ul><ul><ul><li>the manufacturer-retailers – typically Product Distribution Franchises – have been around for a while </li></ul></ul><ul><ul><li>the aggregators – typically Business Format Franchises – only now beginning to show up </li></ul></ul><ul><li>Existent & likely to be successful only in smaller formats </li></ul><ul><li>Substantial action also happening in non metro locations </li></ul><ul><ul><li>Thereby spreading organised retailing over a larger footprint </li></ul></ul><ul><li>Has had to contend with the peculiarities of the Indian real estate markets </li></ul><ul><ul><li>Result – MG (Minimum Guarantee) has become the key driver </li></ul></ul>
  11. 11. Franchising in Retailing – A Variety of Models *many more varieties of the hybrid model exist.
  12. 12. Non Retail Franchising within India <ul><li>Comprises of sectors like Education, Health & Beauty and Professional Services </li></ul><ul><li>Is widely practiced and accepted across the country </li></ul><ul><li>Differs from Retail franchising in terms of the importance given to the location </li></ul><ul><li>Pure franchises / Management contracts followed </li></ul>
  13. 13. Brief Sectoral Analysis <ul><li>IT Education – Down for the moment but surely not out; likely to re-emerge through IT Enabled Services </li></ul><ul><li>Retail – Going strong but getting hurt because of the real estate markets </li></ul><ul><li>Vocational / Preparatory Education – Fundamentally strong because of huge population base and high competition in public examinations </li></ul><ul><li>F&B – Low level of activity currently but attractive long-term potential </li></ul><ul><li>Professional Services – Low level of activity currently but attractive long-term potential </li></ul>
  14. 14. Value Proposition from a Franchisor Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising Proven Business Format Economies of Scale Brand Name Value Proposition (Franchisors View) Brand Name 1 Economies of Scale 2 Proven Business Format 3 Value Proposition (Franchisees View) Ranking
  15. 15. Value Proposition from a Franchisee Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising Investment / Real Estate Business Experience / Background Local Market Knowledge Value Proposition (Franchisors View) Investment / Real Estate 1 Business Experience / Background 2 Local Market Knowledge 3 Value Proposition (Franchisees View) Ranking
  16. 16. Critical Success Factors for a Franchise System Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising Transparency 5 A Well Established Business Network 1 Constant New Product Development 2 Innovative Products / Services 3 Quality of Franchisees 4 Return on Investment to Franchisees 6 Factors Ranking
  17. 17. Most Common Causes of Friction between Franchisors & Franchisees Source: Annuals Surveys of the Indian Franchise Sector, conducted by FirstFranchising Transparency 1 Training and Support 2 Revenue Sharing 3 Product / Service Delivery 4 Causes of Friction Ranking
  18. 18. Key Concerns for the Indian Franchise Sector <ul><li>Herd mentality – both franchisors as well as franchisees </li></ul><ul><li>Several wrong precedents of franchisors as well as franchisees </li></ul><ul><li>To an extent: </li></ul><ul><ul><li>many franchisee’s commitment to service quality is missing </li></ul></ul><ul><ul><li>many franchisor’s commitment to provide the promised support to their franchisees is in doubt </li></ul></ul><ul><li>Result – a tense relationship, which doesn’t help anyone </li></ul>
  19. 19. Key Concerns for the Indian Franchise Sector <ul><li>Financing for franchises is a problem area with financial institutions </li></ul><ul><ul><li>soft expenses not recognised as part of project cost by many institutions </li></ul></ul><ul><li>Legal & disclosure framework for franchises is not in place </li></ul><ul><ul><li>increases chances of fraud by fly-by-night franchisors </li></ul></ul><ul><ul><li>makes it difficult to resolve disputes </li></ul></ul><ul><li>Real Estate markets completely unstructured & unrealistic </li></ul><ul><ul><li>make Franchising unviable for start-up entrepreneurs </li></ul></ul>
  20. 20. Way to go <ul><li>Need for a Working Group / Regulatory Body on Franchising to identify correct priorities and lobby for them </li></ul><ul><li>Need for disclosure norms & legal framework on the regulatory side </li></ul><ul><li>Most importantly, Franchisors as well as Franchisees need to understand & honour their commitments & responsibilities towards each other </li></ul>
  21. 21. Thank You. [email_address]

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