Franchising: An Industry Perspective Presented by Ritesh Vohra First Franchising Private Limited 16 th November 2002 / FICCI Footfalls 2002 / New Delhi

Agenda Franchising Internationally Franchising in India Retail & Non Retail Franchising in India Franchisor-Franchisee Relationship Summary

Franchising Internationally

Franchising in India

Retail & Non Retail Franchising in India

Franchisor-Franchisee Relationship

Summary

Franchising Internationally Very well accepted Entrenched deeply within USA & Western Europe Fairly well structured in terms of framework In USA: $1 Trillion is spent each year on goods bought at franchised outlets One out of every 12 business establishments is a franchised business A new franchise business opens every 8 minutes of every business day 50% of retail trade is through franchised outlets High growth areas are South-East Asia, Latin America & the Middle East US franchisors lead the way in International expansion

Very well accepted

Entrenched deeply within USA & Western Europe

Fairly well structured in terms of framework

In USA:

$1 Trillion is spent each year on goods bought at franchised outlets

One out of every 12 business establishments is a franchised business

A new franchise business opens every 8 minutes of every business day

50% of retail trade is through franchised outlets

High growth areas are South-East Asia, Latin America & the Middle East

US franchisors lead the way in International expansion

Franchising in India Acceptability growing by the day Fairly conventional industry spread Approximately 600 franchisors spread across industries like education, retailing, professional services, healthcare etc Over 40,000 franchisees Annual turnover from Franchising – anywhere between Rs.8000-Rs.10,000 crores Total investments made by Franchisees – over Rs.5000 crores Over 300,000 people directly employed by franchised businesses Variety of hybrid formats in practice Number of International franchises already existing, more coming in Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

Acceptability growing by the day

Fairly conventional industry spread

Approximately 600 franchisors spread across industries like education, retailing, professional services, healthcare etc

Over 40,000 franchisees

Annual turnover from Franchising – anywhere between Rs.8000-Rs.10,000 crores

Total investments made by Franchisees – over Rs.5000 crores

Over 300,000 people directly employed by franchised businesses

Variety of hybrid formats in practice

Number of International franchises already existing, more coming in

Factors Defining the Growth of Franchising in India Positive Factors Huge consuming class Fast-growing consumerism Shift towards Services from Agriculture & Manufacturing Franchising has already proven to be successful in several sectors Large entrepreneurial pool

Positive Factors

Huge consuming class

Fast-growing consumerism

Shift towards Services from Agriculture & Manufacturing

Franchising has already proven to be successful in several sectors

Large entrepreneurial pool

Factors Defining the Growth of Franchising in India Negative Factors Lack of regulatory framework Financing mechanisms not in place Skewed real estate markets

Negative Factors

Lack of regulatory framework

Financing mechanisms not in place

Skewed real estate markets

Franchising Trends in India The Education sector dominates the Indian franchising scenario, although Retail is fast catching up Most of the franchisors are relatively new and small Several large Indian corporates also going the franchising way Newer & innovative concepts being introduced Substantial interest from international franchisors as well as Indian business houses for master franchises Franchising is now spread across the country, thereby providing opportunities to entrepreneurs everywhere

The Education sector dominates the Indian franchising scenario, although Retail is fast catching up

Most of the franchisors are relatively new and small

Several large Indian corporates also going the franchising way

Newer & innovative concepts being introduced

Substantial interest from international franchisors as well as Indian business houses for master franchises

Franchising is now spread across the country, thereby providing opportunities to entrepreneurs everywhere

Benefits of Franchising Franchising allows the franchisor to: Have greater access to capital Expand rapidly Save operating costs Capitalise on the abilities of independent entrepreneurs

Franchising allows the franchisor to:

Have greater access to capital

Expand rapidly

Save operating costs

Capitalise on the abilities of independent entrepreneurs

Benefits of Franchising Franchisees joining a franchise system enjoy the following benefits: Backing of a bigger organisation Shorter learning curve Established trade mark or service mark Economies of scale Joint advertising and promotion Transfer of management expertise Training & support from the franchisor

Franchisees joining a franchise system enjoy the following benefits:

Backing of a bigger organisation

Shorter learning curve

Established trade mark or service mark

Economies of scale

Joint advertising and promotion

Transfer of management expertise

Training & support from the franchisor

Retail Franchising within India Grew initially in the apparel & footwear sectors Has gradually grown to cover a wide variety of sectors including food, consumer durables, jewelry, books, home décor etc Two varieties of Retailers: the manufacturer-retailers – typically Product Distribution Franchises – have been around for a while the aggregators – typically Business Format Franchises – only now beginning to show up Existent & likely to be successful only in smaller formats Substantial action also happening in non metro locations Thereby spreading organised retailing over a larger footprint Has had to contend with the peculiarities of the Indian real estate markets Result – MG (Minimum Guarantee) has become the key driver

Grew initially in the apparel & footwear sectors

Has gradually grown to cover a wide variety of sectors including food, consumer durables, jewelry, books, home décor etc

Two varieties of Retailers:

the manufacturer-retailers – typically Product Distribution Franchises – have been around for a while

the aggregators – typically Business Format Franchises – only now beginning to show up

Existent & likely to be successful only in smaller formats

Substantial action also happening in non metro locations

Thereby spreading organised retailing over a larger footprint

Has had to contend with the peculiarities of the Indian real estate markets

Result – MG (Minimum Guarantee) has become the key driver

Franchising in Retailing – A Variety of Models *many more varieties of the hybrid model exist.

Non Retail Franchising within India Comprises of sectors like Education, Health & Beauty and Professional Services Is widely practiced and accepted across the country Differs from Retail franchising in terms of the importance given to the location Pure franchises / Management contracts followed

Comprises of sectors like Education, Health & Beauty and Professional Services

Is widely practiced and accepted across the country

Differs from Retail franchising in terms of the importance given to the location

Pure franchises / Management contracts followed

Brief Sectoral Analysis IT Education – Down for the moment but surely not out; likely to re-emerge through IT Enabled Services Retail – Going strong but getting hurt because of the real estate markets Vocational / Preparatory Education – Fundamentally strong because of huge population base and high competition in public examinations F&B – Low level of activity currently but attractive long-term potential Professional Services – Low level of activity currently but attractive long-term potential

IT Education – Down for the moment but surely not out; likely to re-emerge through IT Enabled Services

Retail – Going strong but getting hurt because of the real estate markets

Vocational / Preparatory Education – Fundamentally strong because of huge population base and high competition in public examinations

F&B – Low level of activity currently but attractive long-term potential

Professional Services – Low level of activity currently but attractive long-term potential

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

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

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

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

Key Concerns for the Indian Franchise Sector Herd mentality – both franchisors as well as franchisees Several wrong precedents of franchisors as well as franchisees To an extent: many franchisee’s commitment to service quality is missing many franchisor’s commitment to provide the promised support to their franchisees is in doubt Result – a tense relationship, which doesn’t help anyone

Herd mentality – both franchisors as well as franchisees

Several wrong precedents of franchisors as well as franchisees

To an extent:

many franchisee’s commitment to service quality is missing

many franchisor’s commitment to provide the promised support to their franchisees is in doubt

Result – a tense relationship, which doesn’t help anyone

Key Concerns for the Indian Franchise Sector Financing for franchises is a problem area with financial institutions soft expenses not recognised as part of project cost by many institutions Legal & disclosure framework for franchises is not in place increases chances of fraud by fly-by-night franchisors makes it difficult to resolve disputes Real Estate markets completely unstructured & unrealistic make Franchising unviable for start-up entrepreneurs

Financing for franchises is a problem area with financial institutions

soft expenses not recognised as part of project cost by many institutions

Legal & disclosure framework for franchises is not in place

increases chances of fraud by fly-by-night franchisors

makes it difficult to resolve disputes

Real Estate markets completely unstructured & unrealistic

make Franchising unviable for start-up entrepreneurs

Way to go Need for a Working Group / Regulatory Body on Franchising to identify correct priorities and lobby for them Need for disclosure norms & legal framework on the regulatory side Most importantly, Franchisors as well as Franchisees need to understand & honour their commitments & responsibilities towards each other

Need for a Working Group / Regulatory Body on Franchising to identify correct priorities and lobby for them

Need for disclosure norms & legal framework on the regulatory side

Most importantly, Franchisors as well as Franchisees need to understand & honour their commitments & responsibilities towards each other

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