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Mall As Destn For Franchised Bus

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Why franchisee modle is important for malls in ncr?

Why franchisee modle is important for malls in ncr?

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  • 1. Mall as a Destination for Franchised Business – A Study in Delhi-NCR Region Manas Garai, Lecturer, Indian Business Academy – Greater Noida Abstract: ‘Location’ is always a crucial business decision for any business including franchise format of retail business. In retail franchising, it is such an important factor that often franchisors themselves specify the ‘location type’ in their business (franchise) specification. When the management of franchisee explores locations for setting the outlet, the ‘call of the mall’ comes in a very profound manner. Mall has certain advantages over other locations such as – securing high footfall, helping in building brand equity and of course a single place serving all desire mix. Today’s ‘mall mania’ of all ages is really an intangible asset for the mall duelers and if facts and figures are to be believed, new India’s mall movement will touch many milestones within next couple of years – not only in terms of numbers but also as an effective business place, thanks to numerous creative shades on it. This paper deals with the study of ‘mall as a location for franchised businesses’ in Delhi and adjacent national capital regions with an empirical study. This study examines the presence of franchised outlets in malls and analyzes franchised business entities situated at malls on various aspects. It also critically examines how the franchisee management feels about mall as an effective place for their business. The findings of this study may help in understanding franchised business scenario in malls as well as may help in decision making process while selecting ‘location’ for a franchised business. Keywords: Franchise, Retail 1
  • 2. Introduction: The organized retail sector in India has been witnessing winds of changes in the last couple of years. Hundreds of small, medium and large format supermarkets, hypermarkets and malls are being developed or are already in operation in all the major cities and larger towns. According to some estimates some 600 malls will have opened doors throughout India by 2010 and total organized retail space would amount to 90 million sq. ft. Mall business become a big business today. With this super opportunity, real estate and other specialized (in mall development and distribution) companies have come up and widened the option for the retail owners. Entry of foreign retail companies (brands) further boost up the market dynamics. Land and location has become the most important ‘factor of businesses’ today. All these sea changes in Indian market and economy compelled the retail owners (both franchised and non-franchised) to consider ‘land and location’ with top priorities and to undergo ample research and use their business wisdom before selecting the effective business location for his/her retail outlet. Franchise System: ‘Franchise’ is a method of replicating successful business models across locations through partners against a fee or a percentage of sales or profit. The franchisor provides various direct and indirect support services such as marketing, branding, training, operation etc. to the franchisee. For the franchisor, the main advantages of having a franchise system is to have quick start and expansion, local looping and of course, greater control over its own capital. Franchisee also benefit from the system as they work on a proven business concept, get continuous support from the franchisor and found less risky business proposition compared to start ups. Still over the years of practices, certain disadvantages of the franchise business system were found such as - the ‘price’ or ‘cost’ (franchisee fee, which is often very high) of it, the conflicts that occur between the franchisee and the franchisor, and last but not the least, the lack of clarity over the delegation of authority, power and control. 2
  • 3. In literature, the 4 C’s of ‘Franchising Mix’ is described as - i. Character includes factors such as: size, location, experience of the business, business structure, number of employees, visions and values, openness for sharing information about itself, media coverage, judgments or pending law suits, stock performance, and comments from references. ii. Capacity assesses the ability of the business to pay its bills, i.e., its cash flow. It also includes the structure of the company's debt — whether secured or unsecured — and the existence of an unused lines of credit. Any defaults must also be identified. iii. Capital assesses whether a company has the financial resources (obtained from financial records) to repay their creditors. In general, this portion of the credit report is the one most closely reviewed by the credit analyst. Major focus is given to such balance sheet items as working capital, net worth and cash flow. iv. Conditions consider the external factors surrounding the business under consideration - influences such as market fluctuations, industry growth rate, political/ legislative factors, and currency rates. Formats of Franchise Outlet: Indian franchise system can be divided into Retail Franchising and Non- retail Franchising. The major differentiating factor among the two is the priority given to the real estate. Non retail franchising is dominated by the Pure Franchise and the Management Contract format where as in case of retail franchising it is the Hybrid Franchising which dominates the pie. In her article ‘Franchising in Retailing’ Punita Sabharwal described these three categories as - Pure Franchise Format: In the pure franchise format, the franchisee contributes in terms of store, stocks, premises, interiors and equipment and also manages the store on a day to day basis. The returns for the franchise in this format come from the margin on sales that he is able to achieve from his store. Sectors like home furnishing, telecom, education, and professional services like insurance, consultancy and courier have typically followed the pure franchise models and have seen a huge growth. The primary objective of adopting pure format for these sectors is to maximize the involvement of the franchisee in the business. 3
  • 4. Management Contract Format: In the management contract format the franchisee makes substantial contribution in the form of interiors, equipment and premises while the stocks and management is handled by the franchisors. The franchisee gets some assured returns and some variable returns. Beauty services, health care, skin care and plumbing repairs typically follows the management contract formats because here the franchisee is only expected to market and manage the business while the trained stuff carries out the actual business. Hybrid Contract Format: In the hybrid format, the franchisee makes investment in terms of premises, interior and equipment (fully / partially) while stocks and management is done by franchisors. In this format the franchisors make all the upfront investment, provide stocks on consignment basis and also offer minimum guaranty to the franchisee. In this format no sacrosanct rules are followed as the structure depends on the negotiating power of the franchisor and the franchisee. The same is nicely presented by Ritesh Vohra in one of his presentation, as – Table 1: Different format of Franchised Business Source: Annual survey of the Indian Franchise Sector, conducted by FirstFranchising Again, with the passage of time and practice, further categorization has been done and as a result, new formats have emerged. Some of the new formats are Fashion Station (popular fashion), Blue Sky (fashion accessories), Collection i (home furnishings), Depot (books & music) and E-Zone (Consumer electronics). It is rightly commented by one retail expert that, the retailers are trying to segment the market with the help of format. 4
  • 5. Malls as Franchise Venues: Mall development is a phenomenal happening in India. Because of the changing economic and demographic composition of India, the mall mania is spreading very fast and entering even the second tier cities. Real estate developers are jumping very fast to take this further from Metro cities to smaller cities. Corporate houses like ITC and Sriram group are making steady progress to make these phenomena feasible in rural market also. There is no denying that the top notch cities like Mumbai, Delhi, Bangalore, Hyderabad, Kolkata, Chennai and Pune are leading the way but the second tier cities like Ludhiana, Chandigarh, Nagpur and Surat are catching the eye of all retailers. Retail developers are in such a mood that they may over ride the requirement in a specific city. There is always a great deal of debate and discussion when ‘mall’ is considered as location for setting the retail outlet (both franchise and other category outlets). The same is emphasized by Shubhranshu Pani in his article ‘Malls Growth’ as; there are conflicting opinions about the profitability of franchised brands in mall in India. Those in favor state that malls are best place for a franchised set up because they assure a lot of customer traffic. While those who say that mall space is too costly, those in favor state that the cost of putting up a store inside a mall is proportional to the franchised name you have purchased. Brands do not franchise their name if they do not have a reputation for stability. For heavy traffic, inside of a mall is the most viable location. It is the perfect way to merchandise one’s product, even if he/she is just breaking even. In the worst case scenario, customers will be aware of his presence. Again, it is proved many times that large crowd doesn’t means high sales. Today people go to mall not only for shopping but for hang out, leisure or simply find it as a meeting place. But even, this gives a chance to the smart retailers to convert (some of) them as actual customer with the help of innovate display or promotion techniques. (Thanks to increasing impulse purchasing attitude, supported by disposable income!) For the last decade onwards, franchising became a key part of growth pattern for India and still India is just started witnessing retail franchise revolution, as it is said by industry experts. According to Pani, as long as the real estate market is hot and new mall are being built to feed 5
  • 6. the hunger of the expanding retail market – franchising in India will continue to thrive. Malls will continue to be the leading franchise vehicle in India, due to their popularity and ability to draw large numbers. People have got over their xenophobia regarding glitzy malls and hypermarkets, and now aware that visiting a mall does not necessarily mean higher cost. After analyzing all these discussion and discourse over the advantage and disadvantages of mall, an empirical study was required to furnish certain facts and figures; so that aspiring franchising owners (as well as their managers) can accept/ challenge the existing body of knowledge and can take a better decision about the location in their practice. Keeping these things in mind a research has been carried out in malls situated in Delhi – NCR region. Research Objective: This study conducted with three basic objectives, as – To find out the presence of franchised outlet and its various formats in malls in Delhi- • NCR region. To know the perception of the managers of the franchised outlets about mall as ‘location’ • based on certain critical factors. • Lastly, comparing their perception with other category (non- franchised) outlet managers. Research Methodology: Type of Research: Based on the objective of study, it was found that an exploratory and conclusive research will solve the purpose in most effective way. According, exploratory and conclusive research approach was adopted for the study. Source of Data: Considering the research objective and type of research, ‘primary data’ was decided to be the source of data for the research. Research Method: ‘Survey’ method was chosen as research method for the study. 6
  • 7. Data Collection Instrument: A ‘structured questionnaire’ was developed as data collection instrument. Thinking about the time constrain of the respondents only ‘closed ended’ were placed in the questionnaire. Data Collection Method: Data was collected through ‘personal interviews’ with the target population (retail outlet managers based in malls) through the structured questionnaire. Sampling Plan: (a) Sample Element (as well as Sample Unit): Retail Store situated in malls. (Both Franchised and Non-Franchised retail outlets.) Store managers were taken as the representative of the outlets. (b) Sample Size: A sample of 50 retail outlet situated in malls was taken for the study. [ 5 malls, 10 outlets from each malls] (c) Sampling Procedure: Stratified Random Sampling procedure was followed in the study. ‘Area’ was chosen as control factor for the purpose of stratification. (d) Sample Extent: The extent of the study was Delhi – NCR region (Delhi, Noida, Ghaziabad, Gurgoan and Faridabed.). Data Analysis and Presentation: Statistical tool such as ANOVA, simple correlation was used to analyze the data. To present certain finding cross tabulation, charts and graphs was also used. MS Excel was used for tabulation, data analysis and preparing graphs- charts. 7
  • 8. Major Findings: Category of outlets present in malls: Type of Outlet situated in Malls 20% 28% 52% Franchised Outlet Company Owned Outlet Stand Alone Outlet Chart 1: Category of outlets present in Malls It was found that in malls 28% outlets are franchised outlet, while 52% outlets situated in malls are company owned outlets and rest 20% are stand alone (brand) outlets. It is evident from the data found that, presence of franchised outlet in malls is not very high (28%). Different formats exists in the mall in franchise category: Type of Franchisee Formats Pure Franchisee 36% 43% Format Management Contract Format Hybrid Format 21% Chart 2: Different formats of Franchised Outlet It was found that in the Franchise Category, 36% are of Pure Franchisee Format, 21% are of Management Contract Format and majorities are (43%) of Hybrid Format. 8
  • 9. Perceptions of outlet managers towards malls as location: To understand the ‘perception’ of the managers about ‘malls’, five parameters had been identified for the study as - Parameter 1: High footfall Parameter 2: High sales Parameter 3: Cost of the (mall) location Parameter 4: Brand building Parameter 5 : Support from management of the mall The responses found from the managers (of three different categories, combined) are presented in the following table: Stng. Ni Dis Stng Ag. Ag. Agr/DisAgr Agr DisAgr Par 1 13 30 7 0 0 % (0.26) (0.60) (0.14) (0.00) (0.00) Par 2 0 16 32 2 0 % (0.00) (0.32) (0.64) (0.04) (0.00) Par 3 8 39 3 0 0 % (0.16) (0.78) (0.06) (0.00) (0.00) Par 4 6 30 10 4 0 % (0.12) (0.60) (0.20) (0.08) (0.00) Par 5 0 18 18 14 0 % (0.00) (0.36) (0.36) (0.28) (0.00) Table 2: Cross tabulation data of the responses o It is evident from the table that, 26% of the respondents strongly agreed upon the fact that mall ensures high footfall. There were another 60% who also agreed with the statement. 14% respondents were neutral (neither agree nor disagree) in their view. o When it comes to sales, 32% agreed that mall ensures high sales, but a good chunk of the respondents are not sure (neither agree nor disagree) about that. Interestingly nobody (0%) was found having view strongly agreed or strongly disagreed with the idea. o As per the cost of mall is concern, 16% strongly felt that malls are costlier than outside places, while 78% also agrees with them. o Almost 72% (12% strongly agreed and 60% agreed) felt that mall helps in brand building, while 20% are not sure about that and 8% are not agreed with that. o In case of support from mall management, nobody is extreme with their opinion. 36% are expressed positive view about management of mall, 28% expressed negative view and 36% was neutral in their expression. 9
  • 10. Mall ensure High Footfall : Perception of Franchised and Non-Franchised (company owned and stand alone) outlet managers H0 = There are no variation in opinion, among the three groups H1= There are variation in opinion among the groups SUMMARY Groups Count Sum Average Variance Fran. Outlet 14 59 4.214286 0.335165 Com Ownd 26 105 4.038462 0.358462 Stnd Alone 10 42 4.2 0.622222 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 0.361319 2 0.180659 0.448815 0.641092 3.195056 Within Groups 18.91868 47 0.402525 Total 19.28 49 Table 3: ANOVA table for factor 1 As it is found that, F calculated value is less than the F critical value, therefore, the null hypothesis, that there is no variation in opinion among the three different category of outlet manages, is accepted and the alternative hypothesis is rejected. Mall ensures High Sales: Perception of Franchise and Non-Franchise (company owned and stand alone) outlet managers H0 = There are no variation in opinion, among the three groups H1= There are variation in opinion among the groups SUMMARY Groups Count Sum Average Variance Fran. Outlet 14 47 3.357143 0.247253 Com Ownd 26 86 3.307692 0.301538 Stnd Alone 10 31 3.1 0.322222 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 0.427253 2 0.213626 0.735415 0.48474 3.195056 Within Groups 13.65275 47 0.290484 Total 14.08 49 Table 4: ANOVA table for factor 2 Again as F calculated value is less than the F critical value, the null hypothesis is accepted and the alternative hypothesis is rejected. So it can conclude that franchise managers and the non franchise managers hold the same view. 10
  • 11. Relation between High Footfall and High Sales: Factor 1: Mall ensures high footfall Factor 2 : Mall ensures high sales SUMMARY OUTPUT Regression Statistics Multiple R 0.370812336 R Square 0.137501789 Adjusted R Square 0.119533076 Standard Error 0.510437395 Observations 50 ANOVA Significance df SS MS F F Regression 1 1.993775934 1.993775934 7.652289317 0.008026262 Residual 48 12.50622407 0.260546335 Total 49 14.5 Standard Coefficients Error t Stat P-value Intercept 1.975103734 0.484355047 4.077801493 0.000170282 X Variable 1 0.321576763 0.116248931 2.766277158 0.008026262 Table 5: Simple Regression for factor 1 and factor 2 The table represents the relation between the factors considered. A link has been tried to be established between the high footfall and sales. The results of regression show that the null hypothesis is rejected as there is high variation. The assumption that high sales depend on high footfall is not statistically significant. The table for the output has been shown above. Its multiple R is very low (0.37), so we can say the relationship is not too strong. Even the R square is also very low. So we can say that the sales are not dependent on high footfall. In the earlier analysis it was established that there is no variation in the opinion about the footfalls and sales. So it can conclude that irrespective of the categories, store managers felt that high sales don’t have any relation with high footfalls. 11
  • 12. Mall costs high compared to outside places: Perception of Franchise and Non- Franchise (company owned and stand alone) outlet managers H0 = There are no variation in opinion, among the three groups H1= There are variation in opinion among the groups SUMMARY Groups Count Sum Average Variance Fran. Outlet 14 58 4.142857 0.285714 Com Ownd 26 107 4.115385 0.186154 Stnd Alone 10 40 4 0.222222 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 0.131868 2 0.065934 0.298887 0.743042 3.195056 Within Groups 10.36813 47 0.220599 Total 10.5 49 Table 6: ANOVA table for factor 3 It is found that the calculated F value is less than critical F value. Hence the null hypothesis is accepted and the alternative hypothesis is rejected. That means both the franchise and non franchise managers agreed on the fact mall costs high compared to outside locations. Located in a Mall, helps in Brand Building: Perception of Franchise and Non- Franchise (company owned and stand alone) outlet managers H0 = There are no variation in opinion, among the three groups H1= There are variation in opinion among the groups SUMMARY Groups Count Sum Average Variance Fran. Outlet 14 54 3.857143 0.285714 Com Ownd 26 103 3.961538 0.438462 Stnd Alone 10 31 3.1 0.988889 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 5.544176 2 2.772088 5.526345 0.00699 3.195056 Within Groups 23.57582 47 0.501613 Total 29.12 49 Table 7: ANOVA table for factor 4 In this table, it is found that calculated F value is higher than the critical F value. Hence the null hypothesis is rejected and the alternative hypothesis is accepted, which implies that there franchise managers hold different view from the non franchise managers. 12
  • 13. Management of the Mall is not supportive: Perception of Franchise and Non- Franchise (company owned and stand alone) outlet managers H0 = There are no variation in opinion, among the three groups H1= There are variation in opinion among the groups SUMMARY Groups Count Sum Average Variance Fran. Outlet 14 39 2.785714 0.642857 Com Ownd 26 80 3.076923 0.713846 Stnd Alone 10 35 3.5 0.277778 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 2.976703 2 1.488352 2.43709 0.098389 3.195056 Within Groups 28.7033 47 0.610708 Total 31.68 49 Table 8: ANOVA table for factor 5 It is found that the calculated F value is less than critical F value. Hence the null hypothesis is accepted and the alternative hypothesis is rejected. That means both the franchise and non franchise managers hold the same view. Overall Rating for Mall (in a 10 point scale): Avg. Score Std. Dev. Franchised Outlet 7.07 0.616 Company Owned Outlet 6.85 0.925 Stand Alone Outlet 6.70 0.949 Overall 6.87 0.849 Table 9: Overall rating for Mall by different outlet catagories It was found that average score given by franchise managers (7.07) are higher than the company owned outlet managers (6.85) and stand alone outlet managers (6.70). Even for the franchised outlet managers the degree of variation in the opinion is lesser than the other two category managers. By t test was also found that this variation in rating for mall as business location is statistically significant. 13
  • 14. Suggestion to franchise owner looking for the ‘location’: This question was limited to the franchise outlet managers. And it was found that most of the cases they suggest ‘mall’ as location for setting up retail franchising outlets. 12 10 8 YES 6 4 2 NO Cant Say 0 Graph 1: Suggestion to others for selecting mall as location Conclusion: Based on the statistical analysis the following conclusions can be drawn - 1. Almost one forth of the total outlets (28%) of Malls are franchised outlets. Majority of the outlets (52%) are company owned outlets. The presences of stand alone outlets are comparatively less (20%). 2. Among the franchised outlets, 36% are of pure franchisee format, 21% are of management contract format and rest 43% are of hybrid format. 3. All the managers of different categories agreed on the fact that mall ensures high footfall. But same time they agree that high footfall does not results high sales. 4. They see eye to eye on the fact that mall costs higher compared to outside places but they are not agreed with the fact that mall helps in building the brand. 5. Overall malls are preferred location for setting outlets and out of three categories, franchise category has shown significant preference from others. 6. Most of the franchise managers suggest ‘mall’ as a preferred location for the next outlet. 14
  • 15. Limitation and Scope for Further Research: Any research is limited by any means or other and thus gives a scope for further researchs. In the same way this study also has some limitation which can be addressed by further researches, as – 1. Delhi and NCR region combinedly has more than 100 malls and out of that one third have more than 50 outlets each. So considering the number of outlets and huge variability in them, it is very clear that sample size was not adequate to reflect the exact scenario. To avoid this, proper sampling size determination technique was required to be followed. 2. Further stratification of the sample in terms of area (within Delhi, East Delhi- West Delhi- South Delhi), product category handled by the outlets (apparel- entertainment – household items etc.) and size of the business (turn over – floor area – no. of employee etc.) might gave better result. 3. The responses given by the franchised owned managers could be analyzed in further deeper level. 4. Only few parameters were picked to judge the effectiveness of mall as business place. These parameters can vary time to time and place to place. 5. The findings of this study are subject to data available to the researcher in terms of time and accessibility. References: Dwarika P U and Amtita V G (January, 2007), “Concept of a Mall”, Indian Retail • Review, Vol 1, Issue 1, Page – 7 CII McKinsey report on the Retail Industry (2002), “Malls Will Drive Real Estate • Availability” TFW Info Cell, December 2007, “Basics of Franchising”, Franchising World, Page - 86 • S Punita, April 2007, “Franchising in Retailing”, The Franchising World, Pg - 43 • Pal Yogindar, October 2006, “Franchising in India”, Franchising World, Pg- 176 • Gaurav Marya, 2007, “Franchising: The science of reproducing success”. • Khera Pramod, 2002, “Franchising – The Route Map to Rapid Business Excellence”, • Tata McGraw Hill Pani Shubhranshu, June 2007, “Mall Growth”, The Franchising World, Pg- 82 • 15
  • 16. Appendix: (a) List of Malls situated in Delhi - NCR Region. (The list is not exhaustive). Ansal Plaza, Hudco Place Delhi Cross River Mall, Shahdara TDI Mall Rajouri Garden, New Delhi, India TDI Center Jasola, New Delhi, India West End Mall District Centre, Janak Puri, New Delhi, India Pacific Mall Pitampura, Delhi, India SRS mall Faridabad Manhattan mall Senior mall MB mall Parsvnath mall Pristine mall Sky mall Ansal Plaza, Vaishali Ghaziabad East End Mall, Kaushambi MMX Mall, Mohan Nagar Pacific Mall, Kaushambi Shipra Mall, Indirapuram City Mall ,Vaishali DLF City Center Mall Gurgoan MGF Mega City Mall MGF Metropolitan Mall Sahara Mall The Wedding Mall Gurgaon Ambience Mall MGF Plaza Vishal Mega Mart Gurgaon Metropolitan Mall Mega Mall Gurgaon The Centrestage Mall, Sector 18 Noida DLF Town Square Mall, Sector 18 Gardens Galleria, NOIDA - 201 301 The Great India Place, Sector 38A Mall Eighteen, Sector 18 Sab Mall, Sector 27 Senior Mall, Sector 32, Spice World Mall, I-2, Sector 25A, Senior Mall ,Sector 18 ----- ***** ----- 16