A PROJECT REPORT ON ORGANIZATIONAL BEHAVIOUR OF NESTLE SUBMITTED BY PRASAD D. MAHAJAN ROLL NO: 31 FOR THE DEGREE OF M.

COM (PART II) MANAGEMENT UNDER THE GUIDANCE OF PROF. SUDHA SUBRAMANIAM M.L.DAHANUKAR COLLEGE OF COMMERCE DIXIT ROAD, VILE PARLE, EAST, MUMBAI 57 ACADEMIC YEAR 2013-14

Declaration I, Mr. Prasad D. Mahajan student of M.Com Part- II Management studying in M.L.Dahanukar College of Commerce, hereby declare that I have completed project on organizational behavior of Nestle for the academic year 201314, as per the requirements of the University of Mumbai as a part of Master Of Commerce- Part II programme. The information submitted is true and original to the best of my knowledge.

(Prasad D. Mahajan)

Acknowledgement This satisfaction that accomplishes the successful completion of any work is when we say thank you to the people who made it possible, whose constant encouragement and guidance has been a source of inspiration throughout the completion of project. Firstly I extend my thanks to the various people who have shared their opinion and experiences through which I received the required information which is crucial for my project. Finally, I express my thanks to Professor Kanchan Fulmali who gave me this opportunity to learn the subject and guided me with valuable suggestions.

INDEX 1 2 History of Franchising Introduction What is Franchising? What is a Franchise? Who is a Franchisor? Who is the Franchisee? What is Franchise fee? What is royalty? Basic Elements of Franchising (in a nutshell) Business Format Franchising Modes Of Franchising The four Rs of Franchising 6 7 7 8 8 8 9 9 10 11 12 15

Advantages & Disadvantages of Franchising

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Some general Issues on franchising Why is franchising growing? How is franchising relevant to India? Franchising in India so far? Scope of Franchising in India The potential of franchising in India JUMBO KING VADA PAV KIDZEE FAI

19 19 19 21 22 23 27 28 29

Potential of International Franchising in India Procedure for Approval of Foreign Franchises in India? BASKIN ROBBINS YUM! BRANDS Inc

30 31 32 32 34

Legal Aspects Of Franchising In India

Conclusion

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HISTORY
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Most business historians date the beginning of franchising as a concept to the Middle Ages, when feudal lords initiated the practice of selling to others the rights to collect taxes and operate markets on their behalf. However, this makes the earliest examples of franchising a political activity rather than a business activity. The first examples of franchising as a way of doing business are found in mid-nineteenth century Germany, where brewers set up contracts with tavern owners to sell their beer exclusively in the taverns.

The Father of Franchising

Franchising dates back to at least the 1850s; ISAAC SINGER, who made improvements to an existing model of a sewing machine, wanted to increase the distribution of his sewing machines. In 1851, a young successful company SINGER in the U.S. found it unprofitable to provide after sales service for its products to its distant outlets and far flung customers. To be able to do so without sing its own sales force, the company hit upon a novel idea that became the trailblazer for fanchising. They attracted independent individuals by offering them protected territories with exclusive rights to sell and service their products. For this they drew a legal contract that can be termed as the first franchise agreement between a company and the inestors. This model ran successfully and soo the company was able to establish a big network of franchised dealers. This successful model was developed by Isaac Singer and so he is popularly known as the Father of Franchising.

INTRODUCTION

Starting up a new venture can be a risky affair. You can painstakingly explore and research your market, time the set up to perfection, open your business where demand is high, outdo the competition, offer the best range of products and services available, advertise in the right places and still your business can fail. In fact global Small Business Statistics indicate that one half of new businesses close within the first 3 years of trading. When describing exactly what a franchise is, the important thought is the right to do business in a prescribed manner. Recently, franchising has been enjoying more acceptability vis--vis an independent business. There are inherent benefits in the franchising system, which make them more competitive in the market place. Apart, from these inbuilt benefits in franchising you can be your own boss, you're operating under a trademark that has instant brand recognition, and the failure rate for franchises is much lower than it is for independent businesses. Before we analyze all these factors let us first understand what exactly is franchising.

What Is Franchising?
Though we are familiar with the term franchising, only a few of us are fully aware of what the term exactly implies. The dictionary defines the word franchising rather simply as an authorization granted by a company to someone to sell or distribute its goods or services in a certain area. Literally speaking its exact definition is rights of privilege granted. Franchising in general means granting of certain rights by one party (the franchisor) to another (the franchisee) in return for a sum of money. The franchisee then obtains the authority to exercises those rights under the guidance of the franchisor. The above definition is a very general in its nature and encompasses many different forms of licensing arrangements. The International Franchise Association (IFA) defines franchising as a continuing relationship in which the franchisor provides licensed privilege to do business, plus

assistance in organizing, training, merchandising and management in return for a consideration from the franchisee.

What is a Franchise?
A legal agreement that allows one organisation with a product, idea, name or trademark to grant certain rights and information about operating a business to an independent business owner. In return, the business owner (franchisee) pays a fee and/or royalties to the owner.

Who is a Franchisor?
He is the owner of the franchised system. It owns the know-how of the concept and the brand name. It grants franchises to third parties.

Who is the Franchisee?

He is the one who has been granted the right by the franchisor to carry on the business using the franchisors know-how and the brand name. Now, depending on the rights granted, franchisees can be classified into: 1. Unit Franchisee this is the simplest and most common form of franchising.

This franchisee is granted the right to operate one unit or outlet of the franchised business. 2. Master Franchisee He is generally granted the right to a substantial territory.

It will then grant unit franchises to unit franchisees throughout the territory. The Master Franchisee needs to have sufficient drive and resource to fully exploit the territory and control the unit franchisees territory. International franchisors usually appoint national master franchisees to exploit the market of a particular country. 3. Regional Franchise In a geographically large area a franchisor, or a Master

Franchisee may decide that it is commercially appropriate to further divide the territory up with separate regions and grant a Master Franchise for each separate 8

region. These franchises are known as regional franchises or sometimes area franchises. 4. Multiple Franchises Some unit franchisees operate not just one unit, but

several. These are referred to as multiple franchises and usually have a large number of individual unit franchise arrangements one for each unit.

What is Franchise fee?

It is an upfront entry fee, paid by the franchisee to the franchisor, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisors name, logo and business system. Often, the franchise fee is also the consideration paid for the initial training, site selection, operations manuals and other help given by the franchisor to the franchise before opening the business.

What is Royalty?
It is a continuing payment that has to be made by the franchisee to the franchisor and is payable on a periodic basis, which can be, weekly, monthly, or on any other. Royalty payments can be either fixed amounts or could be based on percentage of gross sales or any other such consideration that may be agreed upon by both the franchisor and the franchisee in the franchise agreement.

Basic Elements of Franchising (in a nutshell)

Thus, we can sum up the basic elements of franchising as under:

1.

An entrepreneur (franchisor) has developed a system of doing business, which

works and decides to grant to another entrepreneur (franchisee) the right to use the system. 2. 3. The two entrepreneurs are legally and financially independent enterprises. The granting of the right to use the franchise system involves the right of the

franchisee to use the franchisors intellectual and industrial property, know-how, business and technical methods, procedural system and other intellectual property rights. 4. The franchisee in exchange undertakes to follow the methods elaborated by the

franchisor and to pay an entrance fee and royalties. 5. 6. The franchisor retains the right of control over the performance of the franchise. The franchisor undertakes to provide the franchisee with training and on-going

assistance.

Business Format Franchising

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As compared to other types of franchising the most popular and widely used is the business format of franchising. It can be defined as the contractual license granted by one person (the franchisor) to another (the franchisee) which:

Permits or requires the franchisee to carry on a particular business using the franchisors know-how and most importantly, the prescribed business format, under the franchisors brand as an independent business, thereby ensuring that the franchisee gets a proven method of operating a business.

Permits the franchisee to also use the franchisors products and services, trade name, trade mark, etc.

Allows the franchisor to exercise continuing control over the manner in which the franchisee carries on the franchised business;

Obliges the franchisor to provide the franchisee with ongoing support in carrying on the franchised business.

As a commercial matter, the agreement inevitably requires the franchisee periodically during the period of the franchise to pay to the franchisor sums of money in consideration for the franchise and / or goods and / or services provided by the franchisor to the franchisee.

There are also some other modes of franchising such as manufacturing franchising, product or trade name franchising, etc.

MODES OF FRANCHISING
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 Direct Franchising Under this system, the franchisor grants franchises to individual franchisees in the foreign country through the execution of an international contract. The main problems associated with this type of franchising is the difficulty of franchisors to control the performance of the franchisees as these are located in another country, the assistance to be provided to the franchisee during the operation of the contract. The question of intellectual and industrial property rights in the foreign country also needs to be considered. Taxation is another issue which receives due consideration. Furthermore, how the franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on taxation. A very important question is clearly that of the choice of law and jurisdiction. There is a tendency for franchisors to want their own domestic law to apply to the agreement, even if the franchise is exploited in another country. Another vital point to be kept in mind is the law relating to transfer of technology that may be applicable. Keeping the above problems in mind, it is observed that direct franchising is not used extensively internationally. Subsidiary or Branch Office Franchising through a subsidiary or a branch office are two methods which are often treated together, although there are differences which derive from the fact that a subsidiary, albeit controlled by the franchisor, is a separate legal entity whereas a branch office is not. Whatever be the difference, an advantage of this approach is that the franchisor is present in the foreign country as a corporate body. The contract will in this case be a domestic contract and thus subject to local legislation. The problems associated with this type are similar to direct franchising. In addition, the franchisor will be required to send his personnel to the foreign country for the start up operations thus involving work permit and residence formalities.

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 Area Development Agreements Such agreements traditionally involved an arrangement whereby the developer is given the right to open a multiple number of outlets to a predetermined schedule and within a given area. These arrangements in the past have been used mostly in domestic franchising, but are now being used increasingly in international franchising. Items that are to be considered here include the number and density of the outlets to be opened, detailed development schedule and the consequence of non-complying of the schedule. In such arrangements, the developer will need to have substantial financial resources so as to be able to open the required number of outlets. Master Franchise Agreements In the international scenario, this is widely used. In respect to such agreements, the franchisor grants a person in another country, the sub-franchisor, the exclusive right within a certain territory to open franchise outlets itself and/or to grant franchises to subfranchisees. In this case, there are two agreements involved: an international agreement between the franchisor and the sub-franchisor (the master franchise agreement) and a national franchise agreement between the sub-franchisor and each of the sub-franchisees (the subfranchise agreement). The franchisor transmits all its rights and duties to the subfranchisor, who will be in charge of the enforcement of the sub-franchise agreement and of the general development and working of the network in that country. All the franchisor will be able to do is to sue the sub-franchisor in case of breach of obligation to enforce the sub-franchise agreement as laid down in the master franchise agreement. The advantages of this system are that the sub-franchisor is familiar with the local habits, tastes, culture and laws of its country and that it will know ways about the local bureaucracy for necessary permits as and when necessary. The disadvantages include that the financial returns of the franchisor will be reduced by the amount due to the sub-franchisor and also that the franchisor will have to rely on the sub-franchisor for the performance of the franchise system.

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 Joint Ventures In the case of joint ventures, the franchisor and a local partner create a joint venture. This venture then enters into a master franchise agreement with the franchisor, and proceeds to open franchise outlets and to grant sub-franchises just as a normal sub-franchisor would do. An arrangement such as this will have to consider legislation on joint ventures in addition to all the other legalities that are involved. Problems may also arise with the fact that the double link may create conflicts of interest for the franchisor. The advantages accruing from this arrangement may include that it could be a way to solve the problem of financing franchise operations in countries where financial means are scarce. Miscellaneous forms There is no limit to the refinement that can be made to the above modes of franchising. New forms of franchising, or combinations of different forms of franchising, appear at regular intervals.

The four Rs of Franchising

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Corporate history is replete with instances of outstanding franchising success and also many failures. Learning from them, franchising can succeed if the franchisee has a right combination of the four Rs prescribed. These are: 1. Realism

The franchisee should be very realistic in assessment of his business strengths and weaknesses. Certain key areas where realism is a must while deciding to go into franchising includes questions like are you prepared for the financial insecurity, are you capable of developing a frame of mind when you can smile and be cordial even when the customer is totally wrong. More important is the need for realism in evaluating the products and services offered by the franchisor. 2. Resources

Many franchisees, during the early periods of their business when resources constraints are common, tend to sometimes overlook sending in the royalty cheques to the franchisor. Franchisors keep feeling and rightly so that their royalty is as much a key business expenditure of the franchisee as payment for purchases or payroll is and any delay in handling this area would lead to unfortunate consequences of a long term nature. Therefore, while planning resources on a periodic basis, consider the payments that are to be made to franchisor. Another area where most franchisees have problems is to manage their resources while living within the franchising system. The franchising agreement, in most cases, clearly indicates systems, procedures and methods of managing the resources. The franchisee will do well to either be mentally prepared to accept the resource management terms of the franchisor or make it clear at the beginning that he needs the requisite leeway to manage his own resources.

3.

Research

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Research on the franchisor is a must for the success. Various published sources also provide fairly detailed information on most of the franchises that are on offer but to what extent that will suffice for the Indian conditions needs serious examination. Whatever be the methodology, the prospective franchisee will do well to build comprehensive information on the franchisor, the products or service of offer, competing and substitute products and services before he makes any move committing his financial resources on a long term basis. 4. Resolve

Resolve to be part of the franchising system. The problem starts when a person gets into franchising only because he has an entrepreneurial instinct but the instant he becomes a franchisee, the true entrepreneur in him starts resenting the shackles that are imposed by the franchising system. The options are clear either stay within the system and fully learn the nuances of the business and prosper or try ones fledging entrepreneurial talent and get into trouble.

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Advantages & Disadvantages of Franchising

Advantages to the Franchisee: He is the proprietor of his own business and owns the tangible assets of the franchised outlet. He gains from the franchisor the entire business concept with full training, assistance in every aspect of setting up and running the business, and access to necessary materials and supplies. Franchisees have access to regional and national promotions / advertising campaigns. He gets an access to global standards and international technology in products and services, without loss of control. There is minimum risk as it is a tried and tested formula of the franchisor.

Disadvantages to the Franchisee: He is not an independent entrepreneur. He has to follow the franchisors instructions. The lower risk is offset by the lower reward for the success.

Advantages to the Franchisor: Franchising allow for intensive and rapid expansion of a regional or national business system. With minimum capital outlay franchising accelerates the networks growth and probably its profitably. It basically works on the OPM (Other Peoples Money) principle.

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 The risk that the franchisor would have had to otherwise bare alone gets spread across the franchisees. Self-employed franchisees are generally more motivated than salaried managers and are more likely to give better results for less expenditure of capital on behalf of the franchisor. Also this reduces the requirement of appointing and maintaining the additional staff that the franchisor would have had to in case of a non franchised business. The franchisor is free from the day to day unit operations since direct managing responsibilities become the franchisees obligation. Franchising gives him an assured earnings stream to fund continuous R & D investment.

Disadvantages to the Franchisor: It has to control and co-ordinate a network of semi-independent entrepreneurs to ensure favorable image of the franchise. Decreased margins due to the share of the franchisees. The franchisor-franchisee relationship is based on trust. The franchisor has relatively less control over the business.

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Some General Issues on Franchising

Why is franchising growing?
Franchising is one of the worlds fastest growing and most lucrative industries. Franchise businesses will be turning over an estimated $ 2 trillion (which is roughly equal to twenty times the size of Indias current GDP). Franchising permits businesses to grow more rapidly than any other method. By increasing the efficiency by which goods and services are distributed, it brings impressive gains to any economy. On a cultural level, franchising is one of the few developments that generate employment, earnings and entrepreneurship at the same time. It disseminates ownership rights and decision-making power to thousands of small-unit operators. For developing countries, or countries shifting to a market economy, franchising has the effect of creating relationships between one economy and another. It promotes sharing of technologies, trademarks, marketing, intellectual property and even architectural designs. Franchising is a particularly good developmental tool in any part of the world where financial resources are short and the need to simulate individual initiative is acute. There are no tariff barriers to be dealt with. It puts little strain on the receiving countrys balance of payments. Thus, not surprisingly, awareness of the benefits of this business formula is growing at an international level.

How is franchising relevant to India?

Franchising affords India an opportunity to build its commercial infrastructure and develop its domestically oriented businesses in an efficient, profitable and pan-national manner. It also offers India the opportunity to import and develop foreign concepts in a way, which ensures that the equity of the business remains in India, so avoiding the politically undesirable situation whereby successful domestic businesses are owned by foreign corporations. 19

The key attractions of franchising in India are as follows: 1. Lower Capital Requirements Franchising is an excellent way for both Indian and foreign corporations to expand their businesses and make their brand names known in India without having to risk large sums of money by way of direct investment. The franchisees finance the expansion of the business in India. In return they have the opportunity to make substantial income and capital profits. 2. Geographical extent of the country Franchising can enable a company to take advantage of the vast Indian market of over 1000 million people and growing at a rate of 1.9% p.a. There is an ever-growing demand of goods and services such as fast food and beverages, clothing, electronic goods, computer hardware and software and professional services. The infrastructure is poor, however, and operating a corporately owned distribution system that fully exploits the geographical expanse of the country is extremely difficult and inefficient. Empowering participants in the distribution system by granting them an equity interest in it (i.e. by granting a franchise) can substantially improve the efficiency in the distribution system. 3. Cultural Empathy Franchising well suits the entrepreneurial side of Indian culture. Indian business people are fiercely proprietary and feel a need to have ownership and control over their business operations which they can pass on to future generations. However, at the same time they are keen to benefit from the goodwill and technology that can be provided by the franchisor. Franchising allows them to reconcile these conflicting ambitions. 4. Harnessing local market knowledge A company needs a great deal of knowledge of the different regional markets in India. What holds good for Punjab may not be relevant for Kerela. Franchising provides a sure and easy way of accessing the right level of relevant local market knowledge. Also in case of international franchisors Indian master franchisees offer them direct access to substantial market knowledge and a considered and sophisticated approach to its exploitation.

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Franchising in India so far?

Franchising in India is at its early stage and neither business people nor the courts have had much exposure to it. Soft drinks and hotel franchises arrived in India in the 1960s, but in the 1970s and 1980s, the government expelled foreign brands from India. Some international franchises have recently come back to India and are doing well. Hotel businesses like Best Western Group and the Quality Inn Group have established themselves. Also, Walt Disney has been successful in having its label in all sorts of goods for children, whether they are clothing, toys, and school equipments. Fast food chains like McDonalds, Slice of Italy, Dominos, and Taco Bell have also come in. Pepsi and Coke have re-captured the soft drinks market. Let us have a look at some key facts that point to the growth of the franchising sector in India: There are over 600 active franchisors in the country There are over 40,000 franchisees (across sectors) in India today. The total investment put in by these franchisees in setting up their individual franchised businesses is over Rs 5,000 crore. The total annual turnover achieved by franchised businesses in India is in the region of Rs 8,000-10,000 crore. The total manpower directly employed by these franchised businesses is around 300,000. Industry classification reveals that IT education sector dominates the Indian franchise sector with a sizeable share of 40 per cent. Number of outlets: A majority (68 per cent) of franchise operations are small with 50 or less outlets. Only three per cent franchisors have more than 500 outlets, while 22 per cent have outlets numbering 51-100. The fact that most operators are comparatively small is a probability because most of the franchisors are still comparatively new.

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 Annual turnover from franchising Turnover from franchising is still not very large. Only two per cent of franchisors have a turnover of more than Rs 500 crore from their franchising operations. About five per cent have a franchise turnover ranging Rs 100-500 crore; Four per cent have a turnover ranging Rs 50-100 crore; 11 per cent have a turnover ranging Rs 20-50 crore and 24 per cent have a turnover ranging Rs 5-20 crore. However, more than half (54 per cent) has a turnover less than Rs 5 crore. These facts and figures highlight the extent to which franchising as a way of doing business has been accepted in India. Also, there are increasing numbers of businesses that are exploring the franchising route to business expansion.

Scope of Franchising in India

Ms. Shah an NRI arrived, on New Years Eve. She was so happy to know that the Indian economy had grown in the last quarter at 8.4%. She decided to go to the US to pursue her dream of running her own business late back in 1970, an era plagued by regulation and bureaucracy. Her business of selling Indian garments in the New York, US had been tremendous successful. Now, in 2004, she was amazed to see the change in the Indian capital. She used the Hertz Rent-A-Car service for airport pick-up. She decided to stay at Orchid (a franchised hotel chain). For instant rejuvenation she dropped at Shehnaz Hussain Beauty Parlour. She was overjoyed when she came to know about the local Subway operating with the same American standards in India. She appreciated the food, as it tasted exactly the same as she had at the Times Square Junction, New York. She was glad that the Ritu Beri designed clothes are available in Delhi, and they are franchising at an international level. She knew that the clothes designed by her were a rage in the US and she couldnt afford to miss this golden opportunity. What one would notice is that all these companies have expanded gradually and made their presence by franchising. Franchising, as a way of expansion in India was little known till the 1990s. Today, franchising has forayed into all industries from Food and 22

Fuel to Lodging and Child Care. In India, the industry is a little over ten million ($). There is limitless potential, as this industry is at a very nascent stage. Ordinary start-ups face a problem with finding the right location, evaluating an opportunity and also in most of the times lack experience as to how a similar business is managed. They risk their initial investment. 90% of start-ups fail in the first year itself. Of those that survive another 90% fail in the next two years. In a franchised business, over 90% succeed. This success rate usually lures entrepreneurs with no experience but with a surplus capital and a will to succeed towards franchising.

THE POTENTIAL OF FRANCHISING IN INDIA

India is a geographical diverse country. Franchising in India is at a very nascent stage. However, this industry has clocked the growth rate of 25-30%, the second fastest growing industry. In the US, 45% of the sales come from franchised businesses; India is still to reach that stage, where franchised businesses are as widespread as the local grocer. The way things are going it looks like franchising, as a dynamic and ever changing industry will firmly establish itself in a few years to come. It is not difficult to spot malls. Organised retailing though only at 2% of the retailing, will take off in a very big way. The Indian middle class has been slowly expanding; it now buys consumer appliances, thanks to the economy growth of over 8, the stock market crossing 6,000, forex reserves surpassing 100 Billion USD, and the increase in disposable income. Today, over 33 million Indians can afford the best services and products and over 310 million Indians buy consumer appliances. India offers lot of potential for the franchising community. Apart from Indians being very entrepreneurial, franchising as a way of doing business has been well accepted. Today, we can find international names like Gold Gym, Subway, Hilton, etc. The service sector which will open up in 2006 according to the WTO guidelines will bring in more opportunities for the Indian entrepreneur and a larger market for the franchisor.

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With Goldman Sachs predicting that India will be the third largest economy in 2025 and S&P upgrading Indias credit standard, and an extremely stable government, the franchising community has a lot to cheer. Let us look at some major Indian franchisors but before that let us have a look at what Mr. Gian Mario Migliaccio has to say about the Indian franchising industry. How infofranchise.com helps the franchisors market their opportunity online Gian Mario Migliaccio: 38 years old; Co-Founder of Made In It, the Italian parent company of InfoFranchise, the first Franchise Website available worldwide. The initial web site was born in Europe in 1999. First in Spain, Italy and then France, Greece, the UK and another dozen of International countries soon followed. His background is with Advertising Agencies. His first agency was started in Italy when he was 20 years old and then all other endeavors were developed in the same field, during 95 when the Internet Boom was at in its first stages in Europe. By 1998 Made In It turned its focus to the Internet and officially became a Web Company. What does your company do to help franchisors? InfoFranchise, a registered trademark all over the world, specializes in recruiting. It is exactly in the heart of the market. It helps potential franchisees looking for the right brand and the Franchisor looking for the right partner. InfoFranchise is not a consulting company, but is the way to expand the franchise business. In Italy or in other European countries, InfoFranchise produces thousands of leads monthly. InfoFranchise is becoming the fastest and most valuable outlet for any Franchisor. As done throughout the world, in India we will apply our experience and expertise. What additional benefits would an Indian franchisor get by partnering with you? InfoFranchise.in will be the Indian Franchise Website, but it doesnt stop there. InfoFranchise is a connection link from India to the world and vice-versa. Our goals are

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to promote the best Indian franchise concepts through the web and show the India Experience throughout the world network. India is a great area for franchise concepts. Now Indian brands can act on expanding their experiences overseas, and InfoFranchise will help them as they go worldwide! Can franchising work for everyone? Franchising is a wonderful idea. It is one of the best ways to create your own-business with low risk. But low is not zero. The franchisee needs to be sure before signing the contract. The problem is the same all over the world: dont sign a colorized brochure. Sign the value of know-how. Ask a lawyer, consulting agency and/or even ask the other franchisees in the chain directly is good advice. The other important thing is being a positive person: the franchisee is not an employee, they are the company and they have the responsibility to create success. This is 24/7 job. The possibility for success is inside everyone. Find it. Can you list some of the pros & cons of marketing through internet in a developing country like in India where the reach of internet is extremely low in the smaller towns? India does have two sides it seems. Part of the world knows that India may be the best place for the IT Engineers, Programming developers or for innovative technologies. Then there is the other half of India that is not so up to date. This situation is not so different in China or Russia and is very similar to Old Europe after the second World War. The economy is in need of creating a Booming India and the Internet is just the way to accelerate that boom. Now about 20% of the Indian population can navigate Internet well. With just a look you can see that this percentage is not so different from the entire European region.

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How do you see India as a growing market for franchising? India is a great market with enormous potential. The one thing that sets it apart: The Culture. In India the culture is so different from Europe or the USA, it is necessary to know the market, the culture and the history. Adapting the concept before starting in India is the only way to make it as an overseas brand. The Indian concept can also use the International experience to create and expand a great concept in one of the largest and fastest growing markets in the world. What do you recommend to someone considering franchising his or her business? Everything is franchise-able, but it definitely depends on the franchisors experience. Only the franchisors who create a great positive experience can gain success.

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Indian Success Stories Jumbo King Vada Pav

Three years ago, Dheeraj Gupta was in Dubai trying to market Indian sweets. He asked a client about the population of Indians living in the United Arab Emirates, of which Dubai is a small part-- about 15 to 20 lakhs. This was stunning news. Here he was trying to sell Indian sweets to a population just about the size of Malad, which houses about 16 lakh people. He wondered why he had abandoned a population of I billion Indians and tried to entice 20 lakh people to eat his sweets. It was then that he decided to focus on these one billion people and make them his customers. Fortunately, around the time, he read the biography of Ray Kroc, the man behind McDonalds. Fifty years ago, Ray Kroc had been able to spot the potential of the hamburger and franchise it to the world. Today, with 30000 outlets worldwide, McDonalds at $30 bn is bigger than Indias largest company, Reliance at $16 bn. coincidentally, around the same time as he was reading the book, Dheeraj was in London, staying with the Burger King franchisees. He observed the operations closely and decided to experiment on something similar in Mumbai. The product most similar to the burger was vada pav.. ubiquitous and inexpensive, it looked like the ideal finger food to experiment with. The journey to brand the vada pav began in august 2001. Jumbo King has several first to its credit. It is the first vada pav company to set up at 1500 sq feet central kitchen to manufacture vadas. It is the first company to brand the vada pav, pay 12% sales tax and now franchise it. Ask him how did he do this and pat 27

comes the reply We have grown almost at 250% year on year in the past. This has happened due to the franchise route that the company has taken. The target of the company is to grow through the franchisee route. For first it wants to make a strong presence in the western suburbs and then moving on to central and south Mumbai. Eventually it is targeting 100 stores in Mumbai within three years.

KIDZEE is a chain of preschool, an initiative of Zee Interactive Learning Systems Ltd. having more than 425 franchised schools across India and Abroad, for children between the age group of 2 to 6 years (1.5 years to 5.5 years in certain areas). It encompasses teaching methodology involving complete interaction where children are encouraged to collaborate & help each other. KIDZEE has adopted the philosophy of learning through play.

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Franchising Association of India (FAI)

About FAI The Franchising Association of India is a Membership Organisation (it is a non profit organisation) of Franchisors, Franchisees, Vendors, Consultants, Financial Institutions and Students and others. Their services are dedicated to provide a one-stop shopping experience for franchising business and with membership of the prestigious World Franchise Council , they have an ongoing access to knowledge of the World accepted best practice related to Franchising in different areas of business activity. In recognition of the increasing role of franchising in the market place and the very beneficial positive contributions of franchising to the Indian economy, the franchisor and franchisee members of the FAI believe that franchising must reflect the highest principles and standards of fair business practices. Mission of FAI: Tap the vast entrepreneurial energy available in the country by promoting the concept and practice of franchising in India.

The objectives of the Franchising Association of India are: Encourage and safeguard the business environment for franchising, both with regard to Franchisors and Franchisees. Act as a resource centres for current and prospective Franchisors and franchisees, the media and the Government. Disseminate knowledge to promote the concept of franchising and to propagate it as a healthy business practice.

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 Establish a forum for discussion and deliberation on franchise-related matters and problems and help promote the interest of members by organizing seminars, conferences and meetings.

Potential of International Franchising in India

The Indian economy is growing at an average of 8% - 8.5% in the recent years, thanks to the ongoing reforms and disinvestments. The middle class has never had it so good, with plenty of options and credit available in abundance at a competitive rate. There has been a change in mindset; a flamboyant generation is gradually replacing the debt-cautious. Banks have identified India as one of the fastest growing retail market. Banks and financial institutions have disbursed loans of over Rs. 100,000 crore (USD 20 Billion). Franchised operations are becoming more popular in geographically vast and culturally diverse nations like India, as franchising helps to overcome the difficulties posed by having a chain of company owned outlets. The Franchising Industry received a fillip in during the 1990s due to the opening up of the economy. Since, then, sales from franchised business have grown at an average rate of 20 30% compared to an economic growth rate of 6-8% Today, International franchising in India is one of the most exciting areas in the franchise industry. today, globetrotters are more likely to do their shopping in franchised stores. global franchise organisations like pizza hut, marks and spencer, mcdonalds, subway, hp, holiday inn, medicine shoppe, marrybrown, dominos, golds gym, kodak, kentucky fried chicken are bullish on the potential of franchising in india and have started their franchise operations. It is advisable for international companies wishing to make a presence in India, to divide India into different zones and appoint master franchisees for each of them or they can also opt for a national master franchisee. India is a self-governing and competitive territory for doing business. Franchise companies enjoy economies in scale. India also has a vibrant, vigorous and vivacious media, a pool of high skilled and technologically sophisticated labour, an independent and impartial judiciary and a robust legal infrastructure. Based on the successful

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companies that have enjoyed financial gain since the silent franchise boom during the 1990s, the future of franchising is positive.

Procedure for Approval of Foreign Franchises in India The approval procedure is complex and bureaucratic. The application has to be made to Secretariat for Industrial Assistance, Department of Industrial Development in form FC (SIA) along with 10 extra copies. No fees need to be paid with the application for technical collaborations. On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration number. The application is then sent to the Foreign Collaboration section 1 in SIA, which sends the document to various departments such as the technical advisory section, department of economic affairs and the concerned administrative ministry for scrutinizing. Their comments along with the papers are then put before the Project Approval Board (PAB). The Board takes into account the need for foreign know-how, technology transfer and the terms of the franchising agreement. Those proposals involving only financial collaboration or a combination of financial and technological collaboration are sent to the Foreign Investment Promotion Board (FIPB). If the investment in the project is up to 600 crore rupees, the application is sent for final decision to the Empowered Committee headed by the Finance Minister. In respect to projects requiring more than 600 crore rupees, the application is sent to the cabinet committee for final approval. The Section 2 of SIA issues the final approval within a period of approximately 45 days from the submission of the application form. The approval by the government may vary the terms of franchise including the mode of payment of royalty / lump sum payment to the franchisor. If the terms are not favorable to the franchising business, representation against the same can be made to the administrative ministry concerned. A copy of the representation made by the applicant should also be sent for information to the Foreign Collaboration Section 2 of SIA.

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We thus see the bureaucratic bottlenecks involved in obtaining the permission to set up foreign franchises in India. This deters investment.

Some of the major international franchisors

Let us look at some of the major international franchisors present in the country:

Baskin Robbins set up its operations in India in 1993 and soon started its own manufacturing plant in Pune, Maharashtra. It is the only manufacturing plant to be established outside North America. Baskin Robbins operates on a Franchise Model and its business margins are competitive. Currently there are 150 Baskin Robbins stores established across India. Its spread in India is quite unique, in the sense that you are as likely to find a cozy little Baskin store tucked away in remote Shillong as you would in the main streets of Mumbai. As of today, Baskin Robbins looks forward to an eventful year ahead, with plans of exponential growth and expansion.

Yum! Brands Inc.

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Yum! Brands Inc. (Previously known as Tricon Global Restaurants Inc.), based in Louisville, Ky., is the worlds largest restaurant company in terms of system restaurants with over 34,000 restaurants in more than 100 countries and territories. KFC, Pizza Hut, Taco Bell are some of the well known brands of the company. The company is on an expansion spree in India. As of now there are more than 125 Pizza Hut restaurants across 31 cities in India. The company plans to open more 35-40 Pizza Hut restaurants across the country this year. The company also plans to double the number of KFC restaurants in the country from the current 15. Cities in which it would set up outlets include Mumbai, Delhi and Chennai this year. Yum! has been following the franchisee model with Pizza Hut and KFC in India so far. Currently, KFC is present in six metros including Bangalore, Hyderabad and Chandigarh. "There is tremendous potential in the metros and we plan to expand our presence in towns such as Jalandhar, Ludhiana and Indore in this year," Mr. Arvind Mediratta, Chief Marketing Officer, Yum! Restaurants International, said. The food chain that entered the Indian markets nine years ago has also changed its brand positioning from `good time, great pizzas' to `treat you just can't beat.' It has also roped in actor Jaaved Jaaferi as its brand ambassador for a year to market its new meal combos. On marketing spends of the company, Mr. Mediratta said, "Yum! has been allocating around Rs 15 crore-20 crore each year to marketing and advertising activities which amounts to nearly one per cent of the total turnover of the company."

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LEGAL ASPECTS OF FRANCHISING IN INDIA

Some Basic Legal Issues
Franchising as a business concept is catching up very rapidly in India. Though this being so, presently, there is no franchise specific legislation in India. However, there are various laws, which affect the relationship between the franchisor and franchisee, such as the Contract Act, Competition Laws, Intellectual Property Laws, etc. Besides these, there are other laws which need to be considered by a foreign franchisor before expanding into India, such as Foreign Exchange Regulations, Taxation, Labor Regulations, Property Laws, etc. An in-depth understanding and legal assistance in respect of these laws is necessary before foraying into the franchise market. (i) Contract Act Formation of Contract: The contractual relationship between the franchisor and the franchisee would be governed by the Indian Contract Act, 1872. The franchise agreement must ensure the existence of the basic ingredients of a valid contract such as lawful consideration for the

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agreement, lawful object and purpose of the agreement and capacity of the parties to enter into an agreement. (ii) Intellectual Property Rights: Franchise relationship essentially deals with use of Intellectual Property Rights of the franchisor by the franchisee for the franchise business. Hence, understanding of Intellectual Property Rights legislations becomes very important. Trade Mark Protection: There are three courses of action that can be initiated against trade mark infringement, viz. (a) an injunction under statute (b) an infringement or a passing off action, depending on whether the trade mark is registered or not and (c) criminal action for an offence of falsifying a trade mark. Appropriate provisions need to be incorporated in the Franchise agreement dealing with the rights and obligations of the parties in case of infringement of trade marks, restriction on use of the trade marks during and post termination of the franchise agreement. Know-how and Confidential Information: The franchisors know-how and confidential information would be a valuable trade secret. Therefore, it is advisable to incorporate sufficient safeguards in the franchise agreement against unnecessary disclosure of such information. Copyright Protection: The Manuals containing the entire technique of running the franchise business and advertising material are of great value to a franchisor and unlawful reproduction and piracy of this literary work can be protected under the Copyright Act, 1957. According to Section 17 of the Copyright Act, the author of a work shall be the first owner of the copyright therein. Therefore, the franchisor as the owner of the copyright has the exclusive right to own and license the work, institute proceedings for infringement by claiming injunction, damages and accounts of profits made by the defendant as a result of the violation of the copyright

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(iii) Monopolies & Restrictive Practices Law and Competition Law: The Monopolies and Restrictive Trade Practices Act, 1969 prohibits imposition of restrictions in respect of sources of supply and pricing of products. It must be ensured, that the terms of the franchise agreement, are not construed as monopolistic or restrictive, or else the MRTP Commission could grant an injunction preventing such trade practices and may also award compensation to the complainant for any losses or damages suffered. Care needs to be taken while drafting the franchise agreement to ensure that the franchise agreement is not hit by the provisions of the MRTP Act and at the same time sufficiently protects the interests of the parties.

Competition Law: The focus is now shifting from curbing monopolies to promoting healthy competition in India. Accordingly, the Competition Act, 2002 has been passed to replace the MRTP Act. Some of its provisions have not yet come into force, as a Government notification to that effect is awaited. Hence, presently the applicability of the provisions of the MRTP Act continues. (iv) Consumer Protection and Product Liability: The Consumer Protection Act, 1986 provides for rights and remedies to consumers for defect in products and deficiency in services making the manufacturers and service providers liable for the same. The term manufacturer as defined and understood in the Consumer Protection Act would include a manufacturer, assembler and a person who puts his own mark on any goods manufactured by another manufacturer. This would also be the case for the services rendered by the franchisee under service marks of the franchisor. To avoid complications in future, the responsibility in respect of liability with regard to defective products and deficient services and indemnification from any claims on that account should be expressly set out in the franchise agreement.

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(v) Foreign Exchange Regulations: Normally, a franchise arrangement would involve payments such as franchise fee, royalty for use of trade marks and system, training expenses, advertisement contributions, etc. If such payments are to be made to a foreign franchisor the provisions of Foreign Exchange Management (Current Account Transactions) Rules, 2000 would be relevant where under, prior approval of the Reserve Bank of India (RBI) would be required for making remittances outside India for purchase of trademark/franchise in India. However, remittances for use of trademark/franchise in India would not require such approval. (vi) Labour Laws: Issues with regard to employees employed by the franchisee would be subject to various labour legislations such as Employees Provident Funds and Miscellaneous Provisions Act, 1952, Payment of Bonus Act, 1965, Payment of Gratuity Act, 1972 etc. There are also various legislations at the State level, which prescribe hours of work in shops and establishments. (vii) Taxation: Various direct and indirect tax laws such as income tax, sales tax, excise customs etc. would be relevant in the context of franchise relationship as they are in any other business concept. (viii) Real Estate: Location of the franchised outlet is the key factor for success of the business. Hence proper care needs to be taken while selecting the site. The user of the land and building under the Town Planning law needs to be checked. The municipal laws applicable to a particular area also regulate construction of buildings. Acquisition of property, whether on ownership or lease, would require consideration of various legal implications, which affect the title and continuity of user of the property during the franchise period. (ix) Insolvency Laws

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Although the general picture of franchising is one of success, there have been cases of insolvency among the franchisees and franchisors. Insolvency becomes an issue if either the franchisor or one of the franchisees becomes unable to pay its debts as and when they fall due. Clearly, the risk of insolvency for both franchisor and franchisee in India will be greatly increased if the franchise concept is a foreign one and it has not been properly adopted for the Indian market. The laws that are relevant in India in relation to insolvency are found in the Companies Act, 1956 and the Provincial Insolvency Act, 1920. (x) Industry Specific & State/Local Regulations: Depending on the nature of the industry/sector to which the franchise belongs, various sector specific legislations need to be considered e.g. in the case of a food and hospitality, licenses under the Shops and Establishments Act, Eating House license from the Municipal Corporation, Health license from the Health Department of the Municipal Corporation would be required. Conclusion Considering the peculiar nature of the business concept in franchising, appropriate legal advice and proper understanding of the relevant legislations is a must both for the franchisor and franchisee before entering into the relationship. A proper understanding between the parties suitably documented would form a strong foundation for success of the business relationship and expansion of the franchise network. To conclude, the future trends involving franchised businesses are varied. The local franchising industry can expect a colorful future. On the one hand, franchisors and franchisees have some exciting possibilities to pursue, while on the other, there is a range of new threats to contend with. In my view, the future brings increased complexity to the role of franchise system management. This complexity will also lead to growth and further penetration of this amazing WIN-WIN PARTNERSHIP. Franchise strategists will have more options and to consider and at least some of these will require specialists skills to evaluate, progress and prosper in this rapidly changing evolving market.

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