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Project report on

Franchising and its Scope


in India
Submitted to:

Prof. Rosie
Murray

GROUP MEMBERS
NAME ROLL NO

Neeru Kapoor 41

Amisha Khanna 42

Richa Khosla 44

Hardeep Singh Saini 83

Ronak Shah 90

Rohan Shetty 98

Dipti Soni 102

Ankush Thorat 108

Rugved Vaidya 113

Ritika Vohra 117


INDEX

Sr.no. Topic

1 What is Franchising

2 How does franchising work

3 History of franchising

4 Franchising in India with caselets

5 Franchising models in India

6 Legal framework for franchising in India

7 Franchising in India – Road ahead


What is franchising?

A franchise is a right granted to an individual or group to market a company's goods or


services within a certain territory or location. Some examples of today's popular franchises
are McDonald's, Subway, Domino's Pizza, and the UPS Store.

Franchising can also be defined as:

“A continuing relationship in which a franchisor provides a licensed privilege to the


franchisee to do business and offers assistance in organizing, training, merchandising,
marketing and managing in return for a monetary consideration”

In other words Franchising is the practice of using another firm's successful


business model. The word 'franchise' is of Anglo-French derivation - from franc- meaning
free, and is used both as a noun and as a (transitive) verb. For the franchisor, the franchise is
an alternative to building 'chain stores' to distribute goods and avoid investment and
liability over a chain. The franchisor's success is the success of the franchisees. The
franchisee is said to have a greater incentive than a direct employee because he or she has a
direct stake in the business.
There are many different types of franchises. Many people associate only fast
food businesses with franchising. In fact, there are over 120 different types of franchise
businesses available today, including automotive, cleaning & maintenance, health & fitness,
financial services, and pet-related franchises, just to name a few.

How Franchising Works

If you are thinking about buying into a franchise system, it is important that
you understand exactly how franchising works, what fees are involved, and what is
expected of you from the franchise company.

An individual who purchases and runs a franchise is called a "franchisee." The


franchisee purchases a franchise from the "franchisor." The franchisee must follow certain
rules and guidelines already established by the franchisor, and in most cases the franchisee
must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to
the franchisor. Franchising has become one of the most popular ways of doing business in
today's marketplace. In most states you cannot drive three blocks without seeing a
nationally recognized franchise company.

The History of Franchising

Franchising began back in the 1850's when Isaac Singer invented the sewing
machine. In order to distribute his machines outside of his geographical area, and also
provide training to customers, Singer began selling licenses to entrepreneurs in different
parts of the country. In 1955 Ray Kroc took over a small chain of food franchises and built
it into today's most successful fast food franchise in the world, now known as McDonald's.
McDonald's currently has the most franchise units worldwide of any franchise system.

Today, franchising is helping thousands of individuals be their own boss and own
and operate their own business. Franchising allows entrepreneurs to be in business for
themselves, but not by themselves. There is usually a much higher likelihood of success
when an individual opens a franchise as opposed to a mom and pop business, since a proven
business formula is in place. The products, services, and business operations have already
been established.

Advantages of Buying a Franchise

There are many advantages to buying a franchise. Some of these advantages are:

 Corporate image - The corporate image and brand awareness of the company is
already established. Consumers are always more comfortable purchasing items from
a familiar name or company they trust.
 Training - The franchisor usually provides extensive training and support to the
franchise owner.
 Savings in time - Since the franchise company already has the business model in
place you can focus on running a successful business.

Businesses for which franchising works best have the following


characteristics:
 Businesses with a good track record of profitability.
 Businesses which are easily duplicated.

As practiced in retailing, franchising offers franchisees the advantage of


starting up quickly based on a proven trademark, and the tooling and infrastructure
as opposed to developing them.

The following US-listing tabulates the early 2010 ranking of major


franchises along with the number of sub-franchisees (or partners) from data
available for 2004. It will also be seen from the names of the franchise that the US is
a leader in franchising innovations, a position it has held since the 1930s when it
took the major form of fast-food restaurants, food inns and, slightly later, the motels
during the first depression.

Franchising is a business model used in more than 70 industries that


generates more than $1 trillion in U.S. sales annually (2001 study). Franchised
businesses operated 767,483 establishments in the United States in 2001, counting
both establishments owned by franchisees and those owned by franchisors.

1. Subway (Sandwiches and Salads | Startup costs $84,300 – $258,300 (22000


partners worldwide in 2004).
2. McDonald's | Startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in
2010)
3. 7-Eleven Inc. (Convenience Stores) |Startup Costs $40,500- 775,300 in 2010,
(28,200 partners in 2004)
4. Hampton Inns & Suites (Midprice Hotels) |Startup costs $3,716,000 –
$15,148,800 in 2010
5. Great Clips (Hair Salons) | Startup Costs $109,000 - $203,000 in 2010
6. H&R Block (Tax Preparation and e-Filing)| Startup Costs $26,427 - $84,094
(11,200 partners in 2004)
7. Dunkin Donuts | Startup Costs $537,750 - $1,765,300 in 2010
8. Jani-King (Commercial Cleaning | Startup Costs $11,400 - $35,050, (11,000
partners worldwide in 2004)
9. Servpro (Insurance and Disaster Restoration and Cleaning) | Startup Costs
$102,250 - $161,150 in 2010
10. Minimarkets (Convenience Store and Gas Station) | Startup Costs $1,835,823 -
$7,615,065 in 2010

The midi-franchises like restaurants, gasoline stations, trucking stations which


involve substantial investment and require all the attention of a business.

There are also the large franchises - hotels, spas, hospitals, etc. –

Two important payments are made to a franchisor:

(A) A royalty for the trade-mark and

(B) Reimbursement for the training and advisory services given to the
franchisee. These two fees may be combined in a single 'management' fee. A fee for
"Disclosure" is separate and is always a "front-end fee".

A franchise usually lasts for a fixed time period (broken down into
shorter periods, which each require renewal), and serves a specific "territory" or
area surrounding its location. One franchisee may manage several such locations.
Agreements typically last from five to thirty years, with premature cancellations or
terminations of most contracts bearing serious consequences for franchisees.

A franchise is merely a temporary business investment, involving


renting or leasing an opportunity, not buying a business for the purpose of
ownership. It is classified as a wasting asset due to the finite term of the license.
A franchise can be exclusive, non-exclusive or 'sole and exclusive'.

Franchising in India

Franchising is in its early stages in India, and has become increasingly


popular as a means of doing business in the past few years, both in terms of international
franchises and domestic ones. As a result, the Franchising Association of India was set up
in Mumbai, in 2000 which has links with other such associations around the world. The
Franchising Association is still considering whether it should have a Code of Conduct or
whether they should press for specific legislation in relation to franchising. The difficulty
with a Code of Conduct is that not all franchisors and franchisees are members of the
Association and it is difficult to enforce.

Regarding the background, international soft drink and hotel franchises


arrived in India as early as in the 1960s, but in 1977 the Government of the day had
expelled foreign brands from India. The foreign brands started returning gradually from the
mid ‘80s. In the 1990’s as the market opened, foreign franchises started coming in
gradually, and faced many hiccups along the way especially KFC, Schweppes etc. Since
then there has been progressive entry of international franchises, some have been successful
and others not so fortunate. The well-known franchises relating to soft drinks, ice-cream
parlous or restaurants include Pepsi, Coke, Baskin Robbins, Move pick, Subway,
McDonalds, TGIF, Geoffrey’s, Taco Bell, Pizza Hut, Pizza Piazza, Dominos Pizza,
O’Brian’s Sandwich Bar, Ruby Tuesdays and Barista. Retail franchises include Marks &
Spencer, West Side, Evita Peroni, Pepe Jeans and Adams.

Courier companies like Air Action and DHL are there along with computer and
software related franchises. The Government has liberalized the rules and regulations in
relation to the retail industry and a boom in this sector is on its way.

Franchising has also become a popular method of doing business within India
with the franchisor granting numerous unit franchises in a wide range of areas. This has
been the case in respect of IT education and franchises such as APTEC, NIIT, and STG.
Then there are local food chains like Chawla’s, Nirulas, Nilgiris, Coffee Day, Café Nescafe,
and Sagar Ratna. Health clubs like VLCC have come up along with hair and beauty parlous
who often sell their products like Shanaz Hussein, Biotique and Habibs. There are
numerous cargo and courier companies like Blue Dart, ADL, Dartmail, Blaze Flash, First
Flight, Professional Couriers and DTDC. Clothing retail outlets especially for designer
clothing include Bentley, L.F Couture, Ritu Beri and Deewan Sons. Other retail chains
include Shopper’s Stop, Lifestyle and Ebony. There are Indian travel agencies which now
want to franchise abroad like Uniglobe or expand locally like Travel Port. Now the major
area for local franchises seems to be healthcare with Apollo Hospitals and various
diagnostic centers. Shanaz Hussein beauty saloons and products is already an international
franchise, and slowly other Indian franchisors are likely to look to expand internationally
with the easing of restrictions by the Government especially since 2000.

It took some time for international franchises to become acceptable because of


certain attitudes of Indian businesses towards foreign franchises whereby they could not
understand why the Indian party had to make all the investments in India and on top of that
had to make hefty payments in foreign exchange to the Master franchisor. Indians feel the
foreign franchisor or business should also invest, participate and have some interest in the
development and success of the entire business. If the brand name is very well known world
wide and the product is marketable in India, then the attitude can significantly change, as it
is obvious that the local business would profit just by riding on the back of a well known
brand.

If the brand is well known in another country but not in India or to Indians
travelling abroad, then it is difficult to convince an Indian businessperson to pay lump sum
payments or royalties as its worth is not the same in India. That again can be overcome if
the product or service provided by the franchise is in short supply in the country and
important to its development. Market research and pilot projects can assist in assessing the
prospects of any international franchise in India.

The lower the price a product or service can be sold at, the more customers they
are likely to have. Some products may be designed to appeal to the masses and other high
price items can be marketed just for a select clientele like those in big business, professions,
the film industry or celebrities. Expensive cosmetics and beauty therapy from abroad is for
the latter. The needs of the affluent has been met already with many expensive products in
the market, however there is still scope in the retail sector for cheaper goods in terms of
clothing or cosmetics. In the soft drink and fast food sector, Coke, Pepsi, McDonald and
Pizza Hut have already captured the mass market.

In many instances the products sold by the franchise outlets may have to be
significantly tailored to local taste, which may go against the franchising concept or
principle that outlets should be identical, and a customer should find identical quality of
goods. If one goes to a McDonalds or TGIF or Pizza Hut in India, the food tastes different
and the menus are geared to local taste and culture. For instance, people like spicy food, and
beef and pork have to be absent in the menu to avoid offending religious sentiments. In
relation to Restaurants and pubs, even if families would like to go together, the licensing
laws in many states prohibit entry of persons less than 21 years to go to an eating place or
restaurant where liquor is sold.

Regarding retail franchises involving clothing, the children’s wear and men’s wear
is similar to any other western country except that the material has to suit the tropical
climate and relatively milder winters. The women’s fashion however, is significantly
different with the majority wearing salwar kameez or saris. Western clothes like suits,
trousers, skirt and tops for women are becoming popular among teenagers and women in
cosmopolitan areas of large cities.

A foreign franchisor needs to be aware of local culture and custom, and when
deciding on franchise fees or other payments they have to consider realities about the
buying power and people’s habits about spending and not make assessment on the basis of
population numbers. Research should be done on the viability of any product or service in
any given in India.

While a sizeable proportion of the Indian population still lives in the villages and
has limited purchasing power, India also has a large and growing middle class and a much
smaller wealthy segment of consumers. The Indian market has a segment of
approximately 150-200 million people with growing purchasing power, who seek
products and services for a better lifestyle. Approximately 2 percent of Indians have a
per capita income in excess of $13,000, which translates into a segment of 20 million
relatively well-off consumers. This is small in comparison to India's total population, but
still comprises a substantial market segment. Approximately 8 percent of Indians have a
per capita income of more than $3,500, or about 80 million people; more than 100 million.
Franchising in some form has been operating in India for several decades.

One well known example of this is the Bata shoe chain, started in the 1960's.
However, franchising in its modern concept has become popular in India only in recent
years. The industry is still very much in an evolutionary stage. New franchise business
concepts
now span across diverse sectors as education, specialized food services, healthcare,
garments and apparel, entertainment, fitness and personal grooming clinics, stationery
As the service economy grows in India, opportunities for franchising will increase.
Given the current boom in the retailing and entertainment sectors in India, an increasing
number of players are seeing franchising as a growth option. According to industry
experts, the Indian franchise economy currently accounts for 5 percent of the country’s
GDP. According to a study conducted by the Federation of Indian Chambers of 3/3/2005
Commerce and Investments (FICCI), there are approximately 600 active franchisers and
more than 40,000 franchisees in India currently across various sectors.

The same study estimates that total annual sales turnover achieved by franchised
businesses in India is in the range of $1.6-2.1 billion. Franchising is poised to spur
economic growth because it encourages private enterprise with no danger of flight of
capital, and because it offers the potential to establish products and services that meet global
standards.

Unlike in the U.S. and some countries in the west, India does not have a specific
law on
franchising as yet. Franchising is covered within the broad definition of transfer of
technology contained in domestic legislation. A legal framework for new franchisers
interested in setting up master franchises in India exists, in terms of brand protection and
rules regarding payment of franchise fees. However, there is a growing need to improve
this regulatory framework.
Kentucky Fried Chicken, Dominos€™s Pizza, TGI Friday, Ruby Tuesday,
Subway, and Baskin Robbins for food. Pizza Hut and Dominos€™s Pizza have opened
many outlets and McDonald's has been open for business since 1996. Similarly, Indian
companies with
strong brand recognition are also using the franchising route to expand business
volumes. Archies for giftware, MRF for automotive tires, NIIT for computer training
schools and Apollo Hospitals for healthcare are examples.
Several foreign management-training institutes are adopting the franchise route to
expand their operations in India. CMC is a government-owned enterprise that has 120
computer education institutes in India. It requires potential franchisees to provide a
minimum space of 1,200 square feet and invest $32,000-34,000.
While franchising is growing in India, the concept has functioned mainly on an agent
basis. It is still evolving and being refined, but is expected to mature rapidly over the next
several years. Franchising in India is often perceived as a strategy to cover the high
cost of real estate that a company that is interested in retailing would have to bear. As a
result, if business projections are not met, franchisees can and sometimes do shift to
other franchise concepts.

With minor variations, in a typical franchise operation, a company approaches


an owner of prime commercial space to provide the real estate, to invest in interiors and
inventories to run a franchise business, and to hire staff for the operation. Franchisees
prefer to recruit staff directly, but most franchisers insist on training the staff themselves.
U.S. firms need to use several criteria to evaluate prospective franchisees. The key one
is that prospective franchisees must be financially sound. Other considerations include
space location and availability, a willingness to work through initial teething problems
together, high ethical standards, and similarity of goals and values.

Financial arrangements can vary. Some companies offer franchisees a


percentage of
commission on sales, while others provide a fixed percentage of the retail price of the
product as a profit. The costs of promotions and advertising are usually shared between
franchiser and franchisee, with some companies assisting franchisees in specific
promotional activities to help increase product sales. Most franchisers provide their
franchisees with initial training in the business and some franchisers also help with site
selection.

Franchise fee payments in hard currency are allowed. A potential franchisee must
submit a proposal for a franchise operation to the government ministry that regulates the
particular industry sector. Among other details, the proposal must contain the amount of
franchise fee that will be paid to the franchiser. The proposal moves from the relevant
ministry to the Ministry of Industry and the Foreign Investment Promotion Board in the
Ministry of Finance. Reserve Bank of India approval of the franchise fee is automatic
when the Ministry of Industry clears the proposal. There are value or percentage limits
on approvals of franchise fees, with franchises involving advanced or high technology
receiving the highest limits.

Royalty payments ranging from 3 to 8 percent are allowed in


hard currency, in addition to the franchise fee, although the norm is closer to 5 percent.
The royalty is calculated on total turnover for the year for the franchise operation.
The Franchising Association of India (FAI), established through the efforts of the Indo
American Chamber of Commerce in 1999, is the first organization of its kind in India. It
represents the interests of franchisers, franchisees, vendors, consultants and other
interested individuals and bodies.

The FAI™s objectives include improving the business environment for


franchising; acting as a resource center for current and prospective
franchisers and franchisees, media and the government; promoting the concept of
franchising and its use as a healthy business practice; establishing a discussion forum
for franchising matters; and promoting the interests of members by organizing seminars,
conferences and meetings. The FAI is in the process of establishing appropriate
international linkages, and was admitted as a member of the World Franchising Council
in early 2000.

The FAI can publicize updated information on American franchisers that are
interested in expanding their business in India. It can advise potential franchisers about the
current
legislative framework, and lobby with the government for changes. It can also help to
identify high-quality potential Indian franchisees.

Some of the franchising models that exist in India:

1. Manufacture-Retailer – Under this model, the franchisee retailer directly


sells the franchisor’s products e.g. Kodak Express, Bose Corp., Wellspun,
Shehnaz Hussain.

2. Manufacturer-Wholesaler – Licensed Franchisee, under this model,


manufactures & distributes the franchisor’s products, e.g. bottling of soft
drinks Coke & Pepsi.

3. Supplier/ Dealer-Retailer – Here the Franchisee retailer purchases products


for retail sale from the Franchisor, e.g. lifestyle products, Florista.

4. Retailer-Retailer - Here the franchisor markets a service or a product under


a common name and a standardized system, through a network of
franchisees, e.g. The Medicine Shoppe, Big Bazaar, Shopper’s Stop.

Legal Framework for Franchising in India


India does not have a specific legislation to regulate franchising. Hence, a plethora of
legislations govern franchising in India, including:

 Foreign Exchange Management Act, 1999 – This law regulates all


franchising activities involving foreign investments and foreign remittances.
 The Contract Act, 1872 - Franchising in India is basically built on the
principles of Contract law.
 Intellectual Property Laws including:

o The Copyright Act, 1957;


o The Trademark Act, 1999;
o The Patent Act, 1970;
o The Geographical Indication of Goods (Registration & Protection) Act,
1999;
o The Designs Act, 2000; and
o The Semiconductor Integrated Circuits Layout Design Act, 2000.

 The Monopolies and Restrictive Trade Practices Act, 1969 – This law
regulates monopolies and restricts unfair and restrictive trade practices.
 The Competition Act, 2002 - This Act will replace the MRTP Act and will
regulate competition and fairness in business.
 The Specific Relief Act, 1963 - This Act provides specific enforcement for
breach of contract by a party.
 Consumer Protection Act, 1986 – Law protecting the consumers.
 The Sale of Goods Act, 1930;
 Direct & Indirect Taxation Laws & Cesses;
 Activity Specific Legislations including:

o The Prevention of Food Adulteration Act, 1954;


o The Drug & Cosmetic Act, 1940;
o The Pharmacy Act, 1948.

 Real Estate Laws including:

o The Transfer of Property Act, 1882 – law regulating sale, mortgage,


lease, gift of immovable property.
o The Indian Easement Act, 1882 – law regulating the license of
immovable property.
o The Registration Act, 1908 – law regulating the registration of
agreements & documents.
o The Indian Stamp Act, 1899 and State Legislations – law governing
the levy of stamp duty.
o Rent Control Legislation- laws regulating tenancy and letting of
immovable property.

 Employment and Welfare Legislations including:

o The Apprentices Act, 1961;


o The Child Labour Act, 1986;
o The Contract Labour Act, 1970;
o The Employees’ Provident Funds and Miscellaneous Provisions Act,
1952;
o The Employee State Insurance Act, 1948;
o The Employers’ Liability Act, 1938;
o The Minimum Wages Act, 1948;
o The Payment of Bonus Act, 1965;
o The Maternity Benefit Act, 1961;
o The Payment of Gratuity Act, 1972;
o The Sales Promotion Employees Act, 1976;
o The Trade Unions Act, 1926;
o The Workman’s Compensation Act, 1923;
o The Payment of Wages Act, 1948;
o Shops and Establishments Act(s); and

Issues Impacting Franchising

 Food Adulteration Issues i.e.:


 In Fruit Juices & Beverages;
 In Milk & Dairy Products;
 In Cooking Oil & Food Products.
 Consumer Rights & Product Liability
 Fitness of Products;
 Packing, Storage & Quality Issues;
 Complacency of Franchisor - MacDonald's French Fries;
 Non-adherence to Standards.

FRANCHISING- THE ROAD AHEAD

 India’s vast geographical spread, diversity, growing economy, purchase power,


young population & acceptance of western concepts are huge enablers for
franchising.
 Growth sectors include reality, food & beverages, hospitality, health & fitness,
tourism, education, etc.
 For the last several years, franchising is growing in India at a steady rate of 25-30%.
 Established brands like Pizza Hut, MacDonald‘s, Kodak, Crossword, KFC, Subway
are consolidating.

According to IFA approx 4% of all the business in US is franchise. In this


business you are going to sell the products or services of a bigger brand which would
promote the brand as a whole. In order to make you guys understand this business in a
simple language, you can take the example of Mc Donalds which does not operate itself
all over the world but there are people who look to invest money and start their stores as
a Franchise of the original Mc Donalds company and get commissions or percentages
on the total sales.

The scope of this business is increasing and increasing because all the people are
looking to invest in these kinds of projects where there are fewer risks, knowledge sharing
and automated branding because the main company would promote the brand and which
would get the franchise with easy sales. You can check out websites like
FranchiseIndia.com for a list of all the opportunities available for business and start your
new franchise business.