Franchising: An Industry Perspective

Presented by

Ritesh Vohra First Franchising Private Limited 16th November 2002 / FICCI Footfalls 2002 / New Delhi
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Agenda

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

Franchising Internationally

Very well accepted Entrenched deeply within USA & Western Europe Fairly well structured in terms of framework In USA:

$1 Trillion is spent each year on goods bought at franchised outlets One out of every 12 business establishments is a franchised business A new franchise business opens every 8 minutes of every business day 50% of retail trade is through franchised outlets

High growth areas are South-East Asia, Latin America & the Middle East US franchisors lead the way in International expansion

Franchising in India

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

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

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Factors Defining the Growth of Franchising in India

Positive Factors

Huge consuming class Fast-growing consumerism Shift towards Services from Agriculture & Manufacturing Franchising has already proven to be successful in several sectors Large entrepreneurial pool

Factors Defining the Growth of Franchising in India

Negative Factors

Lack of regulatory framework Financing mechanisms not in place Skewed real estate markets

Franchising Trends in India

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

Benefits of Franchising

Franchising allows the franchisor to:

Have greater access to capital Expand rapidly Save operating costs Capitalise on the abilities of independent entrepreneurs

Benefits of Franchising

Franchisees joining a franchise system enjoy the following benefits:

Backing of a bigger organisation Shorter learning curve Established trade mark or service mark Economies of scale Joint advertising and promotion Transfer of management expertise Training & support from the franchisor

Retail Franchising within India

Grew initially in the apparel & footwear sectors Has gradually grown to cover a wide variety of sectors including food, consumer durables, jewelry, books, home dcor etc Two varieties of Retailers:

the manufacturer-retailers typically Product Distribution Franchises have been around for a while the aggregators typically Business Format Franchises only now beginning to show up

Existent & likely to be successful only in smaller formats Substantial action also happening in non metro locations

Thereby spreading organised retailing over a larger footprint

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

Result MG (Minimum Guarantee) has become the key driver

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Franchising in Retailing A Variety of Models

Model Player Input

Premises Interiors Equipment Stocks Management

Pure Franchise Franchisee Franchisor

Management Contract Franchisee Franchisor Franchisee

Hybrid* Franchisor

(50%) (50%)

(50%) (50%)

(Consignment)

Franchisees Returns

Margin on Sales

Rent + %age of Sales

Higher of Minimum Guarantee or Margin on Sales

*many more varieties of the hybrid model exist.

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Non Retail Franchising within India

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

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Brief Sectoral Analysis

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

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Value Proposition from a Franchisor

Ranking 1 2 3 Value Proposition (Franchisors View) Brand Name Economies of Scale Proven Business Format Value Proposition (Franchisees View) Brand Name Economies of Scale Proven Business Format

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

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Value Proposition from a Franchisee

Ranking 1 2 3 Value Proposition (Franchisors View) Value Proposition (Franchisees View)

Local Market Knowledge Investment / Real Estate Business Experience / Background Investment / Real Estate Business Experience / Background Local Market Knowledge

Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

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Critical Success Factors for a Franchise System

Ranking 1 2 3 4 5 6 Factors A Well Established Business Network Constant New Product Development Innovative Products / Services Quality of Franchisees Transparency Return on Investment to Franchisees

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Source: Annual Surveys of the Indian Franchise Sector, conducted by FirstFranchising

Most Common Causes of Friction between Franchisors & Franchisees

Ranking 1 2 3 4 Causes of Friction Transparency Training and Support Revenue Sharing Product / Service Delivery

Source: Annuals Surveys of the Indian Franchise Sector, conducted by FirstFranchising

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Key Concerns for the Indian Franchise Sector

Herd mentality both franchisors as well as franchisees Several wrong precedents of franchisors as well as franchisees To an extent:

many franchisees commitment to service quality is missing many franchisors commitment to provide the promised support to their franchisees is in doubt

Result a tense relationship, which doesnt help anyone

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Key Concerns for the Indian Franchise Sector

Financing for franchises is a problem area with financial institutions

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

Legal & disclosure framework for franchises is not in place

increases chances of fraud by fly-by-night franchisors makes it difficult to resolve disputes

Real Estate markets completely unstructured & unrealistic

make Franchising unviable for start-up entrepreneurs

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Way to go

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

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Thank You.
ritesh.vohra@firstfranchising.com

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