Franchising In India

Vishal Kirit Gala

A billion humans, GDP growing at 6-7% per annum, a recently liberalised economy, 30 million television sets versus 20 million in the UK! The marketers paradise! These are some of the indicators of how large the potential of this country is. The world is no more looking at India as the land of Taj Mahal or snake charmers. There is a constantly growing middle class of about 200 million who are in their daily lives exposed to brands ranging from Bata, Nike, Reebok for their footwear requirements to Matiz, Santro and Maruti as their long  desired cars. Yes, we are moving into a highly materialistic world, the mass market. And what centers on this vast phenomenon is delivery of products and services, which satisfy these material needs. This is where Franchising comes in handy.

Franchising is a business model that aims to replicate a successful business format across a number of locations through a network of entrepreneurs. What it most efficiently does is to allow a successful businessman to expand its business enterprise to different markets without very high investments. Imagine the amount of funds McDonald's would require if it were to finance all its outlets around the world. Also it would require the best geniuses in the world to understand all the diverse markets. The businessman (referred to in franchising world as 'franchiser') gets access to the local entrepreneur's (referred to as 'franchisee') capital and market knowledge. For example the McDonald's Bombay franchisee has good market knowledge about the potential customer base and thus can help McDonald design its offering and deliver it better. In return the franchisee uses the franchiser's brand to attract its customers and deliver products to them using the proven business format of the franchiser. Thus it seems a win-win relationship for both of them. But things are not always so straightforward as they appear. There could be a lot of problems attached to this seemingly simple relationship. There have been franchising systems that have collapsed for reasons such as uncontrolled expansion, litigation due to unclear agreements, choosing wrong location, and over-dependence on the franchiser. Most of the failures of the computer education franchising system can be attributed to uncontrolled expansion. Thus in order to ensure success in this model one has to take utmost care right at the beginning. The foundations of the franchising system have to be built on mutual trust and a good working relationship rather than just written agreements. There has to be a constant commitment from the franchiser to help the franchisee in setting up his business and to ensure a smooth flow in operations and profits. This support can be provided in form of helping in choosing locations, training manpower, setting up systems of operations, advertising, on-going advice and technical support. The franchisee on the other hand needs to have faith in the business format of the franchiser and should innovate on it only if required. A fine balance between independence and interdependence needs to be maintained.

In India the franchising industry has just started to take shape with names like McDonald's, Archies, NIIT, and Pizza Hut going for large-scale operations. These companies have started operations through the franchising route in areas like Fort and Bandra in Mumbai and Greater Kailash 1 and South Extension in New Delhi. Location is one of the main drivers of franchisee choice in India. The property rates at prime locations in the metropolitan cities often hinder the franchiser in buying space. It is much cheaper for a franchise to deliver his goods and services through the person who owns or can rent the premises. Also the consumer behavior in India is slowly tilting towards branded purchases. The TV channels boom has added a lot to brand awareness. When the TV channels started operations, most of the people instantly hung on the television programmes due to lack of other entertainment options. Through these programs they started exposing the consumer to world famous brands like Sony, Nike, Intel as well as Indian brands like Bata, Asian Paints and Videocon. This helped the companies in getting instant publicity to a widely distributed market in the country. Since then the franchises have been helping them in delivery of their products and services without much or their investment in delivery systems. Also the manger-cum-owner format helps franchisers to ensure that the franchisee would put in a lot of hard work to make the business a success.

Some of franchising systems that have been adopted by companies in India to expand are: -
1. Master Franchising System: In master franchising the franchiser grants rights for a particular area to the master franchiser for a front-end master franchisee fee. The master franchiser on his part is responsible for appointing further individual franchisees within that area. McDonald's, TGIF, Pizza Corner and Pizza Hut have adopted this system in India.
2. Area Development Franchising System: In an area development agreement, the franchiser grants development rights of a particular area to the franchisee in turn for a front-end development fee. The franchisee on his part is responsible for developing a certain number of units within a given period of time. Excel Infotech EIIT  has adopted this unique mode of franchising.
3. Exclusive Showrooms: In an exclusive showroom the company or the franchiser grants exclusive showroom rights to the franchisee with the condition that the franchisee shall stock only his brand or products. The franchisee profits by being given stocks at better profit margins than other retail outlets. This system is widely followed by brands like Raymond's, Allen Solly, and ColorPlus.

There are many more variants but what it in essence tells us is that there is a lot of customisation required in Indian context for franchising arrangements. This customisation not only takes place in systems but also in the main products and services. That's the reason why one walks into the western McDonalds and is able to order a McAloo-Tikki Burger.

The future of the franchising industry in India seems to be bright but will be difficult to sustain without constant innovation. Some of the innovations in franchising have been co-branding and using the intranet/extranet to keep franchise owners plugged in. In franchising, the concept of co-branding simply involves two or more "brands" sharing real estate. Each maintains identity, but there is free flow of customers between them. Co-branding saves operating costs and lures more customers to the site.  However this is a phenomenon of matured franchising markets and once most of the franchisers have explored all new entries in India they will probably shift their focus to this system of delivery.

Another innovation, the Intranets and extranets can help a franchiser to be in constant communication with their franchisees spread over large geographical areas and ensure smooth delivery of products and free flow of information. This would not only help in efficient delivery of products but also lead to ultimate reduction in costs and increase in bottom-line.

 

Vishal Kirit Gala is a Student at Management Development Institute (MDI), Gurgaon Uploaded on February 8, 2001

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