Nov Retail Franchising

1

Franchising: An Industry Perspective

Presented by

Ritesh VohraFirst Franchising Private Limited

16th November 2002 / FICCI Footfalls 2002 / New Delhi

2

Agenda

Franchising Internationally

Franchising in India

Retail & Non Retail Franchising in India

Franchisor-Franchisee Relationship

Summary

3

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

4

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.8000-Rs.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

5

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

6

Factors Defining the Growth of Franchising in India

Negative Factors

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

7

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

8

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

9

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

10

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 décor 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

11

Franchising in Retailing – A Variety of Models

*many more varieties of the hybrid model exist.

12

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

13

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

14

Value Proposition from a Franchisor

Ranking Value Proposition(Franchisors View)

Value Proposition(Franchisees View)

1 Brand Name Brand Name

2 Economies of Scale Economies of Scale

3 Proven Business Format

Proven Business Format

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

FirstFranchising

15

Value Proposition from a Franchisee

Ranking Value Proposition(Franchisors View)

Value Proposition(Franchisees View)

1 Local Market Knowledge

Investment / Real Estate

2 Business Experience / Background

Business Experience / Background

3 Investment / Real Estate

Local Market Knowledge

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

FirstFranchising

16

Critical Success Factors for a Franchise System

Ranking Factors

1 A Well Established Business Network

2 Constant New Product Development

3 Innovative Products / Services

4 Quality of Franchisees

5 Transparency

6 Return on Investment to Franchisees

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

FirstFranchising

17

Most Common Causes of Friction between Franchisors & Franchisees

Ranking Causes of Friction

1 Transparency

2 Training and Support

3 Revenue Sharing

4 Product / Service Delivery

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

FirstFranchising

18

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 franchisee’s commitment to service quality is

missing many franchisor’s commitment to provide the promised

support to their franchisees is in doubt

Result – a tense relationship, which doesn’t help anyone

19

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

20

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

21

Thank You.

ritesh.vohra@firstfranchising.com