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Franchising: Get the basics right for competitive advantage

With no definite laws governing this sector, franchising is perceived as a business proposition ‘low in transparency with high degree of risks involved’. However there exists immense growth potential of this marketing channel in India. Or to put it in other words any company wanting to make it big in the Indian consumer goods market will have to in one way or the other depend on this channel partially or in totality.

Internationally a proven format for expansion, sales through franchised outlets contribute almost 40 per cent of the total retail sales in the US. Similar figures exist in other markets such as UK (35 per cent approx), Australia (25 per cent approx), New Zealand (20 per cent approx) etc. Although franchising spans over 100 products and services, 6 out of the top 10 global franchisers belong to the food industry (the other categories include fitness centres -Curves, commercial cleaning - Jani King, communication & postal service centres - The UPS store among others). In contrast, IT education and IT enabled services have dominated the franchising sector in India.

Franchising in India still remains in its nascent stages. A recent study conducted by FICCI puts the number of franchisees all over India to over 40,000. However turnover from franchising is still very small. Only 2 per cent of the franchisers have turnover in excess of Rs 500 crore with almost 50 per cent doing less than Rs 5 crore of turnover every year. Majority of the franchisers also have till now gone ahead with this channel with a very myopic view. Key reasons have been lack of investment to open company owned establishments and to raise working capital at low interest rates. Strong systems and processes, which are the key to success of any franchising operation, do not exist in majority of the franchisee operations in India.

With no definite laws governing this sector, franchising is perceived as a business proposition ‘low in transparency with high degree of risks involved’. However there exists immense growth potential of this marketing channel in India. Or to put it in other words any company wanting to make it big in the Indian consumer goods market will have to in one way or the other depend on this channel partially or in totality.

With over 12 million small and medium scale entrepreneurs doing businesses all over the country, with a deep know-how of regional & local consumer needs/tastes & preferences and customer relationships which in some cases span generations, re-inventing the wheel on your own could be a very costly as well as time consuming proposition. Howard Schultz, Chairman & CEO, Starbucks once said “When companies fail, or fail to grow, it’s almost always because they don’t invest in the people, the systems, and the processes they need... underestimate how much money it will take to do that...how they are going to feel about reporting large losses. Unfortunately, that’s a given in the early stages of retail development, unless you raise money by franchising. Huge investments upfront mean not only potential annual losses but also a dilution of the founder’s shareholding. Among our competitors in the specialty coffee business, you’ll see examples of all the mistakes we didn’t make: companies that didn’t raise enough money to finance growth; companies that franchised too early and too widely; companies that lost control of quality; companies that didn’t invest in systems and processes; companies that were so eager to grow that they picked the wrong real estate locations; companies that didn’t have the discipline to walk away from a site if they couldn’t make the economics work.”

The three key stages of getting on with franchising are strategic planning, operational planning and execution. Do you have proven, distinct and sustainable value proposition for the franchisee? Is it too early to franchisee? Or are you missing the opportunity? Minmum guarantee only v/s minimum guarantee + commission on sales v/s commission on sales only? Answers to all of the above questions would form part of the strategic planning exercise. Putting in the right organisation structure with the right skill sets to manage he franchised network and developing foolproof processes and systems to support the network defined till the last level forms part of the operational planning stage of franchising.

Identifying, evaluating and selecting the right franchisee partner is the last but one of the most important link in the chain. Ability to identify the right franchisee partner who shares the same passion towards the brand as you do is more important than identifying the right location and signing on the owner of the place as a franchisee. With a strong value proposition and the right franchisee model, strong systems and processes being backed by equally strong organisation and the right minds (company and the franchisee) working together with clearly defined roles and responsibilities with each focusing on their areas of expertise are the key success factors of this rather complicated looking marketing channel.