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Why Franchising Could be India's Next Big Movement
Deepak was stressed out. How would he be able to support his family after he lost his job in the current meltdown? Deepak, 50 formerly the Vice President of an equity firm, was sure that he would not get any job at his age, with his experience and pay scale. He invested all his savings in an international food franchisee as an alternative to a job. Welcome to the franchising world in a recessionary economy! Franchising - Advantages and Disadvantages Franchising is a business setup where the business owner (the franchisor) gives a license to another person (the franchisee) to use their business concept, processes, products and services in a specific geographical area. In return, the franchisee has to pay an initial setup fee along with a monthly/yearly royalty. The major advantage of opting to be a franchisee rather than starting your own business is the security provided by having a proven business concept and well-accepted products and services in the market. Moreover, the franchisor helps with the required product or service training and marketing initiatives whenever required. The franchisee model gives the franchisor wider market penetration, besides expansion in local and international markets. Consumers can avail of a wide variety of quality local and international products. The initial setup fee and the royalty to be paid are the two basic disadvantages of owning a franchisee. In earlier days, this initial setup cost and the royalty became major barriers for international businesses to enter in Indian market. The franchisor’s control in the form of biased terms and conditions also becomes a drawback. Indian Franchising Sector- Facts & Figures Based on the Federation of Indian Chambers of Commerce and Industry (FICCI) report, currently India boasts approximately 1,200 franchisors, of which 300 are international franchisors and 900 are local franchisors. FICCI also states that the Indian franchising market will reach $20 billion by 2013 and is growing at the rate of 38% a year. Booming franchising sectors in India are Retail, Food & Beverage, Education, Health, and Beauty & Tourism. The retail franchisee sector is booming with almost 300 malls and 1500 supermarkets. According to the survey conducted by the FICCI, food franchising is expected to grow at approximately 48%. Education franchisees are expanding from playschools, to English coaching centres, to educational CDs, DVDs for school programs and overseas education centres. India does not have a specific legislation to regulate franchising. Hence, a plethora of legislations govern Indian franchising including, the Foreign Exchange Management Act, The Contract Act, Intellectual Property Laws, The Competition Act, Consumer Protection Act etc. Foreign franchisors can receive royalties up to 1% for domestic sales and 2% on exports for use of their brand name or trade mark, without transfer of technology. If royalties exceed the specified limit, the franchisor needs to take the RBI approval. Royalties to be paid to the foreign franchisor are calculated by a specified formula of the Indian government. How did it started and progress in India? The franchising setup entered India through international soft drinks & hotels in 1960s. After the 1977 setback in the form of expulsion of foreign brands from India, international businesses returned to India in the mid 80s. When the economy opened in the 1990s, international businesses set their foot in India in a big way. Brands like Pepsi, Coke, Baskin Robins, and Pizza Hut gradually expanded. Foreign brands faced an initial hindrance because of the Indian society’s rigid mindset in accepting a foreign brand. Moreover, some of the products provided by the franchisees did not suit the local needs and tastes. Since franchisees are bound by the fact that outlets should be identical worldwide, they could not alter the products based on Indian needs. But these problems resolved gradually over a period of time. Indians started accepting western culture and concepts, helping them to register foreign brands. Premium international brands which were earlier accepted only by the wealthy got an entry in to middle class homes. Retail franchising initially grew in the apparel and footwear sectors; over a period of time it moved to food, consumer durables, books, home décor, and jewellery. With the booming Indian economy and changing lifestyles, retail franchising is currently growing at an annual rate of 8%. Non-retail franchising comprises of sectors like Education, Health & Beauty and Travel. Education is one of the recession-proof sectors, along with the health sector. Since families have more disposable income at hand, they are ready to spend on good quality education. This has led to sudden increase in play schools, spoken English training centres etc. EuroKids has successfully launched 500 preschools across India in the last seven years. The market size of India’s preschool sector alone is valued at US $100 crores and is predicted to grow at 30-35% a year. The Health & Beauty sector has observed entry from Gold’s Gym, Just Cuts, and SPA SIAM etc. In the travel industry, major players like Kuoni, Cox & Kings, SOTC and Thomas Cook have expansion plans. Cox & Kings plans to set up 700 franchisee outlets by 2010. Destination India – Potentials The current market conditions in India favour international businesses that are considering setting up of franchisees in India. India’s cultural diversity, booming economy, reception of western concepts, increasingly affluent middle class, and vast geographical coverage provides an excellent opportunity for international brands. International brands can finance their business in India through the franchisee model, reducing the risks of investing large amounts of money. English serves as the common and easy language for communication between the franchisee and the franchisor, as most of the Indian population is fluent in English. The franchisee business model is now spreading across tier 2 cities along with small towns. These small towns are becoming a favourite destination for franchising opportunities, with entrepreneurs becoming aware of the bigger opportunities that lie in franchising business. Businesses are moving towards small towns and cities as the bigger cities are saturated. There is a vast pool of young entrepreneurial talent to be tapped by the franchising world. Moreover, relaxed foreign investment rules and liberalized WTO guidelines have helped to spread franchised outlets. Organised retail can enter the Indian market only through the franchisee business model as Foreign Direct Investment (FDI) policy does not allow direct entry to foreign retailers. Destination India – Pitfalls Due to the lack of a specific legislation for franchisees, foreign franchisors make their laws applicable in their own country and may force these laws on Indian franchisees. This proves to be an additional headache for the franchisee. Lack of legal and disclosure framework increases the chances of fraud by fly-by-night franchisors, making it difficult to resolve disputes. Also, while accepting western concepts, products may have to be altered a little to suit the Indian market. This may go against international franchisors. Sharing of information and best practices is limited. For example, public and private banks offer special financial support schemes for Indian women. But there are very few women, who take up such loans and start a franchisee. Future for Indian Franchising The transformation story of a small town Gurgaon from a farmland setup to the most bustling destination is the new trend in India. Every small town in India is waiting to be the next Gurgaon and with India’s growth drivers it hardly seems difficult.
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