FRANCHISING

SREEGURUDASS4 MBA

You are in a business for yourself, but not by yourself. The franchisor is always there to help.

FRANCHISING:Running your own business by duplicating the success formula of the franchisor

100

0

50

100

12

34

56

78

910

50

0

Franchise90%

TraditionalRetail

25%Years

%%

FRANCHISE SUCCESS RATEFRANCHISE SUCCESS RATEVS TRADITIONAL RETAILVS TRADITIONAL RETAIL

What is franchising?• “A franchise operation is a contractual

relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.”

CONT…

• Legal and commercial arrangement concerning the successful business of a franchisor

• Use of franchisor’s trade name, format, system and/or procedure under licence

• Means to raise capital and expand quickly• Assistance to franchisee

– Marketing, management, advertising, store design, standards specifications

• Payment by franchisee by way of royalty, licensee fee or other means

TYPES OF FRANCHISE

• 3 main types of franchise:

– Product distribution franchise;

– Business format franchise; and– Management franchise.

Product distribution franchise;

• Examples of famous product distribution franchise:

Produces the syrup concentrate

Sells the syrup concentrate

FRANCHISEE Produces the final drink

Retail Stores

Restaurants & F&B Outlets

Vending Machine Operators

PRODUCT DISTRIBUTION FRANCHISES

BUSINESS FORMAT FRANCHISING

• In a business format franchise, the integration of the business is more complete.

• The franchisee not only distributes the franchisor’s products and services under the franchisor’s trade mark, but also implements the franchisor’s format and procedure of conducting the business.

Famous Examples

BUSINESS FORMAT FRANCHISING -

outlet in Sale, Australia

outlet in Marseille, France

MANAGEMENT FRANCHISE

• A form of service agreement.

• The franchisee provides the management expertise, format and/or procedure for conducting the business.

Famous Examples

WHY FRANCHISE?

• Franchises offer ongoing support– training– national and regional advertising– operating procedures and operational

assistance– supervision and management support– increased spending power, access to bulk

purchasing and economies of scale

Common considerations of franchisors

• Developing franchise concept• Market research• Familiarity with local laws and regulations• Providing training and support to

franchisees

Common considerations of franchisors

• Criteria for choosing franchisees• Control over franchisees• Supply of products/materials to franchisees• Intellectual property rights issues, e.g. trade

mark registration

Common considerations of franchisees

• Demand• Profitability of franchise, and length of

time required to recoup investment• Track record of franchisor• Support rendered to other franchisees

Franchisor–Franchisee relationship

Regulated by contract which usually covers:• Initial fee• Royalty fee/Management fee• Capital required from franchisee• Territory/Area of operation• Duration of license and renewal

Franchising in India

• Revolutionary year - 2010,• Booming entrepreneurship: 1800 Home Grown Franchisors &

2,00,000 Franchisees• 85% success rate in franchising Vs. 90% failure in self start ups• Franchise industry estimation has towered up to over US$ 7

billion• Highest retail outlet density in the world to up to approx. 12

million• Remains the best entry & expansion strategy• SMEs are the key economy drivers• Employs over 97,00,000 employees directly or indirectly

Ratio of Franchisors Food vs. Non-Food

19951995 1996 1997 1998 2000 2001 2003 1996 1997 1998 2000 2001 2003

70%70%

30%30%

47%47%

53%53%

46.8%46.8%

53.2%53.2%

40%40%

60%60%

41%41%

59%59%

46%46%

54%54%

345345

franchisesfranchises

405405

franchisesfranchises48%48%

52%52%

FoodFoodNon foodNon food

Based on a USAID-funded studyBased on a USAID-funded studyHIGH GROWTH AREAS IN FRANCHISING BUSINESS SERVICESBUSINESS SERVICES SECURITY SERVICESSECURITY SERVICES PRINTING AND PRINTING AND ELECTRONIC ELECTRONIC PUBLISHINGPUBLISHING FOOD AND FOOD AND BEVERAGEBEVERAGE CAR SERVICES & CAR SERVICES & ACCESSORIESACCESSORIES

HEALTH SERVICESHEALTH SERVICESCOSMETICS AND TOILETRIESCOSMETICS AND TOILETRIES MAINTENANCE AND MAINTENANCE AND CLEANING SERVICESCLEANING SERVICES LAUNDRY SERVICESLAUNDRY SERVICES HOTELS AND MOTELSHOTELS AND MOTELS RETAILRETAIL

Why is franchising important to SMEs?

• Leveraging on a recognised brand name• Enhancing business image• Ensuring consistent quality• Attaining higher productivity/better motivated

staff • Access to good locations • Economies of scale• Reducing risks of failure

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

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

• 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

• Franchisees joining a franchise system enjoy the following benefits:

– Backing of a bigger organisation

– Established trade mark or service mark– Economies of scale – Joint advertising and promotion – Transfer of management expertise – Training & support from the franchisor

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

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

THANK YOU…..!