franchising in markets

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What is franchising?

Franchising is the practice of using another firms successful

business model. The word franchises of Anglo-French derivation-From franc- meaning free.

For the franchisor, the franchise is an alternative to buildingchain stores to distribute goods that avoids the investment andliability of the franchisees. The franchisee is said to have a greaterincentive that direct employee because he or she has a directstake in the business.

Essentially, and in terms of distribution, the franchisor is asupplier who allows an operator, or a franchisee, to use thesupplier trademark and distribute the supplier, goods. In return, theoperator pays the supplier a fee.

Thirty three countries, including the United States, china, andAustralia, have laws explicitly regulate franchising, with the majorityof all other countries having laws which have a direct or indirectimpact on franchising.

The essence of the franchising concept is as follow:

1) It is a contractual relationship.

2) The franchisor has a responsibility of introducing the franchiseeto all relevant areas in business operation.

3) The franchisor owns a trade name, format and procedure.

4) The franchisee must own his own business.

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Terminology

When you are looking for ways to expand or grow your business itcan be very confusing. Not only are there various option butsomething the terming also needs deciphering.

Its start by defining what a franchising is

A franchising is an arrangement that allows another person (orcompany) to copy or replicate an existing successful businessformat. Previously this require two parties the franchisor who is thefranchisee in order them to replicate the business concept

elsewhere.

Example:Franchising is an opportunity for successful business owner to

grow their business without trying up all of their capital. In order forthis to happen the business must be able to be easily replicatedelsewhere and have identifiable brand. The next step is for thebusiness owner to systemize every facet of business andoperational manuals detailing how they opratrter so that a

franchisee can duplicate it.

Other options

Turn key lease to buy:

You hand over the key to completely fit out franchise outlet whatis ready to open for business. Ideally you lease it to a potential

franchisee with the option to buy the franchise. The leasearrangement thereby you get to assess each other before a longterm commitment is made.

Although the downside of this arrangement is that you have tofinance the setup, the process can also be revenue earner.

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You get, quite legitimately to charge for project managing thebusiness fist out: hiring trades people and purchasing equipmentrequires a considerable amount of time and effort.

Agency

An agency arrangement is when you offer your products orservices to another company for them to sell or distribute. Usuallyan agent sells other complementary lines as well and it is anefficient and cost effective way to get your goods into the market. Itis often used by a company with strong representation on onecountry or state who does not want the initial cost of setting up a

Sales team. Typically agent purchase for a trade accounts andadds there is own margin to create a retail sale price.

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History of franchising

Franchising in France can be observed since the earliest years ofthe twentieth century and gained momentum in 1960s with thedevelopment of hypermarkets and the shopping malls that typicallysurrounded them.

Franchising is a great business opportunity for people interested ininvesting or working on their own. And above all the government ofFrance recognizes this sector as potential sources of developmentand employment. Franchising is actually booming in France andplays a vital role in the French industry for large medium and small

sized companies more than half of all French franchises are smallto medium sized companies.Going further back to early stage the first franchising network of

France came into being around 1911.The franchising history ofFrance tells us about jean prouvost, owner of a wool mill in theRoubaix who charged one of his employers with a responsibility tocreate a chain of wool soups The employer created a sort ofpartnership between the wool mill owner and many traders with an

agreement to warrant them the patent of the brand. The brand wasthe famous laines du penguin (penguin wools); it is because ofthis event that us and France vie with each other for the primacy offranchising mother country,

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Where did it all start?

1) The first modern franchise was developed when the singersewing machine company was established. Since then otheraggressive companies have employed the franchising methods toexpand into markets that would otherwise be unreachable.

2) Today the success stories are endless. Mc Donalds, Burgerking, KFC, singer sewing machines are of the visible examples.

3) Today doctor, dentists, accountant and most of the operationsyou can imagine are profiting from expansion via franchise method.

4) The reasons for franchising in those days were no different thanthey are today. Expansion of any business is risky and requiressignificant investment of capital and human resources to run thelocation. Franchising limits the risk factor of growth allowsexpansion to occur without the vast amounts of operating capital,

and potentially creates the franchise owner at or operating level.

Franchise location;-The franchise should be located which is convenient and

accessible to customer .the factors that affect the franchise locationare area of potential demand completion in the area spacerequirement the presence of another franchisee of the same firmsand other physical of the firm.

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Characteristics of franchisee

1) Risk aversion

Many people think to succeed as a franchisee; you need to be agamble. Nothing could be further from the truth. If you want togamble go to Vegas.

Successful franchises are risk averse. They are willing to takesome risk but want that risk to be as small and controlled aspossible. Any business start up involves some risk of failure, but astrong franchise with a proven track record of success will minimizethis risk. Successful franchisees do their homework, so they knowwhat they are getting into.

2) System orientationDont shy away from franchising because you assume you need a

burning entrepreneurial spirit to become a franchisee. Thats simplynot true.

Entrepreneurs have an almost uncontrollable urge to reinventthe wheel based on their incredible in their ability to figure thefigure out how things should be done to maximize result.Successful franchisees, on the other hand, want proven systems.

They dont want to have to figure out the best way to do something.They want a system of operation that tells them the best way to doanything associated with the business. They are willing to learnfrom others to avoid making mistake, so they can be moresuccessful more quickly.

3) Coach ability

The motto of franchising is in business for you, not by

yourself.Successful franchises look for opportunities to learn fromother s in their franchise system. Their philosophy is when in doubtasked. They constantly ask advice of the franchisor support staffand other successful franchise and follow the advice they get. Theyhelp when they need it.

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4) Hard work affinity

Successful franchise have a willingness to do whatever it takes to

get the job done this attitude shows in their every action putting inlong hours handling multiple tasks no matter what franchise youreInterested in you can be sure its going to take work to make itsuccessful. The best franchises know and accept that fact.

5) Strong people skills

Successful franchises always have excellent interpersonal skillsand can effectively interact with their employees and customer.

They use these skills to create loyalty value and trust through thischaracteristic is listed last, its probably the most important of all.

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Merits and demerits of franchising

Merits

1) Your business is based on a proven idea. You can check howsuccessful other franchises are before committeemen yourself.

2) You can use a recognized brand name and trademark. Youbenefits from any advertising or promotion by owner of thefranchise-the franchisor.

3) The franchisor gives you support usually including training helpsetting up the business a manual telling you how to run thebusiness and ongoing advice.

4) You usually have exclusive rights in your territory. The franchisorwont sell any other franchises in the same region.

5) Financing the business may be easier. Bank is something morelikely to lend money to buy a franchise with a good reputation.

6) Risk is reduced and is shared by the franchisor.

7) If you have an existing customer base you will not have to investtime looking to set one up.

8) Relationship with supplier has already been established.

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Demerits

1) Costs may be higher than you expect. As well as the initial costsof buying the franchise you pay continuing royalties and you mayhave to agree to buy products from the franchisor.

2) The franchise agreement usually includes restriction on how yourun the business. You might not be able to make changes to suityour local market.

3) The franchisor might go out of business, the way they do things.

4) Other franchises could give the brand a bad reputation.

5) You may find it difficult to sell your franchise you can only sell itto someone approved by the franchisor.

6) Reduced risk means you might not gemmated large profit

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What are various modes of franchising In

India?

1) Direct franchising

Franchisor grants franchises to individual franchises in foreigncountry by executing an agreement however there are certainissues associated with his mode of franchising like difficulty offranchisor to control the performance of the franchisees as they arelocated in another country taxation assistance to be provided to thefranchisee during the operation of agreement question of

intellectual and industrial property right in the foreign countrychoice of law and jurisdiction and law relating to transfer oftechnology further the structuring of franchise agreement and theexistence of treaties between the countries involved may haveconsiderable influence on taxation in the light of these issues it hasbeen observed that direct franchising not used extensivelyinternationally.

2) Subsidiary or branch office

Franchising through a subsidiary or branch office though oftentreated together differs because of the fact subsidiary controlled byfranchisor is a separate legal entity whereas a branch office isnot .The advantage of franchising through a subsidiary is that thefranchisor is present in the foreign country as cooperate body andthe franchise agreement will be a domestics deal and thus subjectto local legislation .However it is subject to FDI laws pertaining toretail investment in India. Further franchising through a subsidiaryor branch office requires the franchisor to send his personal to

foreign country for that startup operation, thus involving workpermit and residence formalities in addition to the similar issues asindirect franchising.

3) Master franchising

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The franchising grants a person in another country the subfranchisor, the exclusive right within a certain territory to openfranchise outlets itself and/or grant franchise to sub franchisees.International agreements between the franchisor and the sub

-franchisor (the master franchise agreement) have it be executed inmaster franchising. In this mode the franchiser all rights and dutiesto the sub franchisor that will be the in charge of enforcement ofthe sub franchise agreement and the general and working of thenetwork in that country

This type of franchising is the widely used because ofadvantages like he sub franchisor familiarity with the local habitstastes culture and laws of its own country

4) Joint venture

The franchisor and a local partner create a joint venture andthen his venture enters into a master franchise agreement with thefranchisor for opening of franchise outlets and to grant subfranchises. Is subject to legislation on joint ventures in addition toother legalities that are involved further this mode of franchisingcould be a way to solve the problem of financing franchising

operation in countries where financial means are scare.

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Types of franchising

Thereare many different types of franchise ownershipopportunities. You may choose to become a multi unit franchiseowner an area developer or you may decide to buy an existingfranchise each ownership opportunity has its own uniqueresponsibilities. The following is list of the many different ownershipopportunities franchising offers.

1. Single unit franchise

Single unit franchising is the most likely place a brand newentrepreneur would begin. In this type of franchise the franchiseeWould only be responsible for running one unit however he or shewould be extremely involved with all unit the operations of thebusiness.

2. Buying an existing franchise

Many franchise owners decide to sell their franchises after theyhave opened. There are several reasons why existing franchisingare listed for sale. There are pros and cons to buying an existingfranchise.

3. Multi unit franchiseMulti unit franchising creates the opportunity for the franchisee toopen more than one unit in this case multiple units are usually soldat a reduced rate per unit in this type of operation the franchiseepartakes less in the day to day operation of the unit.

4) Area developerArea development is similar to multi unit franchising the onlydifference is that this type of franchising typically involves a greaternumber of units encompassing a larger territorial area the area

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developer is granted the right to open a pre determined number ofoutlets in a certain geographic territory.

5) Master franchise

Master franchising allows people or corporation to purchase theirright to sub franchise within a certain territory a master franchiseehelps the all franchise company by recruitment franchisees to openunits within a traffic territory.

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Role of franchisee

Once you become a franchisee and of a franchise organization

what are your roles and responsibility?

Financial

The first function you have new endeavor is an investors intoyour business you will need to invest financially with an initialfranchising fee, but also be prepared to pay any additional coststhat might be necessary to get the business up and running suchas equipment costs Also there will be ongoing royalty fees that you

will need to be aware of.

Time

Secondly, you will need to be sure that you can invest anadequate amount of time in the business although the system isbasically set up in franchising you will still need to initially offertraining and continuous support hence the ongoing royaltypayments. Like anything else once you know the in and out of the

system the time investment decreases somewhat.

Leadership and partnership

Once of the most important skill you need to possess as afranchisee is ability to be proactive and take initiative you should beable to easily assume a leadership role.You need to be certain that you understand how the entire system

works and not be afraid to ask the franchisor question it isespecially important to communicate with franchisor anything thatyou notice that doesnt seem right to you.

After all, you are basically assuming a partnership role with thefranchisor therefore you should be able to work together shareideas and resolve issues together you may notice something thatthe franchisor was not aware of since you are much closer to the

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business the franchisor would probably appreciate your bringingconcern or discrepancies to the table especially if you offerpossible solutions.

Communication

With all of the responsibility that the franchisee holdscommunication and organizational skills are key skills to processas a franchisee.

As mentioned, it is important to keep in close communication withyour franchisor .in addition; you will need to be able tocommunicate effectively with your customer, employees, vendor

and other business contacts.Furthermore, it can be quite beneficial to team up with otherfranchisees on a regular basis it can be help you run your businessmore smoothly if you share ideas and solution to problemsexperienced with other in the same capacity.

Organization

In your role as franchisee, you should be prepared to wear manyhats. In operating the business, you will most likely have to

manage all the daily operation involved in operating a business

including ordering supplies, meeting with customer and vendors,

preparing payroll resolving discrepancies, etc. These are just a few

of your sub-roles depending on the type of business you are

running.

In conclusion, as long as you understand your role as a franchisee

and make every effort to carry it out thoroughly you should be ableto manage a successful franchise.

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Process of buying franchisee

1) Choosing the right franchise

This is by the most crucial step of step of the franchise buyingprocess. Deciding which franchise to buy is very difficult sincethere are thousand to choose from. You should choose a franchiseyou have interest in or choose an industry in which you have pastexperience also; you must choose a franchise that is financiallyright for you. Remember, this will be a life changing experience somake sure you make the right choice.

2) Deciding what franchise you can afford

You must remember to ask a lot of question and find out exactlywhat your overall investment is if a franchisor is advertising$50000 initial investment is. This does not mean that this amountis all you are required to invest. This $50000 will probablyrepresent your down payment and possibility a part of yourfranchise fees, legel fees, and build out costs, supplies andworking capital. Get an overall list of the items that make up totalinvestment and make sure it is something you feel comfortablewith.

3)Steps to take after you choose your franchiseOnce you have decided on a franchise that fits your lifestyle andbudget the next step is to investigate the company. When you buya franchise you are not only buying a system but you are also atthe beginning of (hopefully) long lasting relationship. You want tomake sure it is the right relationship. Take your time and investingate the company thoroughly .meet with all of the top executives inthe company. Track down existing franchises on your and ask lotsof question.

4) Hiring a franchise attorney

Anyonewho is considering buying a franchise should consult with afranchise attorney. This will help you to make sure you understandexactly what is expected of both you and the franchisor. You will dothis by reviewing the entire franchise document with your franchise

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attorney. It is imperative that you understand all of thedocumentation up front.

5) Preparing your business plan

If you are borrowing money to your franchise you will need abusiness plan creating a business plan will not only help youreceive financing it will also become your guideline for success.

Another reason you own personal goals .any investment you makeshould always be researched well thought out and follows a certainstructure. Creating a business plan will keep you on the right trackand help you help you focus on the achieving your goals.

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Laws of franchising in India

There is no specific legislation franchise arrangement in India,

reasons being the complexity of the relationship and the vast areasof now which such relationship involve.

The laws regulating franchising in India includes law relating tocontract agency distribution leasing assignment securities financialinvestment intellectual and industrial property, competition,companies, immovable and movable properties, lab our, foreigninvestment insurance banking import export technology transfer,and other legislation which may become applicable in particularcase. The applicability of laws spends precisely upon the modes offranchising which may be domestic trans-border.

Royalty remittance

The FEMA and RBI regulate the terms of payment underfranchise agreement (such as franchise fees, management fees,development fees, administrative fees, royalty fees and technicalfees) where one party is non-Indian entity including the amount tobe paid and procedure for remittances such as finishing of taxclearances and chartered accountant certificate at the time ofremittance of these payment outside India. The RBI prescribescertain requirement such as furnishing of tax clearances andchartered accountant certificate at the time of remittance of royaltypayment by franchisee to franchisor outside India.

The Indian government permits foreign franchisor to chargeroyalties up to1%for domestics sales and 2%on export for use ofthe foreign franchisors brand name or trademark without transferof technology. The laws in India also permit lump sum and royalty

payments to be made by Indian franchises to their foreigncounterparts for use of foreign technology, which includesmanuals, system etc.lump sum payment up to U$$2million arepermitted and royalties of 5%on domestic sales and 8%on exportscan be paid to the foreign franchisor. In addition foreign companiescan enter into consulting agreement and receive up to U$$1miilionper project .amount in excess of these can also be received butwith the permission of the Indian government. These rules allow a

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foreign franchisor to structure its business in India in such a way soas to ensure that it can repatriate the maximum amount from India.

The government has specified formula for calculation ofroyalties which must be adhered to before the foreign company can

remit funds out of India. If the franchise agreement processroyalties or lump sum fees beyond the specified limits, the approvalof the foreign investment promotion board is required.

Taxation

Taxation is another issue which deserves due consideration. It isimportant to know the local sales tax, property tax, and withholdingtax applicable in certain area. Further, how the franchise

arrangement is structured and the existence of treaties betweenthe countries involved may have considerable influence on thestructure adopted.

Where the franchisor receives royaltys services or franchise fees,tax has to be paid under the income tax income tax act (as incomearising and accruing in India.) Whether the franchisor is an Indianor foreign. In case where the foreign franchisor sends trainingpersonnel and supervisors to India, the salaries payable to thesepersons may be subject to personal income tax whether an

arrangement is made to deduct the tax at source or they are as selfemployed persons (professionals.)

In calculating the amount of tax payable by the franchisor or thefranchisee company, the deduction available in tax laws of Indiacan be important for tax planning purposes. Something of theserelate to rent, repair and insurance to premises used for business;depreciation and expenditure of patent rights or copyrights.However, the availability of tax advantages depends on type offranchise, the product of franchise and unit locations.

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Franchising has its disadvantages, risk, barriers, and challenges.The risks and challenges are multiplied in countries with weak legaland regulatory environment, countries were technical services arenot readily available, and countries that do not provide an enabling

environment for small and medium sized (SMEs) enterprises.However with due diligence, sound legal advice and carefully-drafted contracts, risks can be minimized, benefits maximized andchallenges side-stepped.

Disadvantages\challenges of Franchising for aFranchisor

Brand Dilution or Destruction

One franchisee can single-handedly hurt an established brandthrough irresponsible management. Depending on the nature of afranchise, a negligent or irresponsible act in one market can haverepercussions in other markets where a franchisor has a presence.Imagine the implications on a fast food franchise like KFC if afranchisee were found to have served dead vultures and passedthem off as chicken.

Risk of Loss of Valuable Trade Secrets.

With the franchise model, there is the risk that a business ownercould inadvertently lose very valuable trade secrets and otherproprietary information. Given this risk, it is important that locallaws are adequate to protect trade secrets and other proprietaryinformation. It is also important that the franchise agreementeffectively addresses this problem.

Financial Loss Associated with Outlet Failures

Even though franchisees provide much of the capital needed forexpansion, the franchising approach to business expansion is notcost-free. For a franchisor, there are costs associated with duediligence investigations, entry into frontier markets and otherunchartered territories, franchisee selection, as well as pre-operating training and assistance. These initial costs are lost if afranchise fails. Depending on the sector, franchisor failure rate can

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be quite high.

Standardization Challenges

Standardization and quality control are crucial in business formatfranchising. Typically, a franchisor is expected to ensure uniformstandards and quality within its many units. Standardization isachieved through common products, procedures, systems,trademarks and trade dress maintained throughout the franchisorsnetwork. It is important that a franchisor insist that all franchiseesuse the franchisors standardized branding, menus, design layoutsand administration systems. For prospective franchisors, threechallenges arise:(1) Developing standard products and operating procedures; (2)

Effectively communicating these standards to existing franchiseesas well as prospective franchisees; (3) Maintaining standardizationand monitoring performance; and(4) addressing compliance issuesthroughtimely resort to enforcement mechanisms. It is clearlyeasier to ensure standardization in a vertically integrated chain withonly company-owned units that it is with several independentfranchisees. Increasingly, businesses are coming up withinnovative ways (e.g. through management contracts) to overcomestandardization challenges.

Performance Monitoring Costs and Challenges

To ensure standardization throughout a network, periodic trainingand periodic monitoring are usually necessary. Implementingeffective standardization program can be costly and requires a poolof highly trained personnel. Moreover, monitoring costs go up incountries with poor infrastructure and weak legal and regulatoryenvironment.

Innovation Challenges

Innovation can be a challenge for businesses that adopt thefranchising model. With company-owned expansion model,company units easily become incubators for new ideas. It is alsoeasier to implement new ideas and practices throughout a networkwhere the units are all company-owned than is the case infranchised units. Particularly where there are costs and risks

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associated with a particular idea, franchisees are likely to resistattempts by franchisors to use them as laboratories. Extensive Regulation: Detailed Financial and Legal Disclosures

Compared to some other business model, the franchise businessmodel is heavily regulated in many countries. In some countries,franchising is governed by both federal and state laws. Three typesof laws common in franchising are the franchise disclosure laws,the franchise registration laws, and the business opportunity laws.Franchise disclosure laws typically require a franchisor to makeavailable to prospective franchisee detailed information about thefranchisor, the franchise business and the franchisor-franchiseerelationship. Some countries require the disclosure to be in astandard format. In the United States for example, the Disclosure

Document must be given to the prospective franchisee at least tenbusinessdays before the franchise agreement is signed (ten-dayrule). The Disclosure Document outlines about twenty-three (23)topics that must be fully addressed. Topics covered in theDisclosure Document are varied and include: The franchise, itspredecessor and affiliate; Litigation; Bankruptcy; Initial franchisefee; Territory; Franchisors obligation; Earnings claims; FinancialStatements; and Contracts. Even if no law requires a franchisor tomake a full business disclosure, a prospective franchisee can

demand such disclosure. Thus, the franchise model will not workfor a business owner who likes secrecy and who does not wantinformation relating to the business to become public knowledge.

As already noted, there are some disadvantages to the franchisingmodel. Given associated risks and challenges, businesses mustweigh all options for expansion carefully and consider theexperience of existing chains carefully. Franchise associations areimportant. Franchise associations exist in most advanced marketsand in many emerging markets.

Home-Grown Franchises or Foreign Franchises?

A locally-developed franchise can flourish even in markets thatpopular, global franchisees fear to tread. Businesses in Africashould be inspired by the growth of home-grown franchises incountries like India (SPOT Taxi and Kegs Farms) and Brazil(Nature). Home-grown franchises are beginning to emerge in

Africa, although very slowly. While home-grown franchises may not

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be exposed to some risks that Western franchises face in sub-Saharan Africa, they may be subjected to certain restrictions thatare not applied to Western franchises. The point it that thesuccesses and travails of big Western franchising chains in sub-

Saharan Africa may not be a perfect indication of how home-grownfranchises will fare. There is need for further studies to understandthe unique risks and challenges local chains face? There is alsoneed for further studies to understand why home-grown chainsappear to be succeeding in emerging markets like India, Malaysiaand Brazil.

Readiness for franchising

The prospects of minimizing the disadvantages of franchising and

overcoming the challenges associated with franchising are higher ifa business approaches franchising carefully and strategically.Decision to expand and to expand using franchising model shouldnot be made lightly. Before jumping into franchising a businessowner should answer some key questions. Is your type ofbusiness the kind that can be replicated using the franchisingmodel? Do you have a profitable and sustainable business model?Do you own a brand? Is there an established and growing demandfor the product or service you offer? Is your product unique ordistinctive in any way? Do you have the time and resourcesneeded particularly in the start-up phase? Do you have plans forovercoming some of the unique challenges to doing business insub-Saharan Africa such as limited access to finance, limitedaccess to human resources, poor legal and regulatoryenvironment, and, increasingly, security concerns? Have youconsidered the legal restrictions and requirements in place in thecountry you plan to operate in?

Conclusion

Although

franchising offers many advantages to a businessdesiring to replicate and expand, there are associated risks andchallenges. The level of risks and challenges depends very muchon factors such as the market size, experience, competitiveness ofan enterprise. Overall, with due diligence, careful planning, andsound legal advice, risks can be managed and challengesovercome.

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The franchising Association of India is a Membership Organizationof Franchisors, Franchisees, Vendors, Consultants, FinancialInstitution and Students and others.

Indias Franchise Association services are dedicated to provide aone-stop shopping experience for franchising business and withmembership of the prestigious World Franchise Council we haveongoing access to knowledge of the World accepted best practicerelated to Franchising in different areas of business activity as alsonetworking contacts with the WFC member Franchising

Associations in different parts of the world for generating newbusiness opportunities for Indian entrepreneurs.

In recognition of the increasing role of franchising in the marketplace and the very beneficial positive contributions of franchising tothe Indian economy, the franchisor and franchisee members of theFAI believes that franchising must reflect the highest principles andstandards of fair business practices.

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FAI Mission

Tap the vast entrepreneurial energy available in the country bypromoting the concept and practice of franchising in India.

FAI Objectives

Exchange and safeguard the business environment forfranchising, both with regard to franchisors and franchisees

Act as the resource centre for current and prospectivefranchisors, franchisees, the media and the Government.

Disseminate knowledge to promote the concept of'franchising' and propagate it as a healthy business practice.

Establish a forum for discussion and deliberation on

Franchising related matters and problems and help promotethe interest of members by organizing seminars, conferencesand meetings.

FAI Activities

To work towards achievement of the above mission andobjectives our activities will include:

Creation of appropriate forums for discussion of issues and

problems related to Franchising. International linkages to promote - bringing in of foreignfranchisors and best practice for doing business in Indiathrough Marketing India at International Expos and otherwise.

Make representations to the Government with regard tolegislative and other measures affecting the promotion ofconcept and practice of Franchising. Encouraging Bank andVenture Capital funding for franchisees. Publication ofFranchising Successes.

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The result in the form of a 'Report on Indian Franchising Industry'-2013 prepared by KPMG in India is in your hands. As you will

notice this is the first and the most authentic study report on theFranchising Industry in India and KPMG in India have done anexcellent job of covering a lot of ground in term of the rapidprogress made by this Industry in India so far in the context of theInternational scene and otherwise. The context of growth of themodern retail trade has been an important driving force. The issuesand challenges before this Industry including the requiredGovernment support are well brought out. The Franchising Industryhas great potential going forward and is going to be a significantcontributor to GDP growth.

Franchising is clearly a rapidly growing model for businessexpansion in the retail sector and is going to be an increasinglyimportant part of the growing services sector of the Indian economyin the years to come. Franchising has also got a huge potential for

job creation, direct and indirect, particularly for our young andeducated class besides of course providing immenseentrepreneurial opportunities for young and not so young peoplewanting to be their 'own boss I hope this report will stimulate

further and faster growth of the Franchising concept and therelated best practices to ensure healthy growth of the FranchisingIndustry in India.

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The World Franchise Council (WFC) is an association of 45National Franchise Associations, whose purpose is to encourage

international understanding and cooperation in the protection andpromotion of franchising worldwide.

Communication between representatives of world franchiseorganizations helps assist the members of each nations franchiseassociation and in turn the economies and wellbeing of the peopleinvolved in franchising at the local and national level. Thisindependent analysis of the past, present and future of franchisingin India will assist in a clearer understanding of the opportunities todevelop the franchise business model, which can play a major role

in the countrys economic development, as well as the potential tobecome an agent of social change. Franchising, with its multipliereffect in terms of enterprise creation and job generation, has thepower to produce the needed sustainable jobs that can provide abetter future for hundreds of millions of individuals all over theworld. With the evidence from more than 30,000 franchise systemsgenerating at least 2,000,000 business enterprises worldwide,franchising is a proven business strategy worldwide that can haveimmense positive impact on the Indian economy.

We hope that this report prepared by KPMG in partnership withFranchising Association of India, our only recognized member

Association from India, will add a lot of value and be of great helpfor healthy and faster growth of the Franchising Industry in a largemarket like India.

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The International Franchise Association is excited to see thisresearch on Franchising in India and commends the FranchisingAssociation of India and KPMG on assembling the data to tell thesuccess story of franchising in India. U.S. Franchisors count Indiaas one of their growth markets. This research will help educate themedia, government officials and the public about the potential offranchise business to spur economic growth in India. TheFranchising Association of Indias partnership with the InternationalFranchise Association and the Institute of Certified FranchiseExecutives (CFE) program further shows FAIs commitment to the

growth of franchising in India.

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According to KPMG India estimates, the franchising industry isexpected to quadruple between 2012 and 2017. There is scope for

Franchising industry to contribute almost 4% of India GDP in 2017(assuming 6% Y-o-Y GDP growth between 2012 and2017),growing from a current estimated contribution of 1.4 percent ofGDP. This is also expected to create job opportunities (includingboth direct and indirect) for an additional 11 million people by 2017.While increasing consumption, willingness to spend, growingpreference for branded products, global exposure and use ofinternational brands is driving the demand side of franchising,increasing set of opportunity-driven competent entrepreneurs,growing awareness of Franchising as a business opportunity and

its relative low risk profile are driving the supply of new franchiseeunits.

Services sector which includes Consumer services such asFinancial Services, Courier Services, and Health & Wellness andFood Service sub segments is expected to contribute to majority ofthe growth in Franchising in the next half decade.KPMG India estimates suggest that franchisees in these areas areexpected to form around 55 percent of total estimated Franchisees

in 2017. Franchising in Health & Wellness sub-segment isexpected to grow to almost 6 times the current penetration. Retail(which includes sectors such as Apparel, Jewelry, Neighborhoodstores, Food & Grocery) and Education are expected to be theother major areas where there is huge scope for franchising tosucceed. Allowing Foreign Direct Investment (FDI) in single brand& multi-brand retail is expected to generate interest among largeinternational players to adopt the franchising route to enter andexpand in the country.

While certain operating models with-in franchising such as Areadevelopment and Regional Master Franchisee - appear moreattractive than others, diversity in Indian consumer preferences anddegree of localization are expected to impact the choice of finalmodel to be adopted.

Today, India does not have any franchising specific laws; howevervarious generic Indian laws such as Competition laws, Indian

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contract Act etc are applicable on franchising operations. Anyfuture consolidation with formulation of franchise specificregulations in this area should allow conducive growth of franchisesystems along with protection of franchisee rights. Success of

franchising is also dependent on role financial institutions can playin promoting franchising.

Changing dynamics in franchising industry would warrant amindset change as well. A collaborative approach involvingFranchisees, Franchisors, Financial institutions and industryassociations is the need of the hour.

The analyses and point of view presented in the report have beenvalidated through extensive discussions with industry players. We

take this opportunity to thank the industry players for making thisendeavor possible.Ramesh SrinivasHead, Consumer MarketsKPMG in India

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Franchising market potential

India, by witnessing huge demographic branded products,global exposure transformation fuelled by the consumption

led growth, stands as a driving adoption of the franchisingattractive destination globally for the franchisingfraternity. Consumerism is growing rapidly aided by highindustry is expected to quadruple population, increasinghousehold incomes over the last two decades. Scope forthe franchising industry to Overall, the Indian economy haswitnessed a structural shift from an agricultural basedeconomy.According to KPMG in India estimates, the franchisingindustry is expected to quadruple between 2012 and 2017. There

is scope for the franchising industry to contribute to almost 4percent of Indias GDP in 2017 (assuming 6percent Y-o-Y GDPgrowth between2012 and 2017), growing from a currentestimated contribution of 1.4percent of GDP. This is alsoexpected to create job opportunities (including both directand indirect) for an additional 11 million people by 2017.

Both demand and supply side factors are expected tocontribute to this growth.Demand side factorsSupply sideDemand side factor

Increasing consumption andwillingness to spendIncreasing purchasing power ofthe middle class.Growing preference for brandedand quality products amongconsumers.

Increased global exposure andgrowing aspirations to adoptwestern culture and useinternational brands.

Supply side factor

Increasing set of opportunity-driven competent entrepreneursIncreasing awareness ofFranchising as a businessOpportunity and its relative low

risk profile.

Government initiatives such asthe liberalization of FDI in retailwhich has allowed foreignbrands to enter India.

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Franchising Opportunity: Sector Overview

As per KPMG in India analysis, retail and consumer servicessectors are expected to emerge as high potential service sectorswithin franchising to cater to the prevailing consumption boom.Non-traditional segments such as food service, jewellery preschools etc. also present a huge opportunity for growth infranchising.

Despite the challenges the country presents, there have beenmany successful case studies of franchising in India. Fromfranchisors such as Aptech and NIIT which have pioneered thefranchising model in India to new age franchisors such as Gitanjaliand VLCC who are adopting innovativeexpansion models withinfranchising, many brands/companies are adopting the franchisingmodel to expand and provide a consistent and quality experienceto its end customers

Franchise Business Models

Firms that have created an easily replicable business

model, while certain operating models within franchising such as often choose franchising as their preferred routeto expand their area development and regional masterfranchisee appear operations and scale their brand.However, within the realm of more attractive than others,diversity in Indian consumer franchising, there are severalfranchising models that differ preferences and degree oflocalization impact the choice of the final model to beadopted.

Attractiveness of India in Global Franchising

Many international brands have already entered India andare adopting the Franchise route to growth. Global brandssuch as Dominos, KFC, and Baskin Robbins have adoptedvariations of the franchise models to grow in India. Many

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other international brands are contemplating entry plansinto India.However, Indias growing but fragmented market can seem chaoticand difficult to deal with. The international franchisors consider the

following factors as challenges while entering into India:

Transparent Legislative framework: Due to no specificrules or laws promulgated in India to address thefunctioning of franchisors and franchisees,international players perceive a higher risk to businesscontinuity.

India is not one market: Entering a new marketbecomes more complicated in case of India whereconsumers hail from diverse cultural backgrounds.Several cultures, languages and socio-economicdiversities make it a set of multiple markets.

Bribe and corruption: International franchisors remainthreatened with the bribe and corruption cases in India.Due to no legislation around anti-bribe in India, as inthe US; it not only discourages the expansionstrategies of many brands, but also impacts Indias

credibility in the international market.

Franchise Industry Survey Key Highlights

While the survey carried out by KPMG in India corroborated thereasons for growth in franchising and operating establishingmodelsit also brought out certain key findings as mentioned below:

Franchisors believe that they are providing adequate supportto their franchisees; however the latter are expecting more

from thesupport particularly in the post launch phase ofoperations. Response to another related question in thesurvey. Suggested that almost half of those interviewed werenot willing to take up additional franchisees with the existingfranchisors suggesting certain level of dissatisfaction.

While franchisors adopt franchising model for growth, manyentrepreneurs are opting for the franchising route as itprimarily offers a safe and relatively easy way of establishing

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business and is expected to offer higher than market levels ofprofitability. This trend necessitates the need for franchisorsto educate the franchisees on potential profitability andinvestment returns from the business. Sectors such as

jewellery where payback periods could range between aminimum of four to five years are particularly vulnerable tosuch mismatch in outlook.

Real estate rentals are posing a major challenge for thesuccess of franchising. Collaborative efforts betweenfranchisors and franchisees in structuring business modelsthat are sustainable even under such conditions couldaddress this concern.

Regulatory Scenario

While franchising sector in India, per se is not regulated, there aremultiple laws which have an impact on franchise operations.

Any future regulations in this area should allow conducive growthof franchise systems along with protection of franchisee rights.

KPMG Indias comments on a few areas of regulations have beenhighlighted in the table below:

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parameters KPMG comment

Specific franchising Law Franchising focused rules &

regulations are expected tosend a positive message toboth Indian and globalfranchising community aboutthe seriousness of Indiangovernment in promotingfranchising as a mainstreamsector that can contribute tooverall GDP growth andemployment generation

Pre-contractual disclosurenorms

This will not only protectfranchisee rights but alsoensures that only seriousPlayers consider franchising asa business model. This isexpected to reduce overall riskto business continuity.

Control on royaltypayments and franchisee fees

Free market pricing should beencouraged while making surethat royalty and feepayments lie within industrystandards

Conflicts resolution It is critical to have atransparent dispute resolutionmechanism and anindependent body to addressconflicts that may arisebetween a franchisor and

franchisee.Intellectual propertyprotection

It is important to protectintellectual property rights of allthe franchisors to discouragecounterfeiting brands.


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Financing the Franchise Business

One of the key criteria of franchisors while selecting afranchisee is investment capability and financial strength. This in

itself is an indicator of how difficult it is for a franchisee to tap thedebt route to investment. Most lenders do not treat franchisees asa separate customer segment and usually cover them under theambit of the broader Small & Medium sized Enterprise (SME)sector classification. This gets particularly magnified in case ofservices franchising where there is an absence of asset base onwhich a collateral can be taken to provide a loan. A comprehensive and collaborative mechanism is onceinstitutions can offer innovative financial products to franchisees,

adequate support from the franchising ecosystem including that offranchisors and industry associations is necessary to make this asuccess.

Franchise association of industry

Could spearhead formation of collective and mutual creditguarantee consortia comprising of franchisors, franchisees, lendinginstitutions and government. Provide greater reassurance to the lending institutions by offering

services such as due-diligence of the franchisee business plans Increase awareness of innovative asset-light business modelsamongst lending institutions Provide a common platform for the interaction of franchisors,franchisees and lending institutionsSource: KPMG

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Franchising - Pushing India AheadCurrent market landscape for franchising in IndiaCase studies in the Indian Franchising Space

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Franchise Industry SurveyFranchising Regulatory ScenarioBusiness Models in FranchisingEmployment potential in the Franchising Industry

Financing Franchising BusinessFranchising Success: Role of the governmentConclusionAppendixAcknowledgement

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Franchising Pushing India ahead

Contribution of Franchising to GDP and Employment

(2012)

With a potential to push the Indian economy forward, franchisinghas been playing a significant role in generating new employment(both in terms of numbers and job quality), provide revenueoptions for the government in the form of taxes, duties etc. Alongwith its contribution to the country's gross domestic product (GDP),it has also helped many national and international brands to spreadtheir presence in the country.

A brief look at the chart indicates the contribution franchising madeto GDP and employment of various countries. While US standsrelatively high on generating employment through the franchisingmode, Australia has been able to generate significant income forthe country through the franchising route. Close to 10% of

Australian GDP is contributed by Franchising in Australia.

International Scenario

Franchising, though as a concept is western, is not limited to thedeveloped nations only. It hasspread its mark to developingcountries like India, Brazil, and China etc. Even the African nations,over the last few decades have started tasting the flavors offranchising. Such as KFC, Dominos etc have already set upfranchisee outlets in the country to tap this potential. Franchisingaccounts for almost 10- 25 percent of the GDP of most of theOECD (Organization for Economic Cooperation and Development)countries.

Abrief look at the chart indicatesthe contribution franchising madetoGDP and employment of various countries. While US standsRelatively high on generating employment through the franchisingMode, Australia has been able to generate significant income forthe country through the franchising route. Close to 10% of

Australian GDP is contributed by Franchising in Australia.ThoughUS has seen a major closure of establishments during 2008-2011when they decreased from 7.74 Mn establishments in 2008 to 7.36

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Mn establishments in 2011. However the country is seeing areversal of the trend and has grown by 1.5% in 2012 and2 expected to grow by 1.4% in 2013.Brazil and China have seenrelatively higher growth both in new brands resorting to franchising

as a business model for expansion as well as new franchisees .

The following table illustrates the growth of franchising in a fewcountriescountries

franchisorsin 2012

Growthin thelast 5

year(CACR)last 5years(CAGR)

FranchiseeEstablishments

in 2012

Growthin last 5years

(CAGR)

Franchisees/Franchisor

Ratio(2012)

USA ~3500 n.a ~7,50,000 -0.6% ~213

Australia ~1200 5 ~4.2% ~73,000 2.8% ~62

Brazil 2426 ~15.2% 100,000 9% ~41UK 929 ~2.8% ~40,000 2.1% ~43China 5000 ~7.4% 300,000-

350,000

22.4% ~24

As corroborated by the above analysis, there is a large scope forfranchising to contribute to India's economic growth whilegenerating employment (both direct and indirect). Franchising as abusiness model also allows efficient flow of capital from the un-organized segment into organized business. Such a model is wellsuited for an emerging economy like India where there is widespread distribution of capital.

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Current market landscape for franchising in

India

Since liberalization, the Indian economy has witnessed steadyevolution. Consumerism has risen on account of a growing youngpopulation, high disposable income and growing urbanizationconsequently, retail and services sectors are expected to play amajor role in this consumption boom .The macro statistics revealthat agriculture is no longer the chief contributor to the Indianeconomy.

This growth has also given impetus to a huge entrepreneurialappetite Over the last decade, franchising has surfaced as one ofthe most prolific and feasible ways of expanding businesses inIndia Several industry verticals such as food and beverage,education, fashion, tourism and hospitality are leveraging theirgrowth by franchising their products under various formats. .

Today India is home to more than 3000 brands which adopt thefranchising model. Bata, one of the leading footwear companies,was among the first franchisors in India other pioneers of Indian

franchising Were NIIT, Apollo Hospitals and Titan Watches. Inaddition, today several leading global franchise companies, suchas Dominos McDonald's, Yum Brands, Baskin, Robbins andSubway, have already established a presence in India franchiseindustry is expected to continue to benefit greatly from governmentsupport across various sectors through various measures includingallowing foreign direct investments (FDI) in single brand andmulti-brand retail.

Understanding franchising

Franchising is perhaps the most period, with widely usedway of business expansion method adopted by bothinternational and domestic players.While Indian law does not officially owner of a trademark or tradename services define franchising, the term permitting another to

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sell a product indicates a way of doing business or service underthat name or Business format franchising, a involving the use of aperson mark. combination of the other two ('franchisee'), pursuantto a license, There are three distinct types of types of franchising,

using the of another person's ('franchisor') franchising: franchisor'strademark/ business model, name, image and name in order todistribute the business identity along with his/her Product or serviceunder that name or mark.There are three distinct types of franchising:

Product distribution franchising involving a co-operation forthe distribution of goods, mostly in the retail business

Trade name franchising, where the franchisee uses thetrademark / business name of the franchisor in order to sellits own products or services.

Business format franchising, a combination of the other twotypes of franchising, using the franchisor's trademark/business name in order to distribute the franchisor's goods orservices.

The economic significance of franchising market in India

Franchising contributes to economic growth of a nation in

entrepreneurs consider it as the multiple ways such as job creation,access to necessary service and goods expansion country's taxbase. The concept growing at an impressive rate since 2008, asrisk-averse Indian entrepreneurs consider it as the most viableoption to tap the nation's vast consumer market.

KPMG in India estimates suggest that the Franchising business inIndia was worth USD 13.4 billion in 2012 and is expected towitness CAGR of 30 percent over the next 5 years. This amounts

to about 1.4 percent of the country's GDP in 2012.KPMG in India expects both demand and supply sidefactors to contribute to this growth.

1. Increasing consumption and willingness to spend2. Increasing purchasing power of the middle class.3. Growing preference for branded and quality products

among consumers.

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4. Increased global exposure and growing aspirations toadopt western culture and use international brands.

Supply side factors

1. Increasing set of opportunity-driven competententrepreneurs

2. Increasing awareness of Franchising as a businessOpportunity and its relative low risk profile

3. Government initiatives such as the liberalization ofFDI in retail which has allowed foreign brands to enterIndia.Source: KPMG India

Franchise: Sector watch

The franchise business in India is increasingly getting popularamong domestic andinternational players across various sectors.Several major industries credit successful franchisees for theirrapid progress. The key industries that possess high prospects forthe successful franchise opportunities in India are following:

Retail franchising

Food and beverages

Health, beauty and wellness

Consumer services

Education and trainingThe individual growth and potential of these industries are drivingthe growth of the overall franchise sector in India.

Education and training: Owing to the sector demographics,education is one of franchising in sector includes preschools, K-12, education industry through Higher Education, within education,expansion through franchising:

Vocational training: Planning Commission, in 2011, workforce inIndia was skilled.6 4 corresponding numbers for Korea, years (~5million since 2001). Germany and Japan are 96 percent, currently;existing pre-school 75 percent, and 80 percent, franchisebusinesses cater to only respectively. 5. The segment has highneeds to create 10-15 million jobs potential for franchising per year

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over the next decade to opportunities in tier 2 and 3 cities, providegainful employment to which lack quality

Pre-school: India has large population of about 158.8 million

children in the age group of 06 years (~5 million since 2001).Currently, existing pre-school franchise businesses cater to onlyabout one tenth of the total children in this range. The segment hashigh potential for franchising opportunities in tier 2 and 3 citieswhich lack quality education services and facilities. Our estimatessuggest that revenues from franchisee preschools are expectedto reach almost USD 94 million from a current value of USD 16million. It is estimated that a total of 21000 franchiseeestablishments may be required by 2017 to meet the growingdemand for pre-schools.

Food and beverage: The food service industry in India is estimatedto be worth USD 48 billion in 2012 and expected to grow at 13percent, CAGR over the next 5 years.Restaurants (QSR), Caf/bars and fine & casual dine is expected

to see a rapid jump. Our estimates suggest an opportunity to thetune of USD 1.5 billion, USD 1.4billion and USD 1.2 billion forfranchising by 2017, in each of the three segments respectively.

The market size of the overall beauty and wellness industry in India(organized and unorganized put together) is estimated to be USD4.5 billion in 2012. It is expected to grow at nearly 20-25 percentannually. The key industry segments include Salons (60 percent oftotal market), Fitness and Slimming (25 percent) and Spa (includesalternate therapy with 16 percent industry share).

Health, beauty and wellness sector: The key drivers behind thisexponential growth include more awareness toward hygiene andwholesome lifestyle coupled with a surge in retail business in India

The sector is going main stream. Through franchised basedbusiness models. Since the sector requires high capital investmentfor growth, high capital investment for growth players in thissegment area increasingly relying on franchising to scale upbusinesses and extend reach to Tier 2 and 3 cities.

Retail sector:The retail industry landscape in India is change inrapidly on the back of factors such as favorable demographic

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profile rising disposable income levels and the industry appetite tocater to thiermerging consumption boom. The organized retail(including Food &Grocery) is estimated to be USD 24 billion in2012, largely concentrated by retail franchisors in the Apparel,

Consumer Durables and Food Groceries space with around 80percent share. However, India drives only about 2.5 percent of totalretail sales (organized and unorganized) through franchise formats,as against nearly 50 percent in the US, indicating huge potential forthe market in future. KPMG estimates that over 43000 franchiseeestablishments (valued at USD 36billion) may be required by 2017to meet the growing demand in the retail sector from a current baseof13000 (valued at USD 10.6 billion).

Recent FDI reforms in single brand and multiband retail are likely

to lure more global retailers to participate in India. Existing retailmajors are under pressure to consolidate and increase theirfranchise network reach. Meanwhile, several multinationals suchas IKEA, Wal-Mart are looking to establish their brands in India.Franchising is expected to continue to be one of the most popularBusiness formats among organized retailers to tap the emergingconsumption boom, specifically in the tier 2, tier 3 and smallercities.

However recent clarifications issued by the Indian government onFDI regulations in multiband retail allowing foreign retailers to onlyopen company owned company operated outlets could be a bigblow to growth in Retail franchising in India.

Consumer services:The Consume services industry basicallydeals with customer-centric services, which means understandingnew consumer trends and requirements; and generating productsand services accordingly. Innovation remains the key to servicethindustry for the franchisors; however relatively lower investments

and moderate domain knowledge suffices the business need.KPMG in India estimates that a total of around 50,000 franchiseeestablishments (contributing USD~4 billion) may be required by2017to meet the growing demand in the services sector. Currentlyit is estimated that franchising in-services sector contributes toalmost USD 1 billion of revenues from around 15,000 outlets.

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Following are the few case studies highlighting 'innovation' as oneof the key success factorsIn franchising in the consumer services sector in India:Segments 'Innovation' is the

key

Franchise spread till

2012Car cleaning andgrooming segment

3M Car Carerecently launched'germi-cleanTreatment inmetros, for the carowners whogenerally eat andspend most of theirtime inside theircars. This treatmentensures 99 percentdecline in themicrobial andbacterial growth onThe mats or theupholstery of theircars.

3M operatesseventeenfranchisees of itscar-care centers inIndia.

Laundry services Village Laundry

Services (VLS)operates under thetrade name'Chamak' and offersaffordable andhigh quality washing,drying, and ironingServices. VLS hasgot funding fromProcter &Gamble and Calvert(a US-based fund).Boththese companiesaim to build acompletely newservice

The company

operates through 20franchise stores insouthern India.

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concept (high-quality, affordable,Laundromats) and tohelp low-income

individuals getsustainablelivelihoods.

Other niche sectors: The franchise industry in India is growingrapidly in multiple sectors. Despite strong penetration in the retail,foodservice, healthcare, education and services sectors, franchisedoperations have gained momentum in some niche sectorsEntertainment, agriculture, real-estate, telecom, gaming, mediaentertainment and personalized. Services such as home cleaningare among emerging niche sectors KPMG in India estimates asteady growth in the franchise penetration in aforesaid sectors...Overall, the franchising industry in India is expected to witness anabove average growth rate over2012?17 across sectors. The growwould be fuelled by rising income and expenditure levels of theyoung population along with the recent FDI policy changes,economic and socio-cultural developments.

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Case studies in the: Indian franchising space

Despite the challenges the country presents, there have beenmany successful case studies of franchising in India. Fromfranchisors such as Aptech and NIIT which have pioneered thefranchising model in India to new age franchisors suchasMakemytrip.com and VLCC who adopting innovating expansionmodels with-in franchising, majority of the brands/ companies areadopting the franchising model to expand and provide a consistentand quality experience to its end customers. Many internationalbrands such as McDonalds Dominos, KFC, Subway, and BoosterJuice have entered the country through the franchising route.The sector is largely unorganized; the organized share is primarilylimited to grooming spas and saloons. However, the same isexpected to change given the expanding base and inclusion ofinnovative wellness themes such as stress conditioning spas and

specialized segments such as Tai Chi and power yoga.Consultation, diagnostic services, health checkups and pharmacyare also 2some high potential and profitable franchise options inthe healthcare sector.

VLCC

VLCCs performance

VLCCArea of operations Beauty and wellnessStart of operations 2007 (franchise)Key brands VLCC Salon (VS),

VLCC Centre (VCNo of outlets 56 (as of August 2012)Presence across cities -Turnover (INR million) 4760 (FY12)

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Net profit (INR million) 260 (FY12)

How VLCC shapes success amongst franchiseesTraining and support

VLCC provides free startup training to franchisee staff in areassuch as products, services, operations and client handling.

VLCC also supports them in other areas such as selecting sites,developing projects, recruiting staff, launching centers, procuringequipment and marketing.

VLCC maintains a stringent system of quality control through itsteam of dieticians, beauticians and operations experts, who visitfranchisee centers regularly to conduct checks and audits.

Key investment considerationsArea requirements considerations

1,700 - 1,800 square feet (VC)900 - 1,000 square feet (VS

Investment INR4.1 - 4.4 million (VC)900 - 1,000 square feet (VS)

Break-even period 16 - 18 months (VS)

Royalty 14 percent of sales(payable monthly)

Expected ROI 40 percent in the initial 4 - 5years, improves thereon

Quick expansion of network is a key reason for adoption offranchising route by VLCC.

As of August 2012, 25 percent of VLCCs 160 slimming, beautyand fitness centers were franchisee run.

VLCC plans to setup 300 wellness centers by 2015

As of August 2012, 12 out of 51 VLCC Beauty and NutritionInstitutes were operated by franchisees

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VLCC is present in countries such as UAE, Nepal, Sri Lanka andBangladesh. It is exploring new franchise opportunities in Pakistan,Sri Lanka and Bangladesh.

Make mytrip.com

Make my trips performance

Segment Online travel portalStart of operations 2009 (franchise)Key brands Makemytrip.comNo of outlets 51 (2012)Presence across citiesTurnover (INR million) 196.6 (FY12)

Understanding MMTs flight to successKey investment considerations

Area requirements 500700 square feetInvestment INR11.5 millionBreak-even period 11.5 year Royalty INR0.41 million depending on

city tier.Other requirements Preferably located on main road

Or high street.Agreement validity 3 years

The number of franchise outlets has grown from 0 in 2009 to 51 in2012.30-35 percent of MMTs holiday packages are sold throughoffline outlets, majority of which are franchise outlets (72 percent ofthe outlets in 2012).MMT is looking for overseas expansion inregions such as south East Asia through growing number offranchisees in India.

Successfully targeting the clickaverseconsumer

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MMTs franchise partners are a part of MMTs hybrid expansionmodel to help serve those consumers who are more comfortableplanning holidays offline. These are typically consumers lookingfor personal interaction and would not have ideally opted for the

online option.

Strategy for geographic expansion Franchising has given MMT access to key Indian markets such as

Ahmadabad, Kolkata and Bangalore.As on May 2013, MMT is looking to expand further in cities suchas Mangalore, Gandhi ham, Kolhapur and Patiala through thefranchising route.

Focus on quality Service quality is one of the most important factors thatdifferentiate MMTs franchise partners with key competitors suchas offline travel agents. This is enabled through franchisee training which includes: Standard training on products and destination guides. Close involvement if MMTs service delivery team with thefranchisee. Periodical trainings before peak holiday season. Consistency in service quality is maintained through regularaudits at the franchise outlets.

Associating with the right partners Focus on recruiting the right set of partners is the key to successof a franchising model. This becomes even more important in aspecialized service sector like travel. Few important criteria forMMTs franchisee appointment include: Passion for travel industry.

Proven business track record and management skills. Ability to invest the necessary capital.

Other support To enhance demand, MMT supports its franchise partnersthrough: Designing stores optimally Managing store launch and creating awareness in the area.

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Carrying out local promotional activities such as road shows andmall even

Jumbo King

Jumbo kings performance

Area of operations Food retailingStart of operations 2004 (franchise)Key brands Jumbo KingNo of outlets 5050 58.5 (FY11)

The number of franchise outlets has grown from 45 (inOctober 2012) to over 50 (as of May 2013).

The company plans to grow to 200 storesby 2015 and is focusing on the master franchising modelto establish presence in cities such as Bangalore, AuraNagpur, Bhopal and Surratt.

Recipe for success

Location JK targets prime locations with high footfalls, such as railwaysstations for setting up outlets.

JKs franchisee relation team offers support in site election andrent/price negotiation to ensure best locations at optimum costs.

JK also supports a joint ownership model where multipleindividuals can open a franchise outlet. This also helps inOvercoming the cost constraint typically associated withowning/renting prime locations.

Standardizing quality

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The USP of Jumbo King is hygienic food, and with pan-Indiapresence it is important that consistency in food quality ismaintained across outlets.

To ensure consistency, Jumbo King has outsourced allmanufacturing so that there is no difference in quality ofoodoffered.Key investment considerations

Area requirement its 300 square feet (Singlefranchise)

Investment INR1.2 million (Single franchise)

Staff requirement About 7Other requirements Shop should be in prime

location with high footfalls asThe format is of on-the-goservice.

Core factor Jumbo Kings master franchise model Innovativeroyalty system

After expanding through single-unit franchises inareas such as Mumbai, Jumbo King, in 2008, decidedto focus on master franchising rather than single-unit

franchising. A master franchisee is required invest ina minimum of 5 single-unit outlets (directly under hiscontrol).

A key reason for opting for MFs is the businessstability that larger players can offer compared tosmaller players.

The small outlet size also permits franchisees todiversify investment (by investing in multiple outlets)and minimize risk unlike other QSR formats where

franchisee invests in a single outlet.

Increasing ownership of partners

Jumbo King follows a more decentralized franchisee model,unlike most other players in the sector. A masterfranchisee can get the right to sub-license Jumbo King inhis area and expand his presence. A master franchisee

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also contributes to Jumbo Kings regional marketingprogram and localization of the menu.

Franchise industry survey

KPMG in India carried out a survey of Franchisors and Franchiseesto solicit their perspectives on outlook for growth and how overalldynamics between Franchisor and Franchisee community is

shaping up. The results of the survey have been broadlycategorized under the following heads

Growth drivers for franchising in India. Franchise Operating Models Franchisee Satisfaction Franchisee Support &Relationship Management Challenges in Franchising Conflict Management

Growth drivers of franchising in India

India, with its large population has always been a consumptionstory and will continue to remain so for the years to come.Burgeoning consumer class with an increasing appetite forconsumption is considered as the biggest growth driver, both byfranchisors and franchisees. Increase in entrepreneurial drivecoupled with risk taking abilities has steered a number of people,

especially those with no-specific business background, take aplunge in franchising based business models Franchising as abusiness model has achieved stability over the course of time,giving new entrepreneurs increased confidence on the success oftheir ventures. Besides these, availability of investment sandincreased investment capability has also been a key factor drivingthe growth of the industry, especially when investment supportfrom franchisors is minimal.

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Businessmen predominantly choose franchising route as it helpsincrease the scale of operations while reducing the time to market.This also aids in brand building process through value creationFranchising imparts uniformity of product / service offering there byLeading to increased standards and quality. This is mainly thereason for franchisors not willing to customize their offerings forvarious franchisees, an aspect which most franchisees are not verycomfortable with.

Franchising Operating Model

While many brands and companies would view franchising as akey operating model for expansion from a scale and timeperspective, they also believe franchising model allows them keepthe brand relevant to their target consumers and result in betterProfitability for the system (franchisor and franchisee community)as a whole.

There are many reasons for business persons to considerfranchising as a business model. Predominant of the reasons arerelated to capacity expansion, scale building and brand building, ina shorter span of time.

While there are other choices, scale building and brand buildingand Faster Time to Market emerge as dominant choices with 26percent, 16 percent and 17 percent responses.

While Franchisors believe franchising as a good option to grow,many entrepreneurs are opting for the franchising route primarilydue to it offering a safe and easy way of establishing business and

offering higher than market levels of profitability. Franchising is alsoseen as a less-riskier option given that the business concept hasalready been pre-tested in the market and the entrepreneurs get tosee the results of the franchisors as well as other franchisees.

However while Franchisors believe in the concept of franchising,most franchisors are not willing to alter the terms and conditions oftheir proposal, in order to protect the brand value.

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Business Differentiators

Increasing growth in franchising is also reflected in the increasing

competition within the industry, with a constant stream of newfranchisees starting their businesses. Increasing competitionintensifies the need to develop unique selling proposition that canDifferentiate one brand from the other Business concept turns outto be the biggest differentiator in business for 37 % of therespondents; it was closely followed by return on investment andstandardized processes at 26 % each.

While majority of franchisors adopt the Franchisee Owned andFranchisee Operated model for expansion, few franchisors have

also mentioned the need for coexistence of Company OwnedFranchisee Operated models. This was particularly necessary inhigh streets of metro cities where the rentals negatively impact theBusiness viability for the franchisee. Also there are cases wherefranchisors want to have a few large format flagship stores. In boththese cases, franchisors preferred investing initially.

Franchisee Satisfaction

Out of the 20 franchisees surveyed, were either satisfied orsatisfied to a certain extent with franchisor business, both in termsof operations and financial returns. Amongst the 50% franchiseeswho were satisfied to a certain extent, the biggest cause of concernwas the inadequate operational support. But they still continue withthe franchisor, mainly, due to the financial returns obtained. Therewere also around 14% of the franchisees who were entirelyunhappy with the financial returns and operational supportprovided.

In terms of franchisee interest for undertaking additionalfranchisees, almost half of those interviewed were not willing totake up additional franchisees with the existing franchisors. This isprimarily due to friction in the relationship between franchisors andfranchisees on various aspects, especially in financial revenuesharing aspects in comparison to the nature of operationalsupport provided. Such a situation is more relevant in the servicesfranchising business where franchisor support is seen as critical.

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Most of the franchisees who were willing to undertake furtherfranchisees were in product franchising business

Franchisee Support & Relationship Management

Collaboration between franchisor and franchisees is critical tosuccess of franchising businesses. There are several avenues forcollaboration between franchisors and franchisees such as projectset up, marketing, employee training, operational management,revenue management, cost management and risk management.

Project Start-Up Support Operational Support is the first area ofcollaboration between franchisor and franchisee. Most franchisorsare involved in demographic analysis of the location, site

evaluation, survey and approval, facility planning and architecturaldesign of the store and store opening (retail clients). Franchiseesalso acknowledge the importance of franchisor contribution ingetting the basics of the project right.

Marketing Support Functions such as advertising and promotions,regional and local publicity and event based promotion schemeshave been the most important support provided to franchisors.Such activities build the brand, increase credibility of the offering

and ensure increased product awareness amongst the targetclientele. Majority of the franchisors have indicated marketingfunction as the key support provided for the franchisees, which isalso recognized by most franchisees. This is specifically true in thecase of national level brands and large regional brands. Few of theregional brands expect the franchisees to separately share cost ofregional/local marketing. However, amongst smaller brands,marketing support has been usually restricted to advertisementswith nothing specific being done for local publicity.Franchisees of local brands have also indicated the diminishing of

marketing support once the.

Employee Training and Development is taken as a focus areaamongst national brands, especially those in services franchising.Well planned employee development programencompassing well-defined processes for recruitment andselection, continuous training and up gradation of skills tothe technical, operational, sales teams adds to the success

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of franchisee operations. Of the key challenges that new.Franchisees face, hiring and training of employees is thekey. The challenge is particularly severe at retail concepts,where front-line employees are the face of the brand,

dealing directly with each customer every day. While mostfranchisors have well-defined training programs, a largenumber of franchisees particularly find it difficult to hiregood candidates and retain them.

Operational Support an apparent area of collaboration wherebythe franchisor provides defined guidelines for operations,employee management, product/service pricing guidelines, trouble-shooting support, supply chain and procurement support. Largebrands deploydedicated teams to respond to operationalrequirements of franchisees but the case is not the samewith smaller and regional brands. Few franchisees, whileappreciating the good intentions of support fromfranchisors, are disappointed with the pace of response foroperational challenges.

Key challenges in Franchising

Both franchisors and franchisees face certain challenges

before and during operations. From the survey it is clearlyevident that rentals are impacting profitability offranchisees and overall business viability. Franchisors tooare concerned about consistent royalty payments byfranchisees in such a scenario where business viability isbeing threatened. The survey also indicated that one ofthe key reasons for attrition in the. franchising space isdue to falling profits.

Franchisor View - Franchisee Challenges in Operations

The biggest of the franchisee challenges in operations arerelated to real estate. Setting up businesses in the desiredlocations and paying high rentals is on the top of thechallenges. Besides these, deploying the right talent andfunding the business operations are also other challengesfaced by the franchisees

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While location and rentals are biggest problems faced byfranchisees, recruitment of right employee & retainingthem is also suggested as a key concern by franchisees.

Attrition was found to be fairly common in the franchisebusiness with the major reason being falling profits for thebusiness.

Conflict Management

There are several causes of friction between the franchisors andfranchisees, which if not addressed in the beginning, could cause arift between them which might eventually lead to severance ofrelationship.

While most franchisors are aware of the problems with franchisees,matters become worse, when then turn blind eye to the problems.

Some of the key areas of conflict between franchisors andfranchisees include:

Low expenditure on regional marketing and advertisingmodel.

Additional marketing fee for regional publicity, despite a high

revenue share allocation Transcending geographical exclusivity or reducing radius of

coverage Lack of empathy by franchisor employees handling

franchisees

Poor training of franchisees and inadequate handholdingduring initial stages of operation

Financial pressures leading to short term decision making byfranchisors

Not considering franchisees as the critical part of thefranchisee ec

franchising in markets

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