CHAPTER 01

1
 INTRODUCTION

Retailing in India is one of the pillars of its economy and accounts for about 10 percent
of its GDP. The Indian retail market is estimated to be US$ 600 billion and one of the
top five retail markets in the world by economic value. India is one of the fastest growing
retail markets in the world, with 1.2 billion people.
As of 2003, India's retailing industry was essentially owner manned small shops. In
2010, larger format convenience stores and supermarkets accounted for about 4
percent of the industry, and these were present only in large urban centers. India's retail
and logistics industry employs about 40 million Indians (3.3% of Indian population).
Until 2011, Indian central government denied foreign direct investment (FDI) in multi-
brand retail, forbidding foreign groups from any ownership in supermarkets,
convenience stores or any retail outlets. Even single-brand retail was limited to 51%
ownership and a bureaucratic process.[citation needed]
In November 2011, India's central government announced retail reforms for both multi-
brand stores and single-brand stores. These market reforms paved the way for retail
innovation and competition with multi-brand retailers such
as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike,
and Apple. The announcement sparked intense activism, both in opposition and in
support of the reforms. In December 2011, under pressure from the opposition, Indian
government placed the retail reforms on hold till it reaches a consensus.
In January 2012, India approved reforms for single-brand stores welcoming anyone in
the world to innovate in Indian retail market with 100% ownership, but imposed the
requirement that the single brand retailer source 30 percent of its goods from India.
Indian government continues the hold on retail reforms for multi-brand stores.
In June 2012, IKEA announced it had applied for permission to invest $1.9 billion in
India and set up 25 retail stores. An analyst from Fitch Group stated that the 30 percent
requirement was likely to significantly delay if not prevent most single brand majors from
Europe, USA and Japan from opening stores and creating associated jobs in India.
On 14 September 2012, the government of India announced the opening of FDI in multi-
brand retail, subject to approvals by individual states. This decision was welcomed by
economists and the markets, but caused protests and an upheaval in India's central
government's political coalition structure. On 20 September 2012, the Government of
India formally notified the FDI reforms for single and multi-brand retail, thereby making it
effective under Indian law.

2
On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand
retail in India. The government managed to get the approval of multi-brand retail in the
parliament despite heavy uproar from the opposition (the NDA and leftist parties). Some
states will allow foreign supermarkets like Walmart, Tesco and Carrefour to open while
other states will not.
In the past two decades, India has witnessed a sea change in its foreign investment.
Globalization, liberalization and growing brand awareness have resulted in India
becoming one of the largest and fastest emerging markets. Being geographically vast
and culturally diverse, India offers the most favorable franchising environment with a
huge consumer market.
The fact that franchising is a popular business model in India with more than 1,200
franchise ventures (with over 300 international franchisors) and a sales turnover of over
U.S. $7 billion with growth potential in the range of 30-35 percent per annum confirms
its success and huge potential.

Food and beverages, hospitality, retail, beauty and health care and education sectors
dominate the franchise market in India. Studies reveal that more than one-third of new
food outlets are through franchise systems, thanks to the rapid development of mall
culture. With a rise in business and pleasure travel, the hospitality industry business is
growing by leaps and bounds. With India becoming a favored investment, as well as a
tourist destination, there is an inflow of foreign travelers, which has triggered a sharp
rise in demand for quality accommodations, creating more opportunities for hospitality
franchisors. The recent trends have shown a sharp increase in organized retail, be it
foreign or Indian brands. Retailing in food, health and beauty products, clothing,
footwear, household goods and furniture is getting more popular and has already
started to enter into other sectors too.

Seeing the growth of the Retail industry of India and the growth of Franchise itself it is
essential to review and analyze the impact of franchise in the Indian retail industry

3
CHAPTER 02

4
 CONCEPT OF FRANCHISING

Franchising is based on a marketing concept which can be adopted by an organization

as a strategy for business expansion. Where implemented, a franchiser licenses its
know-how, procedures, intellectual property, use of its business model, brand, and
rights to sell its branded products and services to a franchisee. In return the franchisee
pays certain fees and agrees to comply with certain obligations, typically set out in a
Franchise Agreement.

The word "franchise" is of Anglo-French derivation—from franc, meaning free—and is

used both as a noun and as a (transitive) verb. For the franchiser, use of a franchise
system is an alternative business growth strategy, compared to expansion through
corporate owned outlets or "chain stores". Adopting a franchise system business growth
strategy for the sale and distribution of goods and services minimizes the franchiser's
capital investment and liability risk.

As with any business venture, franchising is not immune to risk. But if undertaken in the
right way, franchising can be a vehicle of success for both the franchisor and
franchisee.

Thirty-six countries have laws that explicitly regulate franchising, with the majority of all
other countries having laws which have a direct or indirect effect on
franchising. Franchising is also used as a foreign market entry mode.

Franchising is simply a method for expanding a business and distributing goods and
services through a licensing relationship. In franchising, franchisors (a person or
company that grants the license to a third party for the conducting of a business under
their marks) not only specify the products and services that will be offered by the
franchisees (a person or company who is granted the license to do business under the
trademark and trade name by the franchisor), but also provide them with an operating
system, brand and support.

There are two different types of franchising relationships. Business Format Franchising
is the type most identifiable to the average person. In a business format franchise
relationship the franchisor provides to the franchisee not just its trade name, products
and services, but an entire system for operating the business. The franchisee generally
receives site selection and development support, operating manuals, training, brand
standards, quality control, a marketing strategy and business advisory support from the
franchisor.

5
HISTORY:
The boom in franchising did not take place until after World War II. Nevertheless, the
rudiments of modern franchising date back to the middle Ages when landowners made
franchise-like agreements with tax collectors, who retained a percentage of the money
they collected and turned the rest over. The practice ended around 1562 but spread to
other endeavors. For example, in 17th century England franchisees were granted the
right to sponsor markets and fairs or operate ferries. There was little growth in
franchising, though, until the mid-19th century, when it appeared in the United States for
the first time.

One of the first successful American franchising operations was started by an

enterprising druggist named John S. Pemberton. In 1886, he concocted a beverage
comprising sugar, molasses, spices, and cocaine. Pemberton licensed selected people
to bottle and sell the drink, which was an early version of what is now known as Coca-
Cola. His was one of the earliest—and most successful—franchising operations in the
United States.

The Singer Company implemented a franchising plan in the 1850s to distribute its
sewing machines. The operation failed, though, because the company did not earn
much money even though the machines sold well. The dealers, who had exclusive
rights to their territories, absorbed most of the profits because of deep discounts. Some
failed to push Singer products, so competitors were able to outsell the company. Under
the existing contract, Singer could neither withdraw rights granted to franchisees nor
send in its own salaried representatives. So, the company started repurchasing the
rights it had sold. The experiment proved to be a failure. That may have been one of the
first times a franchisor failed, but it was by no means the last. (Even Colonel Sanders
did not initially succeed in his Kentucky Fried Chicken franchising efforts.) Still, the
Singer venture did not put an end to franchising.

Other companies tried franchising in one form or another after the Singer experience.
For example, several decades later, General Motors Corporation established a
somewhat successful franchising operation in order to raise capital. Perhaps the father
of modern franchising, though, is Louis K. Liggett. In 1902, Liggett invited a group of
druggists to join a "drug cooperative." As he explained to them, they could increase
profits by paying less for their purchases, especially if they set up their own
manufacturing company. His idea was to market private label products. About 40
druggists pooled $4,000 of their own money and adopted the name "Rexall". Sales
soared, and Rexall became a franchisor. The chain's success set a pattern for other
franchisors to follow.

6
Although many business owners did affiliate with cooperative ventures of one type or
another, there was little growth in franchising until the early 20th century, and in
whatever form franchising existed, it looked nothing like what it is today. As the United
States shifted from an agricultural to an industrial economy, manufacturers licensed
individuals to sell automobiles, trucks, gasoline, beverages, and a variety of other
products. The franchisees did little more than selling the products, though. The sharing
of responsibility associated with contemporary franchising arrangement did not exist to
a great extent. Consequently, franchising was not a growth industry in the United
States.

It was not until the 1960s and 1970s that people began to take a close look at the
attractiveness of franchising. The concept intrigued people with entrepreneurial spirit.
However, there were serious pitfalls for investors, which almost ended the practice
before it became truly popular

Advances in technology, orientation towards a service economy, a relative decrease in

the importance of product franchising, an expansive interstate road system, active baby
boom retirees looking to “be their own boss,” and women in the work force, have all
contributed to the burgeoning rise in business format franchising. According to a survey
conducted for the International Franchise Association’s Educational Foundation, as of
2001, there were more than 767,483 franchise-related businesses (including franchisor
owned), generating 9,797,117 jobs (equivalent employment of all manufacturers of
durable goods, such as computers, cars, trucks, planes, communications equipment,
primary metals, wood products, and instruments), meeting a $229.1 billion payroll, and
producing $624.6 billion of output. The same survey found that franchised businesses in
2001 accounted for 7.4 percent of all private-sector jobs, 5.0 percent of all private sector
payrolls, and 3.9 percent of all private sector output. Business format franchising
accounted for 4.3 times as many business establishments as product franchising, and
four times as many jobs, and operated more establishments, met a greater payroll, and
generated more output in business services than in any other single line of business.
The quick service restaurants hired more people than any other business format
segment, and automotive and truck dealers employed more workers and had the
greatest payroll of any other product distribution franchise. Jobs and payrolls in
franchised businesses were greatest in California, Texas, Florida, and Illinois in 2001.
Relative to the size of the statewide economy, franchising had the greatest impact on
jobs and payrolls in Nevada, Arizona, New Mexico, Florida, and Mississippi.

Studies indicate that a new franchise business opens approximately every five to eight
minutes of each business day, and that franchises are, on average, more profitable than
company owned locations. This holds especially true for franchisors in the fast food

7
industry. 50% of all franchise companies in existence started in the last 33 years, 70%
of them in the last 45 years, and 97% of them in the last 55 years.

Fees and contract arrangement

Three important payments are made to a franchisor: (a) a royalty for the trademark, (b)
reimbursement for the training and advisory services given to the franchisee, and (c) a
percentage of the individual business unit's sales. These three fees may be combined in
a single 'management' fee. A fee for "disclosure" is separate and is always a "front-end
fee".

A franchise usually lasts for a fixed time period (broken down into shorter periods, which
each require renewal), and serves a specific territory or geographical area surrounding
its location. One franchisee may manage several such locations. Agreements typically
last from five to thirty years, with premature cancellations or terminations of most
contracts bearing serious consequences for franchisees. A franchise is merely a
temporary business investment involving renting or leasing an opportunity, not the
purchase of a business for the purpose of ownership. It is classified as a wasting asset
due to the finite term of the license.

Franchise fees are on average 6.7% with an additional average marketing fee of
2% However, not all franchise opportunities are the same and many franchise
organizations are pioneering new models that challenge antiquated structures and
redefine success for the organization as well as the franchisee.

A franchise can be exclusive, non-exclusive or "sole and exclusive".

Although franchisor revenues and profit may be listed in a franchise disclosure

document (FDD), no laws require an estimate of franchisee profitability, which depends
on how intensively the franchisee "works" the franchise. Therefore, franchisor fees are
typically based on "gross revenue from sales" and not on profits realized.
See remuneration.

Various tangibles and intangibles such as national or

international advertising, training and other support services are commonly made
available by the franchisor.

Franchise brokers help franchisors find appropriate franchisees. There are also main
'master franchisors' who obtain the rights to sub-franchise in a territory.

According to the International Franchise Association approximately 44% of all

businesses in the United States are franchisee-worked.

Rationale and risk shift

8
Franchising is one of the few means available to access venture capital without the
need to give up control of the operation of the chain and build a distribution system for
servicing it. After the brand and formula are carefully designed and properly executed,
franchisors are able to sell franchises and expand rapidly across countries and
continents using the capital and resources of their franchisees while reducing their own
risk.

There is also risk for the people buying the franchises. However, failure rates are much
lower for franchise businesses than independent business startups.

Franchisor rules imposed by the franchising authority are becoming increasingly strict.
Some franchisors are using minor rule violations to terminate contracts and seize the
franchise without any reimbursement.

Obligations of the parties:

Each party to a franchise has several interests to protect. The franchisor is involved in
securing protection for the trademark, controlling the business concept and
securing know-how. The franchisee is obligated to carry out the services for which the
trademark has been made prominent or famous. There is a great deal of
standardization required. The place of service has to bear the franchisor's signs, logos
and trademark in a prominent place. The uniforms worn by the staff of the franchisee
have to be of a particular design and color. The service has to be in accordance with the
pattern followed by the franchisor in the successful franchise operations. Thus,
franchisees are not in full control of the business, as they would be in retailing.

A service can be successful if equipment and supplies are purchased at a fair price from
the franchisor or sources recommended by the franchisor. A coffee brew, for example,
can be readily identified by the trademark if its raw materials come from a particular
supplier. If the franchisor requires purchase from her stores, it may come under any-
trust legislation or equivalent laws of other countries. So too the purchase things like
uniforms of personnel and signs, as well as the franchise sites, if they are owned or
controlled by the franchisor.

The franchisee must carefully negotiate the license and must develop a marketing or
business plan with the franchisor. The fees must be fully disclosed and there should not
be any hidden fees. The start-up costs and working capital must be known before the
license is granted. There must be assurance that additional licensees will not crowd the
"territory" if the franchise is worked according to plan. The franchisee must be seen as

9
an independent merchant. It must be protected by the franchisor from any trademark
infringement by third parties. A franchise attorney is required to assist the franchisee
during negotiations.

Often the training period – the costs of which are in great part covered by the initial fee
– is too short in cases where it is necessary to operate complicated equipment, and the
franchisee has to learn on their own from instruction manuals. The training period must
be adequate, but in low-cost franchises it may be considered expensive. Many
franchisors have set up corporate universities to train staff online. This is in addition to
providing literature, sales documents and email access.

Also, franchise agreements carry no guarantees or warranties and the franchisee has
little or no recourse to legal intervention in the event of a dispute. Franchise contracts
tend to be unilateral and favor of the franchisor, who is generally protected from lawsuits
from their franchisees because of the non-negotiable contracts that franchisees are
required to acknowledge, in effect, that they are buying the franchise knowing that there
is risk, and that they have not been promised success or profits by the franchisor.
Contracts are renewable at the sole option of the franchisor. Most franchisors require
franchisees to sign agreements that mandate where and under what law any dispute
would be litigated.

Largest franchised chains:

The following U.S. listing tabulates the early 2010 ranking of major franchises along with
the number of sub-franchisees (or partners) from data available for 2004. The United
States is a leader in franchising, a position it has held since the 1930s when it used the
approach for fast-food restaurants, food inns and, slightly later, motels at the time of
the Great Depression] As of 2005, there were 909,253 established franchised
businesses, generating $880.9 billion of output and accounting for 8.1 percent of all
private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private
sector output.

1. Subway (sandwiches and salads) | startup costs $84,300 – $258,300 (41,916

locations worldwide in 2015).

2. McDonald's | startup costs in 2010, $995,900 – $1,842,700 (36,368 Locations in

2015)

3. 7-Eleven Inc. (convenience stores) | startup costs in 2010 $40,500- $775,300,

(56,439 locations in 2015)

4. Hampton Inns & Suites (midprice hotels) | startup costs in 2010 $3,716,000 –
$15,148,800

10
5. Great Clips (hair salons) | startup costs in 2010 $109,000 – $203,000 (3,694
locations in 2015)

6. H&R Block (tax preparation and now e-filing) | startup costs $26,427 – $84,094
(10,800 locations in 2015)

7. Dunkin' Donuts | startup costs in 2010 $537,750 – $1,765,300

8. Jani-King (commercial cleaning) | startup costs $11,400 – $35,050, (11,000 partners

worldwide in 2004)

9. Servpro (insurance and disaster restoration and cleaning) | startup costs in 2010
$102,250 – $161,150

10. MiniMarkets (convenience store and gas station) | startup costs in 2010 $1,835,823
– $7,615,065

Mid-sized franchises like restaurants, gasoline stations and trucking stations involve
substantial investment and require all the attention of a businessperson.

There are also large franchises like hotels, spas and hospitals, which are discussed
further under technological alliances.

11
 RETAIL INDUSTRY OF INDIA

Retailing in India is one of the pillars of its economy and accounts for about 10 percent
of its GDP. The Indian retail market is estimated to be US$ 600 billion and one of the
top five retail markets in the world by economic value. India is one of the fastest growing
retail markets in the world, with 1.2 billion people.

As of 2003, India's retailing industry was essentially owner manned small shops. In
2010, larger format convenience stores and supermarkets accounted for about 4
percent of the industry, and these were present only in large urban centers. India's retail
and logistics industry employs about 40 million Indians (3.3% of Indian population).

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-
brand retail, forbidding foreign groups from any ownership in supermarkets,
convenience stores or any retail outlets. Even single-brand retail was limited to 51%
ownership and a bureaucratic process.

In November 2011, India's central government announced retail reforms for both multi-
brand stores and single-brand stores. These market reforms paved the way for retail
innovation and competition with multi-brand retailers such
as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike,
and Apple. The announcement sparked intense activism, both in opposition and in
support of the reforms. In December 2011, under pressure from the opposition, Indian
government placed the retail reforms on hold till it reaches a consensus.

In January 2012, India approved reforms for single-brand stores welcoming anyone in
the world to innovate in Indian retail market with 100% ownership, but imposed the
requirement that the single brand retailer source 30 percent of its goods from India.
Indian government continues the hold on retail reforms for multi-brand stores.

In June 2012, IKEA announced it had applied for permission to invest $1.9 billion in
India and set up 25 retail stores. An analyst from Fitch Group stated that the 30 percent
requirement was likely to significantly delay if not prevent most single brand majors from
Europe, USA and Japan from opening stores and creating associated jobs in India.

On 14 September 2012, the government of India announced the opening of FDI in multi-
brand retail, subject to approvals by individual states. This decision was welcomed by
economists and the markets, but caused protests and an upheaval in India's central
government's political coalition structure. On 20 September 2012, the Government of
India formally notified the FDI reforms for single and multi-brand retail, thereby making it
effective under Indian law.

12
On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand
retail in India. The government managed to get the approval of multi-brand retail in the
parliament despite heavy uproar from the opposition (the NDA and leftist parties). Some
states will allow foreign supermarkets like Walmart, Tesco and Carrefour to open while
other states will not.

GROWTH
Growth over 1997-2010

India in 1997 allowed foreign direct investment (FDI) in cash and carry wholesale. Then,
it required government approval. The approval requirement was relaxed, and automatic
permission was granted in 2006. Between 2000 to 2010, Indian retail attracted about
$1.8 billion in foreign direct investment, representing a very small 1.5% of total
investment flow into India.

Single brand retailing attracted 94 proposals between 2006 and 2010, of which 57 were
approved and implemented. For a country of 1.2 billion people, this is a very small
number. Some claim one of the primary restraints inhibiting better participation was that
India required single brand retailers to limit their ownership in Indian outlets to 51%.
China in contrast allows 100% ownership by foreign companies in both single brand and
multi-brand retail presence.

Indian retail has experienced limited growth, and its spoilage of food harvest is amongst
the highest in the world, because of very limited integrated cold-chain and other
infrastructure. India has only 5386 stand-alone cold storages, having a total capacity of
23.6 million metric tons. However, 80 percent of this storage is used only for potatoes.
The remaining infrastructure capacity is less than 1% of the annual farm output of India
and grossly inadequate during peak harvest seasons. This leads to about 30% losses in
certain perishable agricultural output in India, on average, every year.

Indian laws already allow foreign direct investment in cold-chain infrastructure to the
extent of 100 percent. There has been no interest in foreign direct investment in cold
storage infrastructure build out. Experts claim that cold storage infrastructure will
become economically viable only when there is strong and contractually binding
demand from organized retail. The risk of cold storing perishable food, without an
assured way to move and sell it, puts the economic viability of expensive cold storage in
doubt. In the absence of organized retail competition and with a ban on foreign direct
investment in multi-brand retailers, foreign direct investments are unlikely to begin in
cold storage and farm logistics infrastructure.

Until 2010, intermediaries and middlemen in India have dominated the value chain. Due
to a number of intermediaries involved in the traditional Indian retail chain, norms are

13
flouted and pricing lacks transparency. Small Indian farmers realize only 1/3rd of the
total price paid by the final Indian consumer, as against 2/3rd by farmers in nations with
a higher share of organized retail. The 60%+ margins for middlemen and traditional
retail shops have limited growth and prevented innovation in Indian retail industry.

India has had years of debate and discussions on the risks and prudence of allowing
innovation and competition within its retail industry. Numerous economists repeatedly
recommended to the Government of India that legal restrictions on organized retail must
be removed, and the retail industry in India must be opened to competition. For
example, in an invited address to the Indian parliament in December 2010, Jagdish
Bhagwati, Professor of Economics and Law at the Columbia University analyzed the
relationship between growth and poverty reduction, then urged the Indian parliament to
extend economic reforms by freeing up of the retail sector, further liberalization of trade
in all sectors, and introducing labor market reforms. Such reforms Professor Bhagwati
argued will accelerate economic growth and make a sustainable difference in the life of
India's poorest.

A 2007 report noted that an increasing number of people in India are turning to the
services sector for employment due to the relative low compensation offered by the
traditional agriculture and manufacturing sectors. The organized retail market is growing
at 35 percent annually while growth of unorganized retail sector is pegged at 6 percent.

The Retail Business in India is currently at the point of inflection. As of 2008, rapid
changes with investments to the tune of US$25 billion were being planned by several
Indian and multinational companies in the next 5 years. It is a huge industry in terms of
size and according to India Brand Equity Foundation (IBEF); it is valued at about
US$395.96 billion. Organized retail is expected to garner about 16-18 percent of the
total retail market (US$65–75 billion) in the next 5 years.

India has topped the A.T. Kearney’s annual Global Retail Development Index (GRDI) for
the third consecutive year, maintaining its position as the most attractive market for
retail investment. The Indian economy has registered a growth of 8% for 2007. The
prediction for 2008 is 7.9%.The enormous growth of the retail industry has created a
huge demand for real estate. Property developers are creating retail real estate at an
aggressive pace and by 2010, 300 malls are estimated to be operational in the country.

Growth after 2011

Before 2011, India had prevented innovation and organized competition in its consumer
retail industry. Several studies claim that the lack of infrastructure and competitive retail
industry is a key cause of India's persistently high inflation. Furthermore, because of
unorganized retail, in a nation where malnutrition remains a serious problem, food

14
waste is rife. Well over 30% of food staples and perishable goods produced in India
spoil because poor infrastructure and small retail outlets prevent hygienic storage and
movement of the goods from the farmer to the consumer.

One report estimates the 2011 Indian retail market as generating sales of about $470
billion a year, of which a minuscule $27 billion comes from organized retail such as
supermarkets, chain stores with centralized operations and shops in malls. The opening
of retail industry to free market competition, some claim will enable rapid growth in retail
sector of Indian economy. Others believe the growth of Indian retail industry will take
time, with organized retail possibly needing a decade to grow to a 25% share. A 25%
market share, given the expected growth of Indian retail industry through 2021, is
estimated to be over $250 billion a year: revenue equal to the 2009 revenue share from
Japan for the world's 250 largest retailers.

The Economist forecasts that Indian retail will nearly double in economic value,
expanding by about $850 billion by 2020. The projected increase alone is equivalent to
the current retail market size of France.

In 2011, food accounted for 70% of Indian retail, but was under-represented by
organized retail. A.T. Kearney estimates India's organized retail had a 31% share in
clothing and apparel, while the home supplies retail was growing between 20% to 30%
per year. These data correspond to retail prospects prior to November announcement of
the retail reform.

It might be true that India has the largest number of shops per inhabitant. However,
there are detailed figures for Belgium, the Netherlands and Luxemburg. In Belgium, the
number of outlets is approximately 8 per 1,000 and in the Netherlands it is 6. So the
Indian number must be far higher.

India's retail market is expected to be worth about US$ 410 billion, with 5 per cent of
sales through organized retail, meaning that the opportunity in India remains immense.
Retail should continue to grow rapidly—up to US$ 535 billion in 2013, with 10 per cent
coming from organized retail, reflecting a fast-growing middle class, demanding higher
quality shopping environments and stronger brands, according to the report ‘Expanding
Opportunities for Global Retailers’, released by A T Kearney.

Challenges Faced by the Retail Industry:

International Standards: Even though India has well over 5 million retail outlets of
different sizes and styles, it still has a long way to go before it can truly have a retail
industry at par with International standards. This is where Indian companies and
International brands have a huge role to play.

15
Inefficient supply chain management: Indian retailing is still dominated by the
unorganized sector and there is still a lack of efficient supply chain management. India
must concentrate on improving the supply chain management, which in turn would bring
down inventory cost, which can then be passed on to the consumer in the form of low
pricing. Lack of Retail space: Most of the retail outlets in India have outlets that are less
than 500 square feet in area. This is very small by International Standards.

Cultural Diversity: India's huge size and socio economic and cultural diversity means
there is no established model or consumption pattern throughout the country.
Manufacturers and retailers will have to devise strategies for different sectors and
segments which by it would be challenging. Real estate issues: The enormous growth
of the retail industry has created a huge demand for real estate. Property developers
are creating retail real estate at an aggressive pace. With over 1,000 hypermarkets and
3,000 supermarkets projected to come up by 2011, India will need additional retail
space of 700,000,000 sq. ft. (65,000,000 m2) as compared to today.

Human resource problems: Trained manpower shortage is a challenge facing the

organized retail sector in India. The Indian retailers have difficulty in finding trained
person and also have to pay more in order to retain them. This again brings down the
Indian retailers profit levels.

Frauds in Retail: It is one of the primary challenges the companies would have to face.
Frauds, including vendor frauds, thefts, shoplifting and inaccuracy in supervision and
administration are the challenges that are difficult to handle. This is so even after the
use of security techniques, such as CCTVs and POS systems. As the size of the sector
would increase, this would increase the number of thefts, frauds and discrepancies in
the system.

Challenges with Infrastructure and Logistics: The lack of proper infrastructure and
distribution channels in the country results in inefficient processes. This is a major
hindrance for retailers as a non-efficient distribution channel is very difficult to handle
and can result in huge losses. Infrastructure does not have a strong base in India.
Urbanization and globalization are compelling companies to develop infrastructure
facilities. Transportation, including railway systems, has to be more efficient. Highways
have to meet global standards. Airport capacities and power supply have to be
enhanced. Warehouse facilities and timely distribution are other areas of challenge. To
fully utilize India's potential in retail sector, these major obstacles have to be removed.

16
India’s Unorganized and Organized Retail Segments:
The Indian retail market is highly fragmented into small, privately owned stores, the so-
called unorganized retail or traditional retail. These unorganized retail stores account for
94 to 97 % of sales, compared to about 80 % in China, about 60 % in Thailand and
about 15 % in the US (Srivastava 2008). These “Mom-and-Pop” stores comprise about
15 million businesses, from local kirana stores to footwear and apparel shops (Knight
Frank 2010). They are usually run by the owner and one or two assistants.
Approximately 95 % of these retail stores are smaller than 500 square feet (Srivastava
2008). India has the highest number of retail outlets world-wide, with an average size of
50 to 100 square feet, but the per capita retail space is amongst the lowest in the world.
Many of these kirana stores are located in shopping centers. For 50 years, time has
stood still in that “Each shop is typically about ten feet square, so that the pro-praetor
can sit in the middle of the floor and reach his entire stock” (Westfall/Boyd 1960, p. 14).
In such stores, there is no self-service for customers. Organized retail, such as
supermarkets and hypermarkets, has steadily gained market share at rates of about 35
% during the last five years. Organized retail now constitutes a 7.8 % share of the
Indian retail sector (Aspic 2010) and accounted for 783 billion INR (13.5 billion EUR) in
2007. Apparel, food and grocery dominate organized retailing in India (IBEF 2010a) and
account for circa 49.6 % of the sales. Previous judgments have been very enthusiastic
about the prospects of organized retail, and the sector is expected to increase its share
of the total retail trade to 16 % by fiscal year 2011/2012 (Joseph et al. 2008). However,
recent research only expects organized retail to possess a share of 10.4 % of total retail
sales in 2011/2012 (KPMG 2009). In contrast with other emerging countries in Asia,
such as China or Vietnam, with organized retail shares of 18 and 23 %, respectively,
India is thought to possess huge future growth potential (Aspic 2010). The development
of organized retail can be captured quantitatively in several ways. In 1999, there were
only three shopping malls in India totaling one million square feet. Only seven years
later, in 2006, malls accounted for 28 million square feet, and in 2009 this value was 52
million square feet (Knight Frank 2010). The reason for the low share of organized retail
in overall retail sales are the severe restriction on foreign direct investments (FDI) in
retail that were in place until the end of 2005. At pre-sent, protests against organized
foreign and domestic retailers are ongoing. However, it is not clear what the impact of
organized retailers on small retailers might be. Some sources con-clued the effect of a
formal retailer to be a loss of about 23 % of sales within a year for nearby small shops.
However, according to the Indian Council for Research on International Eco-gnomic
Relations (ICRIER), total sales returned to their previous level five years after the re-
modal of the restrictions on FDI. Additionally, it was found that only 1.7 % of stores in
the unorganized market close each year, and it is expected that by 2013, unorganized

17
retail busy-nesses will still account for 85 % of the Indian retail market (Salisbury 2010).
Because the organized retail segment has only a modest market share in India, the
develop-mint of this sector is unique. Table 1 shows how several retail formats
developed between 2001 and 2006. It can be seen that the numbers of supermarkets
and specialty stores increased nearly tenfold. Additionally, hypermarkets, which were
nonexistent several years ago, now account for about 10 % of the space of organized
retail. Although department stores have also gained in retail space (+ 540 %), their
importance in organized retail has decreased. In recent months, several Indian retailers
were forced to scale back their expansion plans and close down some stores. For
example, Pantaloons, India’s largest retail company, cut its expansion plans through
June 2010 from 4 million to 2 million square feet and has closed 103 of its stores. This
consolidation can be interpreted as a consequence of the overly enthusiastic expansion
phase in organized retail stores within the last few years. Nevertheless, it seems that
Indian retailers have learned from the past. Hence, recent press releases have
announced a change of firm policies back to modest expansion after several
restructuring programs.

18
FRANCHISING IN INDIA

In the past few decades, India has witnessed a sea change in its foreign investment.
Globalization, liberalization and growing brand awareness have resulted in India
becoming one of the largest and fastest emerging markets. Being geographically vast
and culturally diverse, India offers the most favorable franchising environment with a
huge consumer market.

The fact that franchising is a popular business model in India with more than 1,200
franchise ventures (with over 300 international franchisors) and a sales turnover of over
U.S. $7 billion with growth potential in the range of 30-35 percent per annum confirms
its success and huge potential.

The Mall Boom

The concept of malls has witnessed rapid growth in India—three malls in 2000 are
expected to reach more than 300 malls by the end of 2012—influencing in a great way
the lifestyle of the people. Since malls create an opportunity to have many franchise
businesses under one roof, franchising, which is a convenient business model, would
benefit most by the mall boom.

Legal Aspects

Although India does not have franchise specific legislation or regulation, there are
numerous laws governing various aspects of franchising. While considering franchise in
India, one would have to refer to the following:

• Contract Act. The contractual relationship between the franchisor and the
franchisee would be governed by the Indian Contract Act, 1872. A franchise agreement
would be enforceable under Indian law as it would meet the criteria of a valid contract.
However, care would have to be taken that the agreement does not contain any
provision which makes it void or voidable.

• Consumer Protection and Product Liability. The Consumer Protection Act,

1986, provides for remedies to consumers in case of defect in products or deficiency in
services making the manufacturers and service providers liable for the same. Though,
in fact, goods would be manufactured and likewise services provided by the franchisee,
it is quite likely that the consumers could file an action against both the franchisor and

19
the franchisee. Suitable provisions in the franchise agreement are advised to crystallize
liabilities arising due to consumer claims.

• Competition Law. In view of the globalization and liberalization of its economy, the
focus has shifted from curbing monopolies to promoting healthy competition in India.
Accordingly, the Competition Act, 2002, was enacted and is now in force in its entirety.
The relevant provisions from the franchising perspective are those with respect to anti-
competitive agreements and abuse of dominant position.

The Competition Act prohibits any arrangements with respect to production, supply,
distribution, storage, acquisition or control of goods or provision of services which cause
or are likely to cause an appreciable adverse effect on competition within India.

In terms of the Competition Act, tie-in arrangements, exclusive supply and distribution
agreements, refusal to deal and resale price maintenance would be regarded as being
anti-competitive, if such agreements cause an appreciable adverse effect on
competition in India.

• Intellectual Property Rights

Trademark Protection: India’s IPR laws include the Trademark Act 1999, The Designs
Act 2000, The Copyright Act 1957, The Patent Act 1970, which provide for protection of
the IPR of the franchisor and enforcement mechanism against infringement of the
same.

Trans-border Reputation of Trademarks: Indian Courts have in several decisions

recognized the reputation of and protected trademarks of foreign companies on the
basis of international reputation, even though they were not conducting business in
India. However, it would be prudent to register the marks in India.

• Foreign Exchange Regulations. The Foreign Exchange Management Act, 1999,

and the rules/regulations framed thereunder, govern payments in foreign exchange. A
franchise arrangement would normally involve payments such as franchise fee, royalty
for use of trademarks and system, training expenses, advertisement contributions, and
so on and can be remitted to the foreign franchisor without any approvals. Issue of
guarantees in favor of a foreign franchisor would require approval of the Reserve Bank
of India.

Single Brand Retail. 100 percent foreign direct investment without any approval is
allowed in “Single Brand Product Retailing,” subject to prescribed conditions, such as
the products should be sold under the same brand internationally, the foreign investor
should be the owner of the brand and depending on the percentage of the foreign
investment, a certain amount of products should be sourced from Indian small-scale

20
industries/ cottage industries. In view of this regulatory regime and other reasons,
franchising has proved to be a better business option for foreign franchisors such as
Mother care and Next.

• Other Legislation. In addition to the aforesaid, various other central, state industry
specific and other legislations such as labor laws, property laws, and so forth would
have to be considered.

Franchising in Various Sectors in India

Food and beverages, hospitality, retail, beauty and health care and education sectors
dominate the franchise market in India. Studies reveal that more than one-third of new
food outlets are through franchise systems, thanks to the rapid development of mall
culture. With a rise in business and pleasure travel, the hospitality industry business is
growing by leaps and bounds. With India becoming a favored investment, as well as a
tourist destination, there is an inflow of foreign travelers, which has triggered a sharp
rise in demand for quality accommodations, creating more opportunities for hospitality
franchisors. The recent trends have shown a sharp increase in organized retail, be it
foreign or Indian brands. Retailing in food, health and beauty products, clothing,
footwear, household goods and furniture is getting more popular and has already
started to enter into other sectors too.

Increased stress-level awareness for quality health services has boosted the need for
health care service providers, including wellness centers and spas.

Growing acceptability among the Indian population and proven success of education
franchising in India has led to a boom in the franchising of professional and vocational
courses in the fields of aviation, hospitality, retail, financial services and insurance
programs. Franchising in the pre-school segment has particularly been a growing
phenomenon in the past decade.

It is evident that foreign franchisors have realized the unparalleled potential for
franchising in India. Going by the statistics, there is no doubt that franchising as a
business concept has a very bright future in India.

Preeti Mehta, a senior partner of Kanga & & Co., a leading law firm, has experience in
mergers and acquisitions, foreign investments/ collaborations, private equity, franchising
and banking documentation. Mehta serves on the Editorial Advisory Board of the
International Journal of Franchising Law, is a patron member and on the Executive
Council of the Franchise Association of India and chairs it’s Legal Committee.

21
MARKETING SECTOR IN INDIA:
SPOT, which stands for Self-employment Program for Organized Transport, was started
in 2002 to promote employment, enable asset ownership and build credit history among
low-income households. Unlike other taxi operators in the city, SPOT’s fleet is driven by
owners who operate franchise businesses linked by a common brand, radio and
computerized dispatch system, service delivery standards, processes and values.

Drivers purchase the cars on installment over a three-to-four year period, with vehicle
leases arranged on favorable terms by the franchisor. In addition to arranging financing,
SPOT offers an established network of pooled customer demand, fleet management
services and a dispatch call center that channels customer requests directly to the
driver.

The business is profitable for franchisee and franchisor alike. After paying for fuel,
maintenance, finance charges and royalties, franchisees net more than three times the
average income in India build a credit history and own a valuable asset. Meanwhile, the
franchisor, SPOT, earns a profit margin that exceeds 20 percent.

Typical of franchise businesses the world over, SPOT combines the management and
financial strengths of an established corporate entity with the entrepreneurial vigor and
aligned incentives that come with business ownership.

Franchising seems to have a lot to offer frontier markets that seek to develop their local
economies. Franchise businesses are designed for replication, require less experienced
entrepreneurial talent to run a proven business format, and provide business-learning
opportunities within a defined support structure. In the last few years researchers and
the international development community have begun to promote franchising as
potentially the “next big thing” in development.

Frontier Market Challenges

22
Yet when we researched low-income markets, we found relatively few large-scale
international franchises operating in these challenging markets. For example, KFC has
only three outlets and Subway just seven in sub-Saharan Africa, a multicounty market of
800 million consumers.

Compounding the challenge of limited disposable income that constrains all businesses
in these markets, our study identified two key barriers to the growth of franchise
businesses in frontier markets: limited access to finance, and the lack of legal
frameworks to manage franchise relationships and assets.

Limited disposable income and market size: The average worker in Nairobi labors for an
hour and a half to purchase a Big Mac, vs. just 13 minutes in New York City. While sub-
Saharan Africa represents a huge potential market, it currently cannot sustain sufficient
outlets to encourage investment from the large chains. Only four of the top 10
international franchise chains have ventured out of South Africa into other sub-Saharan
markets, and then with only 30 outlets between them. Franchising requires, rather than
generates, a profitable business model. So basic economics will limit the international
expansion of large chains to larger, more affluent emerging markets (such as Brazil,
China and Russia), at least for the time being.

Limited access to finance: Small and medium-sized enterprises are poorly served by
local banks in frontier markets, leaving a large gap in financing options between
microfinance and traditional corporate lending. This gap, known as “the missing middle,”
encompasses capital needs between $10,000 and $2 million. Franchising typically shifts
the financing burden from the franchisor to the franchisee, but the franchisee in frontier
markets often struggles to access the needed capital on viable terms.

Loose legal frameworks: Business format franchising flourishes in an ecology that

includes the legal and regulatory frameworks and specialist technical and legal advisory
services it needs to prosper. The existence of these factors benefits franchisor and
franchisee alike, while their absence significantly increases the risks and costs of
franchising. A franchise conducive ecology is largely absent in sub-Saharan Africa and
south Asia, though we observed significant differences between national markets.

23
Promising Models

Having noted the formidable challenges, our research identified several promising
franchise models, such as SPOT, that have adapted and thrive in the challenging
conditions.

Home-grown chains are better positioned than Western chains: The tailored products,
pricing, cost structure and better alignment with the local enabling (or disabling)
environment of home-grown chains helps them succeed. Nando’s is a good example of
an indigenous (South African) franchise fast food business thriving in frontier markets
that have not been penetrated by better-known Western chains.

Traditional format (distribution) franchising is better suited to frontier markets than

business format franchising: Simpler is better in these markets. Traditional format
franchisors simply outsource the distribution of their product(s) to the franchisee (think
Avon vs. McDonald’s). As such, they experience fewer franchisor/franchisee conflicts,
require less capital and are less dependent on favorable legal and policy environments.
SPOT Taxi, Fan Milk (Ghana), Kegg Farms (India), Natura (Brazil) and Coca-Cola’s
Manual Distribution Centers (Africa) are all good examples of successful traditional
format franchise businesses in frontier markets.

Successful franchises have innovated to overcome frontier market challenges

Innovative franchisors address the accessto-finance challenge through partnerships

with banks and microfinance institutions, or by selling goods on consignment.
International franchisors have employed master franchise contracts to simplify the
management task and entrust franchisee management to a national entity better
equipped to manage the local environment. And successful franchisors have
compensated for loose contractual, legal and regulatory frameworks with technology. In
SPOT’s case, the radio dispatch system and, eventually, GPS provide low-cost
monitoring and enable the exclusion of “rogue drivers” from franchise benefits.

Franchising of Public Goods and Services: Promise and Problems

24
Some of the most interesting franchise models we studied were designed to deliver
such public goods and services as health care and education in low-income markets.
Socially-motivated development entrepreneurs have started creative franchises in these
sectors in the last decade. The best known examples are the Healthstore Foundation’s
chain of 85 microclinics in Kenya and Rwanda; VisionSpring’s network of 700 “vision
entrepreneurs” selling eyeglasses to lowincome consumers in India; and Living Good’s
Avon-style distribution of health and consumer products to peri-urban markets in
Uganda through community health promoters.

These chains were all started with grant capital, seeking to rapidly replicate a
standardized service with diminishing grant subsidy, and in some cases, to achieve
economic self-sustainability.

While franchising may be more efficient than the current public or foreign aid funded
delivery of health care and education services in these markets, no one has yet proven
a self-sustaining model that can meet these needs at a large scale. Sector economics in
health and education in low-income markets are especially problematic. And all of the
social franchises we studied pursued franchised expansion before establishing financial
sustainability at the unit level. This caused three key problems:

• Insatiable demand for grant-finance, focusing top resources on fundraising rather

than serving customers effectively.

• Increased conflict between franchisees and franchisor, especially with regard to how
to grow, improve and expand the business.

• Subsidized competition against new entrants who might otherwise be able to serve
the market profitably.

That the HealthStore Foundation recently decided to restructure from a grant-fueled to a

for-profit business model is telling. HealthStore’s primary goal is not to make money off
the health-care needs of the poor, but rather to finance its own growth and achieve the
desired health care benefits at a large scale. Whether this is achievable remains to be
seen, but it is certainly worth the concerted effort. We believe that local or national third-
party payors, (e.g., private or statefunded insurance or voucher schemes) will ultimately
prove more effective and sustainable than foreign grant subsidies. In any case, the
franchising of public goods and services in frontier markets warrants further empirical
research and creative, intelligent entrepreneurial effort.

25
FDI POLICY IN RETAIL
Growing liberalization of the FDI policy in the past decade has been one of the key
factors for transforming India from a closed economy into one of the favored
destinations for foreign investments. The FDI policy governs and regulates the entire
inflow of foreign investments into the country. The current FDI cap across various
sections in retail is as follows:

The government is considering in allowing foreign direct investment in multi brand

retailing as a measure to make India more attractive to overseas investors. The
proposal, piloted by the Department of Industrial Policy and Promotion (DIPP) is
currently at the discussion stage and is awaiting government clearance. Liberalization of
FDI in multi brand retail is getting closer to reality. After almost a year of deliberation,
the white paper published by the DIPP\ Ministry of Commerce and Industry, a retail FDI
draft document has been submitted to the Union Cabinet for approval. This is the final
hurdle that needs to be surpassed. One aspect seems to be clear that will be no one
shot, big-bang kind of approach toward introducing FDI in multi brand retail. Instead, we
could expect a phased liberalization approach with a number of conditions laid down, at
least initially, for foreign retailers to enter India. The conditions would be intended to
assure the opposition parties, the local retailer lobbies, the farmer and trade union etc.

26
that the government has adopted a balanced midway’ kind of approach after due
consideration of the views of all stakeholders involved.

On 10th Jan, 2012 Indian Government allow Foreign Investment to float and run wholly
owned single brand retail stores even as the bigger reform measure opening multibrand
retailing to international investors remains mired in political cobweb. Currently, FDI in
retail trade in prohibited except in single brand retail trading in which upto 51% FDI is
permitted, subject to certain conditions. The DIPP, part of ministry of commerce and
Industry has now allowed FDI upto 100% in single brand product retail trading under the
Govt. approval route. However the Govt. has put on hold provisions for 51% FDI in
multibrand retail.

This relaxation in Foreign Investment norms for single brand retailing would be subject
to following conditions:

 Products should be sold under the same brand internationally.

 It would cover only those products which are branded during manufacturing.

 It would need to ensure mandatory sourcing of at least 30% of the value of the
product sold, to be done from Indian small Industries/village and cottage
Industries, Artisans and Craftsmen.

Small Industry will be defined as Industry with the total investment in plant and
machinery not exceeding $1million. The relaxation in foreign investment in single brand
retail sector comes as the compromise for the government who has been able to arrive
at a political concusses to open multibrand retail stores for foreign investors.

27
CHAPTER 03

28
AIM:
To learn about the concept of franchise and how it affects the growing retail industry of
India.

OBJECTIVES:
 To discover the history and origin of the concept of franchise.
 To find out what defines a franchise in the retail industry.
 To find out the impact of franchise on the Indian Retail Industry.
 To find out the various advantages and limitations of opening a franchise.
 To figure out how to counter said limitations as to benefit the retail industry.

29
CHAPTER 04

30
METHODOLOGY:
The data available on this report are obtained from various sources. Some
of them are

 Internet
 Newspaper
 Advertisement
 Field visit
 Survey

The data were primarily collected from the e -portals of the newspaper,
government websites and other travel portals.

31
CHAPTER 05

32
DATA ANALYSIS:

33
34
35
CHAPTER 06

36
 CONCLUSION
Franchising in India has been consistently growing at more than 30 percent for the past
five years, according to the Franchising Association of India. Several international
brands have entered the country through franchising in the last few years. Franchising
in India is being positively received as it creates jobs and wealth at the local level. More
than 750,000 jobs are attributed directly to franchising and more than 90,000
franchisees are operational in India, says the trade group.

Liberalization and economic reforms have had an immense positive impact. The young
people in India are reaping the dividends of its economic reforms. Gone are the days of
slow growth, frugal lifestyles and unbranded products. Indeed, the rise of the young
Indian urban consumer has been a feature of India’s economic transformation over the
past decade. In their mid-twenties, members of this segment do not think twice before
spending on expensive global brands. They are comfortable buying on credit, and have
bought a house and a car, something their parents could never have dreamt of doing in
their youth. The house is an investment for them and the car is an indulgence.

Lessons to Learn from Franchises

Food Concepts and Direct Franchising

Pizza Hut has more than 150 restaurants across 36 cities, including Delhi, Mumbai,
Bangalore, Chennai, Kolkata, Hyderabad, Pune and Chandigarh. Fifty percent market
share is organized in the pizza-retailing segment.

Employing economies of scale, Pizza Hut has made its offerings more affordable. Its
delivery offer of U.S. $4.40 for four personal pan pizzas has been very successful,
helping it grow its sales by 25 percent percent. They have recently introduced a range
of vegetarian personal pan pizzas for U.S. $1.10.

Indians look for value for their money. To build a sizeable market share, it is important
to be able to compete locally. Competition in several segments is mostly from the
unorganized segments. These local business owners are quick to imitate and offer low-
quality, personalized service at a reasonable price.

37
Markets in India are for the masses; volumes in most segments build profitability. A
leading international fast-service chain managed to break even only after 10 years. It
takes some time to get the right product mix and to click with the target audience. The
master licensee should be adequately funded until the venture reaches the break-even
point.

Several franchisors have appointed master franchisees for India, but have been unable
to make an impact because of a mismatch between the company’s overall vision,
values and goals with that of the master franchisee. Master franchisees typically
consider a three-year period for positive cash flow to be achieved.

Expansion Strategies

Pizza Hut has expanded into 12 to 13 new markets including Trichy, Nagpur,
Bhubhaneswar, Thiruvananthapuram and Pondicherry to increase penetration.
Metropolitan areas are closer to saturation, whereas markets in smaller towns and cities
are open. International chains are aggressively buying into the mall mania and
establishing locations with franchise partners.

Pizza Hut has increased its visibility by launching a well-received TV campaign aimed at
the young crowd. It has formed partnerships with recognized brands such as Nestle and
Pepsi. It also holds regular promotional campaigns targeted at children and uses these
alliances to offer packages during these campaigns.

In India, it is important to consider innovative and additional sources of revenue,

considering the ever-rising cost of real estate. McDonald’s in India offers advertising
spots to enable cross selling. Marketers responsible for such products as PlayStation,
Pixar’s film “Finding Nemo” and several other marketers focusing on the same segment
have previously had alliances with McDonald’s.

India is a diverse country with several official languages and dialects. While, the media
in major towns and cities are strong and homogenous, it is important to consider the

38
importance of local newspaper and television channels. Indians are generally not
comfortable accepting habits and cultures that they consider foreign.

The local supply chain for Pizza Hut was developed by Yum! Brands and currently 95
percent of the ingredients they use are locally produced. They now import very few
specialty items such as pepperoni. Subway (development agent model) opened in 2001
in the Saket area of New Delhi. Today it has more than 110 locations. With the high cost
of investment coming down due to localization of suppliers, raw material is no longer
imported. Restaurant equipment is also sourced locally.

Respecting Local Sentiments

Pizza Hut is one of the first international pizza chains with purely vegetarian dine-ins at
Chowpatty (Mumbai), Ahmedabad and Surat, which also serve Jain menus. Pizza Hut
has even opened two all-vegetarian restaurants in the western state of Gujarat to cater
to the Jain religious community, whose members prefer not to eat at places where meat
is served. McDonald’s in India has localized more than 70 percent of its products
catering to the Indian taste buds. International food chains typically offer only a few
localized products in other parts of the world. However, Pizza Hut’s local menu is as
large as the international one. The Indian food heritage is very rich, and hence Indians
like local flavors. The Tandoori range of pizzas, which was developed locally, has a
menu mix of which 20 percent or more is customized for the Indian audience.

To gain acceptance locally, McDonald’s had to modify its menu, substituting mutton for
beef in the burgers, (something it had never done in any other market), choosing names
like McAloo and Maharaja Mac, and introducing variations and dishes that were not
available at any McDonald’s outlet anywhere in the world. From the meticulous sourcing
of raw materials and the elimination of beef and pork from its Indian menu to even
segregating the vegetarian and non-vegetarian workers, McDonald’s seemed to be
extremely orthodox in its approach.

Retail Medicine Shoppe (master franchisee for India: Melrose Trading) started its
operations in India in 1999, with shops operational in Mumbai and several cities in
Maharashtra, Gujarat, Goa, Delhi, West Bengal, Andhra Pradesh and Karnataka.
Currently, it has approximately 125 locations.

39
With the tremendous demand of professional health care in India, The Medicine Shoppe
aims to open 1,000 stores by 2010, primarily growing through its sub-franchisee
network. It also plans to open 350 Sehat stores (low cost clinics adjacent to the shop,
primarily present in low-income areas) in the next three to four years.

US Dollar Store (master franchisee: Nanson Overseas) Single Price Shops, started
operation in 2005. Some of the most popular products are sold at US Dollar Stores,
cashing on the exotic appeal of imported goods in extremely small towns and cities,
where it has been able to rapidly scale up its customer base and franchise plans.

Gold’s Gym (master franchisee: Valecha Engineering for South Asia) was first started in
Mumbai following with centers in another five locations in Mumbai. Gold’s Gym is also in
such locations as Bangalore, Chennai, Pune, Kolkotta, Surat, Ahmedabad, Baroda,
Ludhiana and Noida. Centers in other parts of the country are fast spreading. Gold’s
Gym is recognized for its unique experience and the authority in fitness expertise. In
India, people relate fitness to yoga, meditation, dance, cycling, jogging and hence,
Gold’s Gym offers tutors specializing in these areas.

Cookie Man India (Australian Food India Pvt. Ltd is a joint venture that has the master
franchise rights) started operations in 2000 and operates more than 50 franchisee-
operated units across India. The franchise serves premium cookies and is presently
located at several high-street malls.

Cartridge World (appointed AFL Pvt. Ltd. master franchisee for South Asia)

CW India started operations in 2006 and has grown rapidly with more than 45 franchise
locations. The company is the winner of the Indian Franchising Awards, organized by
the Franchising Association of India.

Legal Aspects of Franchising in India

Most foreign-local joint ventures work on strict documentation. For franchises of strong
foreign brands, the franchise structure is usually an Indian adaptation of the usual

40
structure followed by the franchisor in his country. Although India has no franchise-
specific legislation, it does have very effective statutes that govern a franchise contract.
A robust franchise structure in India would have to be documented appropriately,
considering the applicable local legislation.

The most common structures involve the franchisor bringing in the technology and the
intellectual property rights and the franchisees contributing capital and local expertise.
The franchisor owns the trademark, trade process and know-how. The franchisor is
usually expected to provide training and assistance to the franchisee to enable him to
operate the franchised outlet. The franchisor is required to supervise the outlet and
ensure proper compliance of the franchisee to the franchise system to protect and
maintain the integrity of the brand. The franchisor is also responsible for the
advertisement and promotion of the franchised brand. The franchisee, on the other
hand, is required to obtain and maintain the premises for running the franchised outlet.
He is required to operate the franchised unit in accordance with the directions of the
franchisor.

The usual revenues charged are lump-sum franchise fees or royalties, training fees,
advertisement fees and so on. Following a 2004 amendment, no approval is required
from the Reserve Bank of India for the remittance of fees for the use of a franchise.
Subsequently, in 2006, further relaxation has resulted in remittances even for the
purchase of a franchise being freely permitted. Exchange control regulations have been
liberalized, thereby ensuring a level playing field for all.

It is recommended that the initial application should state a broad category of products
to avoid subsequent applications. For this purpose, products are generally classified
using the Indian Trade Classification based on the Harmonized Commodity Description
and Coding System for reporting trade statistics issued by the government of India.
Code numbers are allotted for different product categories. Chapter 85 of the ITC (HS)
classification code contains code numbers for various electrical products. For example,
if Apple has already obtained a license for the product category in which iPhone falls
(Code No. 8525) by the initial application itself, then it need not make a fresh
application.

Recruiting the Master Franchisee

41
Several consultants claim to assist international companies in their expansion needs.
This is not necessarily cost and time-effective. For American brands, the Gold Key
Matching Service program of the U.S. Commercial Service is another worthwhile option
to consider.

Franchise trade shows are also an effective platform to exhibit and promote products
and services. The next premier national exhibition for the Indian franchising industry is
the FAI Convention and Expo, scheduled Oct. 2 to 3. Several international exhibitors
have successfully appointed India master franchisees through such platforms and these
should be considered for initial market study and recruiting master franchisees.

42
CHAPTER 07

43
LIMITATIONS:
 International Standards: Even though India has well over 5 million retail outlets of
different sizes and styles, it still has a long way to go before it can truly have a
retail industry at par with International standards. This is where Indian companies
and International brands have a huge role to play. Inefficient supply chain
management: Indian retailing is still dominated by the unorganized sector and
there is still a lack of efficient supply chain management. India must concentrate on
improving the supply chain management, which in turn would bring down inventory
cost, which can then be passed on to the consumer in the form of low pricing.
 Lack of Retail space: Most of the retail outlets in India have outlets that are less
than 500 square feet in area. This is very small by International Standards. Cultural
Diversity: India's huge size and socio economic and cultural diversity means there
is no established model or consumption pattern throughout the country.
Manufacturers and retailers will have to devise strategies for different sectors and
segments which by itself would be challenging.
 Real estate issues: The enormous growth of the retail industry has created a
huge demand for real estate. Property developers are creating retail real estate at
an aggressive pace. With over 1,000 hypermarkets and 3,000 supermarkets
projected to come up by 2011, India will need additional retail space of
700,000,000 sq ft (65,000,000 m2) as compared to today.
 Human resource problems: Trained manpower shortage is a challenge facing
the organized retail sector in India. The Indian retailers have difficulty in finding
trained person and also have to pay more in order to retain them. This again brings
down the Indian retailers profit levels.
 Frauds in Retail: It is one of the primary challenges the companies would have to
face. Frauds, including vendor frauds, thefts, shoplifting and inaccuracy in
supervision and administration are the challenges that are difficult to handle. This
is so even after the use of security techniques, such as CCTVs and POS systems.
As the size of the sector would increase, this would increase the number of thefts,
frauds and discrepancies in the system.
 Challenges with Infrastructure and Logistics: The lack of proper infrastructure
and distribution channels in the country results in inefficient processes. This is a
major hindrance for retailers as a non-efficient distribution channel is very difficult
to handle and can result in huge losses. Infrastructure does not have a strong base
in India. Urbanization and globalization are compelling companies to develop
infrastructure facilities. Transportation, including railway systems, has to be more
efficient. Highways have to meet global standards. Airport capacities and power

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 supply have to be enhanced. Warehouse facilities and timely distribution are other
areas of challenge. To fully utilize India's potential in retail sector, these major
obstacles have to be removed.
 1. Control: Some franchisors exert a great degree of control. No decision can be
taken by the franchisees without consulting the franchisor.
 2. Ongoing Costs: Besides the original franchise fee, royalties, a percentage of
franchise’s business revenue, will have to be paid to the franchisor each month.
 3. Lack of Support: All franchisors do not offer the same degree of assistance in
starting a business and operating it successfully. Assistance is provided only at the
time of starting the business.
 4. Expensive: Buying a well-known franchise is very expensive. Entrepreneurs
must have the ability to arrange the necessary finance.
 5. Time consuming: Lot of time is required while selecting a franchise. A complete
and thorough research is required to select the right franchise and to determine
whether it would work for the business or not.
 6. Misunderstanding: Franchise is a complex procedure and disputes may arise
between the franchisee and franchisor.

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SUGESSTIONS

Strong distribution and logistics network:

It is imperative for a retailer to have a strong distribution and logistic network to
succeed in this sector. Players follow a distribution network that suits them the
best. For example, Shoppers Stop follows a “hub and spoke” model for its
distribution network to increase efficiency and productivity

Marketing innovation:
In March 2017, PepsiCo Inc. announced the launch of ready to cook breakfast
items like khichdi, dosa, idli etc., which would be sold under the brand namely
Quaker Nutri Foods. In March 2017, Parle launched Frooti its iconic drink in a fizzy
version, it’s the first innovation in the brand since its launch 32 years ago.

Focus:
As of February 2017, Tanishq is focusing on expanding its large format-retailing
concept, with re-launching their showrooms in Velachery. The Future Group will
set up 4000 “neighbourhood” retail stores in the next 3-5 years as a part of its
focus on small stores. The brand will increase the number of stores from 538 in
March 2017 to 1000 by September 2018. In May 2017, Myntra voiced intentions to
increase their market penetration by spending on technology and buying more
brands instead of spending on discounts and marketing.

Omni-channel retailing:
Retailers are opting for many channel to maximise sales, Omni-channel retailing is
being adopted by many retailers in India. For example, Shoppers Stop is making
efforts to be an omni-channel retailer. Ezone has launched an online platform,
which has led to increase in sales In February 2017, Myntra became the 1st e-
commerce brand to manage the fashion brand -- Mango’s omni channel presence,
globally.

Changing the perception:

Retailers benefit if consumers perceive their store brands to have consistent and
comparable quality and availability in relation to branded products. For this,
retailers are providing more assortments for private level brands to compete with
supplier's brand. New product development, aggressive retail mix and everyday
low pricing strategy help to get edge over supplier's brand

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Offering discounts:
Most retailers have advanced off-season sales from 15 days to a month with
discounts of 20-70 per cent on certain products. Higher discounts and other value-
added services for members.

Lowering prices:
Certain retailers adopt ‘first price right’ approach. Retailers do not offer discounts
under this strategy: they directly compete on the selling price by offering a best
price without any markdowns.

Leveraging partnerships:
To keep customers on shop floors for a longer time and increase conversions,
retailers are now pitching to partner with manufacturers, service providers, financial
companies, etc. to create a buzz around certain product categories.

Strong supply chain:

Critical components of supply chain planning applications help retailers to maintain
profit margins. Retailers develop innovative solutions for managing the supply
chain problems. Innovative solutions like performance management, frequent sales
operation management, demand planning, inventory planning, production planning
and lean systems can help retailers to get advantage over competitors.

Joint Ventures:
To diversify the product offerings and tab the growing luxury retail segment,
retailers are forming joint ventures with foreign luxury brands. Reliance Brands Ltd.
formed a joint venture with Bally, a Swiss luxury brand, to exclusively market its
products in India.

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BIBLOGRAPHY

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