FRANCHISING

SREEGURUDAS
S4 MBA
FRANCHISING:
Running your own business
by duplicating the success
formula of the franchisor

You are in a business for yourself,

but not by yourself. The franchisor is
always there to help.
FRANCHISE SUCCESS RATE
VS TRADITIONAL RETAIL
100

100
Franchise
50 90% 50

0%
% 0
1
2
3
4
5
6
Traditional
Traditional
Years 7
8
Retail
Retail
925%
25%
10
 What is franchising?
• “A franchise operation is a contractual
relationship between the franchisor and
franchisee in which the franchisor offers or is
obliged to maintain a continuing interest in the
business of the franchisee in such areas as know-
how and training; wherein the franchisee
operates under a common trade name, format
and/or procedure owned or controlled by the
franchisor, and in which the franchisee has or will
make a substantial capital investment in his
business from his own resources.”
 CONT…
• Legal and commercial arrangement concerning the
successful business of a franchisor
• Use of franchisor’s trade name, format, system and/or
procedure under licence
• Means to raise capital and expand quickly
• Assistance to franchisee
– Marketing, management, advertising, store design, standards
specifications
• Payment by franchisee by way of royalty, licensee fee or
other means
 TYPES OF FRANCHISE
• 3 main types of franchise:

– Product distribution franchise;

– Business format franchise; and
– Management franchise.
 Product distribution franchise;

• Examples of famous product distribution

franchise:
 PRODUCT DISTRIBUTION
FRANCHISES

Produces the syrup

concentrate

Sells the syrup

concentrate

FRANCHISEE Produces the final

drink

Retail Stores
Vending Machine
Restaurants & F&B
Operators
Outlets
 BUSINESS FORMAT
FRANCHISING

• In a business format franchise, the integration of

the business is more complete.

• The franchisee not only distributes the

franchisor’s products and services under the
franchisor’s trade mark, but also implements the
franchisor’s format and procedure of conducting
the business.
Famous Examples
 BUSINESS FORMAT FRANCHISING
-

outlet in outlet in
Sale, Australia Marseille, France
 MANAGEMENT
FRANCHISE

• A form of service agreement.

• The franchisee provides the management

expertise, format and/or procedure for
conducting the business.
Famous Examples
 WHY FRANCHISE?

• Franchises offer ongoing support

– training
– national and regional advertising
– operating procedures and operational
assistance
– supervision and management support
– increased spending power, access to bulk
purchasing and economies of scale
Common considerations of franchisors

• Developing franchise concept

• Market research
• Familiarity with local laws and regulations
• Providing training and support to
franchisees
 Common considerations of franchisors

• Criteria for choosing franchisees

• Control over franchisees
• Supply of products/materials to franchisees
• Intellectual property rights issues, e.g. trade
mark registration
Common considerations of franchisees

• Demand
• Profitability of franchise, and length of
time required to recoup investment
• Track record of franchisor
• Support rendered to other franchisees
 Franchisor–Franchisee relationship

Regulated by contract which usually covers:

• Initial fee
• Royalty fee/Management fee
• Capital required from franchisee
• Territory/Area of operation
• Duration of license and renewal
 Franchising in India
• Revolutionary year - 2010,
• Booming entrepreneurship: 1800 Home Grown Franchisors &
2,00,000 Franchisees
• 85% success rate in franchising Vs. 90% failure in self start ups
• Franchise industry estimation has towered up to over US$ 7
billion
• Highest retail outlet density in the world to up to approx. 12
million
• Remains the best entry & expansion strategy
• SMEs are the key economy drivers
• Employs over 97,00,000 employees directly or indirectly
Ratio of Franchisors Food vs. Non-Food

Food 46%
41% 345
Non food 40% franchises
46.8%
54%
59%
47% 60%
405
48% 53.2%
70% 53% franchises
52%
30%
1995 1996 1997 1998 2000 2001 2003
HIGH GROWTH AREAS IN FRANCHISING
Based on a USAID-funded study

 BUSINESS SERVICES HEALTH SERVICES

 SECURITY SERVICES COSMETICS AND TOILETRIES
 PRINTING AND  MAINTENANCE AND
ELECTRONIC CLEANING SERVICES
PUBLISHING  LAUNDRY SERVICES
 FOOD AND  HOTELS AND MOTELS
BEVERAGE  RETAIL
 CAR SERVICES &
ACCESSORIES
 Why is franchising important to
SMEs?
• Leveraging on a recognised brand name
• Enhancing business image
• Ensuring consistent quality
• Attaining higher productivity/better motivated
staff
• Access to good locations
• Economies of scale
• Reducing risks of failure
 Franchising in India
• Acceptability growing by the day
• Fairly conventional industry spread
• Approximately 600 franchisors spread across industries like
education, retailing, professional services, healthcare etc
• Over 40,000 franchisees
• Annual turnover from Franchising – anywhere between
Rs.8000-Rs.10,000 crores
• Total investments made by Franchisees – over Rs.5000
crores
• Over 300,000 people directly employed by franchised
businesses
• Variety of hybrid formats in practice
• Number of International franchises already existing, more
coming in
 Factors Defining the Growth of
Franchising in India
• Positive Factors

– Huge consuming class

– Fast-growing consumerism
– Shift towards Services from Agriculture &
Manufacturing
– Franchising has already proven to be successful in
several sectors
– Large entrepreneurial pool
• Negative Factors

– Lack of regulatory framework

– Financing mechanisms not in place
– Skewed real estate markets
 Franchising Trends in India
• The Education sector dominates the Indian franchising
scenario, although Retail is fast catching up
• Most of the franchisors are relatively new and small
• Several large Indian corporates also going the
franchising way
• Newer & innovative concepts being introduced
• Substantial interest from international franchisors as
well as Indian business houses for master franchises
• Franchising is now spread across the country, thereby
providing opportunities to entrepreneurs everywhere
 Benefits of Franchising
• Franchising allows the franchisor to:

– Have greater access to capital

– Expand rapidly
– Save operating costs
– Capitalise on the abilities of independent
entrepreneurs
• Franchisees joining a franchise system enjoy the
following benefits:

– Backing of a bigger organisation

– Established trade mark or service mark

– Economies of scale
– Joint advertising and promotion
– Transfer of management expertise
– Training & support from the franchisor
 Critical Success Factors for a
Franchise System
Ranking Factors

1 A Well Established Business Network

2 Constant New Product Development

3 Innovative Products / Services

4 Quality of Franchisees

5 Transparency

6 Return on Investment to Franchisees

 Most Common Causes of Friction
between Franchisors & Franchisees
Ranking Causes of Friction

1 Transparency

2 Training and Support

3 Revenue Sharing

4 Product / Service Delivery

THANK YOU…..!