Taking the Franchising Route to Growth in Retailing
Abhinay Verma
abhinay@email.com
January 2008
Introduction
Franchising can be defined as a contractual bond between a franchisor, who has developed a brand and a business format through usually a long experience of selling the product or a service and the franchisee who usually provides the capital and the entrepreneurship at the retail outlet level. Pioneered way back in the 1840s in Germany, it was in 1851 in US that Isaac Singer of the Singer Sewing Machines introduced what is generally known as Business Format Franchising today. He introduced one of the most sophisticated written franchise contracts, which is still considered the basis of modern franchise agreements.
Global and Indian Scenario in Franchising Across the world, franchising has emerged as the fastest and most popular route for expanding business operations. Franchising in all developed countries is an extremely popular business model for reaching the consumer. In US with over 3, 20,000 franchised retail outlets, it accounts for USD 1 trillion in retail sales and constitutes nearly 50% of the total retail trade. Franchising is becoming a key part of growth pattern in Asia. However, franchising in India is yet to take off and accounts for less than 5% of country's GDP. Traditionally, local franchising in India was limited to clothing and footwear brands. Franchising as a business model has been known for decades as a business model starting with Bata Shoe Stores but it was the IT industry which made the concept of franchising acceptable to people across the length and breadth of India. Franchising is a fast growing sector of the economy with substantial employment generation potential. In a vast country like India with over 1 billion population and rapidly changing life styles and growing awareness in the consuming class wanting continuous improvement in the quality of products and services, the scope for growth of Franchising is tremendous. This growth will come not only through the foreign franchisors coming into India but also through the growth
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of a number of Indian Franchise systems like Aptech, NIIT, Color Plus and a host of emerging franchise business in the area of health care, beauty parlours and the like. The sectors in which Franchising is making rapid strides are education, specialty retailing, apparel retailing, food and beverage, and beauty. Global franchise organizations like Pizza Hut, Marks and Spencer, Subway, McDonald’s, KFC are bullish on the potential of franchising in India and have started their operations here. Globetrotters are more likely to do their shopping in franchised stores.
What makes franchising an attractive model? Franchising is a marketing format, a very powerful way of retailing goods and services. From the perspective of a franchisor, franchising represents an efficient method of rapid market penetration and product distribution without the typical capital costs associated with internal expansion. From the perspective of the franchisee, franchising offers a method of owning a business but with a mitigated chance of failure due to the initial and ongoing training and support services offered by the franchisor. From the perspective of the consumer, franchised outlets offer a wide range of products and services at a consistent level of quality and at affordable prices. Thus, enabling a win-win situation for all the three parties involved. More importantly, in a country like India where cultural diversities make retailing a big challenge, franchising allows companies to think global and act local. As a result of having franchised outlets, a brand owner based in North India does not have to worry whether he will be unable to identify with his potential customers in the south. He knows that his franchisee in the South, who is a local and understands the particular market, will take care of the local business needs. Hence, he does not have to worry about lack of identification at the retail level. Nor does he need to invest in the costly process of setting up his own outlet, finding the right people, managing large number of culturally diverse stores on a daily basis and so on. Thus, the franchisor can extend his reach without having to invest substantial amount of money in new markets.
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Benefits of Franchising vis-Ă -vis Standalones Compared to standalone entities, a franchisee business is a viable option for the retailer when entrepreneurs who want to run their own businesses want to keep their exposure to risk at a minimum. Global small business statistics indicate 50% of the new businesses close within the first three years of trading. Only 10% of new businesses reach the 10th year of business operations whereas 90% of franchise operations are successful. This is so because franchised businesses are more likely to succeed than many other start-ups because they have a proven track record and have established and effective processes in place. The real difference between franchises and independent businesses is not what they do but how they do it. Getting into the franchise model of business gives these entrepreneurs a head start in the market as they benefit from the experience, support, research and innovation of the franchisor. Being a franchisee also enables you to operate in a larger business arena than you would be able to if you were a standalone firm. Therefore, you get to benefit from economies of scale and better business deals. Franchisees contribute towards a common advertising fund, which enables them to spend on media. This expenditure would not be possible had it been for a standalone. In a nutshell, an entrepreneur gets a complete business system when he opts for the franchise model. Franchising is not a good choice for maverick entrepreneurs. Franchised operations call for uniformity and do not encourage system-wide creativity and innovation. Go for it if you value security of working with a known brand more than the freedom of choice.
Building a Successful Franchise business Franchising is basically the replication of a successful business model format across locations through likeminded partners. That said, it takes more than a proven model and a likeminded part to overcome the challenges of building a successful business. A successful franchise business
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requires specific steps to be followed by the franchisor and the franchisee and the observances of some simple yet best practices of the business. Core ideals such as trust, truth and honesty, mutual respect and reward, open and frequent communication, adherence to the law, conflict resolution and support of the code, are the tenets of healthy franchising. Something as basic as open communication between franchisors and franchisees and honoring the basic franchise agreement often means the difference between success and stagnation. Managing Quality is also critical to the success of the franchise business. It is important for franchisor to develop the systems and tools necessary to ensure the consumer receives a consistent experience. That means start-of-the-art operations manuals, training programs and a commitment on the part of management to inculcate these standards within the organization. As a franchisor, it is important for you to erect barriers to entry and plan for change. If you have an undifferentiated product or service with low barriers to entry, your business will quickly become commoditized. You must anticipate and adapt to changes in the competitive landscape over time. When McDonald’s first started franchising, it had a much more limited menu. It did not have Big Macs, Filet o Fish or salads. It did not have Ronald McDonald. It did not have drive-thru windows. But it continued to adapt and thrive.
Choosing the right franchisee Quality franchisee selection is essential for building a successful and prosperous franchise network. Franchisee selection is critical because of the following reasons: 1) A franchisee’s level of success is going to be largely determined by what he or she brings to the business. A paper to the American Bar Association on "The Psychology of Franchising" revealed that 40% of a franchisee’s success will come through the application of their own hard work and talents. The capability of the franchisee will also determine the contribution they make to the broader business, including the amount of local market share they fight for and the royalty revenues they contribute back to the franchisor.
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2) When a franchisee fails, not only do they lose their own investment, the franchisor also faces significant financial loss. First consider the direct and indirect resources required to support a failing franchisee, including additional staff, travel costs, management time and professional resources. Then there is the loss of royalty revenues and local damage to the brand. These costs will typically add up to $250,000 for a retail franchise and can be in the tens of thousands of dollars for a service-based franchise.
The role of the franchisee Since it’s the franchisee that runs the business on the ground, the success of the franchise business is governed by the characteristics of the franchisee. A franchisee needs to do the following to make the business a successful one: Maintain good relations with your franchisor Communication should be regular and two-way and any advice given acted upon. Whatever issue you may be encountering, you can be sure that someone else must have faced a similar situation before and your franchisor will be able to assist you. A good franchisee candidate is someone who will let the franchisor help and support them. The motto of franchising is that you are in business for yourself but not by yourself. Use the expertise and knowledge bank your franchisor has developed rather than re-inventing the wheel yourself. After all, this is the reason why you have joined a franchise and not gone out on your own. Keeping an eye on the cash flows Refer to your original forecasts and projections and use them to make informed decisions about your business. Do not underestimate the working capital that is required to run the business on a day-to-day basis. Market Your Business Monitor the impact of all the marketing activities you have undertaken. Talk to people and use your contacts to make the people aware of your business.
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Create and Manage Goodwill Successful franchisees always have excellent interpersonal skills and can effectively interact with their employees and customers. They use these skills to create loyalty, value and trust. Look for ways to become more efficient It is too easy to become distracted when you are working for yourself with no one to report to. Time spent planning and preparing saves time in the long run and will increase your efficiency. Be flexible and regularly challenge every task associated with running your business. Keep the paperwork up-to-date and invest in IT systems wherever possible. Avoiding Risks Successful franchisees are typically risk averse. They are willing to take some risk but want that risk to be as small and controlled as possible. Therefore, they choose a strong franchise system with a proven track record. If you are careful and thorough in your franchise research so you know just what you are signing up for, then you have the stuff to triumph as a franchisee. But before you begin research on a franchise company, do some soul searching about your own assets and how they fit with a franchise opportunity. Doing Whatever It Takes Successful franchisees have a willingness to do whatever it takes to get the job done. This attitude shows in their every action--putting in long hours, handling multiple tasks. No matter what franchise you're interested in, you can be sure it's going to take work to make it successful. The best franchisees know and accept that fact. The discussion above yields us the following insight: ƒ
A franchise works best when each of the two parties brings a high number of unique skills and competencies.
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The clearer the definition of the value brought to the franchise by each partner, the higher the resulting performance. Page 6 of 9
Formalizing organizational structure to work through any discrepancies in success perceptions will result in higher performance.
Jointly devising the form and structure of the allocation roles and responsibilities will enhance franchise operations.
Can the principles of franchising be applied to any retail venture? Not all businesses are suitable for franchising but most business concepts can be. In certain industries especially consulting services, independent business start-ups are found to be more profitable and their survival prospects are better than those of franchises as a franchisee is bound to pay royalties and make regular contributions to the advertising fund. A business must possess the following characteristics to be able to be successful in a franchise model: Profitable – Franchising is not a means of rescuing a business that is under-performing. The business should be successful and profitable since at least the last 3-4 years. Unique – Your business needs to have a unique selling proposition or USP that will allow it to be differentiated from competitors. This sustainable competitive advantage would allow it to compete successfully in its' market nationally, with possible potential to expand internationally. That doesn’t mean your concept must be the first to the market. Uniqueness may come from twisting an existing service to gain a competitive position against which your competitors cannot or will not respond. This is illustrated by the example below: Burger King vs. McDonald’s A couple of years after McDonald’s began its incredible run, Burger King joined the fray, and was able to grow in near lockstep. They did that, not by copying the McDonald’s formula, but by carving out a position in the marketplace where McDonald’s chose not to respond— allowing the customer to “have it their way.” And while they are not the next McDonald’s, one might argue that they are the next best thing.
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Transferable – You need to have a business where the systems, procedures, expertise, skills and know-how can be transferred to others. The franchise can succeed only if the business is manageable across locations. The business should be on a format that can be shared with likeminded entrepreneurs for implementation. Supporting – The franchisor needs to have the ability to provide ongoing support to the franchisees. Affordable – If the franchise is very expensive there will be very few people who could afford to buy into your network. In addition, the franchisors business must have credibility with the customers. It is better to position your franchise system in developing areas. This is the best strategy since other competing brands might not have a presence in such areas.
Conclusion It can be deduced that while there is no doubt that a franchise model helps entrepreneurs grow faster and with much less risk, one needs to determine the fit before committing oneself. This involves doing the initial research to identify the right franchisor and then going all out to market your venture. While there are obvious benefits, there are costs and restrictions as well. If you can follow the tried and tested formula developed by the franchisor, it is likely that you will reap rich rewards. Franchising is going to be a big thing in India and it will be prudent if due attention is paid to service quality in order to create the right kind of competitive advantage.
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References Franchises without borders, Stephen Spinelli, Business Strategy Review, London Business School, Spring 2007 Business Tactics, Dhawal Shah, Retail Biz, May 2006 Web Resources http://franchisetips.wordpress.com/2007/11/11/how-to-create-and-build-successful-franchise/ http://www.franchisetrade.com/articles/franchise-owner.htm http://www.entrepreneur.com/franchises/buyingafranchise/franchisecolumnistjeffelgin/article609 86.html http://www.smartcompany.com.au/Growth-Resources/Franchising/Best-practice-in-franchiseeselection-.html http://www.whichfranchise.com/franchiseyourbusiness.cfm http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article17 1428-2.html
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