FAI Franchising-Report-by Dheeraj Gupta

FRANCHISING IN INDIA: METRICS AND MEASURES
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AN ARGUMENT FOR LARGE SCALE ADOPTION
March 2014
For
Franchising Association of India

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THE INDIAN MARKETPLACE
PICTURE SOURCE:thepolishblog.org
Population 1,220,800,358 (2013 est.)
Growth rate 1.51% (2009 est.)
Birth rate 20.22 births/1,000 population (2013 est.)
Death rate 7.4 deaths/1,000 population (2013 est.)
Life expectancy 68.89 years (2009 est.)
India houses 17.5% of the world's population, and is projected to be the
worlds most populous country by 2015.
Its population growth rate is 1.41%,

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India has more than 50% of its population below the age of 25 and
more than 65% below the age of 35. It is expected that, in 2020, the
average age of an Indian will be 29 years, compared to 37 for China
and 48 for Japan.
India will spawn new business models, innovative brands and adopt
globally successful formats with its own unique ‘tadka’.
One of the most promising sectors is franchising.
This report captures the ecosystem and factors that will impact the
large scale adoption of franchising in India.

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FOREWORD: C.Y.PAL-National President FAI
Franchising is a high growth services sector of the Indian economy and
has already got a huge number of small investors involved, has generated
lakhs of jobs and is slated to grow to an over Rs 20,000 crore Industry in
about 5 years as indicated by a recent KPMG – FAI joint study report.
This knowledge paper on measures and metrics of Franchising by
Dheeraj Gupta with his long and valuable experience in this domain will
therefore provide great help and insight into the do’s and do’nts of
Franchising and how to go about doing business in this area and will be
of good value particularly to new investors.
C.Y.Pal
National President.

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PREAMBLE: Dheeraj Gupta, Certification Head, Franchising
Association of India.
The large scale adoption of franchising systems in India is incumbent
upon various factors.
While a qualitative assessment of these factors is possible by senior
industry players, the new incumbents are looking for data and evidence of
what category of people has adopted by natural course.
Hence the aim of this report was to distil the crux of conversations with
people who are
1. Franchisees of existing international brands
2. Franchisees of existing Indian brands
3. People who want to take up franchising but haven’t done so yet
4. Collate available secondary data on the industry
5. Evaluate views put out by the top master franchisors for
international brands in the country, at industry fora
6. Speak to Indian master franchisors
The objective of embarking upon this exercise was to evaluate
1. What is the age group of the average franchisee in India
2. What are the categories that have taken off w r t franchising in
India.
3. Percentage women in the franchise ecosystem, their role to develop
this ecosystem.
4. What economic class of people is going in for franchising?
The report aims to capture franchising today, not necessarily foretell any
trends for the future. Also, for existing franchisees, and those
contemplating franchising, parts such as what to look for and legalese
may be useful.
FAI intends this report to be a sign of the current times. Hopefully, this
report will be an annual feature.

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FRANCHISING DEFINITION
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, 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.”
or in other words Arrangement where one party (the franchiser) grants
another party (the franchisee) the right to use its trademark or trade-name
as well as certain business systems and processes, to produce and market
a good or service according to certain specifications.
1. Legal and commercial arrangement concerning the successful
business of a franchisor.
2. Use of franchisor’s trade name, format, system and or procedure
under license.
3. Means to raise capital and expand quickly.
4. Assistance to franchisee in Marketing, management, advertising,
store design, standards specifications, training.
5. Payment by franchisee by way of royalty, licensee fee or other.
6. Franchising is more than distributorship which extends to an entire
operation or method of business with greater assistance,
control and longer duration but on the other hand distributor merely
re-sells products to retailers or customers.
Source
http://ijarcsms.com/docs/paper/volume1/issue7/V1I7-0019.pdf
Volume 1, Issue 7, December 2013 pg.106-112

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CONTENTS
 Context
 Key Findings
 Summary of conversations: franchising as a plug and play model.
 Key word in conversations: Jugaad.
 How to assess whether a franchise opportunity is good for you.
 Women in franchising:the India story.
 RoI in Franchising
 Why some people stay away from franchising?

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CONTEXT
India, which has a growing middle-class of over one billion people, is
now positioned as a major force in the global economy and a fertile
ground for investment in retail and business development.
Franchising is becoming new business in India and investors are also
taking interest in this.
The franchising industry in India is expected to grow at an annual rate of
30 percent, and to drive the country’s current $330 retail sector even
higher.
India's retail sector is growing at more than 8% percent a year.As per
statistics from the Franchising Association of India, franchises currently
account for only two percent of retail revenues in India compared to
almost 50 percent in the US. However, that two percent is growing at a
fast pace, and the implications point to astounding market potential.
The success rate for individual franchise business owners in the US is 92
percent, and since franchise businesses are based on proven systems, the
success rate for Indian franchises should be comparable. Franchise
business in India is growing at a swift pace of 35 -38 per cent per annum.
India offers a huge potential for education entities looking to spread their
concept in India through franchising and educating the young Indian
population.
In India, professional and vocational skills capturing almost 33 per cent
of the total share of franchising followed by IT training.
We take the numbers available in the ecosystem and put them into
perspective for the future.

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KEY FINDINGS
Over a three year period, and personal interviews with over 2300
franchisors, franchisees and franchisee seekers; the following data
points have emerged.
The conversations to arrive at these measures are spread over the
report
1. 70% of fathers prefer that their sons adopt the franchising route to
entrepreneurship, vis-à-vis start their own business.
2. Women form less than 5% of the franchisee base in the country
right now. Investment and time required are the two most
important considerations.
3. Adoption of franchisees is highest among category SEC B+ with
family savings of approximately 30 lacs. These are the ones that
take up single unit franchisees.
4. Adoption of master franchises is high among category SEC A+
with more than one master franchise. Their family savings are
approximately in the range of 2 crore upwards.
5. Factors that govern which franchise opportunity seems lucrative
are
a. Average initial investment (franchise fees plus equipment costs)
30%
b. Total existing locations and geographies (the more the better)
28%
c. Closure rate (the number of closings in the last three reported
fiscal years divided by the total number of existing
locations)12%
d. Growth in the number of outlets in the last three years 16%
e. The number of training hours (the more support from the HO,
the better). 7%
f. Marketing and advertising outlays of the franchisor. 7%

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6. Vocational skills, professional courses, IT and the beauty industry
are the top contributors to franchising in India.
7. Men may have more than one company’s franchise, (4-5%),
women prefer exclusively to tie up with one organization and grow
that over a single or multiple units as per the response they get
8. 98% of women franchisees in India are married women.
9. Franchising , in India is growing at 30% year on year.
10.All industries and all franchise models are not for everybody. The
gestation periods are different, so is the investment.

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SUMMARY OF CONVERSATIONS
FRANCHISING IS A PLUG AND PLAY MODEL
Franchising provides benefits for both seller and buyer. For franchisors,
the primary benefit is the ability to use other people's money to expand
the brand more rapidly than they could either on their own or through
investors or lenders. The initial franchise fee and ongoing royalties they
collect allow franchisors to build their brand without sacrificing control to
outsiders or the pressure of repaying lenders. The fees and royalties are
used to fund operations at corporate headquarters, train and support
franchisees, market and advertise the brand, improve the quality of goods
or services, and build the brand in the marketplace.
For franchisees, benefits include: a higher chance of success than in a
sole proprietorship; in fact, in India 70% of fathers prefer that their sons
adopt the franchising route to entrepreneurship, vis-à-vis start their own
business.
Some of the key reasons for this are
a. shorter time to opening
b. initial training
c. on-going support
d. assistance in finding an optimal site
e. the selling power of a known brand
f. lower costs through group purchasing
g. use of an established business model
h. national and regional advertising campaigns
i. customer lead generation through websites and centralized call
centers
j. a network of peers (fellow franchisees) to provide advice and
moral support through a company intranet, annual conferences, and
franchisee associations; and, increasingly, assistance with securing
funding.
Potential downsides for franchisees include: lack of independence, from
the goods and services they sell to the color of the paint on their walls;
mandatory company-wide promotions that may not work in their market
(price cuts, new products or services), yet cost money to implement;
costly required redesign of their unit(s); and, after signing a 10- or 15-
year contract, a change in management or ownership that takes the brand
in a new, unwanted direction.

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As with any business opportunity, there is no guarantee of success, and
there are trade-offs to be made. In some ways, franchising is like paying
condo fees instead of owning a home. In a condo association, monthly
fees are pooled for common external maintenance (mowing, snow
removal, roof repairs, etc.) -- a tradeoff many are willing to make to free
themselves to concentrate on their "core business" of living their lives (or
business) within the walls of their condo (or franchise) unit. And unlike
renters, who can be evicted (or corporate employees who can be fired or
"downsized") franchisees have some power of their own: a franchisor
cannot "fire" a franchisee who is operating in conformity with the
franchise agreement.
"Follow the system" is a mantra in franchising and critical to a
franchisee's success. Franchisees buy into the franchisor's operating
system believing that if they follow it to the letter they will succeed and
be profitable. Smart franchisors are always open to suggestions for
change (as well as local or regional variations) from their franchisees, but
any franchisee departing from the "system" without franchisor approval
risks violating the terms of the franchise agreement, which can result in
revocation of the franchisee's right to do business under the franchisor's
name. Franchisees also must agree to keep the franchisor's proprietary
system and trade secrets confidential, as well as sign some type of non-
compete agreement.
Not everyone is cut out for franchising. Some need total independence to
succeed or fail on their own, while others prefer the trade-offs found in
working for a larger organization. For the franchise partnership to
succeed, the buyer must be comfortable not only with the franchise
model, but also with the culture, values, and goals of the franchisor - and
vice versa.
In this light, many view franchising as a commitment much like marriage.
A good match between franchisor and franchisee, sharing mutual goals
over the long term, is essential to the success of each franchise unit, and
thus the brand as a whole - an essential factor that must be considered
seriously by both parties before any contract is signed.
Extract from conversations with global and Indian franchisors
References- : www.franchising.com

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KEY-WORD IN CONVERSATIONS: ‘JUGAAD’
ADVANTAGES OF FRANCHISING TO FRANCHISOR &
FRANCHISEE
We are in times where e-commerce is taking brands where normally a
franchisee would have to be employed. Physical goods and services are
being transacted online with logistical support.
Hence, its critical to have the value proposition of your franchising model
in place.
1. Modern functional optimal Layout.
2. Standardized customer service.
3. Backing of well known, experienced, promoters and professionals.
4. Opportunity to identify and tap an untouched market.
5. Proven process implementation to help to stimulate revenue.
6. Reduction in the process of ‘re-inventing the wheel.’
7. A franchise helps the business to grow in different cultures climes
and economic system.
8. No need of direct control as in case of subsidiary.
9. The international market for expanding brands is vibrant e-
commerce and the world is getting smaller. Franchising legislation in
many countries is leading
to better conduct in franchising.
10. Franchising has emerged as a viable option to bridge the gap
between an employee’s short term commitment to the success of his
employer and the innovative, limited resources outlook and expertise
of the independent business. Almost 75% of the people enter
franchising because they do not want to work for someone else.
Traditionally, in India, this is called awakening the ‘jugaad’ in the
entrepreneur.
11. With emergence of several organized retail opportunities and
influx of foreign trade and finance, the sector has witnessed a
tremendous growth. It has also generated job opportunities for
millions of people across socio economic classes. The franchisees self-
esteem improves as he sees himself to be a part of a retail revolution
or contributing to a larger brand.

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12. It is not always easy and profitable for investors to build a new
brand but on the other hand if investment is done in existing brands
that have already proved their mettle in the market, it is more safe and
profitable.
13. The franchisee partner saves time as the brand is already
developed by franchisor. The franchisor’s advice and guidance gives
direction to the franchise partner on what works and work does not in
the business. Overall minimization of business risk will be there.
14. Many entrepreneurs have a high failure rate during the initial years
and most of them leave their business because of various factors such
as inability to sustain financially, inability to lead, and inability to
adapt and innovate. But in franchising the training guidance, continues
assistance increase the chances of success.
15. Everybody is not an innovator or product developer but many are
ready to invest in business as investors. Supported by strategic
thinking, implementation and customer service may be a key strength.
This helps in being a successful franchisee.
Extract from conversations with global and Indian franchisees and
franchisors.

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How to assess whether a franchise is good for you?
Before signing on the dotted line, it's critical to do due diligence on the
brands you're interested in– a lot of due diligence.
Franchise systems vary greatly, and not just in terms of the products and
services they sell. They also have different rules on how franchisees can
and can't run their businesses.
Some brands have a history of performing better than others, and the
relationship between franchisees and franchisers isn't always warm and
fuzzy.
Most of what you need to make an informed decision about a franchise
system is readily available abroad, However, in India the concept of
disclosure documents hasn’t arrived yet.
Disclosure documents also include a system's franchise agreement, which
is an overview of the requirements of the relationship between the
franchiser and franchisee. For example, many agreements have arbitration
clauses that prevent individual franchisees from suing a franchiser in
court.
Getting a copy of a system's disclosure documents before meeting with
someone from its sales team, is the normal practice. A franchiser
salesman will make you fall in love with the concept as if you were a
customer. You will be so in love with the marketing idea that you won't
be sufficiently skeptical about the business model.
In the absence of such documents, experts also suggest calling or visiting
several of a system's current and past franchisees. "They will tell you the
dirty laundry," he says. The names and phone numbers of all current and
past franchisees are listed in franchise disclosure documents.
These are the things people were looking for, in initial interactions with
their prospective franchisor
1. Average initial investment (franchise fees plus equipment costs)
30%.

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2. Total existing locations and geographies (the more the better) 28%
3. Closure rate (the number of closings in the last three reported fiscal
years divided by the total number of existing locations)12%
4. Growth in the number of outlets in the last three years 16%
5. The number of training hours (the more support from the HO, the
better). 7%
6. Marketing and advertising outlays of the franchisor. 7%
On that note, if you're wondering whether a franchiser has ever been
sued, consider that federal law mandates that franchise disclosure
documents cite any significant litigation it's been involved,
including lawsuits filed by franchisees or groups of franchisees.
Extract from conversations with global and Indian franchisors
References: Wall Street Journal.

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WOMEN IN FRANCHISING: THE INDIA STORY
According to data from Pricewaterhouse Coopers and the International
Franchise Association, approximately 25% of today's global franchisees
are female.
Franchisors are taking note and starting to make their business
opportunities specifically targeted at female franchisees.
FranchiseHelp.com conducted an informal poll to find out which
franchises were most attractive to females looking to start their own
business.
Though women today can fit into any business concept but there are some
business concepts that are quite close to women’s interests. In fact there
are a few franchise domains which are specifically being dominated by
women entrepreneurs. Let us have a look at few of these.
In India, women play the role of Franchisors in important sectors like
beauty, play school and pre-school education, aviation/hospitality/image
training and fitness.
On the franchisee side as well, women are taking up more of the above
disciplines and thriving.
However, women form less than 5% of the franchisees currently in India.
This is despite that fact that Ernst and Young reports have constantly
recognized that women are good borrowers of bank capital and make for
good franchisees.
Its important to note that while men may have more than one company’s
franchise, (7-8%), women prefer exclusively to tie up with one
organization and grow that over a single or multiple units as per the
response they get.
98% of women franchisees are married. A large majority of them are
serious about the revenues that emerge from the same from a financial
independence or survival standpoint.

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Areas identified for growth in franchising for women
1. Non- emergency healthcare such as ophthalmology as well as
dentistry.
2. Specialty /organic Foods
3. Jewellery
4. Creative design centres
5. Massage parlors/spas and wellness endeavours

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ROI IN FRANCHISING
There are many factors that are considered to be best for franchise
business but, one of the most important factors is return on investment.
Therefore, the question that crops up in franchisee’s mind is about the
reasonable rate of return on investment that he/she will be getting after
sealing the franchise pact.
It is indeed significant to calculate the RoI before actually putting in your
hard-earned money. It is advisable for franchisees to analyse the sector or
industry they are planning to get into. This is pertinent because RoI varies
from industry to industry.
RoI calculation is the basis of any investment evaluation. Franchisors
have to keep a constant check on the efficiency of their brand investments
and initiate RoI discussions on a regular basis with franchisees. Business
decisions regarding schemes/activations have to be based on needs
arising from there.
As explained in Rama Bijapurkar’s latest book, international brands have
to Indianize their offerings and National brands have to localize their
offerings.
The acceptable rate of return on an investment will depend on the choice
of industry in which the franchisee places his money. As time and talent
are major contributions for the investor, choice of industry that he/she has
interest in becomes the key factor for them to keep their mind and soul
both involved in the business and in turn helps in maximising the RoI.
Before investing in a business, it is important to analyse the capital
expenditure, operational expenditure and interest on capital investment.
The franchisee must be told by the franchisor, and also self- analyse as
how quickly they get the break-even point on a long term scenario and be
able to take out the initial investment or deploy it back.

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At the operational level, how fast can the franchise can get to a position
where the running expenses are equal to or less than the revenue
generated by the business is key for sustaining interest levels without
disappointment. All industries and all franchise models are not for
everybody. The gestation periods are different, so is the investment.
A very close eye on the operating expenses helps one to create a balance
between the cost and creating market penetration. The franchisee must
watch the competition in the market, ensuring quality of product and
services (if any) and the value being created for the end user. Besides
that, innovation and constant up-gradation of the product is the key to
take the brand to new height. The cost of capital, the return, compared to
conventional business and other investment options need to be examined
carefully and a break-even analysis should be done.
A franchise is almost never a passive investment. Virtually all franchisors
assume that the owner will be investing at least some of their time and
talent in the business in addition to their money. So it is reasonable to
assume that an investment in a franchise should provide a return for both
the money and the time that is being invested in the business; hence the
complication in the RoI calculations.
This also means that the expectations from franchise businesses are
significantly higher for a franchise than for a passive investment.
Extract from conversations with global and Indian franchisees and
franchisors.

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WHY SOME PEOPLE STAY AWAY FROM FRANCHISING?
LIMITATIONS OF FRANCHISING IN INDIA
1. Perceived political instability; from the perspective of an
international brand.
2. Underdeveloped financial system.
3. No proper legal system that protects intellectual property rights and
upholds contractual obligations.
4. Underdeveloped infrastructures.
5. Low income of customers.
6. Entry barriers.
7. High exit cost.
8. Huge investment.
9. Lack of transparency in business.
10. A brand famous in on country may not survive in other country.
11. Lack of awareness among the customers about the available
brands in the market.
Organizations that take up the mantle of franchising have to embrace
advocacy, assistance as well as facilitation for the industry to grow.

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COMMENTS ON THE REPORT FROM THE INDUSTRY
“This Report is a good commentary on status of franchising industry and
segments that prevails in India. It is useful for franchisors & Franchisees,
both to strategies better on business formats to be adopted. In subtle
manner it does the good job of Expectation Management about
franchising opportunities in India”
By Ravi Dighe
Executive Vice President
Aptech Education Ltd.
“Franchising is a method of doing business wherein you take a tested
and proven system and plug it in. You need not reinvent anything. It
works. In India, it is an industry waiting to explode. In a diverse country
like ours, economy of scale is achieved faster through franchising.”
Chandra Gopalan
Director
Contours India

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Thank you!

FAI Franchising-Report-by Dheeraj Gupta

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