The concept of franchising that has changed the business scenario in India at multiple levels. Franchising itself has gone through various transitional stages. From zero receptivity to gradually luring investors through minimum guarantee at initial stage, the franchise industry is steadily inching up to a partnership model where both the franchisor and the franchisee share the pain as well as the perks equally. Today we have with us a person who has seen this industry grow. Industry expert Kumar Nitesh takes us through the changing norms of the franchise industry in India. Read on to see how the franchise industry evolved and what lies ahead.
How has the franchise business evolved over the time?
Initially, the concept of franchising invited people who were looking for an investment option. They wanted to do a safe business where they do not have to build a brand. Rather they can piggy back on an established brand and run a business. Over the years companies have realized that it is not the quantity but it is quality of Franchisee which is most important. Companies desire to have strong and big partners now instead of investors. Commercials have moved away from investor friendly minimum guarantee model to a retailer friendly commission based model. Companies are increasingly looking for partners rather than pure investors.
What was the investor’s receptivity toward franchising as a business model in the initial years of franchising?
The receptivity initially was NIL to be honest and we had to roll out models such as the MG model where we essentially secured their investments for them. It helped in promoting investment rather than retailing skills. Today the industry has evolved into a more partner based Eco-system where the companies need retailers who can take their brands and products forward. Hence they ask franchisees to participate in the profits rather than simply assuring returns.
What are the parameters that are followed now?
Around 3-4 years ago, some brands took up the initiative to implement royalty fees, franchisee fees and sales percentage. Brand fees are a conceptual transaction to secure the serious buy in of a franchisee. The fees are so less that it can hardly secure any investment by the brand. Sales percentage brings the ownership of the performance onto the local partner who is the face of the brand in the market.
How did the distributorship model give way to franchising?
The shift from distributorship to franchising was more evident in the fast paced fashion industry. Earlier there were a lot of local MBOs and fashion stores who had greater footfalls than any other brand store. Distributorship cannot work in a fast changing industry like fashion where transit times and shelf life are of utmost importance. Each store is part of the chain and hence franchisee model works best. This helped to create new franchisees who shared common business interest and were ready to grow by sharing best practices and bring overall market understanding to the business. Franchisees' contribution has been immense as they have helped shape the brand image and secured the right locations for their respective brands.
Please elaborate the various parameters that were considered while signing the deed at that time and how it has changed now.
Initially financial strength was considered to be the biggest parameter before selecting a franchisee, today however, factors such as past experience, accounting and admin setup and other retail brands handled by the potential franchise partner are given equal importance in the selection criteria.
How has the franchise offerings changed or improvised between then and now?
Franchise offerings used to be minimal and standard, today companies are rewarding franchisees who pay on time, carry lesser inventory and achieve higher stock turns by giving portfolios to franchise in new geographies.
How has the investor’s outlook changed towards the franchise business?
Earlier franchisees used to look only at brand image and brand value before taking up a franchise. Today however, they are also asking other right questions like- discount policy, backend support mechanisms, stock ordering and fulfilment capabilities of brands and the strength of the brand sales team.
How do you see the future of franchise industry?
Future of the franchise industry remains strong as more and more brands enter India and the race to reach tier-2/3 towns gathers pace, many more opportunities will emerge for the franchise industry. New product diversification, innovation and brand alliances will help the franchise brands as they will increase their throughput per store and also assist franchise brands to use the brand recall and footfall of these global brands.
