Way to go for Franchising

05 Jul,2013

 

India, by witnessing huge demographic transformation fuelled by the consumption led growth, stands as an attractive destination globally for the franchising fraternity. Consumerism is growing rapidly aided by high population, increasing household incomes over the last two decades. Overall, the Indian economy has witnessed a structural shift from an agricultural based economy to a service based economy.

 

Franchising as a concept has been prevalent in India since a long time. However, shifting consumer trends including growing preference for branded products, global exposure and use of international brands is driving adoption of the franchising route to growth. According to KPMG in India estimates, the franchising industry is expected to quadruple between 2012 and 2017. There is scope for the franchising industry to contribute to almost 4 percent of India’s GDP in 2017 (assuming 6 percent Y-o-Y GDP growth between 2012 and 2017), growing from a current estimated contribution of 1.4 percent of GDP. This is also expected to create job opportunities (including to create job opportunities (including additional 11 million people by 2017).

 

 

KPMG report released at CII Franchising Summit
 

At CII’s Franchising Summit, Bhaskar Bhat, Managing Director, Titan Industries Ltd, Ninad Karpe, Chairman, CII Maharashtra State Council and CEO & Managing Director, Aptech Ltd, SKV Srinivasan, Executive Director, IDBI Bank Ltd, Alan Branch, President – Global Development, Global Franchise Partners Pvt. Ltd, Australia and Dinesh Kanabar, Deputy CEO, KPMG in India released the report titled ‘Collaborating for growth’: Report on Franchising in India 2013.
According to the report, the franchising industry is expected to quadruple between 2012 and 2017. There is scope for the franchising industry to contribute to almost 4 percent of India GDP in 2017 (assuming 6 percent y-o-y GDP growth between 2012 and 2017), growing from a current estimated contribution of 1.4 percent of GDP. This is also expected open up a deluge of job opportunities both (including both direct and indirect) for an additional 11 million people by 2017.

 

While increasing consumption, willingness to spend, growing preference for branded products, global exposure and use of international brands are driving the demand side of franchising, increasing set of opportunity-driven competent entrepreneurs, growing awareness of franchising as a business opportunity and its relative low risk profile are driving the supply of new franchisee units.

 

Even as market potential is huge in the retail sector, KPMG in India estimates that the franchising opportunity would be relatively high in consumer services, food service, and education and health and wellness sectors. Cumulatively, these sectors have a potential to add 1 lakh franchisees in the next five years. Franchising in health and wellness sub-segment is estimated to grow six times the current penetration.  With FDI in single and multi brands retail now permitted, this segment is expected to emerge as one of the high potential service sectors within franchising to cater to the prevailing consumption boom. KPMG in India estimates that over 43000 franchisee establishments (valued at USD 36 billion) may be required by 2017.

 

“The franchising industry in India has potential to grow to USD ~50 bn in the next half decade – around four times the current size. This is also expected to create job opportunities (including both direct and indirect) for an additional 11 million people by 2017. Franchising will be extremely critical for brands to scale up quickly and profitably in India. While policy and financial institutional support is important – the critical growth enabler is going to be the extent of self regulation that franchisers introduce for sustainable and profitable growth of their franchisees.” said Anand Ramanathan, Associate Director- Management Consulting, KPMG in India.

 

Ninad Karpe, Chairman, CII Maharashtra State Council and CEO & Managing Director, Aptech Ltd said. That franchising is a popular way to grow through collaborative efforts, reaching territories where opportunities exist. The umbrella of a popular brand aided by power packed processes makes for a sound business proposition.

 

Overall, the franchising industry in India is expected to witness an above average growth rate over 2012-17 across sectors. The growth would be fuelled by rising income and expenditure levels of the young population along with the recent FDI policy changes, economic and socio-cultural developments.

 

Franchising Opportunity: Sector Overview

As per KPMG in India analysis, retail and consumer services sectors are expected to emerge as high potential service sectors within franchising to cater to the prevailing consumption boom. Non-traditional segments such as food service, jewellery, pre-schools etc. also present a huge opportunity for growth in franchising.

 

Despite the challenges the country presents, there have been many successful case studies of franchising in India. From franchisors such as Aptech and NIIT which have pioneered the franchising model in India to new age franchisors  such as Gitanjali and VLCC who are adopting innovative expansion models within franchising, many brands/companies are adopting the franchising model to expand and provide a consistent and quality experience to its end customers.

 

Franchise Business Models

Firms that have created an easily replicable business model, often choose franchising as their preferred route to expand their operations and scale their brand. However, within the realm of franchising, there are several franchising models that differ significantly in terms of operation, control and legal scope. While certain operating models within franchising – such as area development and regional master franchisee – appear more attractive than others, diversity in Indian consumer preferences and degree of localization impact the choice of the final model to be adopted.

 

Attractiveness of India in Global Franchising

Many international brands have already entered India and are adopting the Franchise route to growth. Global brands such as Domino’s, KFC, Baskin Robbins have adopted variations of the franchise models to grow in India. Many other international brands are contemplating entry plans into India.

 

However, India’s growing but fragmented market can seem chaotic and difficult to deal with. The international franchisors consider the following factors as challenges while entering into India:

 

> Transparent Legislative framework: Due to no specific rules or laws promulgated in India to address the functioning of franchisors and franchisees, international players perceive a higher risk to business continuity.

> India is not ‘one’ market: Entering a new market becomes more complicated in case of India where consumers hail from diverse cultural backgrounds. Several cultures, languages and socio-economic diversities make it a set of multiple markets. It becomes a challenge for an international franchisor to understand all diversified tastes and preferences, to establish and expand business in India.

> Bribe and corruption: International franchisors remain threatened with the bribe and corruption cases in India. Due to no legislation around ‘anti-bribe’ in India, as in the US; it not only discourages the expansion strategies of many brands, but also impacts India’s credibility in the international market.

 

Franchise Industry Survey – Key Highlights

While the survey carried out by KPMG in India corroborated the above key reasons for growth in franchising and operating models, it also brought out certain key findings as mentioned below:

 

> Franchisors believe that they are providing adequate support to their franchisees; however the latter are expecting more support particularly in the post launch phase of operations. Response to another related question in the survey suggested that almost half of those interviewed were not willing to take up additional franchisees with the existing franchisors suggesting certain level of dissatisfaction.

> While franchisors adopt franchising model for growth, many entrepreneurs are opting for the franchising route as it primarily offers a safe and relatively easy way of establishing business and is expected to offer higher than market levels of profitability. This trend necessitates the need for franchisors to educate the franchisees on potential profitability and investment returns from the business. Sectors such as jewellery where payback periods could range between a minimum of four to five years are particularly vulnerable to such mismatch in outlook.

> Real estate rentals are posing a major challenge for the success of franchising. Collaborative efforts between franchisors and franchisees in structuring business models that are sustainable even under such conditions could address this concern.

 

Regulatory Scenario

While franchising sector in India, per se is not regulated, there are multiple laws which have an impact on franchise operations. Any future regulations in this area should allow conducive growth of franchise systems along with protection of franchisee rights. KPMG India’s comments on a few areas of regulations have been highlighted in the table below:

 

Source: KPMG in India Analysis

 

 

Financing the Franchise Business

One of the key criteria of franchisors while selecting a franchisee is investment capability and financial strength. This in itself is an indicator of how difficult it is for a franchisee to tap the debt route to investment. Most lenders do not treat franchisees as a separate customer segment and usually cover them under the ambit of the broader Small & Medium sized Enterprise (SME) sector classification. This gets particularly magnified in case of ‘services’ franchising where there is an absence of asset base on which a collateral can be taken to provide a loan.

 

A comprehensive and collaborative mechanism is once again needed to address this issue. While lending institutions can offer innovative financial products to franchisees, adequate support from the franchising ecosystem including that of franchisors and industry associations is necessary to make this a success.

 

Post a Comment 

Comments are closed.

Today's Top Stories
Videos