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Big firms taking to franchising in India
It is strange to think that franchising is still a nascent industry in India, given that top global fast-food chains Taco Bell, Subway, McDonald’s, Pizza Corner, Domino’s Pizza and Kentucky Fried Chicken (KFC) are well known in the country, as are international hotel franchises such as Le Meridien and Sheraton.
Going by the vast masses of people on the streets of India, the market potential for franchising is huge. Yet, franchising, so much a part of the developed world and which commands over 55% of retail sales in the US, has a hold on India only recently. The world’s largest democracy, India has a population exceeding one billion people, of whom nearly 30% belongs to a relatively untapped middle class.
Says former Cadbury India managing director CY Pal, chairman of the Franchising Association of India (FAI): “Franchising is a faster mode of expansion that combines a proven business format with committed entrepreneurial input.”
Adds Viraj Gandhi, managing director of Medicine Shoppe, a branded medical-store chain: “Franchising for us is a strategy to achieve scale and size with lower capital-investment and manpower pressure.
“India can easily accommodate more than 5,000 Medical Shoppe pharmacies. However, it is inconceivable that any company can achieve this number, even in 25 years, unless it uses franchising as its growth model.”
Over a few short years, India’s franchising industry has undergone massive growth. Today, it has about 1,800 domestic franchisors.
Unlike trends in the US and Western Europe, franchising in India is dominated by the IT-education sector, which accounts for 40% of the business, followed by IT-enabled services (14%) and business services (11%).
According to Gaurav Marya, CEO of Franchising World, IT-education companies can be considered pioneers of India’s franchise industry.
“NIIT and Aptech are two Indian IT-franchise companies that have successfully expanded to 2,400 outlets, with a presence in almost 52 countries,” he says.
The latest trend sees major corporations joining the fray. Reliance Industries, India’s largest conglomerate, is betting on franchising and so are other big groups like the Tatas (with Titan watches and Tanishq jewellery), Aditya Birla (Madura Garments) and Hindustan Lever (Lakme beauty salons, Ayush therapy centres and a soon-to-be-launched launderette chain).
Other major retail and F&B groups charting the franchising route include Essar Oil, Pepsi (Yum restaurants) and Café Coffee Day.
Indeed, the country’s franchising scene has undergone a sea change with the entry of international companies and brands following the liberalisation of the economy in the early-1990s. The footwear industry, earlier dominated by Bata and Liberty, today offers global brands Nike, Reebok, Lee Cooper and Adidas.
“The market has become much more competitive and difficult for individually-run companies to set up a big franchise network and undertake brand building,” says Prashant Gunthey, general manager of RAMMS India, a leading retail solutions company.
“The large corporations have several options to fund their expansion plans — [with the aid of] banks, financial institutions, the equity market or internal accruals. But franchising is a faster and safer mode of expansion. It also solves the crucial issue of not deviating from the area of core competency.”
There are several reasons why franchising has begun to flourish in India. For one, individual skills and determination, which are so closely linked to a franchisee’s success, are common traits in the country.
As much of India’s retailing is of the mom-and-pop type, slow progress is being made towards organised operations. With changing lifestyles, trends are pointing towards more retail chains, supermarkets, department stores, convenience stores and other retail formats commonly found in other parts of the world.
Marya believes that progress in infrastructure and real-estate development in India will pave the way for the development of retail and international franchising in the country.
“The real-estate scenario has gone in for a complete facelift,” he says. “Of the 199 major shopping malls planned, a number are operational. We feel the infrastructure for retail development is already in place.”
Marya sees three significant hurdles, which international franchise companies need to overcome to develop markets in India: “Most problems stem from trademark protection, the legal structure and money-transfer regulations.”
Without legal protection for their brands, and a way to collect franchise fees and royalty revenue, international franchise companies have been reluctant to invest in the country.
Recent improvements, however, have been made in India’s international banking to ease restrictions on the flow of fees to franchise companies.
Still, expansion into India is not for beginners or the faint-hearted. Trends show that companies with experience in Asia or the Middle East are mainly the ones looking at India, not those new to international franchising.
With two franchise trade shows held annually in India and the International Franchising Association (IFA) considering a trade mission to the country in 2005, things seem to be moving in the right direction, albeit with some distance to go.
Language is one pitfall. Although English is the accepted language of power, influence, politics and business in India, its major official language is Hindi, the primary tongue of 30% of its populace.
A common trap for English-speaking westerners working in India is the belief that they will be able to easily communicate with Indians who speak English. The truth is, Indian English is spoken with a mother-tongue accent and many idiomatic expressions that make it sound almost foreign to the standard English user.
“International franchise companies learn very quickly the inadequacies of the infrastructure in India,” says Craig Slavin, owner of Franchise Architects, a Chicago-based international franchise consulting firm in the US.
“Companies that take water, sewage, electricity, sanitation, and zoning standards for granted must step back to ensure that the basics are in place. Regional and strip shopping centres are yet to be developed.”
There may be examples of successful domestic and international franchises in India, but industry experts report a need for greater sophistication and professionalism among Indian franchise companies.
Slavin does not expect major improvements in the foreseeable future. Clearly frustrated, he says: “I won’t do business in India right now. Franchising is a wealth-building concept. It helps the middle to mid-upper class build assets and wealth through their own businesses.
“With the projects I have worked on in India, I have yet to find a company which understands that. Franchising is very dictatorial, much like in its early days. [Companies in India] appear interested in learning about western business practices but have an inability to implement them.”
FAI’s Pal believes that people like Slavin are in the small minority. “Not only have big corporations taken the plunge into the franchising field, they have tasted success, too,” he says. “The fact that even multinational players operating in India have realised the value of franchising for their growth says it all.”