The reading level for this article is Novice
INTRODUCTION TO FRANCHISING
Ms. Shah an NRI arrived, on New Years Eve. She was so happy to know that the Indian economy had grown in the last quarter at 8.4%. She decided to go to the US to pursue her dream of running her own business late back in 1970, an era plagued by regulation and bureaucracy. Her business of selling Indian garments in the New York, US had been tremendous successful.
Now, in 2004, she was amazed to see the change in the Indian capital. She used the Hertz Rent-A-Car service for airport pick-up. She decided to stay at Orchid (an another franchised hotel chain). For instant rejuvenation she dropped at Shehnaz Hussain Beauty Parlour. She had come here to set up a liaison office in India. Having no previous experience about doing business in India, she decided to avail the services of a franchised Business Service Provider, Crestcom. She was overjoyed when she came to know about the local Subway operating with the same American standards in India. She appreciated the food, as it tasted exactly the same as she had at the Times Square Junction, New York. She was glad that the Ritu Beri designed clothes are available in Delhi, and they are franchising at an international level. She knew that the clothes designed by her were a rage in the US and she couldn’t afford to miss this golden opportunity.
What one would notice is that all these companies have expanded gradually and made their presence by franchising. Franchising, as a way of expansion in India was little known till the 1990s. Franchising in the US was initiated by the fast food industry, whereas in India it was IT Education industry who led to its evolution.
Today, franchising has forayed into all industries from Food and Fuel to Lodging and Child Care.
Franchising is a marketing format, a very powerful way of retailing goods and services. It is a business partnership. Like all business partnerships it involves two parties, the franchisor and the franchisee. The franchisor provides the know-how, training, system and the brand, whereas the franchisee forms the front end and is responsible for managing his business unit. In the US, almost a third of the retail sales come from franchised business. Globally, there are over a nine hundred thousand franchised outlets with sales exceeding a couple of trillion of dollars. In India, the industry is a little over ten million ($). There is limitless potential, as this industry is at a very nascent stage.
What has made franchising so popular all over the world? 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.
Ordinary start-ups face a problem with finding the right location, evaluating an opportunity and also in most of the times lack experience as to how a similar business is managed. They risk their initial investment. 90% of start-ups fail in the first year itself. Of those that survive another 90% fail in the next two years. In a franchised business, over 90% succeed. This success rate usually lures entrepreneurs with no experience but with a surplus capital and a will to succeed towards franchising.
The greatest monetary benefit for the franchisor is the network of a large number of entrepreneurs (which is an intangible asset) in the form of franchisees who all work together to achieve the goal of the franchisor. The franchisee is a dedicated entrepreneur and not a salaried employee, thus he is more likely to show greater commitment dedication, interest and involvement. The franchisee benefits from a tried tested and proven business concept, which can dramatically reduce the chances of failure.
THE POTENTIAL OF FRANCHISING IN INDIA
India is a geographical diverse country. Franchising in India is at a very nascent stage. However, this industry has clocked the growth rate of 25-30%, the second fastest growing industry. In the US, 45% of the sales comes from franchised business, India is still to reach that stage, where franchised business are as widespread as the local grocer.
Franchising, as a dynamic and ever changing industry will firmly establish itself in a couple of years. It is not difficult to spot malls. Organised retailing though only at 2% of the retailing, will take off in a very big way. The Indian middle class has been slowly expanding, it now buys consumer appliances, thanks to the economy growth of over 8, the stock market crossing 6,000, forex reserves surpassing 100 Billion USD, and the increase in disposable income. Today, over 33 million Indians can afford the best services and products and over 310 million Indians buy consumer appliances.
India offers lot of potential for the franchising community. Apart from Indians being very entrepreneurial, franchising as a way of doing business has been well accepted.
Today, we can find international names like Gold Gym, Subway, Hilton etc. The service sector which will open up in 2006 according to the WTO guidelines will bring in more opportunities for the Indian entrepreneur and a larger market for the franchisor.
With Goldman Sachs predicting that India will be the third largest economy in 2025 and S&P upgrading India’s credit standard, and an extremely stable government, the franchising community has a lot to cheer.