While Indian companies offer a plethora of products, they lack strong brands. Licensing can become a great solution in such a scenario
What are the benefits of being a franchisee over starting an independent business?
Historically, India has been a shopkeepers’ nation and shopkeepers are generally less risk takers and are traditionally more into managing business well through hard work. Franchising is a form of business where you buy into something that is proven. So the risks are lower.
Franchising helps entrepreneurs to get mileage for a brand’s equity in the market and a ready business model to execute while it helps the brand to enjoy greater presence at a number of touch points and serve a wider customer set. But to be able to do that franchisees should get associated with a brand/company, which has a proven track record and an established brand name to derive benefits of brand loyalty.
What are the basic guidelines for establishing an effective franchisor / franchisee relationship? How is knowledge transferred in the process?
There are three things in an ecosystem. The first is the consumer. Now, consumer needs are very immediate. A consumer won’t give time to a company to settle down and improve its service. Second, the franchisee’s horizon is shorter. It has a three-five year horizon. So if a person takes up a franchise, he/she would want/be able to make money in five years.
A company, or a brand, has a much bigger horizon of 20-30 years. The trick is to maintain a win-win situation for the consumer, the franchisee and the company. It all starts with a consumer interface. Before expanding, franchisors need to see if there is a value in the format to expand into another geographical locations.
Franchisors need to look for like-minded franchisees. Franchises also come with three different capabilities: strategic, operational, financial. For example, a franchisee with a dominant financial capability is required to expand a hotel chain while a franchisee with good operational capability is required for a restaurant or a food chain. For opening a company in a financial domain, one should look for a franchisee with strong strategic capabilities. For example, a chartered accountant or one having good knowledge about the sector.
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Knowledge transfer from the franchisor to the franchisee needs good training on the part of the franchisor. There are two sets of training, which are required. The first is the pre-start function—the training that is required before setting up the franchise. This is an initial spot training and it generally takes place at the franchisor’s headquarters. The second is an ongoing training. The franchisee’s staff needs regular training to maintain a certain quality for the products and services offered, which is provided on a regular basis by the franchisor.
How are standards enforced for the franchisee? What is the role of franchisee in business development?
The process of enforcing standards is crucial and complex. The franchisors need to first standardise their processes so that they can be duplicated and transferred. These processes would need to be put into different baskets having different training structures. They are complemented with effective on ground training to implement the strategy. This can be divided into various manuals: operational manuals, training manuals, managers manuals etc. In some cases, a sub-manual can be created. For example, if a franchisor is in into food, a hygiene manual is required while if a franchisor is into salons, a hairstyling manual is needed.
The key role of a franchisee is to bring local expertise and knowledge in the market and acquire new customers. Business development is integral to the role of the franchisee.
How does the franchisor protect the system and the brand effectively so that equity is not diluted in any way?
Franchisors need to preserve the essence of the brand while maintaining an efficient business model. This can be done by designing the business model right, by standardising the processes and systems and by building an effective audit structure to audit the processes and systems.
Franchising is a very attractive way of raising capital. For instance, if a person wants to expand 200 stores and wants to start his/her own business, he/she either need to take debt or equity. In franchising, the business takes place without taking debt or equity. But it is a very ‘responsible’ way of doing it as franchisees work on other-people’s-money principle, which means using someone else’s money to build a brand. So, it has to be done very responsibly.
Can you explain the differences between franchising and joint ventures?
Joint venture and franchising are different models. A joint venture is a strategic partnership between two companies, which is formed to introduce a new product or service. It is the JV company, which expands the brand in the new market. JVs are a high investment and high risk scenario. The foreign company shares the responsibility and risk pertaining to operations, management, profits, and taxation, along with the local partner in proportion to its shareholding.
In franchising, the franchisors allow the local partners or franchisees to use their brand names and replicate the systems for fast expansion in exchange of a fee and royalties. It is the local partner who brings capital and is responsible for developing the brand in the assigned territory. Hence, franchising is typically a low-cost and low-risk model.
In terms of brands that operate under a franchising arrangement, which ones are doing well? What can Indian franchisees learn from their international counterparts?
Brands such as Raymond, Titan, Geetanjali, Naturals, Mobile Store have successfully adopted the franchising model in India. About 85 per cent of small format businesses in India run through franchising.
However, Indian companies lack a few things: they tend to give preference to short-term goals of quick profits against growing and nurturing an organisation. This can damage the brand and hampers further growth as resources have to be diverted to manage the franchisees. It is easy to get into franchising but one needs to keep reinvesting to keep the brand alive. Second, Indian companies don’t invest in putting systems and process and are more man-led business whereas American companies make systems idiot-proof, which make these systems highly scalable.
| MARYA MATTERS |
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With the slowdown still affecting businesses, how do you see the licensing market in India panning out?
India is passing through a huge change. The country has largely been an export-oriented market but with the decline in exports and the rise in production capabilities, Indian companies have started focusing on the domestic market, thus, creating new shelf space. But even though they have products to offer, they lack strong brands. Licensing can become a great solution in such a scenario.
For instance, initially Videocon had only one product and the highest market share in that in India. When LG and Samsung entered the market, Videocon started taking licences from Toshiba, Philips, Akai and expanded its market share.
What are parameters to determine the potential of a licensing deal? What are the risks involved in intellectual property licensing?
There has to be some kind of emotional connect to unlock value in a brand. Licensing is a great phenomenon where intellectual property of a brand can be leveraged, since creating a brand is very costly.
The numbers may be few but India has produced some great brands, such as Nirma and Rasna. But these brands have not expanded. For example, for a manufacturer entering into the candy market, it would make great sense to take a licence from Rasna and produce candies under that brand name instead of making it own branded candies and compete with big players.
However, licensing comes with its own set of risks. If a licensing programme is not well handled it can kill the whole category.
Consider Kingfisher. It extended its brand to Kingfisher Airlines via an internal licensing deal. Market data suggests that the poor performance of the airlines business has caused a dent in its core business—Kingfisher beer. Though it is not immediate but the brand is losing its aspirational value among the youth and affecting new customer acquisition.
Where are the highest leverage points with intellectual property and licensing?
One has to understand the core values of the brand—what it stands for, in which segment it can be extended and in which segment it should not be extended. For example, Oxford University stands for education and heritage. So an Oxford liquor is a bad idea as education and liquor cannot go together.