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The media columns in the last few months have been agog with stories on the spat between fast-food chain McDonald's and Connaught Plaza Restaurants that controls the franchise to run McDonald's stores in north and east India. While the matter is sub-judice, it has brought into focus the delicate nature of a franchisor-franchisee relationship. Be it a management failure or the unmet expectations of business partners, a small glitch in the operational structure, communication or in the franchise contract has the potential to completely break down the relationship.
That said, the potential of franchising as a cost-efficient way of business expansion cannot be underestimated. According to a new report by KPMG India, the franchising industry is expected to quadruple between 2012 and 2017. The industry is expected to contribute to almost 4 per cent of India's GDP in 2017 (assuming 6 per cent y-o-y GDP growth between 2012 and 2017), growing from a current estimated contribution of 1.4 per cent. This is also expected to create job opportunities (both direct and indirect) for an additional 11 million people by 2017. With an increase in consumption and willingness to spend, the growing preference for branded products and the exposure to international brands are driving the demand side of franchising; a growing awareness of franchising as a business opportunity and its relatively low risk profile are driving the supply of new franchisee units.
Experts say the franchisee-based business model draws its success largely from the choice of franchisee, a detailed operating manual, adequate protection of intellectual property rights and investment in the right processes. But first, there has to be a proven system for operating a business and generating profits. If the franchisor inherently doesn't have a fully developed business model that can be scaled up, the business cannot sustain for long. Says Dheeraj Gupta, founder and managing director, Jumbo King, a chain of fast food restaurants specialising in vada pav, "The right franchisee selection guarantees 80 per cent chance of business success." And how does he do it? In his words, a prospective franchisee needs to have at least two to three years of business experience, ideally in retail.
"Avoid an investor-profile franchisee. Look for one who is keen to dedicate his entire time to the business. After the franchisee delivers good results from the store/business, he can then scale up to two, four or 10 outlets," says Gupta. Also, a franchisee should not stretch too much when it comes to investment. Gupta says, a franchisee who can invest up to Rs 20 lakh fits the Jumbo King bill smoothly; the odds weigh against a franchisee who has to take a huge loan to start with.
On the part of the aspiring franchisee, the selection of the right brand is key. The three things that can make or break it for him are information about the franchisor/brand, evaluation of the business potential and negotiation. A franchisee must assess the inherent opportunities in the business, if it suits his/her core competencies and of the managerial skills at his disposal. He also needs to negotiate with the franchisor with regard to financial expectations, supply chain management, marketing assistance and training.
One slip, and the whole relationship will collapse.
Franchisor support
The franchise information section of the Ferns N Petals website goes completely against Gupta's line of thought: "Out of the 100 franchisees that we have, 95 are from different fields," it says. Evidently, the choice depends on the nature of the industry. With the florist, training is key. The website goes on to say: "We will train and equip the franchisee to run a flower shop and we provide skilled manpower to operate the shop." Not surprisingly, it has a training school dedicated to its nation-wide franchisees. Ferns N Petals has also put in place a system to update its franchisees on designs for bouquets, floral jewellery, card decorations, what's in and what's not for the season, together with dedicated teams visiting each franchisee regularly to guide them on visual-merchandising.
Kolkata-based Pabrai's Fresh and Naturelle Ice Creams, on the other hand, has put in place an inventory system that, it claims, is one of its unique offerings to its franchisees. "We have developed our in-house system, using a string of algorithms, wherein the ideal stock levels are based on dynamic sales at each franchisee outlet and their logistic supporter. As a result, our franchisees or logistic supporters are required to stock approximately two-three weeks' stock," says Kunal Pabrai, founder, Fresh and Naturelle Ice Creams. The ice-cream stocks are either air-freighted or sent by superfast trains to their respective destinations. This translates into lower inventory for Pabrai's franchisees and logistic supporters. This is a key ingredient for a product category which has low shelf life and is, therefore, highly perishable.
If getting the franchisees to adhere to the company mandated systems is one of the key challenges for Pabrai now, for Subway restaurant chain, which aims to have 430 franchised restaurant s in India by December 2013, it is about establishing a standard operating procedure that fosters a transparent environment. "We have on-ground resources to extend support to our franchisees and check that our standards are met. In addition, our consultants visit all our restaurant locations on a monthly basis to keep a check and advise franchisees on how to ensure standardisation of our product range," says Manpreet Gulri, country head, Subway India.
Mind you, it's best to think of roping in franchisees when you have achieved a critical mass. Vikram Vora, director & CEO, Mydentist clinic, which has built its chain with a company-owned company-operated model in large cities, says, "The only reason we will take on a franchisee, if ever we do, would be to increase the rate at which we are growing or while expanding in a smaller city."
The florist franchisor may be particular about the brand, but it doesn't participate in the day-to-day affairs of the franchisee's business. It has a fixed royalty system, independent of the sales volume of the franchisees. "We have learned from our experience that in this business, the less (franchisor-franchisee) interaction one has, the smoother the relationship is. Also, each franchisee store operates live under camera which is accessible from the Ferns N Petals head office," shares Vikaas Gutgutia, managing director, Ferns N Petals. Technology helps Gutgutia keep a tab on the activities of a store owner or manager in terms of quality, variety, shop-floor uniform and handling of customers.
To achieve this level of consistency, Jumbo King's Gupta emphasises the need to have the right processes in place to monitor the brand and its performance. "Instances of dishonesty may arise from under-reporting of sales meant to cut down the royalty payment to the franchisor. There can be instances of deliberately compromising quality as well," he adds. For Gulri of Subway, such issues are "few and far between" on account of the close relationship shared by the franchisor with his franchisees and the interdependence he offers them.
Control, however, is the bedrock of the relationship that playschool group Shemrock has with its franchisees. There is communication through a range of mediums, including sending fake parents and surprise visits to the franchisee playschools, audit of accounts and safety.
"As you grow into a national player, it becomes an expensive proposition to send representatives to each and every franchisee location," says Amol Arora, vice-chairman & managing director, Shemrock & Shemford Group of Schools. It has expanded from 75 to 225 playschools over the last four years by roping in able franchisees.
Not all franchisees have similar capabilities. Each franchisee has to be tackled as a separate individual, says Arora. To simplify the process, the playschool group has developed a dedicated communication software to manage interactions with its nationwide franchisees.
The agreement
In the final analysis, nothing can beat a formal agreement. Putting in writing the terms of the business and the relationship can make things easy for the two partners in the business. While the partners are expected to be clear about the expectations from each one of them, experts say the onus is on the franchisor to ensure that all anticipated outcomes are captured in the agreement. In the words of Kunal Pabrai, "The agreement should not be static but a dynamic document, which is regularly revised, as needed, to ensure long term success of the franchise."
Gaurav Marya, chairman, Franchise India Holdings, puts down the key steps in the process: "The franchisor should ensure that the contract allows no scope of negotiation in the case of brand digression. The franchisee, on his part, should make sure the contract mentions all the support he needs and will get from the franchisor." While the franchisor should register his trademark in the land he is operating, the franchisee can neither go for co-branding nor develop his own intellectual property in a franchise model. "The franchisee can only recommend the franchisor about the required changes or any great idea," Marya says.
The agreement should not only earmark territories to be controlled by the two partners, it should also lay down the exit criterion for them. "The termination and post-termination clauses of the agreement are the most important parts of the agreement. New franchisees often tend to ignore this clause. So, it is on the franchisor to put in place a realistic arrangement," says Arora of Shemrock. One lesson from the McDonald's-Vikram Bakshi tangle: Business partners should consider termination of their contract before a situation or relationship turns bitter.
The important thing to bear in mind in franchising - indeed, in any business - is that there are no quick fixes and there are no get-rich-quick routes. Challenges do arise irrespective of the business model, but it is the manner in which these challenges are dealt with that determines the success of the business in the end.
