BBA V SEM

Subject Notes: Franchise Management

UNIT - 1 & 2

Franchising – Meaning and Definition

A franchise is an agreement or license between two parties, which

gives a person or group of people (the franchisee) the rights to market
a product or service using the trademark of another business (the
franchisor).
Franchising can be defined as “a contractual agreement between or
license between two parties (Franchisor & Franchisee) for the purpose
of organizing and managing business, where the parties are mutually
benefited”.
Franchise is one form of exclusive retailing. It in fact, is not just a
method of retailing. It is a method of marketing which is lying between
entrepreneurship and employment. A franchiser is an independent
business person who abides by the marketing plan of the financier and
pays him a fee for the use of his brand and known-how.

Franchise is a form of business organization in which a firm which

already has a successful product or service (the franchisor) enters into
a continuing contractual relationship with other businesses
(franchisees) operating under the franchisor’s trade name and usually
with the franchisor’s guidance, in exchange for a fee.

The franchising concept can be understood as license type

transactions. In India, all the contracts come under the purview of the
Indian Contract Act, 1872, which is based mainly on the English Law
Principles. The agreement to the franchise is a standard printed
agreement which deals with rights and obligations of the licensor and
licensee. The term ‘franchise’ has its origin in the French word
‘affranchir’ which means to ‘to free’.
In its simplest terms a franchise can be considered a license from
owner of trademark or trade name permitting another to sell a product
or service under that name or mark. The usefulness of franchising lies
in the fact that it helps the mega corporations to expand their business
and popularize their brand names without investing large amounts of
money. These corporations act as ‘franchisers’.
It is the local dealer who acts as a ‘franchisee’ and operates at a lesser
cost by using his local market, knowledge. The franchisee will be able
to do business successfully without risks by utilizing the good-will
attached to the brand name of the franchiser.

According to the International Franchise Association (IFA) of

America, “A franchising operation is a contractual relationship
between the franchiser and franchisee in which the franchiser offers or
is obligated to maintain a continuing interest in the business of the
franchisee in such area as know-how and training; wherein the
franchisee operates under a common trade name, format and
procedure owned and controlled by the franchiser, and in which the
franchisee has or will make a substantial capital investment in his
business from his own resources”.

Brand visibility is one of the important activities of every company.

Today, competition in every field has become cut-throat and everyone
wants to stay ahead in the race. One can remain ahead or get an
advantage over the competitors is by indulging in business. One of the
best techniques to make the business survive in today’s competitive
environment is to grab onto one of the numerous franchise business
opportunities.

What sectors are most receptive to franchises?

Successful franchises in India generally reflect larger global trends. The

most successful franchises world-wide cater to middle class tastes and
attempt to capitalize on consumers’ leisure time, whether they be retail
stores, cafes, or restaurants.

India offers additional avenues for franchising given the country’s high
level of privatization in education and health care.

The most successful franchise sectors in India are:

 Food and beverage;

 Hotels;
 Retail;
 Beauty and fitness;
 Health care;
 Medical services; and
 Education.

An Overview of the Indian Franchise Industry

One major advantage that players in the franchise industry have is that
the business model and products/services are already established. It
becomes much easier to run a readymade operation, and at times, even
support for training and planning of finances are provided by the owners
to new franchisees. This is just one of the reasons why the sector has
achieved success worldwide, including in the Indian subcontinent.

The model of franchise management began in the 1990s in India, with

the start of the era of liberalisation. This system was initially adopted by
a few educational institutions and IT companies for business expansion
and was slow to grow at first. But today, the franchise industry in the
country has several well-known brands in various cities operating under
this model.

While the industry is in its nascent stages in India as compared to other

trades, the growth in the sector has been strong – a figure to the tune of
30% annually. According to Gaurav Marya, Chairman of Franchise
India, “The franchise industry in India is today estimated to be at USD
47-48 billion.” And going by recent trends, it seems that this figure is
only set to rise in the future.

Franchise Industry in India: Causes and Growth

The easy business model that franchising offers is a major reason why
the industry is growing in leaps and bounds all over. However, there are
several more reasons behind it becoming such a huge success and among
the fastest-growing sectors in India:

 Lower rate of failure: Compared to other start-up ventures,

franchises have a reduced chance of failing since the business
concept has already been worked out. Existing loopholes are taken
care of, and there is a proven model of what works and what does
not – so franchisees are more eager and confident about investing
in such businesses.

 Demand for franchised business: The rising purchasing power of

the Indian middle class coupled with an increase in brand
awareness has created a substantial market demand for
international brands that retail primarily through the franchise
system. In addition, being a country of over a billion people, the
Indian market provides huge numbers in sales simply because the
number of consumers are so high.

 India as a big market: Due to the demand in India, foreign

investors and brands, mostly American, view the country as a big,
beneficial destination to set up franchised outlets. The franchise
model also works across diverse fields like food and beverage,
beauty, healthcare, and many more – thus allowing a greater
number of companies with varied products and services to set up
successful franchise businesses across the country. “India, being
one of the fastest-growing economies in the world, offers good
 opportunities in this emerging business model,” believes
Chackochen Mathai, founder and CEO of Franchising Rightway.

 Privatisation in different sectors: Gone are the days of consumers

having to depend on a single service. With privatisation of
everything in India from education and healthcare to
telecommunication, there has been a constant rise both in the
arrival of international brands in the country as well as national
retail chains. And with it, the scope for franchising has gone up,
too. Names like EuroKids, Guardian Pharmacy, and Ferns n Petals
are just a few examples of successful privatisation and franchising
in India.

 ‘Indianisation’ of products and services: Understanding the

customer segment and catering to their specific needs is a key part
of any successful business, and this is a major reason why
franchised outlets in India have built such a massive consumer
base. Most big brands in the country have customised their
offerings to suit the Indian palate, such as McDonald’s, Domino’s
Pizza, and even hospitality services. With the demographic
makeover that India is experiencing with a middle class that has
increased disposable income, there is a steady growth in the
number of consumers for branded products and franchised names.

 First-time entrepreneurs: Reports indicate that the Indian

franchise industry is being driven by young people who are opting
for franchising as their first entrepreneurship venture. These new
entrants choose to be franchisees due to the minimised risk and
already-established model, which provide almost-instant benefits
and freedom in business. In fact, currently about 35% of Indian
franchisees are first-time businessmen, contributing substantially
to the growth of the sector in India.
The salient features of the franchising system are given
below:

(i) Two Parties – In a franchise there are at least two sides – the
franchiser and the franchisee. There can be more than one franchisee.
(ii) Written Agreement – There is an agreement in writing between the
franchiser and the franchisee.
(iii) Exclusive Right – The franchiser owns a brand or trade mark and
allows the franchisee to use it in a specific area under a license.
(iv) Payment – The franchisee makes an initial payment for the license
and becomes a part of the franchiser’s network. He also pays a regular
license fee which may be an agreed percentage of sales or profits.
(v) Support – The franchiser provides assistance to the franchisee in
marketing, equipment and systems, staff training, record keeping. The
franchiser initially sets up the business to be run by the franchisee.

(vi) Restrictions – The franchisee is required to operate the business

in accordance with the policies and procedures specified by the
franchiser. He gives an undertaking not to carry on any competing
business and not to disclose confidential information regarding the
franchise. The franchiser cannot terminate the agreement before its
expiry except for ‘good cause’.

(vii) Specified Period – The agreement is for a specific period e.g., five
years. On the expiry of this period, the agreement may be renewed
with the mutual consent of both the parties.

History

 The model of franchise management began in the 1990s in India,

with the start of the era of liberalisation.
 This system was initially adopted by a few educational
institutions and IT companies for business expansion and was
slow to grow at first.
 But today, the franchise industry in the country has several well-
known brands in various cities operating under this model.
  Today India is home to more than 3,000 brands which adopt the
franchising model:
Bata, one of the leading footwear companies, was
among the first franchisors in India; other pioneers of
Indian
franchising were NIIT, Apollo Hospitals, and Titan
Watches.

The Difference Between Franchising, Chains &

Licensing

A chain is a group of identical businesses that use the same logo, products,
marketing, etc. (just like a franchise) where each individual location is owned
by the parent. This means that a location can have a store manager who runs
day-to-day operations, but that person does not own the business. With a
franchise, as we know, each location is owned by the individual.

Restaurants are the most common form of this, but not the only option. Costco
and Walmart are chains: multiple locations, each owned by Costco or
Walmart’s central business structure.

A licensed store has slightly more subtle differences. It is very similar to a

franchise in that the brand owner (licensor) gives permission to the individual
(licensee — are you sensing a theme here?) for the brand to be used and
products to be sold, but the structure and fees associated differ widely.
Typically, the licensor has little to no operational control of the licensee, and
the licensee receives significantly less training from the brand. Additionally,
there is typically no one-time fee upfront, like with a franchise. Instead, an
ongoing licensing fee is typically assessed.

An excellent example of licensed stores are Starbucks that appear inside of

other stores, like a Target or Safeway, often in the form of a big kiosk rather
than a self-contained space. These mini-Starbucks still carry all of the same
coffees, snacks, and merchandise, but they are not held to the same
standards as traditional Starbucks locations. Nor are the Target Starbucks
baristas employees of Starbucks: they’re employed by Target.
The Pros and Cons of Franchise Ownership
Pros

Proven business model. Alex has already gone through months or years of

trial and error to refine her business model. Often, being a franchisee removes
much of the risk inherent with a startup, because the franchisor has already
made mistakes. You get to reap the knowledge from those mistakes without
having to make them yourselves. (Of course, any type of business carries risk,
franchises included. Franchises are not a magical, success-insured
investment.)

Market-tested products or services. The product or service has already

received feedback from the market — it’s already passed through the first few
rounds of trial by fire. And again, you get to reap the rewards of those
mistakes without having to pay for them yourself.

Brand recognition. One of the most difficult aspects of running a small

business is bringing customers in the door. With a franchise, the brand is
often already nationally recognizable. One obvious example is Subway. Or a
more recent example is Menchies. Your franchisor has already worked to
build the brand you’ll be using so you don’t have to.

Territory security. When you purchase a franchise location, you also receive

a specific geographic territory. This means your franchisor won’t sell another
franchise location too close to yours — they don’t want their franchisees
competing with one another for market share, and neither do you. You can
even purchase multiple territories at once, if you want to expand your number
of locations. 

Marketing support. Along with brand recognition, the franchisor

will often provide marketing slogans, images, content and support with
building your strategies and budget. Some franchisors even have national or
international marketing campaigns that they run on behalf of their locations.
Training program. Training programs are typical built into a franchise system
to give you a solid understanding of the business model and strategies for
running a location.

Operational assistance. Many franchisors have a team dedicated to ongoing

support for you and your location. They’ll answer your questions and assist
with the many details that come with their franchise brand.

Built-in support system. Last but not least, being a franchisee means you
have a built-in support system of other franchisees. The brand will have online
forums and annual conventions where franchisees can come together, answer
questions, trade tips and tricks, etc.

Cons
Rules and regulations. There are specific rules around how, when and
where to operate your franchise location. These rules apply to every franchise
owner, and are in place to ensure the brand remains true and uniform. They
restrict the franchisor’s freedom to do whatever he or she wishes.

Fees and royalties. Purchasing your location can be expensive — even more

so than buying an independent business or building your own. Franchisees
also typically owe a percentage of revenue back to the franchisor in the form
of a royalty.

High start-up costs. Outside of the franchise fee, the cost of actually getting
your doors open can be very high. Typically, a franchisee is required to
procure equipment and materials through the franchisor. This can
occasionally be more expensive than if the franchisee had the freedom to
choose a different supplier.

Why Franchising Is Important

The Right Franchisee Will Give The Brand Market Insights And A
Deeper Understanding Of What Will And Won’t Work In That
Particular Region:
– Knowing The Expenditure Involved In Setting Up The Store As Well
As Maintaining A Fixed Budget.
– Research Is Crucial When Finalising On A Retail Partner, Being
Aware Of The History As Well As A Proven Track-Record Will Help On
Establishing The Partnership.
– Integrity And Past Experience (Track Record) Also Plays An
Important Role.
– Relationship Building Along With The Business
– Brand Pedigree
– Proven Business Model
How Franchising Works In India
India Offers Mainly Four Types Of Entry Points For Franchises, Which
Includes:
– Direct Franchising
– Master Franchising
– Regional Franchising
– Local Incorporation.
Direct Franchising Is Where A Company Creates A Direct Network Of
Franchises. This Works Well For Local Companies With Pre-Existing
Experience In India. However, It Can Prove To Be Challenging To
Foreign Companies Entering India For The First Time. In This Case,
The Owner Company Directly Provides Sales And Support Services To
The Franchisees. A Common Example Of Direct Franchise Is The
Franchise Opportunities Off Ered By Monsoon Salon & Spa In Metro
Cities Like Delhi, Mumbai, Pune, Chandigarh, Kolkata And More.

Master Franchising Is Where A Company Awards Exclusive Rights To

Develop A Foreign Brand To A Localentity, Often Accompanied With A
Large Investment Made By The Franchisor. The Owner Recruits A
Specific Person Or A Company To Provide Services To Franchisees In A
Specified Territory Which Can Typically Be A Major Market Or Even
One Or More States. The Master Franchisee Is Then In Charge Of
Developing The Company’s Brand Either Through Cultivating A Sub-
Franchised Network Or Opening Outlets Owned By The Master
Franchisee (Though The Two Are Not Mutually Exclusive). A Master
Franchise Can Own A Number Of Individual Franchisees In A Certain
Area, However, The Same Is Not Applicable For A Direct Franchise.
Generally Master Franchise Model Is Adopted By Fast Food
Restaurants, Real Estate Agencies, And Convenience Food Stores.

Regional Franchising Operates In The Same Way As Master

Franchising But Covers Only A Specific Regional Area As Opposed To
The Entire Country. Given India’s Diversity Along With The
Complexity Of State-Specific Laws, Many Franchisors Choose A
Regional Franchising Approach.

Local Incorporation Is When A Foreign Franchisor Forms A Subsidiary

Company And Awards It Franchising  In India. The American Fast
Food Chain Subway, For Example, Has Established A Subsidiary In
India, Which Handles Their Franchising Network.

There are four major types of franchises:

a. Business Format Franchises,

b. Product Franchises,
c. Manufacturing Franchises, and
d. Business Opportunity Ventures.

a. Business Format Franchises:

This is the most common type of franchise. Here a company expands
by supplying an established business concept/format, including its
brand name, symbol, and/or trademark to independent business
owners. In this arrangement, the franchisee acquires the right to use
or follow a business format and also the best practices and processes
associated with it.
The franchiser company generally assists the independent owners
significantly in launching and operating their businesses. In return,
the business owners pay fees and royalties to franchiser. Hence, the
franchisee acquires the right to use all the elements of a fully
integrated business operation.
Some of the examples are fast-food restaurants such as
McDonald’s, Domino’s Pizza, and KFC. Such franchisees maintain the
design and styling aspects determined by the franchiser in their retail
environments, ranging from the product offered to store design,
ambience, atmospherics, and internal infrastructure to service
standards to deliveries.

b. Product Franchises:
In these franchise agreements, the franchisee gets the right to use the
brand/trade names, trademark, and/or products from the franchiser.
Through this kind of agreement, manufacturers allow retailers to
distribute their products and use their brand names and trademarks.
They also monitor and control on the way retail stores distribute their
products. In return of these rights, store owners pay royalties/fees or
buy a minimum quantity of products.
Some of the examples are Tommy Hilfiger, Arrow, Scullers,
Cotton King Stores, Reebok stores and Bata stores who operate under
this kind of franchise agreement.

c. Manufacturing Franchises:
In this case, franchiser offers the right to produce and sell goods to a
manufacturer under its brand name and trademark. This type of
franchise is generally popular among food and beverage companies.
For example, soft drink bottlers and canners often obtain franchise
rights from soft drink companies to produce, bottle, and distribute soft
drinks. The major soft drink companies supply the concentrate to
them, which are further processed, packed, and distributed by the
regional manufacturing franchises.
One example is Gemini Distilleries Pvt. Ltd, Goa, a manufacturing
franchise of Bacardi Ltd for manufacturing of winery products.

d. Business Opportunity Ventures:

This concept works on the format in which an independent business

owner buys and distributes the products from one company. The
company supplies the business owner with clients or accounts, in
return of which the business owner pays the company a pre-decided
fee.
For example, the business owners may obtain vending machine
routes and distribution rights, through this type of franchise
arrangement (e.g., coffee vending machine).
Retailer brands and companies often look toward franchising as a key
operating model for expansion from scale, geographical coverage, and
time perspectives.
For example, Gap is looking forward to script a new story in India as
it struggles to maintain customer loyalty in markets across the world.
The company was set up in 1969 by Doris and Donald Fisher and has
presence in around in 90 countries through around 3,300 company-
operated stores and 400 franchise stores.
In India, its franchisee is Arvind Lifestyle Brands and opened its first
store in Delhi, five years after its rival Zara did and a few weeks before
H&M announced its plans. Zara, Gap’s Spanish rival, has JV with
Tata’s Trent. Gap, Zara, and H&M are the brands that are popular
even before they entered India. So Gap hopes to leverage the
increasing fashion consciousness and latent awareness the Indian
consumer has about its brands.

Following are the important points of franchising:

1. Market Growth:
Franchise is the key to rapid market expansion. It helps a company to
growth rapidly and expands the range of markets in quick time and
without incurring large investments. The computer education network
of NIIT is a good example of rapid growth through franchising. It has
able to build a network of over 100 branches across the country
through franchising.
2. Helps in Brand Building:
Brand building is indeed a journey. Building a brand has everything to
do with capturing the hearts and minds of consumers. A brand
incorporates and conveys the values and traits that a company wants
associated with their product or service. Establishing a strong brand
can have significant value, and truly is a journey that companies
should embark upon in their quest to be successful.
3. Choosing your Own Job Description:
The owner of a business can delegate certain aspects of the business to
others and it creates a job description. A quality job description is one
that not only works for your employees, but is legally compliant, and
also fulfils many other requirements.
4. Lower Costs:
When someone is buying an existing company through franchising, it
is almost always less expensive. The business owners live the
scripture, “you reap what you sow”.

Franchising – Franchise Relationships (Between

Retailer and Manufacturer)

The most common franchise relationship is between a retailer and a

manufacturer or sometime a wholesaler, e.g., Car showrooms, Bata
and Liberty shoes showrooms, Haldiram franchise etc. In India
manufacturer-manufacturer franchise relationship is the oldest. Here
one manufacturer produces goods for the other under licence. A large
number of items are reserved for manufacture in SSI units. These
franchise SSI units manufacturer the items as per the design,
specifications and quality control of the franchiser.

They use the logo and trademark of the franchiser who is responsible
for sales and marketing e.g., Singer Sewing Machines have three
franchise manufactures in Ludhiana besides one in Hapur. Road
Master Industries and Dewan Rubber are the franchise manufacturers
of TI cycles for bicycle tyres and rims, Colgate and Hindustan unilever
use franchisee for production of tooth brush as the item is reserved for
manufacture in SSI sector. It also includes sub-contractor producing
goods as per the design and technical specifications of the mother
units, who provide them with all technical assistance.
Exclusive dealership is an example of manufacturer-wholesaler
franchise relationship. The retail and service franchise are
comparatively new relationships in India and differ widely from
manufacturer- retail franchise system already prevalent in India.
Retail-retail relationship tries to duplicate one retail outlet.

It can vary from the Kwality chain of restaurants, wherein the

franchisee have a lot of independence and pay a royalty for using the
name, to Wimpy or Pizza King wherein alt decisions including
recruitment and training are reserved for the franchiser. Here the
franchisee is an extension of the franchiser. Each franchise outlet
clearly resembles that of the franchiser. It is akin to company outlets
but with different owners and investors.
The franchise is like a marriage. The stakes are high on both sides. The
franchiser gives up his precious asset, the brand and the franchisee
forgoes his independence and right to operate alone. The implicit trust
is the corner stone of the relationship between the franchisee and
franchiser.

Franchise arrangements are usually either:

(i) Product or trade name franchises, or

(ii) Business format franchises.

The former involves product-distribution arrangement within a

specialised geographic territory. For example, a petrol pump is a
product and trademark franchise. A business format-franchise
includes not only a product and trade name, but also operating
procedures such as – design facilities, accounting procedures and
practices, employee relations, quality assurance standard, and over all
image and appearance of business, e.g., restaurants, convenient stores
are often a business franchise.

Franchising – Advantages and Disadvantages

Advantages:

1. To the Franchiser:
(i) The franchiser can enter into foreign markets and new territories in
the domestic market safely and easily.
(ii) The franchiser can expand his business without investing a large
amount of money. The cost of new premises and extra staff is done by
the franchisee.
(iii) A regular income is received by way of royalty or fee from
franchisee.
(iv) With expansion of business, the franchiser can obtain economies
of scale through bulk buying from suppliers.
(v) The franchisees have a financial stake in business. Therefore, they
are likely to work very hard to make them succeed.
(vi) The franchiser retains control over the franchisees.
(vii) The franchiser can increase his goodwill by expanding his
network. His brand name becomes popular.
(viii) The franchiser gets feedback about the needs and preferences of
customers from the franchisees.

2. To the Franchisee:

(i) Support and advice is available from the franchiser in respect of

staff training and marketing. Such support is available not only in the
initial stages but also on a continuing basis.
(ii) The franchisee can start his business with less initial investment
than what is required without a franchise.
(iii) The franchisee gains from the established name, brand and
national advertising of the franchiser.
(iv) The chance of failure is minimum due to proven success of the
product and its secure place in the market. Franchising allows people
to start and run their business with less risk.
(v) Banks are more willing to lend money to a franchisee because
documented information relating to the success of other franchisees
with the same product or service is available.

Disadvantages:

1. To the Franchiser:
(i) The franchiser’s trade name and reputation may be tarnished if the
franchisee does not maintain standards of quality and service.
(ii) The franchiser has to provide initial financial assistance and
specialist advice.
(iii) There are ongoing costs of supporting the franchisee and national
advertising.
2. To the Franchisee:
(i) The franchisee does not have complete independence in his
business.
(ii) The franchisee has to make payment of royalties on a regular basis.
(iii) In some cases the franchisee is required to buy all supplies from
the franchiser even though cheaper local alternatives may be available.
(iv) The franchisee may not be able to sell the business without the
franchiser’s approval.

Franchising – Assistance Provided by Franchisor

Since franchise is a ready-made business available to an entrepreneur,
it is an attractive proposition as compared to setting up an enterprise
from the start. The franchisee gets a semi established business from
the day one. The business is akin to the other enterprises of an
established chain. The franchiser is required to provide the franchisee
with all the assistance in starting and establishing the venture.

Normally the franchiser is expected to assist the franchisee

in:
1. Advertising and providing a strategy for marketing

2. Training the manpower

3. Selection of the equipment

4. Office design, layout etc.

5. Standardised policy and procedures

6. Assistance in site selection and logistics

7. Assistance on legal matters.

In addition to the professional help, the franchisee also get lot of

intangible benefits. Like all other things the franchise also has some
disadvantages as they lack independence, individual identity, and have
continuous obligation that is difficult of cancel. Franchises normally
combine personal ownership with the systems of big business.

Franchising is also advantageous to the franchiser who grows rapidly

using other people’s money. It helps him in expanding the business
geographically into various location including the remote one. He can
manage with less number of people and hence is saved of many a
labour related problems. Franchisee being independent owner of
various chain stores are more committed and work longer hours than
managers.

Besides other benefits discussed above franchising provides an

entrepreneur the ability to penetrate the market rapidly with limited
finances. Even larger companies are being attracted to franchising,
thus, making franchise a mere lucrative business for the franchisee.
Franchise is becoming popular as it is regarded as a promise of instant
success and is considered to be least risky way to become an
entrepreneur. However with the mushrooming of franchising these
benefits are limited to franchisee of a few reputed franchisers.

Yet, franchising has its own risks. When a large franchiser folds up,
the effects on the rest of the network can be crippling. A few years ago
an apparel company ‘Stencil’ had to close shop. Well over 100
franchisee found themselves out of business overnight. The same was
the fate of Mother care franchisees when it pulled the stutters. The
franchise relationship is an unequal one. A franchiser gets to call the
shots. In US the law of franchise protects the interest of the franchisee
while in India there is no law regulating franchising business and
buyers of the franchise have to be extra cautious.