TYBMS

PRESENTS

FRANCHISING

SIDDHARTH UPPONI ACADEMIC YEAR: 2008-2009

FRANCHISING

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Name of the Student: Siddharth. Upponi

Seat No.: _____________

Name of the Guide: Prof.Sheetal. Modi

Date: ________________

DECLARATIONI, _________________________________________________ of

_________________________ College of T.Y.B.M.S. (Semester V)

hereby declare that I have completed this project on

___________________________________________ in the

Academic year___________. The information submitted is true and

original to the best of my knowledge.

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Signature of the Student

CERTIFICATE

I, ____________________________________________________

hereby certify that _______________________________________

of _________________________College of T.Y.B.M.S. (Semester V)

has completed the project on ______________________________in

the Academic year _____________. The information submitted is

true and original to the best of my knowledge.

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Signature of the Signature of the PrincipalProject Coordinator of the College

INDEX

1 History of Franchising

Father of Franchising

COKE

Mc DONALD’S

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2 Introduction

What is Franchising?

What is a Franchise?

Who is a Franchisor?

Who is the Franchisee?

What is Franchise fee?

What is royalty?

Basic Elements of Franchising (in a nutshell)

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10

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Business Format Franchising

Modes Of Franchising

The four ‘R’s of Franchising

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3 Advantages & Disadvantages of Franchising 20

4 Some general Issues on franchising

Why is franchising growing?

How is franchising relevant to India?

Franchising in India so far?

Scope of Franchising in India

The potential of franchising in India

NIIT

APTECH

KOUTONS

JUMBO KING VADA PAV

SHAHNAZ HUSAIN

SHAADI POINT

EURO KIDS

KIDZEE

FAI

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25

26

30

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35

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5 Potential of International Franchising in India

Procedure for Approval of Foreign Franchises in India?

BASKIN ROBBINS

SUBWAY

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The TACO MAKER

Mc DONALDS

ADIDIAS

YUM! BRANDS Inc.

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46

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6 LEGAL ASPECTS OF FRANCHISING IN INDIA

Some Basic Legal Issues

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7 THE FUTURE OF FRANCHISING 54

HISTORY

Most business historians date the beginning of franchising as a concept to the Middle

Ages, when feudal lords initiated the practice of selling to others the rights to collect

taxes and operate markets on their behalf. However, this makes the earliest examples

of franchising a political activity rather than a business activity. The first examples of

franchising as a way of doing business are found in mid-nineteenth century Germany,

where brewers set up contracts with tavern owners to sell their beer exclusively in the

taverns.

The Father of Franchising

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Franchising dates back to at least the 1850s; ISAAC SINGER, who made

improvements to an existing model of a sewing machine, wanted to increase the

distribution of his sewing machines. In 1851, a young successful company

“SINGER” in the U.S. found it unprofitable to provide after sales service for its

products to its distant outlets and far flung customers. To be able to do so without

sing its own sales force, the company hit upon a novel idea that became the

trailblazer for fanchising. They attracted independent individuals by offering them

protected territories with exclusive rights to sell and service their products. For this

they drew a legal contract that can be termed as the first franchise agreement

between a company and the inestors. This model ran successfully and soo the

company was able to establish a big network of franchised dealers. This successful

model was developed by Isaac Singer and so he is popularly known as the Father

of Franchising.

A slightly later, yet much more successful, example of franchising was the franchising

of John S. Pemberton's (An American druggist who invented Coca-Cola.) Coca-Cola.

Although he was the one behind the origin of Coca Cola it was later aquired by to

young men Thomas and Whitehead in 1899. In 1901, realising that they lacked the

capital to establish their own bottling plant, they started awarding franchises to

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bottling plants, and provided the syrup to the bottlers who would just add carbonated

water and bottle it for distribution to the retailers within the territory. The idea was a

success and by 1919 there were 1,000 thriving franchised Coca- Cola bottlers.

Modern franchising came to prominence with the rise of franchise-based food service

establishments. This trend started as early as 1919 with quick service restaurants such

as A&W Root Beer. In 1935, Howard Deering Johnson teamed up with Reginald

Sprague to establish the first modern restaurant franchise. The idea was to let

independent operators use the same name, food, supplies, logo and even building

design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard

Johnson's started franchising motels. The 1950s saw a boom of franchise chains in

conjunction with the development of America's Interstate Highway System. Fast food

restaurants, diners and motel chains exploded.

In regards to contemporary franchise chains, McDonalds is arguably the most

successful worldwide with more restaurant units than any other franchise network.

McDonald's founders (Dick and Mac McDonald) first venture into the food

business was in 1937, when they opened a hot dog stand in Arcadia, California

(which they coincidentally purchased from another MacDonald, Erin Elizabeth).

They opened the first McDonald's restaurant on May 15, 1940, in San Bernardino,

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California. Hamburgers proved to be their most popular product, so in 1948 the

brothers introduced their "Speedee Service System," a streamlined assembly line

for hamburgers that allowed them to produce burgers quickly and inexpensively.

Their cheap burgers were very successful, and in 1953 they began to franchise

McDonald's restaurants. Entrepreneur Ray Kroc visited the first restaurant in 1953,

and sensing its potential, he convinced the brothers to put him in charge of

franchising. He later purchased the brothers' interest in the company, and oversaw

its worldwide expansion.

I N T R O D U C T I O N

Starting up a new venture can be a risky affair. You can painstakingly explore and

research your market, time the set up to perfection, open your business where demand is

high, outdo the competition, offer the best range of products and services available,

advertise in the right places and still your business can fail. In fact global Small Business

Statistics indicate that one half of new businesses close within the first 3 years of trading.

When describing exactly what a franchise is, the important thought is “the right to do

business in a prescribed manner.”

Recently, franchising has been enjoying more acceptability vis-à-vis an independent

business. There are inherent benefits in the franchising system, which make them more

competitive in the market place. Apart, from these inbuilt benefits in franchising you can

be your own boss, you're operating under a trademark that has instant brand recognition,

and the failure rate for franchises is much lower than it is for independent businesses.

Before we analyse all these factors let us first understand what exactly is franchising.

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What is Franchising?

Though we are familiar with the term ‘franchising’, only a few of us are fully aware of

what the term exactly implies. The dictionary defines the word ‘franchising’ rather

simply as ‘an authorisation granted’ by a company to someone to sell or distribute its

goods or services in a certain area’. Literally speaking its exact definition is ‘rights of

privilege granted’.

’Franchising in general means granting of certain rights by one party (the franchisor)

to another (the franchisee) in return for a sum of money. The franchisee then obtains

the authority to exercises those rights under the guidance of the franchisor.

The above definition is a very general in its nature and encompasses many different

forms of licensing arrangements.

The International Franchise Association (IFA) defines franchising as a “continuing

relationship in which the franchisor provides licensed privilege to do business, plus

assistance in organizing, training, merchandising and management in return for a

consideration from the franchisee”.

What is a Franchise?

A legal agreement that allows one organisation with a product, idea, name or

trademark to grant certain rights and information about operating a business to an

independent business owner. In return, the business owner (franchisee) pays a fee

and/or royalties to the owner.

Who is a Franchisor?

He is the owner of the franchised system. It owns the know-how of the concept and

the brand name. It grants franchises to third parties.

Who is the Franchisee?

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He is the one who has been granted the right by the franchisor to carry on the business

using the franchisor’s know-how and the brand name. Now, depending on the rights

granted, franchisee’s can be classified into:

1.      Unit Franchisee – this is the simplest and most common form of franchising.

This franchisee is granted the right to operate one unit or outlet of the franchised

business.

2.      Master Franchisee – He is generally granted the right to a substantial territory.

It will then grant unit franchises to unit franchisees throughout the territory. The

Master Franchisee needs to have sufficient drive and resource to fully exploit the

territory and control the unit franchisees territory. International franchisors usually

appoint national master franchisees to exploit the market of a particular country.

3.      Regional Franchise – In a geographically large area a franchisor, or a Master

Franchisee may decide that it is commercially appropriate to further divide the

territory up with separate regions and grant a Master Franchise for each separate

region. These franchises are known as regional franchises or sometimes area

franchises.

4.      Multiple Franchises – Some unit franchisees operate not just one unit, but

several. These are referred to as multiple franchises and usually have a large number

of individual unit franchise arrangements – one for each unit.

What is Franchise fee?

It is an upfront entry fee, paid by the franchisee to the franchisor, usually payable

upon the signing of the contract (franchise agreement) for the right to use the

franchisor’s name, logo and business system. Often, the franchise fee is also the

consideration paid for the initial training, site selection, operations manuals and other

help given by the franchisor to the franchise before opening the business.

What is Royalty?

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It is a continuing payment that has to be made by the franchisee to the franchisor and

is payable on a periodic basis, which can be, weekly, monthly, or on any other.

Royalty payments can be either fixed amounts or could be based on percentage of

gross sales or any other such consideration that may be agreed upon by both the

franchisor and the franchisee in the franchise agreement.

Basic Elements of Franchising (in a nutshell) –

Thus, we can sum up the basic elements of franchising as under:

1.      An entrepreneur (franchisor) has developed a system of doing business, which

works and decides to grant to another entrepreneur (franchisee) the right to use the

system.

2.      The two entrepreneurs are legally and financially independent enterprises.

3.      The granting of the right to use the franchise system involves the right of the

franchisee to use the franchisor’s intellectual and industrial property, know-how,

business and technical methods, procedural system and other intellectual property

rights.

4.      The franchisee in exchange undertakes to follow the methods elaborated by the

franchisor and to pay an entrance fee and royalties.

5.      The franchisor retains the right of control over the performance of the franchise.

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6.      The franchisor undertakes to provide the franchisee with training and on-going

assistance.

Business Format Franchising

As compared to other types of franchising the most popular and widely used is the

business format of franchising. It can be defined as the contractual license granted by

one person (the franchisor) to another (the franchisee) which:

Permits or requires the franchisee to carry on a particular business using the

franchisor’s know-how and most importantly, the prescribed business format,

under the franchisor’s brand as an independent business, thereby ensuring that

the franchisee gets a proven method of operating a business.

Permits the franchisee to also use the franchisor’s products and services, trade

name, trade mark, etc.

Allows the franchisor to exercise continuing control over the manner in which

the franchisee carries on the franchised business;

Obliges the franchisor to provide the franchisee with ongoing support in

carrying on the franchised business.

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As a commercial matter, the agreement inevitably requires the franchisee periodically

during the period of the franchise to pay to the franchisor sums of money in

consideration for the franchise and / or goods and / or services provided by the

franchisor to the franchisee.

There are also some other modes of franchising such as manufacturing franchising,

product or trade name franchising, etc.

MODES OF FRANCHISING

Direct Franchising –

Under this system, the franchisor grants franchises to individual franchisees in the

foreign country through the execution of an international contract. The main problems

associated with this type of franchising is the difficulty of franchisors to control the

performance of the franchisees as these are located in another country, the assistance to

be provided to the franchisee during the operation of the contract. The question of

intellectual and industrial property rights in the foreign country also needs to be

considered. Taxation is another issue which receives due consideration. Furthermore,

how the franchise arrangement is structured and the existence of treaties between the

countries involved may have considerable influence on taxation. A very important

question is clearly that of the choice of law and jurisdiction. There is a tendency for

franchisors to want their own domestic law to apply to the agreement, even if the

franchise is exploited in another country. Another vital point to be kept in mind is the law

relating to transfer of technology that may be applicable.

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Keeping the above problems in mind, it is observed that direct franchising is not used

extensively internationally.

Subsidiary or Branch Office –

Franchising through a subsidiary or a branch office are two methods which are often

treated together, although there are differences which derive from the fact that a

subsidiary, albeit controlled by the franchisor, is a separate legal entity whereas a branch

office is not. Whatever be the difference, an advantage of this approach is that the

franchisor is present in the foreign country as a corporate body. The contract will in this

case be a domestic contract and thus subject to local legislation.

The problems associated with this type are similar to direct franchising. In addition, the

franchisor will be required to send his personnel to the foreign country for the start up

operations thus involving work permit and residence formalities.

Area Development Agreements –

Such agreements traditionally involved an arrangement whereby the developer is given

the right to open a multiple number of outlets to a predetermined schedule and within a

given area. These arrangements in the past have been used mostly in domestic

franchising, but are now being used increasingly in international franchising.

Items that are to be considered here include the number and density of the outlets to be

opened, detailed development schedule and the consequence of non-complying of the

schedule. In such arrangements, the developer will need to have substantial financial

resources so as to be able to open the required number of outlets.

Master Franchise Agreements –

In the international scenario, this is widely used. In respect to such agreements, the

franchisor grants a person in another country, the sub-franchisor, the exclusive right

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within a certain territory to open franchise outlets itself and/or to grant franchises to sub-

franchisees.

In this case, there are two agreements involved: an international agreement between the

franchisor and the sub-franchisor (the master franchise agreement) and a national

franchise agreement between the sub-franchisor and each of the sub-franchisees (the sub-

franchise agreement). The franchisor transmits all its rights and duties to the sub-

franchisor, who will be in charge of the enforcement of the sub-franchise agreement and

of the general development and working of the network in that country. All the franchisor

will be able to do is to sue the sub-franchisor in case of breach of obligation to enforce

the sub-franchise agreement as laid down in the master franchise agreement.

The advantages of this system are that the sub-franchisor is familiar with the local habits,

tastes, culture and laws of its country and that it will know ways about the local

bureaucracy for necessary permits as and when necessary. The disadvantages include that

the financial returns of the franchisor will be reduced by the amount due to the sub-

franchisor and also that the franchisor will have to rely on the sub-franchisor for the

performance of the franchise system.

 

Joint Ventures –

In the case of joint ventures, the franchisor and a local partner create a joint venture. This

venture then enters into a master franchise agreement with the franchisor, and proceeds to

open franchise outlets and to grant sub-franchises just as a normal sub-franchisor would

do.

An arrangement such as this will have to consider legislation on joint ventures in addition

to all the other legalities that are involved. Problems may also arise with the fact that the

double link may create conflicts of interest for the franchisor. The advantages accruing

from this arrangement may include that it could be a way to solve the problem of

financing franchise operations in countries where financial means are scarce.

Miscellaneous forms –

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There is no limit to the refinement that can be made to the above modes of franchising.

New forms of franchising, or combinations of different forms of franchising, appear at

regular intervals.

The four ‘R’s of Franchising

Corporate history is replete with instances of outstanding franchising success and also

many failures. Learning from them, franchising can succeed if the franchisee has a right

combination of the four R’s prescribed. These are:

1.      Realism –

The franchisee should be very realistic in assessment of his business strengths and

weaknesses. Certain key areas where realism is a must while deciding to go into

franchising includes questions like are you prepared for the financial insecurity, are you

capable of developing a frame of mind when you can smile and be cordial even when the

customer is totally wrong. More important is the need for realism in evaluating the

products and services offered by the franchisor.

2.      Resources –

Many franchisees, during the early periods of their business when resources constraints

are common, tend to sometimes overlook sending in the royalty cheques to the

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franchisor. Franchisors keep feeling and rightly so that their royalty is as much a key

business expenditure of the franchisee as payment for purchases or payroll is and any

delay in handling this area would lead to unfortunate consequences of a long term nature.

Therefore, while planning resources on a periodic basis, consider the payments that are to

be made to franchisor. Another area where most franchisees have problems is to manage

their resources while living within the franchising system. The franchising agreement, in

most cases, clearly indicates systems, procedures and methods of managing the resources.

The franchisee will do well to either be mentally prepared to accept the resource

management terms of the franchisor or make it clear at the beginning that he needs the

requisite leeway to manage his own resources.

3.      Research –

Research on the franchisor is a must for the success. Various published sources also

provide fairly detailed information on most of the franchises that are on offer but to what

extent that will suffice for the Indian conditions needs serious examination. Whatever be

the methodology, the prospective franchisee will do well to build comprehensive

information on the franchisor, the products or service of offer, competing and substitute

products and services before he makes any move committing his financial resources on a

long term basis.

4.      Resolve –

Resolve to be part of the franchising system. The problem starts when a person gets into

franchising only because he has an entrepreneurial instinct but the instant he becomes a

franchisee, the true entrepreneur in him starts resenting the shackles that are imposed by

the franchising system. The options are clear – either stay within the system and fully

learn the nuances of the business and prosper or try one’s fledging entrepreneurial talent

and get into trouble.

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Advantages & Disadvantages of Franchising

Advantages to the Franchisee: -

He is the proprietor of his own business and owns the tangible assets of the

franchised outlet.

He gains from the franchisor the entire business concept with full training,

assistance in every aspect of setting up and running the business, and access to

necessary materials and supplies.

Franchisee’s have access to regional and national promotions / advertising

campaigns.

He gets an access to global standards and international technology in products and

services, without loss of control.

There is minimum risk as it is a tried and tested formula of the franchisor.

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Disadvantages to the Franchisee: -

He is not an independent entrepreneur. He has to follow the franchisor’s

instructions.

The lower risk is offset by the lower reward for the success.

Advantages to the Franchisor: -

Franchising allow for intensive and rapid expansion of a regional or national

business system.

With minimum capital outlay franchising accelerates the network’s growth and

probably it’s profitably. It basically works on the OPM (Other People’s Money)

principle.

The risk that the franchisor would have had to otherwise bare alone gets spread

across the franchisees.

Self-employed franchisees are generally more motivated than salaried managers

and are more likely to give better results for less expenditure of capital on behalf

of the franchisor. Also this reduces the requirement of appointing and maintaining

the additional staff that the franchisor would have had to in case of a non

franchised business.

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The franchisor is free from the day to day unit operations since direct managing

responsibilities become the franchisee’s obligation.

Franchising gives him an assured earnings stream to fund continuous R & D

investment.

Disadvantages to the Franchisor: -

It has to control and co-ordinate a network of semi-independent entrepreneurs to

ensure favorable image of the franchise.

Decreased margins due to the share of the franchisees.

The franchisor-franchisee relationship is based on trust.

The franchisor has relatively less control over the business.

Some General Issues on Franchising

Why is franchising growing?

Franchising is one of the world’s fastest growing and most lucrative industries. Franchise

businesses will be turning over an estimated $ 2 trillion (which is roughly equal to twenty

times the size of India’s current GDP).

Franchising permits businesses to grow more rapidly than any other method. By

increasing the efficiency by which goods and services are distributed, it brings impressive

gains to any economy. On a cultural level, franchising is one of the few developments

that generate employment, earnings and entrepreneurship at the same time. It

disseminates ownership rights and decision-making power to thousands of small-unit

operators. For developing countries, or countries shifting to a market economy,

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franchising has the effect of creating relationships between one economy and another. It

promotes sharing of technologies, trademarks, marketing, intellectual property and even

architectural designs.

Franchising is a particularly good developmental tool in any part of the world where

financial resources are short and the need to simulate individual initiative is acute. There

are no tariff barriers to be dealt with. It puts little strain on the receiving country’s

balance of payments. Thus, not surprisingly, awareness of the benefits of this business

formula is growing at an international level.

How is franchising relevant to India?

Franchising affords India an opportunity to build its commercial infrastructure and

develop its domestically oriented businesses in an efficient, profitable and pan-national

manner. It also offers India the opportunity to import and develop foreign concepts in a

way, which ensures that the equity of the business remains in India, so avoiding the

politically undesirable situation whereby successful domestic businesses are owned by

foreign corporations.

The key attractions of franchising in India are as follows:

1.      Lower Capital Requirements –

Franchising is an excellent way for both Indian and foreign corporations to expand their

businesses and make their brand names known in India without having to risk large sums

of money by way of direct investment. The franchisees finance the expansion of the

business in India. In return they have the opportunity to make substantial income and

capital profits.

2.      Geographical extent of the country –

Franchising can enable a company to take advantage of the vast Indian market of over

1000 million people and growing at a rate of 1.9% p.a. There is an ever-growing demand

of goods and services such as fast food and beverages, clothing, electronic goods,

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computer hardware and software and professional services. The infrastructure is poor,

however, and operating a corporately owned distribution system that fully exploits the

geographical expanse of the country is extremely difficult and inefficient. Empowering

participants in the distribution system by granting them an equity interest in it (i.e. by

granting a franchise) can substantially improve the efficiency in the distribution system.

3.      Cultural Empathy –

Franchising well suits the entrepreneurial side of Indian culture. Indian business people

are fiercely proprietary and feel a need to have ownership and control over their business

operations which they can pass on to future generations. However, at the same time they

are keen to benefit from the goodwill and technology that can be provided by the

franchisor. Franchising allows them to reconcile these conflicting ambitions.

4.      Harnessing local market knowledge –

A company needs a great deal of knowledge of the different regional markets in India.

What holds good for Punjab may not be relevant for Kerela. Franchising provides a sure

and easy way of accessing the right level of relevant local market knowledge. Also in

case of international franchisors Indian master franchisees offer them direct access to

substantial market knowledge and a considered and sophisticated approach to its

exploitation.

Franchising in India so far?

Franchising in India is at its early stage and neither business people nor the courts have

had much exposure to it. Soft drinks and hotel franchises arrived in India in the 1960’s,

but in the 1970’s and 1980’s, the government expelled foreign brands from India.

Some international franchises have recently come back to India and are doing well. Hotel

businesses like Best Western Group and the Quality Inn Group have established

themselves. Also, Walt Disney has been successful in having its label in all sorts of goods

for children, whether they are clothing, toys, and school equipments. Fast food chains

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like McDonalds, Slice of Italy, Dominos, and Taco Bell have also come in. Pepsi and

Coke have re-captured the soft drinks market.

Let us have a look at some key facts that point to the growth of the franchising sector in

India:

There are over 600 active franchisors in the country

There are over 40,000 franchisees (across sectors) in India today.

The total investment put in by these franchisees in setting up their individual

franchised businesses is over Rs 5,000 crore.

The total annual turnover achieved by franchised businesses in India is in the

region of Rs 8,000-10,000 crore.

The total manpower directly employed by these franchised businesses is around

300,000.

Industry classification reveals that IT education sector dominates the Indian

franchise sector with a sizeable share of 40 per cent.

Number of outlets: A majority (68 per cent) of franchise operations are small with

50 or less outlets. Only three per cent franchisors have more than 500 outlets,

while 22 per cent have outlets numbering 51-100. The fact that most operators are

comparatively small is a probability because most of the franchisors are still

comparatively new.

Annual turnover from franchising Turnover from franchising is still not very

large. Only two per cent of franchisors have a turnover of more than Rs 500 crore

from their franchising operations. About five per cent have a franchise turnover

ranging Rs 100-500 crore; Four per cent have a turnover ranging Rs 50-100 crore;

11 per cent have a turnover ranging Rs 20-50 crore and 24 per cent have a

turnover ranging Rs 5-20 crore. However, more than half (54 per cent) has a

turnover less than Rs 5 crore.

These facts and figures highlight the extent to which franchising as a way of doing

business has been accepted in India. Also, there are increasing numbers of businesses that

are exploring the franchising route to business expansion.

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Scope of Franchising in India

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 (a franchised

hotel chain). For instant rejuvenation she dropped at Shehnaz Hussain Beauty Parlour.

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. Today, franchising has forayed into all industries from Food and

Fuel to Lodging and Child Care.  In India, the industry is a little over ten million ($).

There is limitless potential, as this industry is at a very nascent stage. 

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 POTENTIAL OF FRANCHISING IN INDIA 

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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 come from franchised businesses; India is

still to reach that stage, where franchised businesses are as widespread as the local

grocer. 

The way things are going it looks like franchising, as a dynamic and ever changing

industry will firmly establish itself in a few years to come. 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.  

Let us look at some major Indian franchisors but before that let us have a look at what

Mr. Gian Mario Migliaccio has to say about the Indian franchising industry.

How infofranchise.com helps the franchisors market their opportunity online…

Gian Mario Migliaccio: 38 years old; Co-Founder of Made In It, the Italian parent

company of InfoFranchise, the first Franchise Website available worldwide. The initial

web site was born in Europe in 1999. First in Spain, Italy and then France, Greece, the

UK and another dozen of International countries soon followed. His background is with

Advertising Agencies. His first agency was started in Italy when he was 20 years old and

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then all other endeavors were developed in the same field, during ’95 when the “Internet

Boom” was at in its first stages in Europe. By 1998 Made In It turned its focus to the

Internet and officially became a “Web Company”.

What does your company do to help franchisors?

InfoFranchise, a registered trademark all over the world, specializes in recruiting. It is

exactly in “the heart of the market”. It helps potential franchisees looking for the right

brand and the Franchisor looking for the right partner. InfoFranchise is not a consulting

company, but is the “way to expand the franchise business”. In Italy or in other European

countries, InfoFranchise produces thousands of leads monthly. InfoFranchise is becoming

the fastest and most valuable outlet for any Franchisor. As done throughout the world, in

India we will apply our experience and expertise.

What additional benefits would an Indian franchisor get by partnering with you?

InfoFranchise.in will be the Indian Franchise Website, but it doesn’t stop there.

InfoFranchise is a connection link from India to the world and vice-versa. Our goals are

to promote the best Indian franchise concepts through the web and show the India

Experience throughout the world network. India is a great area for franchise concepts.

Now Indian brands can act on expanding their experiences overseas, and InfoFranchise

will help them as they go worldwide!

Can franchising work for everyone?

Franchising is a wonderful idea. It is one of the best ways to create your own-business

with low risk. But “low” is not “zero”. The franchisee needs to be sure before signing the

contract. The problem is the same all over the world: don’t sign a “colorized brochure”.

Sign the value of “know-how.”

Ask a lawyer, consulting agency and/or even ask the other franchisees in the chain

directly is good advice. The other important thing is being a “positive person”: the

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franchisee is not an employee, they “are” the company and they “have” the responsibility

to create success. This is 24/7 job. The possibility for success is inside everyone. Find it.

Can you list some of the pros & cons of marketing through internet in a developing

country like in India where the reach of internet is extremely low in the smaller

towns?

India does have two sides it seems. Part of the world knows that India may be the best

place for the IT Engineers, Programming developers or for innovative technologies. Then

there is the other half of India that is not so up to date. This situation is not so different in

China or Russia and is very similar to “Old Europe” after the second World War. The

economy is in need of creating a “Booming India” and the Internet is just the way to

accelerate that boom. Now about 20% of the Indian population can navigate Internet

well. With just a look you can see that this percentage is not so different from the entire

European region.

How do you see India as a growing market for franchising?

India is a great market with enormous potential. The one thing that sets it apart: The

Culture. In India the culture is so different from Europe or the USA, it is necessary to

know the market, the culture and the history. Adapting the concept before starting in

India is the only way to make it as an overseas brand. The Indian concept can also use the

International experience to create and expand a great concept in one of the largest and

fastest growing markets in the world.

What do you recommend to someone considering franchising his or her business?

Everything is “franchise-able”, but it definitely depends on the franchisor’s experience.

Only the franchisors who create a great positive experience can gain success.

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Indian Success Stories

A lot of local companies have made it big by taking the franchising route. Lets us have a

look at some:

NIIT is a computer training and software solutions company based in New Delhi, India.

Formerly known as the National Institute Of Information Technology, the name being

derived from Indian Institutes of Technology(IIT). NIIT, the brainchild of two young

Indian entrepreneurs, Rajendra S. Pawar and Vijay K. Thadani, pioneered and nurtured

the concept of high quality IT education in India. Set up in 1981, NIIT has trained one

out of every three software professionals in the country and is a beacon in the global IT

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revolution. From introducing computers to the people of India, to providing advanced IT

skills to students and professionals, NIIT has evolved into a training powerhouse. While

special-priced, IT programs have enabled ordinary citizens to achieve computer and

Internet literacy, NIIT's career education has shaped the lives of millions of individuals.

NIIT's unique and pioneering Franchise-based business model, built around a network of

education centers across India and overseas, has enabled thousands of entrepreneurs to

achieve success in the IT training industry.

NIIT- called the McDonalds of the IT education world by globally renowned magazine,

the Far Eastern Economic Review-uses stringent norms to select and skill its Business

Partners and today has more than 3,430 schools. NIIT franchisees are equipped with

cutting-edge curriculum and courseware to provide high quality IT training to individuals

and enterprises. The franchisees pay for marketing and infrastructure--space, desks, and

computers. NIIT provides all the course materials and selects and trains all faculty

members. In return, the company gets royalties of roughly 20 percent on student tuitions

and also is reimbursed for the teaching materials it supplies. In a good year, NIIT's net

margins can run 20 percent. For the franchisees, the deal can be sweeter: Some have

racked up margins of 30 percent.

Aptech Limited is an IT education and training company having 3,200+ training centers

spread across 52 countries. The company is headquartered in Mumbai, India. Established

in 1986, the company pioneered IT training in the subcontinent with the distinction of

being the first ISO-certified ITES company in Asia.

It has been growing at a rate of over 100% every year. Every year, Aptech trains over

300,000 students and professionals with courses on the latest technologies. It is ranked

amongst the 300 best small companies in the world by Forbes Global and also listed

amongst the top 25 fastest growing companies in India by Business world. Aptech is

acclaimed as the leading IT-training organization internationally.

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Aptech is the first IT training and education organisation to be awarded the ISO 9001

certification for Education Support Services in 1993. This has ensured consistent high

quality standards in delivering world-class curriculum.

Aptech's Training and Education business is conducted through a franchisee model across

the globe. The average center has between four and six computer labs, five or six

classrooms, and 700 enrolled students at any given time. Centers tend to be larger in

urban areas and smaller in rural towns. Virtually all Aptech centers are now

independently owned franchises. The transition from a company-owned center model to a

franchise model was driven by two primary factors. First, Aptech wanted to grow its

business within India without unnecessary capital demands. Secondly, the model enables

Aptech to leverage the local knowledge of each franchisee. Despite local ownership,

Aptech maintains strict control over franchisees through a combination of contractual

obligations, supervision by regional managers, and curriculum and advertising control.

The Koutons story reveals how much a regional brand can grow in a short span

competing with major corporate brands. It has just opened its 225th exclusive outlet,

which is still a far-off dream for many national brands, and again, it hopes to touch the

magical 1000 number by 2008 end, even as it ventures into the rapidly growing womens’

wear segment. With immediate targets set to clock in a turnover of Rs 500 crore during

2006-07 against Rs 168 crore last year the brand is set for major expansions.

Explorers try many routes before they find one that works. The Koutons story dates back

to 1991 when it started its operation under the name Charlie Creations, selling mostly

denim wear. Finally in 2001, the brand Koutons came into existence.

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Now, imagine from 74 stores in March ’05, it took only a year's time to take it to 225

stores till date. Asked about this retail stratagem, a candid Mr. Kohli (Managing Director)

admits, “In 2002 we got into the franchisee model and this turned out to be a major retail

chapter in Koutons' history.” In franchise mode Koutons supplies goods on credit, as

franchisees are unwilling to block cash. The company bears the risk on the choice of

products stocked by the franchisee, the sale and return of products and, sometimes, even

the operational cost. But at the same time Koutons takes all the decisions regarding

pricing, promotions, products, etc. “As we know the quality of our garments, we are

willing to take the risks rather than passing on to the franchisee. For retailers there is no

cash block while for us the franchisee margins are lower at 15-20 per cent and we have

full control over what is stocked,” Kohli added.

Jumbo King Vada Pav

Three years ago, Dheeraj Gupta was in Dubai trying to market Indian sweets. He asked a

client about the population of Indians living in the United Arab Emirates, of which Dubai

is a small part-- ‘about 15 to 20 lakhs.’

This was stunning news. Here he was trying to sell Indian sweets to a population just

about the size of Malad, which houses about 16 lakh people. He wondered why he had

abandoned a population of I billion Indians and tried to entice 20 lakh people to eat his

sweets.

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It was then that he decided to focus on these one billion people and make them his

customers. Fortunately, around the time, he read the biography of Ray Kroc, the man

behind McDonalds. Fifty years ago, Ray Kroc had been able to spot the potential of the

hamburger and franchise it to the world. Today, with 30000 outlets worldwide,

McDonalds at $30 bn is bigger than India’s largest company, Reliance at $16 bn.

coincidentally, around the same time as he was reading the book, Dheeraj was in London,

staying with the Burger King franchisees. He observed the operations closely and decided

to experiment on something similar in Mumbai.

The product most similar to the burger was vada pav….. ubiquitous and inexpensive, it

looked like the ideal finger food to experiment with. The journey to brand the vada pav

began in august 2001.

Jumbo King has several first to its credit. It is the first vada pav company to set up at

1500 sq feet central kitchen to manufacture vadas. It is the first company to brand the

vada pav, pay 12% sales tax and now franchise it. Ask him how did he do this and pat

comes the reply “We have grown almost at 250% year on year in the past. This has

happened due to the franchise route that the company has taken.”

The target of the company is to grow through the franchisee route. For first it wants to

make a strong presence in the western suburbs and then moving on to central and south

Mumbai. Eventually it is targeting 100 stores in Mumbai within three years.

Shahnaz Husain

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Shahnaz Husain remains the best known name in India for her nature based cosmetic

care. Her own products and treatment drawn from Ayurveda have resulted in a vast

network of franchise establishments. Today Shahnaz Husain heads a chain of over 400

franchise salons in India and abroad, with outlets in prestigious stores and locations all

over the country and some of the places abroad. Her franchise based enterprise has

helped in worldwide extension of the Shahnaz Husain Herbal Clinics, popularizing her

formidable range of nearly 350 products.

Started in 1997 Shaadi.com is one of the world’s largest matrimonial service providers.

Today, it is one of the most successful matrimonial services, with over 70 lakh members

and five lakh successful marriages to its credit. The process is divided into three simple

steps, i.e. register, search, and contact.

In 2004 Shaadi.com launched its offline division Shaadi Point with the idea of serving the

non internet users to help them find a life partner. Shaadi Point has revolutionized the

matrimony industry and has made matchmaking a smarter, faster and much easier

process. After launching its first centre at Dadar, in Mumbai, Shaadi Point has established

a chain of 96 flourishing matrimonial service centres in more than 61 cities across India.

Within 4 years of time Shaadi Point aims to transform the Indian matchmaking industry.

The plan is to have 500 centres across the country by 2010. Keeping the consumer in

mind the company contemplated of what would be the best distribution for optimum

value and service and realized that the company should take the franchising route.

Matrimonial matchmaking is a very personal and sensitive matter and hence it needs

extreme commitment and dedication for effective consumer service. The maximum

commitment and dedication comes with ownership, so it took the franchising route.

Through franchising, the company created owners at every centre and hence ensured that

the commitment is at its maximum.

By taking the franchising path, Shaadi Point has been able to reach 61 cities of India

effectively in a short period of just 2 years.

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EuroKids is the leading provider of Pre-School education in India; both in the number of

Pre-Schools we operate and the number of students we serve. It is an endeavor by

EuroKids International Private Limited, which in addition to being the leader in the

organized Pre-School segment, is also the leader in the children's book segment in India.

EuroKids Pre-Schools have been in the forefront leading the change in a completely

fragmented and unstructured Pre-School environment. Most of the pre-schools in India

lacked basic infrastructural facilities and followed no curriculum. But this changed since

EuroKids Pre-Schools entered the picture.

EuroKids Pre-Schools are rapidly gaining popularity as the first, and the most sought

after Pre-School in the country today. EuroKids is the first of its kind Pre School in India

with international standards, which aspires to inculcate quality education to kids. With

more than 180 franchised Pre School's across India, EuroKids is rapidly gaining

popularity as the first and the most sought after Pre School in the country today.

KIDZEE is a chain of preschool, an initiative of Zee Interactive Learning Systems Ltd.

having more than 425 franchised schools across India and Abroad, for children

between the age group of 2 to 6 years (1.5 years to 5.5 years in certain areas). It

encompasses teaching methodology involving complete interaction where children are

encouraged to collaborate & help each other. KIDZEE has adopted the philosophy of

learning through play.

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Franchising Association of India (FAI)

About FAI

The Franchising Association of India is a Membership Organisation (it is a non profit

organisation) of Franchisors, Franchisees, Vendors, Consultants, Financial Institutions

and Students and others. Their services are dedicated to provide a one-stop shopping

experience for franchising business and with membership of the prestigious World

Franchise Council , they have an ongoing access to knowledge of the World accepted

best practice related to Franchising in different areas of business activity. In recognition

of the increasing role of franchising in the market place and the very beneficial positive

contributions of franchising to the Indian economy, the franchisor and franchisee

members of the FAI believe that franchising must reflect the highest principles and

standards of fair business practices.

Mission of FAI:

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Tap the vast entrepreneurial energy available in the country by promoting the concept

and practice of franchising in India.

The objectives of the Franchising Association of India are:

Encourage and safeguard the business environment for franchising, both with

regard to Franchisors and Franchisees.

Act as a resource centres for current and prospective Franchisors and franchisees,

the media and the Government.

Disseminate knowledge to promote the concept of franchising and to propagate it

as a healthy business practice.

Establish a forum for discussion and deliberation on franchise-related matters and

problems and help promote the interest of members by organizing seminars,

conferences and meetings.

With a president as dynamic as Mr. C.Y.Pal (Chairman, Cadbury India Ltd.) and many

other big names like Arun Khetan (CEO, Zee Interactive Learning System Ltd),

Pramod Khera (CEO, Aptech Ltd.) attached to it the organisation promises to do its bit

to promote and strengthen franchising in India.

Let us see what Mr. had to say about franchising in India and about the inception and

working of FAI.

Mr. C.Y. Pal,

President – FAI

WHILE Franchising, as a way of doing business, has been known in the country for

decades the concept, until recently, was practiced in a very limited way and in many

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cases was something for which one used the spare real estate, or what one’s wife did.

With opening of the economy, the environment for franchising, has in the last few years,

undergone a sea change.

With our vast and inherent entrepreneur talent, franchising is now poised to help spur the

economy as it is an excellent way of encouraging private enterprise; it fulfills the growing

need for connecting the customer through self-driven localized business partners called

franchisees, and helps in establishment of global standards for products and services. The

practice of franchising is, thus, fast catching up as is evident from the increasing number

of examples we see around us in diverse fields such in Aptech and NIIT in computer

education, McDonalds and Dominos Pizza in Food, DHL and Blue Dart in couriers and

many other examples in healthcare, fitness centres and the like.

Like all business partnerships franchising involves two parties to the deal i.e. franchisor

and the franchisee, while the former provides the brand, the know-how, the training and

the systems for the product or service the later forms the front end for expanding the

business acumen abundantly available in our country at the grass root level. In order to

reinforce the basis of a mutually beneficial and enduring relationship, it is vital to ensure

that both the parties understand their rights and responsibilities to work in unison for

success of the business.

It is in this context that the Indo American Chamber of Commerce, supported actively by

the United States Foreign Commercial Service in India and backed by a group of high

repute professionals with extensive experience in the fields of franchising, took the

initiative about a year ago to form the Franchising Association of India (FAI) to provide a

forum for Franchisors, franchisees and other related interests, to promote the concept of

franchising. FAI has since been incorporated as an Association under the Companies Act

and after meeting the rigorous criteria has also been admitted as a member of the

prestigious World Franchising Council (WFC).

FAI is, thus, the only and exclusive body, which will henceforth represent the interests of

all concerned with franchising in India at the national and the international level.

Membership of WFC also helps to provide FAI with strong contacts to the Franchising

Association of other countries including the International Franchising Association in the

United States. All these linkages will clearly help to connect the Indian entrepreneurs

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with the enormous increase in opportunities for franchise businesses available all over the

world.

Potential of International Franchising in India

The Indian economy is growing at an average of 8% - 8.5% in the recent years, thanks to

the ongoing reforms and disinvestments. The middle class has never had it so good, with

plenty of options and credit available in abundance at a competitive rate. There has been

a change in mindset; a flamboyant generation is gradually replacing the debt-cautious.

Banks have identified India as one of the fastest growing retail market. Banks and

financial institutions have disbursed loans of over Rs. 100,000 crore (USD 20 Billion).

Franchised operations are becoming more popular in geographically vast and culturally

diverse nations like India, as franchising helps to overcome the difficulties posed by

having a chain of company owned outlets.

The Franchising Industry received a fillip in during the 1990s due to the opening up of

the economy. Since, then, sales from franchised business have grown at an average rate

of 20 – 30% compared to an economic growth rate of 6-8%

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Today, International franchising in India is one of the most exciting areas in the franchise

industry. TODAY, GLOBETROTTERS ARE MORE LIKELY TO DO THEIR

SHOPPING IN FRANCHISED STORES. GLOBAL FRANCHISE ORGANISATIONS

LIKE PIZZA HUT, MARKS AND SPENCER, MCDONALDS, SUBWAY, HP,

HOLIDAY INN, MEDICINE SHOPPE, MARRYBROWN, DOMINOS, GOLD’S

GYM, KODAK, KENTUCKY FRIED CHICKEN ARE BULLISH ON THE

POTENTIAL OF FRANCHISING IN INDIA and have started their franchise operations.

It is advisable for international companies wishing to make a presence in India, to divide

India into different zones and appoint master franchisees for each of them or they can

also opt for a national master franchisee.

India is a self-governing and competitive territory for doing business. Franchise

companies enjoy economies in scale. India also has a vibrant, vigorous and vivacious

media, a pool of high skilled and technologically sophisticated labour, an independent

and impartial judiciary and a robust legal infrastructure. Based on the successful

companies that have enjoyed financial gain since the silent franchise boom during the

1990s, the future of franchising is positive.

Procedure for Approval of Foreign Franchises in India

The approval procedure is complex and bureaucratic. The application has to be made to

Secretariat for Industrial Assistance, Department of Industrial Development in form FC

(SIA) along with 10 extra copies. No fees need to be paid with the application for

technical collaborations.

On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration number.

The application is then sent to the Foreign Collaboration section 1 in SIA, which sends

the document to various departments such as the technical advisory section, department

of economic affairs and the concerned administrative ministry for scrutinizing. Their

comments along with the papers are then put before the Project Approval Board (PAB).

The Board takes into account the need for foreign know-how, technology transfer and the

terms of the franchising agreement.

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Those proposals involving only financial collaboration or a combination of financial and

technological collaboration are sent to the Foreign Investment Promotion Board (FIPB).

If the investment in the project is up to 600 crore rupees, the application is sent for final

decision to the Empowered Committee headed by the Finance Minister. In respect to

projects requiring more than 600 crore rupees, the application is sent to the cabinet

committee for final approval. The Section 2 of SIA issues the final approval within a

period of approximately 45 days from the submission of the application form.

The approval by the government may vary the terms of franchise including the mode of

payment of royalty / lump sum payment to the franchisor. If the terms are not favorable

to the franchising business, representation against the same can be made to the

administrative ministry concerned. A copy of the representation made by the applicant

should also be sent for information to the Foreign Collaboration Section 2 of SIA.

We thus see the bureaucratic bottlenecks involved in obtaining the permission to set up

foreign franchises in India. This deters investment.

Some of the major international franchisors

Let us look at some of the major international franchisors present in the country:

Baskin Robbins set up its operations in India in 1993 and soon started its own

manufacturing plant in Pune, Maharashtra. It is the only manufacturing plant to be

established outside North America. Baskin Robbins operates on a Franchise Model and

its business margins are competitive. Currently there are 150 Baskin Robbins stores

established across India. Its spread in India is quite unique, in the sense that you are as

likely to find a cozy little Baskin store tucked away in remote Shillong as you would in

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the main streets of Mumbai. As of today, Baskin Robbins looks forward to an eventful

year ahead, with plans of exponential growth and expansion.

An interview with Chetan Arora, Development Agent, Western Region, India of

Subway would help us understand Subway’s India drive.

Mr. Chetan Arora is the development agent for the entire state of Maharashtra

(including Mumbai), Goa and Rajasthan.

Give some information about how subways India was founded and incorporated?

Subway opened its first outlet in New Delhi in December 2001 from there on we are 47

stores strong in various cities including Mumbai, Pune, Bangalore, Hyderabad and

smaller cities like Ranchi, Baroda etc. We are also now developing the state of Rajasthan.

Subway functions through development agents (someone like myself) who are assigned a

territory and are responsible for developing the area, selling franchises, developing

suppliers maintaining operational standards etc. Subway has a local Indian company,

which is called Subway Systems India Private Limited and has two Area Development

Managers who are responsible for working with the Development Agents and assisting

them on a national basis. We now have a training centre in New Delhi where all

franchisees are trained before they are permitted to open a Subway store.

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What is subway’s USP?

Subway has many things that they do uniquely. Subway stores bake their bread fresh in

the stores everyday. We have several low fat sandwiches, which are also available in

India. These have less than 6 grams of fat including the bread, meat and vegetables that

go into the sandwich. In fact Jared Fogle who went on a low fat subway diet lost 245

pounds in one year. Subway also has great variety on its menu’s with a specialized Indian

menu to cater to the market here including Paneer Tikka and Chicken Tikka Sub’s.

Subway gives customers the unique opportunity to create their own sandwiches and can

customize the sandwich to their exact taste and requirement. In fact there are over 2

million sandwich combinations that can be made at Subway.

What is subway India’s future expansion strategy?

We are looking to grow in areas where we are already established such as Mumbai and

Delhi. We have opened in several smaller cities over the last one year and will continue

to expand our reach to cities in India such as Jaipur, Baroda etc. We are also looking at

non-traditional locations such as gas stations, airports, hospitals etc. In fact we have

recently opened in a petrol pump in the Bandra Kurla complex in Mumbai and already

have an airport and hospital location in New Delhi. We are looking at growing both from

our existing franchisees and new franchisees. We are looking to have 125 Subway

locations by the end of 2007.

Where do you see additional growth in the management of a food chain, where the

maximum possible growth is achieved in the short period?

There are always new challenges as the chain grows, when at its infancy the challenges

are to find the right suppliers, find the right franchisees etc. As you grow and the scale of

growth expands the focus moves to other areas like creating new opportunities for growth

by establishing relationships with partners such as BPCL and HPCL to set up stores.

Looking at changing marketing strategies to reach out to a larger audience. The

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experience is always interesting and challenging. As for your question of achieving

maximum possible growth, I cant define that and believe that one should grow at a pace

where one does not expand at a pace to ignore the basics of the business which is

customer service and serving a good quality and healthy product.

Is subway’s open to adaptations? have you adapted to the tastes of the people of

India?

Subway has always been open to adaptations. In fact in India stores have a separate

Vegetarian and Non-vegetarian counter preparation area. This is unique to Subway in

India. We have a Indian menu created for India only. The Vegetarian menu includes

sandwiches such as Aloo Patty, Paneer Tikka and Veg Shammi among others. In our

Non-Vegetarian menu we have sandwiches like the chicken tikka, chicken seekh and

chicken kali mirch among others. Customers have appreciated the fact that we have

separate preparation areas for Vegetarian and Non-vegetarian foods.

How does subway innovate to survive in the competing market? and what is the

expected growth in this segment in the coming decade?

We continue to develop new and exciting products for our customers. We have developed

a low fat range of subs, which were unique to Subway. We are now in the midst of a

toasted sub rollout where Subway stores across the world are being fitted with custom

designed and made toaster ovens, which will allow our customers to have their Subway

sandwiches, toasted. This is a result of many years of testing design and customer

feedback.

I would say that in India we could look at a 20% sustained growth in this segment year on

year for the next five years and another 10-15% for the next five years on.

Basically Subway’s Franchising pattern is as follows:

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In 1968, Gil L. Craig began his career in Mexican fast food. After gaining invaluable

experience in successfully developing a large franchise system, Mr. Craig founded his

own company, The Taco Maker, Inc. (TTM). What was once only a dream has

blossomed into an international franchise system in the United States, Latin America and

even the Far East. The world headquarters of The Taco Maker, Inc. are located in Ogden,

Utah. With new outlet development, outlet sales have continued to grow rapidly.

Mexican Quick Service restaurants (QSR) are enjoying an unprecedented rate of growth,

outpacing all other segments of the restaurant industry. The Taco Maker is firmly seated

as a leader in the Mexican QSR segment. Long known for its fresh, high quality and

flavorful Mexican fast food, The Taco Maker offers various outlet types to meet almost

every need from traditional freestanding buildings and mall food courts to its fast

growing programs for non-traditional locations. The Taco Maker Inc. started its India

operations in July 2005 through its Master Licensee Holders H.K.Multiplex &

Hospitality Pvt. Ltd. under the dynamic leadership of their Chairman, Mr. Harmanjit

Singh. Involved in the food and hospitality business since 1984, taking up challenges and

being a pioneer is nothing new for Mr. Singh and this can be gauged from his successful

ventures like ‘Parikarma’, the first revolving restaurant, ‘Mehmaan’ and ‘Ashoka Palace’,

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now he is all set to get the FIRST Mexican QSR chain into India. Taco Maker is new to

India and has setup up only 3 franchised outlets in the country however team

H.K.Multiplex are poised to take up this challenge and are committed to make Taco

Maker one of the strongest brands in India within the next five years.

McDonald's

Fast food major McDonald's is looking at the franchisee model to grow its presence in

India and will invest about US$ 88 million to set up more outlets across the country in the

next three years.

"In another two years' time we will be operating through franchisees since it is a good

way to expand and grow our business in the country," McDonald's India (North) Joint

Venture Partner and Managing Director Vikram Bakshi said.

He said the company, which did not franchise at all during its 10 years in India, wanted to

first establish its brand across the country and understand the consumers here.

"Now that the unit economics is working, McDonald's would operate through franchisees

in the coming years," he added.

Since the company started its operations in India in 1996 Adidas has 80 exclusive stores

across the country. These franchisee outlets are spread across India's key markets. Adidas

India has been growing with compounded annual growth rate of 50 percent. Over and

above this, they are also present at over 800 distributor serviced outlets. Today the

company works with a group of franchisees that it believes share its vision and

aggressiveness. All the franchisee outlets are designed to facilitate a total brand

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experience and help customers understand the company's cutting-edge technologies and

products through first-hand experience. Sports goods and footwear manufacturer Adidas

India plans to open flagship stores in the metros and will make hefty investment in retail

operations, informs Andreas Gellner, Managing Director. Gellner stated that in India 100

percent FDI is not allowed, which is the basic reason for them adopting a franchisee

route.

Yum! Brands Inc.

Yum! Brands Inc. (Previously known as Tricon Global Restaurants Inc.), based in

Louisville, Ky., is the world’s largest restaurant company in terms of system restaurants

with over 34,000 restaurants in more than 100 countries and territories. KFC, Pizza Hut,

Taco Bell are some of the well known brands of the company. The company is on an

expansion spree in India.

As of now there are more than 125 Pizza Hut restaurants across 31 cities in India. The

company plans to open more 35-40 Pizza Hut restaurants across the country this year.

The company also plans to double the number of KFC restaurants in the country from the

current 15. Cities in which it would set up outlets include Mumbai, Delhi and Chennai

this year. Yum! has been following the franchisee model with Pizza Hut and KFC in

India so far. Currently, KFC is present in six metros including Bangalore, Hyderabad and

Chandigarh. "There is tremendous potential in the metros and we plan to expand our

presence in towns such as Jalandhar, Ludhiana and Indore in this year," Mr. Arvind

Mediratta, Chief Marketing Officer, Yum! Restaurants International, said.

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The food chain that entered the Indian markets nine years ago has also changed its brand

positioning from `good time, great pizzas' to `treat you just can't beat.' It has also roped in

actor Jaaved Jaaferi as its brand ambassador for a year to market its new meal combos.

On marketing spends of the company, Mr. Mediratta said, "Yum! has been allocating

around Rs 15 crore-20 crore each year to marketing and advertising activities which

amounts to nearly one per cent of the total turnover of the company."

LEGAL ASPECTS OF FRANCHISING IN INDIA

Some Basic Legal Issues

Franchising as a business concept is catching up very rapidly in India. Though this being

so, presently, there is no franchise specific legislation in India. However, there are

various laws, which affect the relationship between the franchisor and franchisee, such as

the Contract Act, Competition Laws, Intellectual Property Laws, etc. Besides these, there

are other laws which need to be considered by a foreign franchisor before expanding into

India, such as Foreign Exchange Regulations, Taxation, Labor Regulations, Property

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Laws, etc. An in-depth understanding and legal assistance in respect of these laws is

necessary before foraying into the franchise market.

(i) Contract Act

Formation of Contract:

The contractual relationship between the franchisor and the franchisee would be

governed by the Indian Contract Act, 1872. The franchise agreement must ensure the

existence of the basic ingredients of a valid contract such as lawful consideration for the

agreement, lawful object and purpose of the agreement and capacity of the parties to

enter into an agreement.

(ii) Intellectual Property Rights:

Franchise relationship essentially deals with use of Intellectual Property Rights of the

franchisor by the franchisee for the franchise business. Hence, understanding of

Intellectual Property Rights legislations becomes very important.

Trade Mark Protection:

There are three courses of action that can be initiated against trade mark infringement,

viz. (a) an injunction under statute (b) an infringement or a passing off action, depending

on whether the trade mark is registered or not and (c) criminal action for an offence of

falsifying a trade mark. Appropriate provisions need to be incorporated in the Franchise

agreement dealing with the rights and obligations of the parties in case of infringement of

trade marks, restriction on use of the trade marks during and post termination of the

franchise agreement.

Know-how and Confidential Information:

The franchisor’s know-how and confidential information would be a valuable trade

secret. Therefore, it is advisable to incorporate sufficient safeguards in the franchise

agreement against unnecessary disclosure of such information.

Copyright Protection:

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The Manuals containing the entire technique of running the franchise business and

advertising material are of great value to a franchisor and unlawful reproduction and

piracy of this literary work can be protected under the Copyright Act, 1957. According to

Section 17 of the Copyright Act, the author of a work shall be the first owner of the

copyright therein. Therefore, the franchisor as the owner of the copyright has the

exclusive right to own and license the work, institute proceedings for infringement by

claiming injunction, damages and accounts of profits made by the defendant as a result of

the violation of the copyright

(iii) Monopolies & Restrictive Practices Law and Competition Law:

The Monopolies and Restrictive Trade Practices Act, 1969 prohibits imposition of

restrictions in respect of sources of supply and pricing of products. It must be ensured,

that the terms of the franchise agreement, are not construed as monopolistic or restrictive,

or else the MRTP Commission could grant an injunction preventing such trade practices

and may also award compensation to the complainant for any losses or damages suffered.

Care needs to be taken while drafting the franchise agreement to ensure that the franchise

agreement is not hit by the provisions of the MRTP Act and at the same time sufficiently

protects the interests of the parties.

Competition Law:

The focus is now shifting from curbing monopolies to promoting healthy competition in

India. Accordingly, the Competition Act, 2002 has been passed to replace the MRTP Act.

Some of its provisions have not yet come into force, as a Government notification to that

effect is awaited. Hence, presently the applicability of the provisions of the MRTP Act

continues.

(iv) Consumer Protection and Product Liability:

The Consumer Protection Act, 1986 provides for rights and remedies to consumers for

defect in products and deficiency in services making the manufacturers and service

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providers liable for the same. The term ‘manufacturer’ as defined and understood in the

Consumer Protection Act would include a manufacturer, assembler and a person who

puts his own mark on any goods manufactured by another manufacturer. This would also

be the case for the services rendered by the franchisee under service marks of the

franchisor. To avoid complications in future, the responsibility in respect of liability with

regard to defective products and deficient services and indemnification from any claims

on that account should be expressly set out in the franchise agreement.

(v) Foreign Exchange Regulations:

Normally, a franchise arrangement would involve payments such as franchise fee, royalty

for use of trade marks and system, training expenses, advertisement contributions, etc. If

such payments are to be made to a foreign franchisor the provisions of Foreign Exchange

Management (Current Account Transactions) Rules, 2000 would be relevant where

under, prior approval of the Reserve Bank of India (RBI) would be required for making

remittances outside India for purchase of trademark/franchise in India. However,

remittances for use of trademark/franchise in India would not require such approval.

(vi) Labour Laws:

Issues with regard to employees employed by the franchisee would be subject to various

labour legislations such as Employees’ Provident Funds and Miscellaneous Provisions

Act, 1952, Payment of Bonus Act, 1965, Payment of Gratuity Act, 1972 etc. There are

also various legislations at the State level, which prescribe hours of work in shops and

establishments.

(vii) Taxation:

Various direct and indirect tax laws such as income tax, sales tax, excise customs etc.

would be relevant in the context of franchise relationship as they are in any other

business concept.

(viii) Real Estate:

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Location of the franchised outlet is the key factor for success of the business. Hence

proper care needs to be taken while selecting the site. The user of the land and building

under the Town Planning law needs to be checked. The municipal laws applicable to a

particular area also regulate construction of buildings. Acquisition of property, whether

on ownership or lease, would require consideration of various legal implications, which

affect the title and continuity of user of the property during the franchise period.

(ix) Insolvency Laws

Although the general picture of franchising is one of success, there have been cases of

insolvency among the franchisees and franchisors. Insolvency becomes an issue if either

the franchisor or one of the franchisees becomes unable to pay its debts as and when they

fall due. Clearly, the risk of insolvency for both franchisor and franchisee in India will be

greatly increased if the franchise concept is a foreign one and it has not been properly

adopted for the Indian market. The laws that are relevant in India in relation to insolvency

are found in the Companies Act, 1956 and the Provincial Insolvency Act, 1920.

(x) Industry Specific & State/Local Regulations:

Depending on the nature of the industry/sector to which the franchise belongs, various

sector specific legislations need to be considered e.g. in the case of a food and hospitality,

licenses under the Shops and Establishments Act, Eating House license from the

Municipal Corporation, Health license from the Health Department of the Municipal

Corporation would be required.

Conclusion

Considering the peculiar nature of the business concept in franchising, appropriate legal

advice and proper understanding of the relevant legislations is a must both for the

franchisor and franchisee before entering into the relationship. A proper understanding

between the parties suitably documented would form a strong foundation for success of

the business relationship and expansion of the franchise network.

 

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THE FUTURE OF FRANCHISING

Franchising is an entrepreneurial alliance. Much like a commercial business partnership

wherein the franchisor provides the brand name, manufacturing / service delivery process

and access to the system and the franchisee provides the capital and forms the front end

of the delivery system.

Franchising is based on sound principles of excellent and consistent quality that is

associated with a brand name.

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Currently, In India not many innovative franchise concepts are available. In this

subcontinent people prefer to save some cash rather than go for quality service. This is

because people fear to take the risk of deviating from the conventional idea of the

concept of business and adopt franchising as a method of business.

Franchising, today contributes roughly about 1% of the total retailing activity in India.

This is no doubt a very grim picture for the franchising community. When carefully

observed behind this gloomy image India has a very big opportunity. With the

internationalisation of franchising and emergence of new technology, it is a dynamic

method of doing business. It is in keeping with the liberal philosophy according to which

without freedom, the human spirit languishes and the economy stagnates. With the issue

of global governance, there seems to be a growing trend of drinking water being supplied

as a commodity with a profit motive. Though the issue of global governance and water is

debatable at the same can be conceived as commoditisation of water, the possibility

cannot be denied that the future may involve corporatisation of water and provide

opportunities of franchising! As Asian and world economies, grow with the ever

increasing populations and move toward free market economies, new franchise concepts

will come on the scene and the solid, well-managed existing Franchise companies will

continue to grow.

Economic development is the precursor to social development. The vital component of a

progressive economy is the number of entrepreneurs. Franchising clearly offers aspiring,

new business owners the best possible chance of succeeding with the least risk. The

major advantage is that in the system, the means for distributing goods and or

services has been developed, tested, and associated with the trademark. If the current

trends are anything to go by one can safely say that within two to three decades or even

less, franchising will comprise over 50% of the retail economy, and will employ millions

of people, and enable hundreds of thousands to realize their dream of successful business

ownership. Programs exist that are designed for low-income individuals aspiring to be

entrepreneurs to provide franchise opportunities.

Today in India we see there is a sudden growth in demand of consumer durables, mobile

phones, better utilities and everything that is needed for a better standard of living.

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The hotel industry is at the forefront. Chain affiliation is the key word. A chain can be

effective if its components adhere to brand standards. Customer satisfaction at one

member hotel is directly proportional to customer preference for the brand. Networking

and teamwork are the positive characteristics associated with success in this field.

Therefore, an environment conducive to franchising seems to be developing. There is a

move toward better protection of franchisee rights and over time, this should push more

franchisors towards structuring their Relationships with their franchisees in a totally win-

win manner. It is a common perception that the current regulatory framework affords

little opportunity to small business franchisees to obtain redressal in the event of conflict

with the franchisor. The power equation is generally in the favour of the franchisor. The

attorney of the franchisor who drafts the agreement could err by overemphasizing the

rights of the franchisor and magnifying the obligations of the franchisee. Progressive

attorneys now seem to have realized that there should be no room for ambiguity in the

agreements. Vague agreements written in bad language underplaying rights of the

franchisee can be rejected. This encourages a review of outdated agreements. The best

franchisee support structures are provided by franchisors to protect them. The mutual

goal is success for both parties. The franchisor contributes his brand, products, mode of

operation, system, and marketing. The franchisor also sets the rules, guidelines, and

product quality to be followed by all of its franchisees.  The expertise of the franchisor

and the hard work of the franchisee translate into a strong partnership.

The growth of franchising is inevitable, because of the inescapable logic of the

underlying concept. Business owners realize the importance of finding ways of reaching

out and creating a distinctive brand image with respect to customers. This synergy creates

competitive strength. Franchising to reiterate is a WIN-WIN-WIN. The Franchisor wins

by having a presence, whereas the franchisee wins by owning a profitable business and

the society wins at large by having superior products and services.

Franchising in this century will be highly influenced by Technology and Internet.

Technology improvements, notably in telecommunications, computers and the Internet,

are having a major influence on franchised businesses. Technological developments

including the Internet are having a profound effect on franchising. The Internet is still

relatively new, yet it is rapidly altering the business environment, changing the way we

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gather information, interact and conduct business. An increasing number of franchised

businesses are racing to get on-line, and to consider an appropriate Internet strategy

(often in that particular order). They are looking to explore and exploit the opportunities

this new technology provides (such as, increased sales), whilst simultaneously attempting

to protect themselves from a new class of threats (e.g., new, often global competitors)

accompanying it.

The Internet is building up to become a major threat to retailers. The numbers of E-

commerce sites selling to customers are increasing exponentially. Many franchisors have

taken some step toward building their brand on-line by establishing a web site. Most

provide information to the market for end users of products/services, as well as the

market for franchisees and investors. In addition, some franchisees are establishing their

own sites.

Franchisors today are collaborating with competitors and complementary product/service

providers to explore co-marketing and other strategic opportunities.

The development of the Internet is also responsible for a new range of challenges to the

franchise relationship. While the Internet provides a wonderful opportunity to build sales

globally, there are a number of issues between franchisors and franchisees that need

resolving.

One key question is who can develop what? It appears most franchisors want to control

Internet developments centrally, and do not want franchisees starting their own web sites.

There are exceptions, however with others believing multiple sites help build brand

awareness.

Another question involves who bears the expense for setting up the website? In addition,

critical to this is yet another - how are profits distributed? These are particularly pertinent

issues given the company's web site may compete for customers in the franchisees

territory. Some franchisors want to keep profits for themselves, claiming that while the

web site may take some sales, the increased awareness it provides to local franchisees far

outweighs this. Franchisees argue however, that such web sites cannibalize sales and

diminish the value of the franchise.

To conclude, the future trends involving franchised businesses are varied. The local

franchising industry can expect a colorful future. On the one hand, franchisors and

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franchisees have some exciting possibilities to pursue, while on the other, there is a range

of new threats to contend with. In my view, the future brings increased complexity to the

role of franchise system management. This complexity will also lead to growth and

further penetration of this amazing WIN-WIN PARTNERSHIP. Franchise strategists will

have more options and to consider and at least some of these will require specialists skills

to evaluate, progress and prosper in this rapidly changing evolving market.

THANK YOU

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