Franchise Model In India

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An Introduction to Franchising

by

Rahul Jain


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Growth of Franchising

Singer Sewing Machinefirst franchise(mid-19thcentury)

Automobile (e.g. Ford), petroleum products(e.g. Shell), soft drinks (e.g. Coca Cola)

Food and restaurants (e.g. McDonalds,

Starbucks)


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Brief Outline

What is franchising?

Types of franchising

Why franchise?

Considerations for franchisor/franchisee

Pitfalls/Be careful


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A franchise operation is a contractual relationship betweenthe franchisor and franchisee in which the franchisoroffers or is obliged to maintain a continuing interest in the

business of the franchisee in such areas as know-howand training; wherein the franchisee operates under acommon trade name, format and/or procedure owned orcontrolled by the franchisor, and in which the franchiseehas or will make a substantial capital investment in hisbusiness from his own resources.

- Definition by International Franchise Association


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Legal and commercial arrangement concerning thesuccessful business of a franchisor

Use of franchisors trade name, format, systemand/or procedure under licence

Means to raise capital and expand quickly

Assistance to franchisee

Marketing, management, advertising, store design,standards specifications

Payment by franchisee by way of royalty, licenseefee or other means


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Franchising is more than distributorship

Extends to an entire operation or method of business Greater assistance, control and longer duration

Distributor merely re-sells products to retailers orcustomers


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TYPES OF FRANCHISE

3 main types of franchise:

Product distribution franchise;

Business format franchise; and

Management franchise.


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A product distribution franchise model is verymuch like a supplier-dealer relationship.

Typically, the franchisee merely sells thefranchisors products. However, this type offranchise will also include some form ofintegration of the business activities.

PRODUCT DISTRIBUTION

FRANCHISES


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FRANCHISES

Examples of famous product distribution franchise:


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Produces the syrup

concentrate

Sells the syrup

concentrate

FRANCHISEE Produces the finaldrink

Retail StoresRestaurants &F&B Outlets

VendingMachine

Operators


FRANCHISES


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BUSINESS FORMAT

FRANCHISING

In a business format franchise, the integration ofthe business is more complete.

The franchisee not only distributes thefranchisors products and services under thefranchisors trade mark, but also implements thefranchisors format and procedure of conductingthe business.


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Famous Examples


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BUSINESS FORMAT

FRANCHISING -

outlet in

Sale, Australia

outlet in

Marseille, France


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MANAGEMENT

FRANCHISE

A form of service agreement.

The franchisee provides the managementexpertise, format and/or procedure forconducting the business.


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Famous Examples


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Why is franchising important to

SMEs?

Leveraging on a recognised brand name

Enhancing business image

Ensuring consistent quality

Attaining higher productivity/better motivatedstaff

Access to good locations Economies of scale

Reducing risks of failure


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WHY FRANCHISE?

Franchises offer important pre-openingsupport:

site selection design and construction

financing (in some cases)

training grand-opening program


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WHY FRANCHISE?

Franchises offer ongoing support

training

national and regional advertising operating procedures and operational

assistance

supervision and management support

increased spending power, access to bulkpurchasing and economies of scale


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Common considerations of

franchisors

Developing franchise concept

Market research Familiarity with local laws and regulations

Providing training and support tofranchisees


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franchisors

Criteria for choosing franchisees

Control over franchisees

Supply of products/materials to franchisees

Intellectual property rights issues, e.g. trademark registration


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franchisees

Demand

Profitability of franchise, and length of timerequired to recoup investment

Track record of franchisor

Support rendered to other franchisees


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franchisees

Experience and profitability of otherfranchisees

Existence of competition

Capital required

Demands of franchisor, e.g. income

projections, deadline to open more franchiseoutlets


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FranchisorFranchisee relationship

Regulated by contract which usually covers:

Initial fee

Royalty fee/Management fee Capital required from franchisee

Territory/Area of operation

Duration of license and renewal IPRs

Termination


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BE CAREFUL

The franchisee is not completely independent.

In addition to the initial franchise fee, franchiseemust pay ongoing royalties and advertising fees.

Franchisee must be able to balance restrictionsand support provided by the franchisor with theirown ability to manage the business


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A damaged image or franchise system canresult if other franchisees perform poorly or

the franchisor has financial problems.

The duration of a franchise is usually limitedand the franchisee may have little or no sayconcerning termination

BE CAREFUL


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Not reading, understanding and/or askingquestions about the franchisee agreement

and other legal documents Not understanding the responsibilities of a

franchisee and the rights and obligations of afranchisor

Not seeking sound legal and financial advice

Not verifying oral representations of franchisor

Common Mistakes of Prospective

Franchisees


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Not analyzing the local market in advance

Not analyzing the competition Not making thorough due diligence of the

franchisor

Not choosing the right location

Common Mistakes of Prospective

Franchisees


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Franchising in India

Grown from a questionable format to anadmissible mode of business expansion inIndia

Pioneering companies proved that franchising

can work in any market/ country Brought a graphic change in over-all working

culture in the business

Technology and internet are helping at bothends:

To create the awareness about new products& services, and


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Franchising in India

Revolutionary year - 2010,

Booming entrepreneurship: 1800 Home GrownFranchisors & 2,00,000 Franchisees

85% success rate in franchising Vs. 90% failure in selfstart ups

Franchise industry estimation has towered up to overUS$ 7 billion

Highest retail outlet density in the world to up to approx.12 million

Remains the best entry & expansion strategy

SMEs are the key economy drivers

Employs over 97,00,000 employees directly or indirectly


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Franchisinga great model for

SMEs

Proven formula for success

Due diligence

Central role of IPRs

Avoidance of dispute

Conclusion


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Assignment

Write a one page note on a company whohave successfully adapted franchise model.(Both Franchisor and Franchisee perspective)

Provide all references

Documents

Franchise Model In India