Franchising is still the better way to learn market realities

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: Estimates of the Franchising Association of India, reveal that nearly 800 franchise systems already operating in India and new franchise development is worth Rs 500 crore annually. There are successful cases of franchising in the services sector, mainly in education, healthcare, food services and retailing.

There are three key reasons why franchising is a preferred entry route for global brands into India. First, till January 2006, FDI in retail was not allowed and franchising was the only window available. Even with 51% FDI allowed in single brand retail, many companies prefer franchising as an entry route to test the market till further control is allowed. Second, the size and spread of the Indian market coupled with local variance of consumer preferences implies that expansion through local franchisees is a smarter way to learn the market realities.

Third, franchising is an excellent route to establish scale of operation, without risking large investments in a new country. More so in India where occupancy cost as a percentage to sale is typically higher compared to global benchmarks.

From the overseas franchiser perspective, there are significant challenges. Everything including customising products to local tastes; use of brand names, slogans and even colours; managing local tax and legal issues; intellectual property protection, etc are areas of concern. An example: KFC’s slogan “finger lickin good” directly translated in Chinese meant “eat your fingers off!”

It is wrong to assume that a business model successful in the home market will succeed overseas. Major issues include local price sensitivities; operation costs; supply chain costs and networks and selection of local partners. Unlike developed markets such as the US or Australia, there is no mandatory legislation or code of conduct for franchising in India, which makes local operations more risk-prone.

A key challenge in establishing a franchise system in a new territory is securing a supply chain to source quality materials locally and setting up a reliable, cost-effective transportation and logistics network. It is important to analyse the economics of what to import and what to source domestically, considering issues such as evaluation of quality and reliability of local supply compared to the cost of imported product and total time-to-market.