Franchising is a business model that has been effectively leveraged by the West in expansion of business, while splitting the cost and responsibility with the local franchisee. Most multinational businesses operate on this model. To put it simply, franchising suggests the ownership of something unique and saleable, which the franchisee uses for payment of a fee, known as royalty or licensing fee. The franchisee then sets up a business for the manufacture, distribution and/or sale of that product/service locally. Albeit franchising suggests the ownership of something unique and saleable, but interestingly many successful franchise businesses are quite the ordinary everyday use products/services. Undoubtedly, businesses with novel products, such as Tetra Pak, are very successful. But then so are the businesses with run-of-the-mill products. The trick lies in creating an ingenious story around the product. Water is a classic example. Bottled water became a saleable product by creating of a story around purity and its monetisation became possible, with the addition of salts and mineral blends protected through the trade-secret route.
A thought-through and well-executed franchising model can help scale a business exponentially and can be beneficial for both the franchisor and franchisee, because costs and responsibilities are split between the two, with each leveraging its strengths. The only costs a franchisor typically incurs is in the initial setting up of the flagship manufacturing/retail set-ups, in crafting and drafting the standard operating procedures (SOPs), in protecting its intellectual property, in imparting training and staff cost for ensuring compliance by the franchisee, and in the marketing of the brand. The larger operating costs are either undertaken by or split with the franchisee, who make the investment in land, factory, retail space, capital expenditure, equipment, day-to-day running costs, labour and employees, utilities, rent, logistics and, in some instances, even local marketing.
Franchisee can draw support of the franchisor for site selection, training of employees, and business operations. The massive advertising outreach of the franchisor helps draw customers for the franchisee. Centralised departments such as marketing, operations and sales, human resource and training, and legal, etc, help minimise operational costs for the franchisee. The gestation to the business inception for the franchisee is, therefore, shorter. A successful franchise model requires a combination of identifying and protecting the intellectual property against infringement, maintaining quality control and marketing the brand internationally, nationally and/or locally depending on the reach of the business. Once the proprietary part, i.e. the module that will be licensed, is identified, the franchisor must claim ownership of it by protecting it, initially, either through registration (in case of patents, designs, trademarks and in some instances copyrights) or by simply claiming ownership publicly (in case of trademarks, copyrights and/or trade-secrets) and thereafter by doggedly protecting it including through litigation against infringers.
But the long-term success of a franchise business depends, significantly, on the level of detail of the SOP—which can be created for anything that requires standardisation, including processes for purchase, manufacture, stocking, stacking, logistics, distribution, sale, creating a particular look and feel to the outlet including through equipment, colour, design, layout, placement, etc. SOPs help create recall of the experience in the mind of the customer. Importantly, they also help the franchisor control and the franchisee maintain quality, which is an important component of franchising. While the licensor earns revenue from the licensing fee and from commissions and, in some instances, even training fees, the licensee earns from the sale of the product. A little known but useful fact is that SOPs help create another business avenue for the franchisor. While no direct fees are derived from these SOPs, they provide the franchisor with the opportunity to build an inventory of vendors for supply of standardised products for the franchisee to pick from.
The vendors could include suppliers of equipment, raw material, furniture, architects, civil engineers, contractors, painters, printers, advertising agencies, etc. The licensor has the ability to generate bulk business for the vendor, the ability to negotiate lower prices and offer lower rates to its licensees, and at the same time earn a commission from each sale. Franchising has been effectively applied to manufacturing, distribution, retail and even wholesale businesses, and it truly is a win-win model for all—franchisor, franchisee and, importantly, the customer. If India Inc wants to globalise, it must consider franchising as a serious option.
By Payal Chawla, Founder of JusContractus, a Delhi-based law firm