Moneymanagement’s Weblog

Making a success of Franchising

Posted in Uncategorized by moneymanagement on July 10, 2008

Success is a heady feeling. Each person’s definition of success will differ according to the goals he has set for himself. In business, success is usually measured by means of the financially well being of the organization.

One of the most successful business models of the modern world is franchising. As India is opening up to the world, franchising has become the fastest path to expansion. If you are part of the franchising business you must remember the saying….As you climb the ladder of success, be sure it’s leaning against the right building.

The advent of franchising

The word ‘Franchise’ comes from old French meaning privilege or freedom. In the middle ages a franchise was a privilege or a right. In those days, the local sovereign or lord would grant the right to hold markets or fairs, to operate the local ferry or to hunt on his land. This concept extended to the Kings granting a franchise for all manner of commercial activities such as building roads and the brewing of ale. In essence the king was giving someone the right to a monopoly for a certain type of commercial activity.

In 1851, the Singer Sewing Machine Company began granting distribution franchises for their sewing machines. Singer had written franchise contracts which were the forerunners of modern franchise agreements.

It was Ray Kroc (1902-1984), a milk shake mixer salesman who discovered the McDonald brothers’ small San Bernardino, California hamburger stand in 1954, who is credited with unleashing the wave of franchising we know today. He found they were buying so many of his mixers because they had developed a high-volume production system which enabled them to provide fast service with consistent results and low cost. Kroc became their licensing agent and recruited franchisees, starting in the Chicago area. In 1961 he bought out the McDonald brothers’ interest. By 1988, McDonald’s had opened its ten thousandth restaurant and today there are over 30,000 McDonald’s restaurants worldwide.

Franchising is clearly a powerful model to help people realize their dreams. Its success is manifested in the number of operating franchises, the number of brand names built through franchising; the millions of customers served every day, and the tremendous opportunity it represents to franchisees.

To protect the interest of franchisors and franchisee many franchising associations have come up and are doing an admirable job of guiding new entrepreneurs and regulating the existing ones.

Indian franchising market

In India, the franchising is fast becomes the hottest new business concept. To understand the wide spread impact of the business, here are some facts and figures.

ü There are over 600 active franchisors and 40,000 franchisees today in India.

ü The total investment put in by these franchisees in setting up their individual franchised businesses is over Rs.5000 crores.

ü The total annual turnover achieved by franchised businesses in India is in the region of Rs.8000-10,000 crores.

ü The total manpower directly employed by these franchised businesses is around 300,000.

In India, the franchise economy is about to take off. Currently it accounts for just over 4% of the country’s gross domestic product. But the growth of franchising in India has taken place only in the recent years and this where the action is.

Traditionally, local franchising in India was limited to the clothing and footwear brands. However, the last few years have seen the penetration of Franchising into industries like computer education, F&B, healthcare and more recently entertainment and cyber kiosks. IT education and IT enabled services constitute 55% of the total franchisors in India.

Before embarking on a franchise

To franchise a business demands a substantial investment in both time and money. Before embarking on this course, a prospective franchisor should find out all he can about franchising. Whilst financial projections will determine the viability of the project on paper, you need to understand the reality and then decide whether the corporate climate within the business is the right incubator for your business to take the franchising route. Given the large investment and the fact that other people’s livelihoods are at stage, franchising, once embarked upon, cannot easily be abandoned. The pros and cons should be weighed up carefully, and professional advice should be sought before a final decision is made. From a prospective franchisee’s viewpoint, a franchised business will be the ideal entry point to a business of his own if he: –

  • Has the financial resources to adequately capitalise the business.
  • Is able to learn new concepts easily and is open to change.
  • Is prepared to work hard for the success of his business.
  • Has realistic expectations regarding the extent of support he can expect to receive from the franchisor.
  • Is willing to follow the network’s systems and procedures to the letter.
  • Is a team player and can follow the rules set by the franchisor.

The corner stones of success

Yeh hi hai Right Choice

The right choice of franchisor is essential. The choice has to be made at two levels. First comes the choice of business. Once you have chosen your field of interest, then look around for the prospective franchisors. For instance if you have decided you wish to be in the food business you may want to choose between pizza, ice-creams or a sit down formal restaurant.

The choice should be made keeping in mind your aptitude, experience and the marketability of the franchise concept you wish to take up.

Quality

The customer expects to receive the same quality in a franchise any where around the world. The ability to easily recognize a franchise means that there will be no surprises or disappointments-quite simply, the consumer knows the business already, whether they are in New York City, Mumbai or Timbaktu. Hence the first cornerstone of a success franchise is quality and consistency.

No lone rangers

Franchising is corporative effort. The very reason you take up a franchise is to repeat the success story the franchisor. The franchisee has to follow the procedures and standards set by the franchisee even if at some point he might not be in complete agreement of the procedures of the franchisor. Even though you are the owner of the business, not all decisions are yours.

Location Location Location

The success of most business enterprises is location. Incase of franchising, the business areas are often retail oriented. Hence location takes up an additional dimension. Today’s business is extremely competitive and the customer is a busy man. He may not be travel an extra mile to eat pizza if there is a burger available where he is right now.

Adapting to local conditions

An international franchise knows the secret of success is to adapt to the local markets. The quality of the Mcdonald burger may be same everywhere but it sells more vegetarian products in India and no beef and ham products here.

It is not only the international franchisor which adapts according to the local needs but even the Indian ones who adapt to different local markets. India is a very special market. It is extremely diverse and each location may need some modification according to the special needs. The products which will work in one part of the country may fail miserably in other parts. Also the market strategy may have to change from place to place.

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