FRANCHISING

UNIVERSITY OF MUMBAI

PROJECT ON

FRANCHISING

SUBMITTED BY

NIDHI MEHTA

PROJECT GUIDE

PROF. RAJWADE

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V(2009-10)

V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE,SINDHI COLONY, CHEMBUR – 400071

FRANCHISING

UNIVERSITY OF MUMBAI PROJECT ON

FRANCHISING

SUBMITTED BY

NIDHI MEHTA

PROJECT GUIDE

PROF. RAJWADE

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V(2009-10)

V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE, SINDHI COLONY, CHEMBUR – 400071

FRANCHISING

UNIVERSITY OF MUMBAI PROJECT ON

FRANCHISING

Submitted In Partial Fulfillment of the requirements

For the Award of the Degree of Bachelor of Management

ByNIDHI MEHTA

PROJECT GUIDE

PROF. RAJWADE

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V(2009-10)

V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE,SINDHI COLONY, CHEMBUR – 400071

FRANCHISING

Declaration

I student of BMS – Semester V (2009-10) hereby declare that I have completed this project on . The information submitted is true & original to the best of my knowledge.

Student’s Signature

Name of Student

FRANCHISING

C E R T I F I C A T E

This is to certify that Ms. Of

TYBMS has successfully completed the project on

___________________________ under the guidance of

___________________________ .

Project Guide Principal Dr. (Mrs) J. K. PHADNIS

Course Co-ordinator Mrs. A. MARTINA

External Examiner

FRANCHISING

ACKNOWLEDGEMENTS

On the completion of my project “Franchising”, I take the opportunity to express

my deep sense of gratitude towards all those people without whose guidance,

inspiration and timely help this project would have never seen the light of the

day.

I find great pleasure in expressing my deepest sense of gratitude towards my

project guide “Prof. R V Rajwade”, whose knowledge, experience and guidance

right from the conceptualization to the finishing stages proved to be very

essential and valuable in the completion of the project.

I would also like to thank Mr. Kalpesh Kothari who owns Archies Franchise for taking his valuable time out and providing me with valuable inputs for the project. Without his co-operation it would has been difficult to compile the project.

I would also like to thank our co-ordinator Mrs. A. Martina and all those people

who have directly or indirectly contributed towards the compilation of this

project.

FRANCHISING

EXECUTIVE SUMMARY

This report on “Franchising” aims to give an overview of Franchising and the

franchises marketing and legalization aspects in India and also in International

market.

OBJECTIVES OF THE REPORT:

To understand the concept of Franchising as practiced in India and also in

international market.

To analyze the success of Franchising with a detailed study of the two

successful franchises i.e. WAL-MART and ARCHIES.

SUMMARY:

The report contains an introduction to the concept of Franchising and the

various Franchising concepts that are involved in it.

The advantages, disadvantages, appeals and drawbacks of Franchising.

It has special mention general issues of the Franchising i.e. how to

investigate a franchise and how to select a franchisor?

It also has special mention of the Franchising Practices in India i.e. how it

evolved and the present stage.

How Location plays an important role while setting up a Franchisee

Chain.

The Marketing of the Franchise is studied using Philip Kotler’s 4 P’s.

It then goes on to study of success of franchises. It also analyses the scope

for growth of franchising in both Indian and International market.

FRANCHISING

Towards the end of the report the main problem that plague the industry

have been highlighted and recommendations given to try and do away with

the problems or at least reduce their intensity to a minimum.

Research Methodology

Sub objective

Broad objective

Interview

Retail Outlet Name Address Phone No

Archies Kalpesh Kothari Ghtakopar 9773716455

Monginis Sameer Shah Ghatkopar ------

Bata Subhash Agrawal Parel 24105091

InternationalScenario

Legalization

What is franchising?

Indian Scenario

Detail

Study

Of

Successful

Franchises

WAL-MART

&

ARCHIES

FRANCHISING

A FINAL PROJECT ON

FRANCHISING

INDEX

Sr.No.

Content Page No.

1 Introduction 1

2 General Issues on Franchising 21

3 Franchising in India 35

4 International Franchising 45

5 Legalization in Franchising 49

6 Problems faced by Franchising Industry

55

7 Recommendations 57

8 Evaluation of successful franchises

59

9 Conclusion 77

FRANCHISING

INTRODUCTION

Today’ franchising is recognized as one of the most effective distribution arrangements

for a variety of products and services. The word franchising originated from French

language, it means “freedom”.

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 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.

At least two levels of people are involved in a franchise system:

(1) the franchisor, who lends his trademark or trade name and a business system; and

(2) the franchisee, who pays a royalty and often an initial fee for the right to do business

under the franchisor's name and system. Technically, the contract binding the two parties

is the “franchise” but that term is often used to mean the actual business that the

franchisee operates.

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”.

Franchising is a method of distribution that a franchisor, who has perfected a business

concept, adopts to transfer the knowledge, with a follow-up mechanism, to a franchisee

wanting to set up an entrepreneurial business. Franchising uses the strength, power and

experience of the “chain” or “network” of a large organization and the entrepreneurial

skills and commitment of a proprietor or a small business unit.

WHAT IS FRANCHISING?

FRANCHISING

Franchising has emerged as a very powerful means of distribution for goods and services.

The last 40 years have seen the evolution of different types of franchising. Of these, the

most common and prevalent type is “business format” franchising which adopts a more

holistic approach than simply “product” or “process” franchising.

A franchise is the agreement or license between two legally independent parties which

gives:

• A person or group of people (franchisee) the right to market a product or service using

the Trademark or trade name of another business (franchisor).

• The franchisee has the right to market a product or service using the operating methods

of the franchisor.

• The franchisee has the obligation to pay the franchisor fees for these rights.

• The franchisor has the obligation to provide rights and support to franchisees.

FRANCHISOR FRANCHISEE

Conceptual Framework

FRANCHISOR

Owns trademark or trade name Provides support:(sometimes) financingadvertising & marketingtraining

Uses trademark or trade nameExpands business with franchisor’s support

Receives fees Pays fees

FRANCHISE AGREEMENT

FRANCHISEE

FRANCHISING

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 other parties.

Who is the Franchisee?

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. McDonald’s, Pizza corner and Pizza Hut have adopted this system in India.

3. Regional Franchisee.

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.

5. Developers.

FRANCHISING

Large Corporations sometimes prefer to exploit their territory by opening outlets

themselves. These are known as developers. They have a single developer agreement,

which allows them to open many units. These are pilot operations so that they become

fully familiar with the business at an operational level and can localize it so as to improve

its chances of success. Excel Info Tech has adopted this unique mode of franchising.

What is Franchise fee?

A fee paid by franchisee to a franchiser. Franchise fee revenue should be recognized

when all material service or conditions relating to the sale have been substantially

performed or satisfied by the franchiser.

The offer document:

The franchise offer document gives comprehensive information to the prospective

franchisee. The contents of the document have to be organized under various heads as

explained here. This is the basic document explaining the relationship between the

franchisor and the franchisee. A franchising framework is the basis for preparing the offer

document. Following is a list of items covered in the offer document. This list is not

exhaustive, but it covers the most essential elements that should be included in the offer

document.

Details of the franchisor

Experience

Franchise fees

Royalty and other payments

Franchisee’s initial investment

Sourcing o raw material, promotional material and other services

Obligations of the franchisee

Franchisor’s obligations

Territory, trademark, patents, and restrictions on doing any other business

Renewal, termination, transfer, dispute resolution

HISTORICAL BACKGROUND OF FRANCHISING

FRANCHISING

Franchise operations, as we know them, are not very old. The boom in franchising did not

take place until after World War II. Nevertheless, the essentials of modem franchising

date back to the Middle Ages when the Catholic Church made franchise-like agreements

with tax collectors, who retained a percentage of the money they collected and turned the

rest over to the church. The practice ended around 1562 but spread to other endeavors.

For example, in 17th century England franchisees were granted the right to sponsor

markets and fairs or operate ferries. There was little growth in franchising, though, until

the mid 19th century, when it appeared in the United States for the first time.

The Singer Company implemented a franchising plan in the 1850s to distribute its

sewing machines. The operation failed, though, because the company did not earn much

money even though the machines sold well. The dealers, who had exclusive rights to their

territories, absorbed most of the profits because of deep discounts. Some failed to push

Singer products, so competitors were able to outsell the company. Under the existing

contract, Singer could neither withdraw rights granted to franchisees nor send in its own

salaried representatives. So, the company started repurchasing the rights it had sold. The

experiment proved to be a failure. That may have been one of the first times a franchisor

failed, but it was by no means the last. Fortunately, the Singer venture did not put an end

to franchising.

Other companies tried franchising in one form or another after the Singer experience.

One of the first successful American franchising operations was started by an enterprising

druggist named John S. Pemberton. In 1886, he invented a beverage comprising sugar,

molasses, spices, and cocaine (which is no longer an ingredient). Pemberton licensed

selected people to bottle and sell the drink, which is now known as Coca-Cola. His was

one of the earliest—and most successful—franchising operations in the United States.

For example, several decades later, General Motors Corporation established a

somewhat successful franchising operation in order to raise capital. Perhaps the father of

modern franchising, though, is David Liggett. In 1902, Liggett invited a group of

druggists to join a "drug cooperative."

FRANCHISING

His idea was to market private label products. About 40 druggists pooled Rs.1,92,000

($4,000) of their own money and adopted the name "Rexall." Sales soared, and "Rexall"

became a franchisor. The chain's success set a pattern for other franchisors to follow.

It was not until the 1960s and 1970s that people began to take a close look at the

attractiveness of franchising. The concept intrigued people with entrepreneurial spirit.

However, there were serious pitfalls for investors, which almost ended the practice before

it became truly popular.

Since there was no regulation of franchises to speak of, a number of hucksters involved

themselves in the field. Many of them initiated get-rich-quick schemes which cost

investors countless dollars. As a result, franchising became a bad word to some people. In

1970 alone, over 100 franchisors went out of business. Concurrently, thousands of

franchisees lost their businesses and their money.

Some franchisors formed The International Franchise Association (IFA) in 1960 to

build and maintain a favorable economic and regulatory climate for franchising. It is the

only association serving as the voice for franchising in the United States and is a major

participant in the international franchise arena. IFA's mission is to enhance and to

safeguard the business environment for franchising worldwide. Today, more than 75

industries operate within the franchising format, and IFA's membership and network

encompass some 1,000 franchisors, 350 suppliers, and over 7,000 franchisee members.

Individual states began passing laws to regulate franchise activities. By 1979,

The Federal Trade Commission (FTC) initiated a franchise trade rule requiring

disclosure of pertinent information to prospective franchise owners. Franchising became

a respectable word again, and the practice flourished, aided by the efforts of early

franchisors like Ray Kroc and Dave Thomas.

Ray Kroc, the founder of the highly successful McDonald's hamburger chain and one of

the paradigmatic franchisors, called franchising the "updated version of the American

Dream." He established his franchising operation in 1955, after obtaining exclusive

franchise rights from Dick and Mac McDonald, who started the chain. Kroc went on to

launch a massive franchising campaign and 15 years later the chain included 1,500

outlets.

FRANCHISING

Wendy's founder Dave Thomas believed that McDonald's hamburgers were skimpy and

decided he could improve the basic hamburger. In 1968, Thomas received Rs.81.6 ($1.7)

million as his share of the sale of four chicken stores by Hobby House Restaurants, for

whom he was a manager. He invested most of it into a new chain of hamburger stands.

By the end of 1972, he had nine outlets with annual sales of Rs.86.4 ($1.8) million. By

June 1975, he opened the 100th Wendy's restaurant. Less than two years later, the

number jumped to 1,000. In 1978 alone he opened 500 outlets. By 1999 there were well

over 5,000 outlets worldwide. Thomas proved that there was plenty of room in the

franchising world.

FRANCHISING

TYPES OF FRANCHISES

There are two types of franchises

Product distribution franchises simply sell the franchisor’s products and are

supplier-dealer relationships. In product distribution franchising, the franchisor

licenses its trademark and logo to the franchisees but typically does not provide them

with an entire system for running their business. Product franchising prevalent for

the finished category of products, implies the rights to sell the product as it is

received from the parent company. The only value-addition that happens at the

franchise outlet is in terms of display, which facilitates easy accessibility of the

product to the customer and the actual sales transaction. Hence, product franchising

is only applicable for the sale of a product. The industries where you most often find

this type of franchising are soft drink distributors, automobile dealers and gas

stations.

Some familiar product distribution franchises include:

PEPSI

FORD MORTORS COMPANY

TATA car dealership

Although product distribution franchising represents the largest percentage of total retail

sales, most franchises available today are business format opportunities.

Business format franchises is a more comprehensive type of franchising where

the name, sale and the method of doing of business are transferred to the franchise outlet.

The transfer of knowledge for conducting the business has to be accompanied by an

effective follow-up mechanism by the parent organization.

BUSINESS FORMATPRODUCT DISTRIBUTION

FRANCHISING

Example:- McDonalds have perfected this technique over the years and today have a

rigorous franchising system which ensures that any franchise outlet will deliver the product

with the same stamp of customer service and quality that McDonald’s is famous for.

Business format franchises are the most common type of franchise.

Some familiar business format franchises include:

McDonald’s

Subway

Pizza hut

FRANCHISOR

FRANCHISEE

FRANCHISEE

BUSINESS FORMAT MODEL

FRANCHISING

Successful Examples Of Franchising in different sectors:

The success stories of franchising are endless. McDonald’s, Jumbo King, Kentucky Fried

Chicken, Archies, Monginis, Cafe Coffee Day are only a few of the more famous

examples where franchising has proved successful.

Today even couriers, doctors, opticians, law firms, accountants and many other types of

operations are profiting from the business expansion undertaken via the franchise

method.

Most popular franchising industries and there successful franchises

are:

Food –bakery -MONGINIS

Food-restaurants and fast food - McDonalds, KFC

Motels and hotels – ORCHID

Retail store- WAL-MART

Education – NIIT, IMS

Retail – clothing – PANTALOONS

Retail- shoes – BATA ,REEBOK

Greeting cards – ARCHIES, HALLMARK

Furniture- DURIAN , PERGO

Automotive repair- MRF

Hair care products – L’Oreal

Any product that can leverage a network of outlet to reach out to more customers in wide

geographical regions is suitable for franchising.

The franchising is clearly responsible for the success or failure of the product and for the

viability of the franchise outlets. The franchisor has to understand the essence of

franchising, and has to develop an appropriate business format for the franchising of the

product. For this, it is necessary to understand the critical success factor i.e. “elements” of

franchising.

Brand System/ Know-how

Market Market

Customer

Franchisor

Franchisee

Product/ service

Brand

The Franchising Environment

FRANCHISING

THE ELEMENTS OF FRANCHISING

The figure given below shows the ‘environment’ in which franchising operates.

The franchisor and the franchisee are bound together by the system, which ensures that

the customer gets the product or service as promised to him by the brand name and its

associated brand promise.

In a franchising environment the franchisor defines the product specifications as per the

needs and expectations of the customer. The system ensures that the right product with

the right quality reaches the customer at the right place, right time and right price.

The Franchising Environment

The franchisor builds up the brand that carries the associated image and promise

regarding the company and the product. Thus the three crucial elements of franchising

are the brand, the product and the franchising system. For franchising to be successful,

the three elements need to be clearly understood and defined as they form the basis on

which the structure or framework for franchising can be built.

FRANCHISING

1. Product

Before the franchising of a product can be planned, it should have been successfully

tested in the marketplace. A tasted product is different from a test-marketed product.

Many companies make the mistake of getting their products test-marketed in controlled

conditions using the services of marketing agencies and after obtaining positive results,

start franchising the product aggressively. This can lead to disastrous results when the

product is introduced in real-life situations.

Testing a product means that it has to be successfully sold in the market place, preferably

through multiple outlets or units, and in different geographical markets. Successful

selling also implies a body of satisfied customers who have actually returned for a repeat

purchase.

Product management is one of the element of framework for franchising. The production

and operations can be handled entirely at franchisor’s end or at the franchisee’s unit or

partly at both depending upon the nature of the product. The actual sales transactions and

after-sales services have to take place at the franchisee outlet. This is the common feature

of all franchise operations. These aspects of product management are shown

diagrammatically in the figure given below.

Product Updates

Product

Sales Strategy, Materials

Franchisee

Research and Development

After-Sales Service

Production

Sales

Franchisor

Product Management

Market Feedback

Complaints/ Feedback

FRANCHISING

2. Branding

The product offered in the market has to be backed by a proper marketing strategy with a

strong brand image that the market associates with the features and benefits of the

product or with the company offering it. But the brand can be built gradually through the

combined promotion efforts of both the franchisor and franchisee. The franchisee,

however, expects the franchisor to have strong brand at the outset, which will ensure the

success of the product. If the brand image is weak, the franchisee will not pay much for

buying the rights to use the brand name.

Branding is essential for the success of franchising. The stronger the brand, the easier it is

to get franchisees for it as also an appropriate value for the franchise. Managing brand

involves creating positioning and spreading the brand.

The figure given below outlines the entire process. Expansion through the openings of

new outlets, which is the franchisor’s role, results in improving the brand reach.

Feedback from the market offers the franchisor inputs to help modify communication

about the product, thus fine-tuning the brand and its image.

The franchise system has to clear the issue of brand management in order to avoid future

conflicts. Some franchisors assign a fixed amount for brand promotion in their budgets

every year. Other franchisors, however, make it clear that all promotion and sales

activities are the responsibility of the franchisee at the later units level. But it is important

to define these aspects clearly in the franchising offer document.

Feedback

Brand Reach

Brand Image

Feedback

Brand Reinforcement

Market FranchiseeFranchisor

Sales

Research & Development

Expansion

Marketing

Brand Management

FRANCHISING

3. Franchising system

The system, which forms the third element of franchising, is a combination of the

accounting system, the feedback and control system and the know-how transfer system.

This is outlined in the figure given below. The collection of payments from the customer

and payment of royalty by the franchisee, backed by a proper financial control

mechanism, forms the backbone of the accounting and financial management system.

The transfer of know-how, product, service, material and training from the franchisor to

the franchisee is another aspect that requires attention. For the franchisor, a feedback

system for quality control and customer complaints, can offer an important insight into

the functioning of the product, the franchisee outlet and the entire franchising system.

Franchisor Franchisee CustomerRoyalty

Training Payments

Feedback and Control

RawMaterials

RawMaterials

Product/ServiceKnow-how

Product Sale/Service Delivery

Quality Control/Customer Complaints/Feedback

The System

FRANCHISING

THE FRANCHISING FRAMEWORK

The three elements of the product, branding and the system integrate together to form the

franchising framework. The franchising framework is depicted in the figure back.

The franchisor invests in R&D, marketing (brand building) and is responsible for

quality/operations control and expansion. The franchisee sells and delivers the product to

the customer and provides after-sales service. The franchisee invests in the outlet

including manpower and equipment.

The system ensures that there is a flow of royalty and feedback to the franchisor. It also

ensures that the franchisee receives the product, know-how and training. The system

incorporates control and mechanisms and feedback systems to allow the franchisor to

monitor the later.

The franchisor has to define all the parameters mentioned in the framework so that the

three elements if franchising take shape. By defining these parameters, the franchisor is

able to prepare an offer document that can form the basis of the understanding between

the franchisor and the franchisee.

FRANCHISING

CustomerBrand Image

PaymentProduct/Service

Feedback

After-SalesSales

Franchisee

Sales Promotion

Investment- Men, Machine, Capital

Feed- back/

Reports

Product/Raw

MaterialTraining Royalty

System/Know-

how

Research &Development Marketing

Quality/ Operations

controlExpansion

Franchisor

The Franchising Framework

FRANCHISING

PARTS OF FRANCHISING

The four R’s of Franchising:

American corporate history is stuffed with instances of franchising outstanding 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:

Resolve

Research

Resources

Realism

4 R’s

FRANCHISING

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

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 flexibility 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 be adequate 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.

FRANCHISING

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 stays within the

system and fully learns the nuance of the business and prospers or tries one’s fledging

entrepreneurial talent and get into trouble.

Finalization of agreements:

Once a particular franchise opportunity is selected, a consultant can explain to you your

rights and obligations under the franchise agreement. You should understand that your

consultant has limited ability to “negotiate” the deal on your behalf, unlike other types of

business transactions. Most franchise offerings, particularly in established franchise

systems, are offered virtually on a “take it or leave it” basis. This is due to a natural

reluctance to negotiate, a desire for uniformity, the franchisor’s obligation to disclose the

franchise terms (stating whether such terms are negotiable or non-negotiable) to all

prospective franchisees.

Incorporation:

While a sole proprietorship is the simplest form of ownership, a sole proprietor has his or

her personal assets at risk for any liability in connection with the operation of the

franchised business. In a partnership the partners are jointly and individually liable for the

liabilities of the partnership and for the actions of the other partners acting within the

scope of the partnership. With a corporation, a shareholder generally will not be liable for

the liabilities of the corporation except to the extent of the shareholder’s capital

contribution. A shareholder’s personal assets are protected.

FRANCHISING

THE RESPONSIBILITIES OF BOTH THE PARTIES

Franchisor:

The Franchisor provides a ready made, established and tested business format

including brand name, proven and time tested products, corporate power, know-

how, training and supports systems.

The Franchisor provides complete assistance in terms of site selection of the

business, personal training, business setup, advertising and product supply.

The Franchisor also provides manuals, literature, etc. to help the franchisee to

follow all necessary policies and practices as prescribed by the franchisor.

Franchisee:

Buys licensed rights to the whole business package from the Franchisor in a specific

territory for a specific period.

Invests in capital, time, effort and any relevant past experience to create his business,

replicated from the Franchisor’s business system.

Moreover the franchisee manages the store and the business and generates revenues

that are ultimately shared between the Franchisor and franchisee.

Brand name protection: The franchisee is obliged to protect and promote the brand

name of the Franchisor. The Brand name or the trademark should not be changed or

damaged by the franchisee nor any derivatives of it formed in the name of the

franchisee.

Secrecy: The know-how, system, methods and all other information provided in the

manuals and future updates should not be divulged to any third party. The franchisees

should be asked not to copy the manuals in any part.

Taxes: If the franchisee is supposed to comply with local tax statutes like sales tax,

VAT, service tax, etc. the same should be specified and the franchisee should be

obliged to comply with them and provide the relevant financial information to the

statutory bodies and to the Franchisor.

For the services provided by the Franchisor, the franchisee has to pay an upfront

“franchisee fees” and an on-going royalty or profit sharing.

FRANCHISING

GENERAL ISSUES ON FRANCHISING

WHY FRANCHISING?

Franchising is upcoming because of the various reasons given below:

The global franchising revolution:

The global franchise economy accounts for 20 percent of the business around the

world, employing 27 millions people. It has been a very successful mode of

expanding business without large investment and with the minimum risk possible.

The emergence of global market:

The world has become a smaller place due to the advances in technology. The high

rate of technology advancement and business opportunities linked to it, has led to

better economic conditions, with people seeking comfortable standards of living and

leading to an increased demand for improved products and services. Transport and

communication has improved a great deal and has led to an almost standardized

market structure.

Increased Media Exposure:

The wide exposure and accessibility to Internet and TV channels has led to a

revolution in the industry. A brand name that was once limited in influence to a town

or a region, is now recognized nationwide as a result of the increased penetration of

various media. Even international brands are there for the asking with just the click

of the mouse while surfing the Internet.

Increased Brand awareness and recognition:

The shrinking of the world economy, exposure to various media, and a trend of aping

the west has led to high levels of brand recall, awareness and recognition. The

demand for branded goods and services has increased manifold.

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Ever-increasing Customer demands:

Due to the intense competition and brand wars in the market, today’s market has

transformed into buyer’s market. In order to succeed, the firms have to meet the

customer ever-increasing demands. The customer wants the right product, at the right

time, at the right place and at the right price.

Availability:

The customer demand for the product or services has to be met, thus a wide

distribution is necessary. The most effective way to expansion is through franchising.

This is not only cost-effective but also guarantees a number of outlets without the

direct headache of running them.

Brand Visibility:

It has now become important for a brand name to be present everywhere if it has to

survive, since brand recognition is what is required and what matters. Franchising is

the best way to have larger visibility coupled with best possible service as it is

combining the brand name, know-how, technology, etc. of the franchisor with the

capabilities and hard work of the franchisee. In the present age, with people seeking

immediate recognition, small businesses alternative to franchising which in turn helps

the company to expand its reach.

Think Global, Act Local (Glocal):

Expansion is a must for a company and at the same time an outlet must be managed

locally. In order to succeed, its necessary to have global perspective and have a tried

and tested way of doing business which is the Franchisors responsibility. Also it is

necessary to tailor your product to local tastes for maximum profitability, the

franchising is an ideal way to achieve this balance.

Thus it can be said that Franchising is an ideal business model to expand the reach of the

business and satisfy the needs of the customer.

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FRANCHISE APPEAL

There are two primary reasons for the tremendous success of franchising as a method of

marketing goods and services.

The advantages to Franchisor:

Multi location Business:

Franchising helps the franchisor to setup in various locations at the least possible cost.

It increases availability and brand visibility. This helps in penetrating the market at a

fast pace. Thus it is an excellent opportunity for rapid expansion without an enormous

outlay of capital.

The Franchisor shares risks with the franchisee. Also a part of the investment is

sharing the risks put in by the Franchisee who is an important source of capital for the

Franchisor.

Localization of the offering:

The franchisee has knowledge of the local customers, their needs, income levels,

spending habits, etc. Thus he is an irreplaceable source of information for the

Franchisor. The Franchisor uses his knowledge to tailor his products to satisfy the

local needs. Thus it also provides the potential for exporting through appointment of

master licensees who have local expertise.

Increased Market Share:

Due to higher visibility and easier availability of a standardized product or service, the

market share increases rapidly. Thus satisfying the basic purpose of franchising i.e. to

get customers and keep them.

Thus a company can establish several outlets quickly in researched areas and expect a

uniform standard of service to customers from its franchisees.

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The advantages to franchisee:

A proven business format:

The franchisee gets access to a proven, time-tested way of doing business. He is

provided the right to use the brand name, the know-how techniques of production

(in case of process franchising), literature, etc. of the Franchisor. The franchisee uses

the Franchisor’s brand to attract its customers and deliver products to them using the

proven business format of the Franchisor. Thus he has a certain set of guidelines to

follow for success.

Minimum Risks:

The risks reduced to a minimum as the Franchisor supports the franchisee by

providing training, know-how, business processes, advertising, etc. through

franchising, the franchisee ca count on the experience and support of the Franchisor

and thereby reduce the risk of failure that comes as a result of financial

mismanagement and inexperience with business management, which are the cause of

more than 90% of all business failures.

Synergy of operations:

Due to the presence of a number of franchisees in the network, the per-unit cost is kept

to a minimum. Thus the franchisee spends less on advertising and promotion.

Economies of scales:

The franchisee is able to leverage the economies of scale a large organization would

enjoy and saves a substantial amount on material, equipment, overheads, etc.

Scope for growth:

The Franchisor conducts training and development programs for the staff. The

franchisor also engages in constant R & D and new product development. Thus there

is a scope for growth without any investments.

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Entrepreneurship:

Franchising provides an opportunity to start a business without having a great amount

of risk. It allows people to be their own boss and provides them with a successful

model which they can follow and reap rich rewards.

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Drawback of franchising

Franchising also has drawbacks:

Lack of independence

Inflexibility

Lack of independence:

An important feature of franchising is that every aspect of the business format is defined

and each outlet is operated strictly in agreement with this format.

Discipline:

Being a franchisee means working within a system in which there is little freedom or

scope to be creative. Almost every aspect of operating the business is laid down in the

manuals.

Franchisor Monitoring:

Regular field staffs monitoring visits are necessary but may seem as an intrusion at

later stages.

Services Charges:

At first these services are necessary to set up and settle into the business and

franchisees may not mind paying them. However as time goes on, if less use is made

of the Franchisees resent making the continuing payments.

Reputation:

Each franchisee affects reputation of the whole system depending on their

performance and ability. In many franchises there is a wide gulf in the quality of

product and services between the best and the worst franchisees. Thus a bad franchisee

can harm the reputation of other outlets in the chain.

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Inflexibility:

Responding to the market:

Franchising tends to be an inflexible method of doing business as each franchisee is

bound by the franchise agreement/contract to operate the business format in a certain

way. This can make it difficult for a franchisor to introduce changes to the business

format, refit outlets, or introduce new types of equipment. In some franchises it can be

difficult for a franchisee to respond to new competition or to a change in the local

market.

The Job Itself:

What may seem attractive challenge now could become boring after a few years. After

a while the franchisee may spoil relations with the Franchisor.

Drawbacks of the franchising model also include the herd mentality that exists among

Indian Franchisors as well as franchisees.

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HOW DO YOU INVESTIGATE A FRANCHISE?

Like starting any business, buying a franchise involves a risk. Studies show

that successful franchisees:

Conduct their own marketing research

Use their own financial and legal advisors

Develop thorough marketing and business plans

Have prior work experience

Prospective franchisees must devote a vast amount of time researching the franchises

available and evaluating the strength of the franchisors.

Find out what franchises are available:

Read directories:

How to open a franchise business

Franchising- The Route Map to Rapid Business Excellence

Indian franchise

Conduct research on the internet:

IFA Franchise Opportunities Guide – www.franchise.org

Source Book Publications — www.worldfranchising.com

Evaluate the strength of the franchisor:

Investigate the franchisor’s history:

How long has the franchisor been in business?

How many current franchisees are there?

What is the failure rate of the franchisees?

Are there any pending or past lawsuits and what have they been for?

Does the franchisor have a reputation for quality products or services?

What is the franchisor’s financial health?

Credit rating

Profitability

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Reputation

What are the earnings claims and profit projections?

On what are they based?

Are the projections based on franchisor or franchisee-run units?

How long have the units used for projections been in business?

What is the background of the principals/management?

What is their business experience?

Have they personally had any bankruptcies?

Have they personally had any recent litigation?

Candidate Evaluation

Carefully study and obtain professional advice concerning the franchisor’s and

franchise agreement, paying special attention to:

Costs

Term (duration of) agreement and renewal provisions and conditions

Termination clauses

Franchise territory

Procedures and restrictions

Training and assistance

Earnings potential - gross sales, net profit

Expansion plans

How fast do they plan to grow

Where do they plan to grow?

Do they have a business plan for your area of location?

What is their analysis of the competition in your area?

How many units are being planned for your area? Why that many?

How much is going to be spent in regional advertising in your area?

Visit and talk with existing franchisees, emphasizing the:

Level of training

Quality of products or service

Level and promptness of support

Operations and quality of the operations manuals

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Visit/talk with franchisees who have left the system and find out why they left.

Visit the franchisor’s headquarters:

Meet the support team

Review the operations manuals and see if you can sit in on a training class

Go to work in an existing franchise for a couple of weeks and get to know the:

System

Manuals

Training program

Support

Earnings potential

Seek advice of a legal representative and accountant who specialize in franchises.

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THE CRITERIA FOR SELECTING A FRANCHISE

Before buying any business, you must carefully consider many factors that

are critical to your success:

Costs

How much money will this franchise cost before it becomes profitable?

Can I afford to buy this franchise?

Can I make enough money to make the investment worth my time and energy?

Your Abilities

Do you have the technical skills or experience to manage the franchise?

Do you have the business skills to manage the franchise?

Demand

Is there enough demand in your area for the franchisor’s products or services?

Is the demand year-long or seasonal?

Will the demand grow in the future?

Does the product or service generate repeat business?

Competition

How much competition do you have, including other franchisees?

Are the competing companies/franchises well established?

Do they offer the same products and services at the same or lower prices?

Is there a specialty or niche you can capture?

Brand Name

How well known is the franchise name?

Does it have a reputation for quality?

Have any consumers filed complaints with the local Better Business Bureau?

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Training and Support

What kind and how much training and support does the franchisor provide?

Do existing franchisees find this level of training and support adequate?

Franchisor’s Experience

Has the franchisor been in business long enough to have established the type of

business strength you are seeking?

Expansion Plans

Is the franchisor planning to grow at a rate that is sustainable?

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MARKETING OF THE FRANCHISE OFFERING

The franchisor’s job is to market the franchise proposal and attract the right potential

franchisees. The marketing of the franchise can best be understood by starting from the

basics Philip Kotler’s four P’s of marketing, viz. the product, price, promotion and place,

can be used as a starting point to devise marketing plan for selling a franchise. The four

P’s are discussed in detail below:

PRODUCT

The “product” includes the actual product, the franchise package, the franchise unit and

the brand associate with the product. The product and he franchise package should both

be attractive to a potential franchisee, who should also be convinced that investing in the

product will give him adequate returns. In businesses where the product is a service, the

franchisor has to lay down the procedures and guidelines for the execution of the service

in the form of manuals. These manuals, along with the equipment needed to render the

service, in effect, become the “product” which the franchisees sees, as they represent the

know-how and the product or service specifications that the franchisor is transferring to

the franchisee.

PRICE

The price of a franchise implies the franchise fees that franchisee is being charged the

franchise fees is a one-time payment that a franchisee makes to the franchisor in the form

of start-up fees. Additionally the franchisor charges royalty, collected in the form of

ongoing fees, on the basis of the business that is generated by each franchise unit.

The following factors determine the franchise fees:

Brand strength

Numbers of successfully running units

Return on investment for the franchise

Competition in the market

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Some of the examples of franchises investment are:

Monginis- Rs.4,00,000-6,00,000

Archies- Rs 10,00,000-12,00,000

NIIT- Rs. 20,00,000-30,00,000

PROMOTION

The franchise proposition has to be promoted in order to generate potential franchisee

inquiries. How, then, does a franchisor actually find potential franchisees for his product?

As for any other product, potential inquiries can be generated by one or more of the

following ways:

Advertising

Direct marketing or

Word-of-mouth

In each of the above, the first step is to define a typical or ideal franchisee. For example,

for NIIT franchise, the franchisee who possesses the technical skills or experience in the

relevant field, has a higher chance of succeeding in business than a

non-technical person.

The next step for the franchisor is to draw up the profile of an ideal franchisee ideally

fitting the concerned business and industry. A strategy for advertising and/ or direct

marketing which directly targets this qualified segment, can then be worked out.

PLACE

The fourth ‘P’ of marketing, place refers to the location of the franchise unit. A study of

the demographics of the location and measure the estimation of the demand for the

product can be done. Most importantly, the location should not be too close to an already

existing franchise unit. A market feasibility study should be used to assess the

practicability of a franchise unit at that location. Examples: Franchises like Monginis,

Archies are located near station where as McDonald outlets are located in malls.

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INTRODUCTION TO FRANCHISING IN INDIA

Franchising as a way of doing business started in Europe in the 12th century. Business format

franchising the most popular method of franchising started in the U.S.A. in the 1950’s.

Franchising provided a quick way to rapidly expand service-based industries across the

country. India today is the second largest franchise marketplace, thanks to its size and the

recent positioning of the economy.

India is at a threshold of a revolution in franchising which contributes to around 25-30% of

the world GDP. Though franchising in India did not take off, as it globally, still it is more

popularized through domestic franchising. All the credit goes to IT and education.

Internationally franchising started with international companies, especially US stepping in

emerging markets.

In India, franchising as a concept was unheard of till late 1980’s.the distribution industry was

used to the dealers and retailers, both exclusive and non-exclusive. However, due to the

growth of competition and increasing importance to meeting the needs of the customers, an

alternative had to be found.

Thus was felt the need for solution that had a right mix of independence and interdependence.

This scenario led to the emergence of franchising.

In franchising, the businessman becomes a part of the system under which the Franchisor

allows him (the franchisee) to market products or services, along with the Franchisor’s brand

name, goodwill and marketing paradigms. The franchising can also use the Franchisor’s

intellectual property rights such as know-how, designs, trademark, patents and even trade

secrets. In return, the franchisee agrees to pay a negotiated sum of money.

“It is a win-win situation for both”, says marketing writer Sheetal Talreja. “It frees the

Franchisor from all the hassles and nitty-gritty of day to day management, while still

preserving and strengthening his Unique Selling Proposition. And the Franchisee is saved

from the uncertainties of building up a business brand and from the Franchisor’s well-

developed marketing practices.”

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Considering the enormous success of this model on the west it is necessary that we interpret

the concept as they do worldwide give and make a few changes as aping the west blindly

might not work.

A treasure trove of opportunities

The market in India is seen as a treasure trove of opportunities for the following reasons:

Developing market growing at a fast pace: India has a population of over a billion

people and is a very large market, whose potential is still not tapped to its maximum.

Magic of the middle class: There is a growing middle class population with a growing

purchasing power who are looking for branded and high quality goods and services to

fulfill their needs and changing lifestyles.

The scenario:

The international franchising concept is relatively new in India and it is only since the

early 90’s that the U.S.A. and third-county franchising companies have entered the market.

Franchising in India is currently regarded as a form of marketing arrangement rather than

an industry by itself.

Some of the franchising systems that have been adopted by companies in India to expand

are:

1. Master Franchising System: In master franchising the Franchisor grants for a

particular area to the master Franchisor for a front-end master franchisee fee. The

master Franchisor on his part is responsible for appointing further individual

franchisees within that area.

2. Area Development franchising system: In an area development agreement, the

franchisor grants development rights of a particular area to the franchisee in turn for

a front-end development fee. The franchisee on his part is responsible for a certain

number of units within a given period of time.

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3. Exclusive Showroom: In an exclusive showroom the company or the franchisor

grants exclusive showroom rights to the franchise with the condition that the

franchisee shall stock only his brand or products. The franchisee profits by given

stocks at better profit margins than other retail outlets. Eg. TATA Indicom Station.

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

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

world.

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 centers 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.

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SUITABILITY OF THIS MODEL IN INDIA

India’s training and industrial history has generated a whole sector of potential self-

employed people. Many are the descendents of those involved with distributorships,

agencies and joint ventures partnership. Many are trained professionals in marketing,

customer service, and working with dedication to formal business formats.

Indians have certain traits like

Ability to provide excellent customer service.

Working to a given business format.

Ability to work hard and sell the concept they believe in.

Understanding the pulse of customers.

Quick responses to local needs.

These traits make them the ideal candidates for successful franchisees.

Thus a presence of ample entrepreneurial talent is waiting to be exploited.

In the beginning of the 1980’s, the sectors ideally suited for harnessing the ample

entrepreneurial talent within the country like bottlers, computer education (NIIT, Aptech,

Boston’s), shoes were into franchising.

Thereafter franchising soon gained momentum because of the right environment for

franchising:

Vast geographical spread,

Availability of finance,

Local market various in terms of language culture and habits.

India is so large and diverse that franchising is the only viable alternative for retail

operation that want to expand their reach quickly and cost-effectively.

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IMPORTANT FACTORS AFFECTING FRANCHISING

IN INDIA

Small local market size:

In India great importance is given to local needs as the needs vary due to the diverse nature

of the country.

Price Sensitivity:

Indian customers are highly price sensitive and want the greatest value for money, thus

Franchisors need to keep the cost factor in mind when franchising.

Specialization:

Indians prefer certain kinds of goods to be tailored to their requirements. And a perfect

example for this would be McDonald’s which had to Indianise its burgers to increase sales.

They launch McAloo Tikki for Indian customers. Thus franchising must provide a proven

format but at the same time allow flexibility to the franchisee to alter the offering slightly to

appeal to the customers.

Management :

Indians have certain traits like:

1. Ability to provide excellent customer service.

2. Working to a given business format.

3. Ability to work hard and sell the concept they believe in.

4. Understanding the pulse of customers.

5. Quick responses to local needs.

This helps in managing the showrooms of the franchisees easier and a lot safer.

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WHY FRANCHISING IN INDIA

Though the Franchising in India is at a very nascent stage, but this industry has clocked

the growth rate of 25-30 per cent, the second fastest growing industry. Franchising, as a

dynamic and ever changing industry will firmly establish itself in a couple of years.

Organized retailing though only at 6 per cent of the retailing, will take off in a very big

way. The Indian middle class is slowly expanding and now buys consumer appliances

with more disposable income. 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.

However, there is no specific legislation regulating franchise arrangements in India, but

there are various laws which affect the relationship between the franchisors and

franchisees, including intellectual property laws, taxation, labour regulations, competition

laws, property and exchange control.

Franchising affords India an opportunity to build its commercial infrastructure and

develop its domestically oriented businesses in an efficient and profitable 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:

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.

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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 1.5% p.a. There is an ever-growing

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

goods, 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.

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 foreign franchisor. Franchising allows them to reconcile these

conflicting ambitions.

Harnessing local market knowledge:

Indian master franchisees offer the foreign franchisors direct access to substantial

market knowledge and a considered and sophisticated approach to its exploitation. A

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

What holds good for Mumbai may not be relevant for Kerala. Franchising provides a

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

Customization:

Customization is very important when it comes to Indian customers. This

customization not only takes place in systems but also in the main products and

services. That’s the reason why one walks into the western McDonald’s and is able to

order a McAloo-Tikki Burger.

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FUTURE OF FRANCHISNG IN INDIA

In a vast country like India with over 1 billion population and rapidly changing life styles

and growing awareness in the consuming class wanting continuous improvement in the

quality of products and services the scope for growth of franchising is phenomenal.

Going forward this growth is inevitable not only through Foreign Franchisors coming

into the country but more so through the growth of large number of Indian Franchise

Systems like Aptech, NIIT, Barista, Raymond and a host of other emerging Franchise

businesses in the area of health care, entertainment , beauty parlours, education, business

services and the like.

Considering that there is no dearth of entrepreneurial talent in the country and that there

are scores of Indian Franchisors looking out for suitable Franchisees this sector is set to

explode to a level of over 2500 Franchise system in the next 4/5 years with over 1,00,000

Franchisees operating all over the country with its corresponding positive impact on

employment generation.

Although in a nascent stage, franchising is gaining popularity in the retail segment in

India, more particularly in the areas of food products and drinks, telecommunications,

restaurant chains, consumer goods, apparel and computer training centers. Retailing is the

next big franchising opportunity.

The future of the franchising industry in India seems to be bright but will be difficult to

sustain without constant innovation.

The sectors in which Franchising is making rapid strides are Education, Specialty-

retailing, Apparel retailing, Food and Beverages, Health care and Beauty.

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THE INNOVATION IN FRANCHISING:

Co-branding:

In franchising, the concept of co-branding simply involves two or more “brands”

sharing real estate. Each maintains identity, but there is free flow of customers

between them. Co-branding saves operating costs and lures more customers to the

site. However this is a phenomenon of matured franchising markets and once most

of the franchisors have explored all new entries in India they will probably shift

their focus to this system of delivery.

Example: Shoppers Stop has tied up with Planet M to sell their products within

shop, thus sharing space and creating a pull for customers as two big brands at

present at the same location.

Using the intranet/extranet to keep franchise owners plugged in:

Another innovation, the Intranets and extranets can help a Franchisor to be in

constant communication with their franchisees spread over large geographical

areas and ensure smooth delivery of products and free flow of information. This

would not only help in efficient delivery of products but also lead to ultimate

reduction in costs and increase in bottom-line.

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INTERNATIOANL FRANCHISING

As globalization plays an increasingly prominent role in the world economy, businesses

are prudently seeking to expand their operations abroad. The rise of giant franchisors,

such as McDonalds in China, are sending an urgent signal to large franchise and newly

established franchises alike that international franchising is here to stay. When a

franchise decides to expand into a different country, it is imperative that the franchisor

take all aspects into consideration, including the economic, political and social climate of

the area they are targeting. Important considerations include the economic health of the

region, whether or not resources and capital are available to the target group of qualified

potential franchisees, the possibility of supply-chain issues such as ready availability of

fuel or other necessities required to run the franchise and assessments of the political

climate of the region. The future of this region, including the possibility of political

instability or a rise in regulations that hamper franchise growth, must be taken into

account as well.

 

For example, Mexico’s pro-business, pro-American government is giving franchising a

boost, and in Central America, “franchise-friendly cultures are growing at a record pace

with a large number of successful stories,” including brands like KFC.

 

However, there are other important factors, also called market attractiveness factors that

draw franchisors to certain markets, such as the types of franchise regulations in place in

the region and the structure of the target market. When a franchisor engages in market

selection, they will heavily evaluate the market potential and legal environment. Once the

franchisor selects their market, they will begin recruiting franchisees to help run the

expanded operations.

Interactions between the franchisor and franchisee are particularly important, and in

choosing a franchisee, the franchisor must consider how their partner will fit into the

overall strategy of the organization, how that particular country’s market will perform

and whether or not the franchisee is qualified to become a franchise partner. Franchisors

tend to choose franchisees that understand the brand, have specific expertise and business

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acumen and have extensive knowledge of the local market.

Franchisees are drawn to franchisors that are aware of the local environment and status of

the market, and are willing and able to communicate openly with the franchisee. Besides

these tangible criteria, the franchise partners must have chemistry in order to successfully

form their partnership.

An example of an organization that has implemented these market and partner selection

techniques is Holiday Inn, whose “global ambitions” have led to localized, customized

hotel franchises all over the world, in Europe, the Middle East and Africa. Although it

remains to be seen how successful Holiday Inn’s expansion efforts will be, their

willingness to cater to the local market in their international expansion efforts should

serve them well.

 

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MODES OF INTERNATIONAL FRANCHISING

The following are basically 5 types of international franchising mediums: -

1) Direct Franchising:

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. Keeping the

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

internationally.

2) 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.

3) 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

FRANCHISING

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

4) 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

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

government 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.

5) 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

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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.

6) Miscellaneous forms:

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

to accommodate the differing demands of potential franchisor and / or franchisee. New

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

regular intervals. Examples of these are stated as follows:

Multi-unit Franchising

Affiliation or conversion Franchising

Franchise within a Franchise

Subordinated Equity Arrangements

Management Agreement

Franchise Buy-ins

FRANCHISING

LEGAL ASPECTS INVOLVED IN FRANCHISING

Some Basic Legal Issues

Franchising has been specifically regulated in only a very few countries. In part, this is due

to the complexity of the relationship and due to the great number of areas of law that a

franchising relationship involves. Some of these laws are dealt with here under: -

Competition Law or Anti-trust Themes:

The resources in the market place would best be allocated by free competition; it is

believed that goods and services are provided at the lowest possible price by the rule of

open market forces. Any conduct, which unreasonably restricts those market forces, must

therefore be eliminated. Terms such as ‘prevention, restriction or distortion of

competition’, ‘hinder normal functioning of the market’, ‘distortion of normal play of

competition’ are found in most competition regimes. When considering the expansion of

their businesses through franchising, entrepreneurs should review their business practices

and be mindful of their conduct in five main areas. These are-

Horizontal restrictive agreements

Excusive dealings

Tied sales

Territory or customer restrictions

Resale price maintenance

Indian Competition Law :

In India laws to prevent monopolistic, restrictive and unfair trade practices that distort

free competition in the market are found in Part A of MRTP Act, 1969. Also, the

remedies available to the individual consumers for loss and injury suffered as a result of

defective and sub-standard goods and deception are found in the Consumer Protection

Act, 1986 and Part B of MRTP Act, 1969. The first part of MRTP Act, 1969 is mainly

directed against the franchisors, whereas Consumer Protection Act and Part B of MRTP

Act are directed mainly at those Master Franchisees and franchisees who produce the

goods which the Indian Consumer Purchases.

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Consumer Protection:

It is anticipated that consumer protection laws could have a substantial impact on the

development of franchising in India. As discussed earlier, one of the great strengths of

franchising is that although the franchise network is comprised of independent

entrepreneurs each having entered into a franchise agreement, they all present a common

face to the public who should not be able to distinguish between corporate or franchised

outlets. The franchisee uses the franchisor’s brand name or goodwill, in relation to the

goods he sells or services he offers to the public, thereby representing that the goods or

services are of the same quality or standard as that of the franchisor.

If the consumer finds that it has paid a high price and chosen the particular brand of

goods or a particular agency due to its international reputation, but does not receive the

same quality of goods and services, then it must have a remedy. Also when the product of

the franchise causes injury to the persons who are the consumer of the products or causes

damage to the property of the consumer, then who should be held responsible?

Consumer Protection Law in India

Consumer Protection Act 1986 is the most relevant to the common man who is the

consumer of the franchised product. This Act covers a wide range of persons who may be

liable including manufacturers, assemblers, distributors, wholesalers, retailers and

packers. It may extend to installers, erectors and repairers of goods. Therefore, the

franchisor or franchisee of goods can fall into this category quite easily. At present there

is no provision for disputes arising specifically out of franchising in relation to consumer

protection, however the general law and statutes present can provide some relief to the

consumer.

Intellectual Property Law

The protection of Intellectual Property Rights is of paramount importance to any

international or domestic franchisor that is franchising into a new territory; since its

goods can be copied and marketed by others or its brand name can be misused resulting

in its goodwill being diluted. Further the know-how being transferred by the franchisor to

the franchisee in relation to the product or services needs protection.

FRANCHISING

In India, the Intellectual Property Laws have been in existence for long, but its

implementation has been developing only in the recent years with considerable

interaction with foreign businesses in relation to collaborations, technology transfers and

trade.

Indian Law on Intellectual Property rights:

There are various remedies available in India both under Statute and Common Law in

relation to trademark, design and copyright, which are particularly effective against

infringement and trafficking in trademarks. The Trademarks Act, 1999, which came into

force subsequent to the amendment of Trademarks and Merchandise Act, 1958, was

enacted to provide for the registration and better protection of trademarks and for the

prevention of the use of fraudulent marks on merchandise.

One of the ways for a franchisor to protect a trademark in India is by registration. The

Designs Act 1911 is aimed at protecting the proprietors of novel or original designs and

for enforcing those rights against infringers. It helps the franchisor to protect his exact

design and maintenance of his goodwill, which is the whole basis of the existence of the

franchise system.

The issue of copyright arises in franchise when a franchisor wishes to protect his

franchising manual, which contains the entire technique of running the franchise business

from being used improperly by another. Furthermore, the franchisor may have videos on

how to use the product and for advertisements that need to be protected from being

pirated. Keeping such questions in mind, Copyrights Act, 1957 has been enacted and

gives protection to the franchisor against the above apprehensions.

Labour Laws relating to Franchising:

Labour laws are very important in International and domestic franchises especially in

relation to the various outlet, shops and offices in which persons are employed. No

franchising contract can derogate from the applicability of the labour laws. The labour

laws govern the day-to-day conditions of employment and are particularly relevant in the

franchising context when an outlet is shut down or the business is sold, in relation to the

amount of compensation payable by the master franchisee, franchisor or franchisee.

FRANCHISING

Labour Laws in India:

India has numerous labour laws which any foreign or domestic franchisor must be well

aware of before doing business, and to mention a few: -

Apprentices Act, 1961

Contract Labour (Regulation & Abolition) Act, 1970

Employees Provident Funds and Miscellaneous Provisions Act, 1952

Employees State Insurance Act, 1948

Equal Remuneration Act, 1976

Factories Act, 1948

Industrial Disputes Act, 1947

Minimum Wages Act, 1948

Payment of Bonus Act, 1965

Workmen’s Compensation Act, 1923

Payment of Gratuity Act, 1972

Payment of Wages Act, 1936.

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.

Insolvency Law in India

The laws that are relevant in India in relation to insolvency are found in the Companies

Act, 1956 and the Provincial Insolvency Act, 1920.

FRANCHISING

FINANCIAL AND TAXATION ASPECT OF FRANCHISING

Valuation – What is the franchise worth?

A franchise is like any other asset. Ultimately, its value is what people are willing to pay

for it. However, when considering the commercial viability of licensing as compared to

some other form of exploitation, it is important to try and scientifically arrive at a

reasonable valuation. It is only when the franchisor and the franchisee have taken a view

as to the value of the franchise that negotiation can take place and ultimately a franchise

granted. When entering into a master franchise / development agreement, the franchisor

undertakes a number of commitments, which cost money and thus forms the basis of

valuation. These include:

Training

Technical and / or marketing support.

Making improvements available

Use of trademarks

Supplying goods.

Taxation Aspect

Taxation is another issue which receives due consideration. It is important to know the

local sales tax, property tax, and withholding tax applicable in a certain area.

Furthermore, how the franchise arrangement is structured and the existence of treaties

between the countries involved may have considerable influence on taxation.

The situations and types of taxes that apply to franchising in India are described

below:

Income Tax act, 1961

Companies Act, 1956.

FRANCHISING

TERMINATION OF FRANCHISES

Termination of an international franchise system is without doubt one of the most

difficult issues for a franchisor to face. Not only must the franchisor face often complex

legal provisions, sometimes providing for substantial compensation, it must face the

daunting task of deciding exactly what should happen to the franchise in the territory

following the termination.

Commercial Issues:

The prospect of terminating a franchise agreement with a Master Franchisee, developer

or franchisee raises a question of what is to happen to the franchise in the territory

following the termination. The answer will inevitably depend on the value and potential

value of the market. If the territory has a number of profitable outlets ‘up and running’, it

will usually allow them to continue. One way of achieving this is to terminate the Master

Franchisee’s right to open new outlets.

If full termination is the only possibility, the choices for the franchisor are:

Pulling out of the territory

Stepping into the master franchisee’s shoes

Appointing a new master franchisee for the whole territory.

Legal Issues:

The whole question of jurisdiction and conflict of laws is absolutely vital for the

draftsman to consider when contemplating what may occur in the case of termination.

Termination is generally resulted from breach of the franchising agreement. In such

cases, the grounds are quite reasonable and, provided the obligation of notice being

served is duly complied with, termination is set in action.

FRANCHISING

PROBLEMS FACED BYTHE INDUSTRY

Problems faced by the industry can be broadly classified into three areas:

Problems faced by the Franchisor in Franchising:

Franchisees are not involved in the business: It has been observed that the

franchisee does not have a feeling of ownership towards the brand, the franchisees

see franchising as an alternative sources of income with minimum involvement.

This translates into low sales turnover and thus the threat of shutting the shop.

Concept of franchising is not understood and implemented in its true sense:

In India the franchising concept has been modified to suit the needs of the Indian

market. Also the model is not implemented, as it is the world over. The Franchisor

has the major investments and responsibility and risk is not adequately shared by

the franchisee.

The ‘minimum guarantee’ phenomenon: Most franchisees are in the business for

the minimum guarantees and not because they believe in the brand. Thus all

franchisors have to shell out minimum guarantees to ensure they get a good

location for their outlet. As a result of this franchising in India has become a race

for who gives the highest Minimum Guarantees and returns. Thus cost increase

effect bottom lines of the company, which is determined to the growth of

franchising in India.

Difficulty in finding and retaining the ‘right kind’ of franchisees: This is due to

the fact that some franchisees that have good location are being pursed by all the

big brands, and the brand that offers the best returns is the one that sets up an

outlet.

PROBLEMS

Franchisor’s Problems

Franchisee’s Problems

FRANCHISING

Problems faced by the franchisee in franchising:

Lack of adequate support from the franchisor: This happen only in a few

cases. But generally the franchisor gives all the support and the technical know-

how he can give because in the end he too depends on the franchisee for returns

or profits.

Non-Availability of Merchandise: The franchises face a problem in getting

the required products on time as and when demanded. This is a major problem,

as the franchisor is the only source of supply for the product and non-

availability disappoints the customer and this leads repeat football and the

growth of business.

Longer lead-times and slower decisions-making process: The chain of

communication between the franchisor and the franchisee is very long as there

are many levels between the two. The franchisee has to deal with the Area

Sales Managers, Zonal Managers. Thus any decision has to be approved by the

franchisor and this leads to unnecessary delays.

The franchisee may miss out on a viable business opportunity due to this long

chain of communication. Due to this Order Processing is also delayed and this

one of the main reason for non-availability of merchandise as per the needs of

the local markets.

Difficulty in attraction customers to the stores: It is very essential to have

the required footballs to make the franchised outlet viable. In today’s world,

people want the convenience of getting all things under a single roof, and want

a variety of options to choose from (Brands, Styles, etc) thus it is increasingly

difficult to get a customer to visit a franchised outlet that is mostly a speciality

store and stocks only a limited range of products and brands.

FRANCHISING

RECOMMENDATIONS

Steps to ensure a smooth franchising process:

Standardize the business first: Franchising is not just about the growth but

also of transferring know-how profitability to the franchisee. Companies

must ensure that they have defined operating policies, processes and

procedures to enable the transfer and replication of the operating know-how

easily. It’s important to ensure standardization. What standardization does it

minimize the chance of failure for the franchisee and eventually the

company.

Franchising is not fast-buck option: Franchising only makes sense if it is

an extension of the business and not just a profit-sharing arrangement. Lack

of involvement from side of franchisees and taking it just as side business

for extra income is a restraint to the success of the world.

Money power isn’t everything: Franchising is partly a risk because it

means that the franchisee becomes the custodian of the brand in his area of

operation. If it is given that the franchising business is, in essence, a joint

venture, then maintaining the delicate balance between independence and

control is important.

Faulty understanding and implementation of the franchising concept:

Both parties must have clear understanding of their roles, responsibilities

and rights. To give clear idea of the ideal franchising concept it is imperative

to understand the franchising framework and outlines the inputs put in by

both the parties i.e. the franchisor and the franchisee.

Connecting the franchisees with an IT packages: The franchisees can be

connected to the central warehouse of the franchisor using some software

packages. These packages will help in comparing performance, enter all

transactions into the system, record all goods with the date, etc.

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Formulating laws tat regulate franchising: There are no specific

laws/regulations in India for the franchising industry. General business laws

and industry specific regulations/laws governing foreign investment and

collaborations apply to the franchising industry. There is need for specific

laws governing this industry. There are no laws governing the relationship

between the franchisor and the franchisee.

Liquidation of slow moving stock: The company should replace the

merchandise that is non-moving for a period of 3 months after deducting

some cost. This will ensure that there is no dead inventory at the stores

whose cost the franchisee is bearing.

FRANCHISING

WAL - MART

SUCCESS STORY:

Wal-Mart has achieved its present success because of a history of never being satisfied

with the way things are. Wal-Mart as a Company is a visionary Company that learns from

and cherishes its past, but does not live in it. Here are a few brief highlights of the

greatest Retail Company ever. These highlights are intended to show you how Mr. Sam

Walton’s vision from a few years ago has grown a vision that now includes you as a new

Associate.

Many trace discount retailing birth to 1962, the first year of operation for Kmart, Target

and Wal-Mart. But by that time, Sam Walton's tiny chain of variety stores in Arkansas

and Kansas was already facing competition from regional discount chains. Sam traveled

the country to study this radical, new retailing concept and was convinced it was the

wave of the future. He and his wife, Helen, put up 95 percent of the money for the first

Wal-Mart store in Rogers, Arkansas, borrowing heavily on Sam's vision that the

American consumer was shifting to a different type of general store.

Today, Sam's gamble is a global company with more than 1.3 million associates

worldwide and nearly 5,000 stores and wholesale clubs across 10 countries. In the 1980s,

Wal-Mart became one of the most successful retailers in America. Sales grew to Rs.1,248

billion ($26 billion) by 1989, compared to Rs.48 billion ($1 billion) in 1980. Employment

increased tenfold. At the end of the decade there were nearly 1,400 stores. Wal-Mart

Stores, Inc. branched out into warehouse clubs with the first SAM'S Club in 1983.

FRANCHISING

The first Super center, featuring a complete grocery department along with the 36

departments of general merchandise, opened in 1988. Wal-Mart had become a textbook

example of managing rapid growth without losing sight of a company's basic values. In

Wal-Mart's case, the basic value was, and is, customer service.

Wal-Mart Stores, Inc. is the world's largest retailer, with $244.5 billion in sales in the

fiscal year ending Jan. 31, 2003. The company employs more than 1.3 million associates

worldwide through more than 3,200 facilities in the United States and more than 1,100

units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany and the

United Kingdom. More than 100 million customers per week visit Wal-Mart stores

worldwide.

Guided by founder Sam Walton's passion for customer satisfaction and "Every Day Low

Prices,"

WAL-MART INTERNATIONAL OPERATIONS

Wal-Mart became an international company in 1991 when a SAM'S CLUB opened near

Mexico City. Just two years later, the Wal-Mart International Division was created to

oversea growing opportunities worldwide. Today, customers at more than 1,300 units in

nine countries prove that Wal-Mart's ‘Every Day Low Price’ promise is a message clearly

understood in any language. The division currently operates stores and clubs employing

more than 300,000 associates in the following countries:

ARGENTINA

BRAZIL

CANADA

CHINA

GERMANY

JAPAN

KOREA

MEXICO

PUERTO RICO

UK

FRANCHISING

WAL-MART BUSINESS CATEGORIES

There are four Business Categories of Wal-Mart:

WAL-MART SUPER CENTER

SAM'S CLUB

WAL-MART STORES

MART NEIGHBORHOOD MARKET

 WAL-MART SUPER CENTER

WAL-MART SPECIALITY CATEGORIES

WAL- MART has five major specialty categories which are as follows:

WAL-MART TIRE AND LUBE EXPRESS

TLE is one of the fastest growing divisions within Wal-Mart. In the last 10 years, it has

grown more than 300% - and still growing! The Tire & Lube Express Division (TLE)

prides itself on providing superior customer service and offers fast, accurate and

dependable tire and lube service. It operates in an extremely fast-paced, competitive and

rapidly expanding environment. Currently Wal-mart has more than 1,700 locations in

more than 45 states, meaning there are many career opportunities for both hourly and

management candidates.

WAL-MART OPTICAL

The Wal-Mart Optical Department is one of the fastest growing areas in the company

and provides customers with superior goods and services at low prices you can afford.

They have always pride ourselves on 100 percent customer satisfaction. We'll work

tirelessly to continue meeting your needs by providing Superior Vision with Outstanding

Values for your entire family.

Today, they have many qualified Opticians and Professionals working in Wal-Mart and

in SAM'S CLUB Optical with a wide range of advancement opportunities across the

country. Eye exams are available by an Independent Doctor of Optometry, located next

to or inside Wal-Mart Vision Centers and SAM'S CLUB Optical. The Wal-Mart Optical

Department - seeing into the future with you in mind.

FRANCHISING

WAL-MART VACATIONS

Wal-Mart Vacations offers "Always Low Prices" on cruises, vacation packages, car

rental and hotel discounts, this is another important category of wal-mart specialty

division.

WAL-MART PHARMACY

The Wal-Mart Pharmacy is a logical extension of the cherished company philosophy:

customers deserve superior goods and services at fair and honest prices. Today, more than

720,000 associates across the nation, including more than 6,500 Pharmacists, proudly call

Wal-Mart home and work hard to make our vision reality.

Our pharmacies are not just limited to Wal-Mart Stores now. We've opened pharmacy

clinics in medical facilities, in SAM'S Clubs and even provide a drive-through window at

our new Neighborhood Market grocery stores. We believe in giving our Pharmacists the

opportunity to grow and develop in a multitude of ways during the course of their careers.

We have wide-ranging career paths that might be of interest to you.

WAL-MART USED AND FIXTURE AUCTIONS

Wal-Mart's used fixture program allows for the resale of fixtures for reuse in another

location. When we cannot reuse our fixtures or equipment because of outdated or excess

supply, auctions are held to sell the remaining items. All auctions are open to the public

and held at that Wal-Mart location. Everything from glass showcases, three-door

freezers, trash compactors to front-end alignment lifts may be available at an auction.

FRANCHISING

Sam Walton's 3 Basic Beliefs

The company was built on the Sam’s 3 basic beliefs. Sam Walton built Wal-Mart on the

revolutionary philosophies of excellence in the workplace, customer service and always

having the lowest prices. We have always stayed true to the Three Basic Beliefs Mr. Sam

established in 1962:

RESPECT THE INDIVIDUAL

Every associate's opinion is respected. Managers are considered "servant leaders" who

help new associates realize their potential through training, praise and constructive

feedback. An "open door" management philosophy encourages associates to raise

questions and concerns in an open atmosphere. “‘Our people make the difference' is not

a meaningless slogan - it's a reality at Wal-Mart. We have very different backgrounds,

different colors and different beliefs, but we do believe that every individual deserves to

be treated with respect and dignity."

SERVICE TO OUR CUSTOMERS

The customer is the boss. Everything possible is done to make shopping at Wal-Mart and

SAM'S CLUB a friendly, pleasant experience. The "Ten-Foot Attitude" means that

associates are to greet each person they see. The "Satisfaction Guaranteed" refund and

exchange policy allows customers to be fully confident of Wal-Mart and SAM'S Club’s

merchandise and quality.

We want our customers to trust in our pricing philosophy and to always be able to find

the lowest prices with the best possible service. We're nothing without our customers.

"Wal-Mart's culture has always stressed the importance of Customer Service. Our

Associate base across the country is as diverse as the communities in which we have

Wal-Mart stores. This allows us to provide the Customer Service expected from each

individual customer that walks into our stores."

FRANCHISING

STRIVE FOR EXCELLENCE

Wal-Mart and SAM'S CLUB associates share an exceptional commitment to customer

satisfaction. At the start of each day, store associates gather for the Wal-Mart or SAM'S

CLUB cheer and review sales from the previous day, as well as discuss their daily goals.

"The Sundown Rule" requires a continual sense of urgency, with questions asked in the

morning answered before the end of the day.

New ideas and goals make us reach further than ever before. We try to find new and

innovative ways to push our boundaries and constantly improve.

"Sam was never satisfied that prices were as low as they needed to be or that our

product's quality was as high a they deserved - he believed in the concept of striving for

excellence before it became a fashionable concept."

FRANCHISING

SUCCESS STORY:

Archies came into existence in 1979. Next in line was the establishment was Archies

Gallery Chain. The first of its kind concept-store opened its door in Kamla Nagar in

Delhi in 1987 and was an instant hit. 1993 marked an opening of 100 th Archies Gallery.

Anil Moolchandani, Managing Director of Archies Gifts & Greetings, hails from a

business family originally engaged in the business of sarees. Discontented with his family

business, Moolchandani commenced the business of selling posters and greeting cards

through mail order. His sharp acumen, keen sense of observation and ability to predict

future trends has helped him grow the business from a small beginning to the current size

of Rs700mn today.

In 1996 Archies had not only became a public company, it had also established itself as a

market leader. One key reason for this leadership position is the efforts and investment

that Archies had made in its distribution network. The resounding success of the

company is apparent from the ever expanding Franchise-network. Archies began

franchising in 1989 and currently have around 350+ franchises in 100+ cities and 6

countries and more than 100 company owned stores.

FRANCHISING

Brand Image

For three decades Archies has given millions of people means to express their joy and

love and created days of celebrations like Friendship day, Mother’s day, Daughter’s day,

Valentine’s day etc. and while doing so they have became a Super brand in India. Super

brand explore the history, development and achievements of 101 of the strongest brands

in India, revealing extra-ordinary findings along the way. Since the inception of super

brand concept in India, Archies was selected as a super brand in 2003-05, once again

making the list in 2006-08 as well as 2009-10. There are nearly 500 retail counters across

100+cities and 6 countries. More than 30 million people visit our stores in a year and they

have succeeded in bringing a smile on every face with their out-of-the-box greetings and

gifting ideas.

Over the years Archies have added to their portfolio, bringing to India, world famous

gifting brands. Today, the company boasts several collaborations. These includes

American Greetings Cards, Gund-soft toys, Russ-soft toys & gifts from US and Me To

You- Teddy & Fizzy Moon soft toys & gifts & Keel soft toys from UK.

FRANCHISING

Product:

Archies product portfolio contains all-occasion Greeting Cards, Gift Items, stationary,

posters, perfumes, fashion jewellery and accessories. The Archies success story is not

only limited to Indian stores. Archies also exports greeting cards and gifts to Western

Europe, Russia, the Dutch & Scandinavian markets. For the last 30 years Archies have

been reaching out to millions of hearts, constantly cheering a reason to smile and

celebrate occasion like friendship day, mother’s day, father’s day, Raksha Bandhan,

including Seasonal Greetings like Diwali, New Year, Christmas and every day cards like

birthday, anniversary, wedding, etc.

Archies create an endearing and endless variety of gift items like soft toys, photo frames,

quotations, mugs, etc, for special occasions all around the world. It produces and markets

international quality stationary items. Archies parfum has introduced a large collection

of perfume, deodorants, air fresheners and body spray each better than other. Keeping up

with the innovative approach, Archies introduced its sub-brands like Stupid-Cupid—a

range of trendy jewellery, handbags, sunglasses, hats and funky belts. They even came

with idea of corporate gifting and introduced “GiftWorks”. Moving ahead Archies

launched Ginger-Lemon caption based T-shirts for boys and girls. Branded as Ginger-

Lemon, Masala-Tee’s, the branding has been carefully thought out, to bring out the zesty

and spicy USP of the product. Being aware of the huge potential in fashion accessories

market. The company has ventured onto this arena with DesignWE- latest fashion

accessories such as wrist watches, multi-function knives, wallets, pens, key chains, etc.

FRANCHISING

Corporate Social Responsibility:

Feelings and emotions have been at the heart of the Archies brand for the past 30 years. It

promises ‘the most special way to say you care’. As part of its core beliefs in the social

responsibility, the company has also extended helping hand to foster the cause of some of

the best known and highly regarded social institutions across the country like Help Age

India and Child Relief and YOU (CRY) whereby they design, produce, market social

expression products of these brands. The company believes that as long as there are

emotions, Archies brand positioning will remain fresh and fragrant. The brand is committed

to providing its customers with opportunities to express their emotions.

FRANCHISING

Following are the resources requirements, in brief to be a part of Archies

franchise network.

The Premises:

On best location in your city/ town/ mall.

Owned/ Leased / Rented.

Required Carpet Area approx. 500sq. ft. and above

On ground floor with minimum 15 ft. frontage.

Investment:

An approximate investment of Rs. 10-12 lakhs, which includes:

Franchisee fee Rs. 1,00,000/- non-refundable.

Security deposit Rs. 1,00,00/- interest free and refundable.

Cost of interior designing approx. Rs. 1000/- per sq. ft.

Accessories like Air conditioners, computer, music system and registrar approx.

Rs. 0.75 lakhs- 1 lakhs.

First consignment approx. Rs. 5-6 lakhs.

All franchisee contribute small sum towards common group advertising.

FRANCHISING

The premises:

On best location in your city/ town/ mall.

Owned/ Leased / Rented.

Required Carpet Area approx. 300sq. ft. and above

On ground floor with minimum 10 ft. frontage.

Investment:

An approximate investment of Rs. 7-8 lakhs, which includes:

Franchisee fee Rs.75,000/- non-refundable.

Security deposit Rs.75,000/- interest free and refundable.

Cost of interior designing approx. Rs.1000/- per sq. ft.

Accessories like Air conditioners, computer, music system and registrar approx.

Rs. 0.5 lakhs- 0.75 lakhs.

First consignment approx. Rs.3-4 lakhs.

All franchisee contribute small sum towards common group advertising.

FRANCHISING

Franchisee Profile Questionnaire

1. I would rather have direct control over all operations than share control with others.

2. I would rather work in a small company with high management responsibility and

personal exposure than in a large company with good reliable pay and prestige.

3. I would rather keep working on a problem until I solved it than seek help from others.

4. I prefer investments with a -20% to +50% return on my money than a 5% fixed return

on my money.

5. I would rather make decisions on my own than make them in a committee.

Strongly agree Mildly agree Mildly disagree Strongly disagree

6. I would rather take extra time and capital to change a techniques that might increases

sales 10% per year than avoid the risk and stay with the present plan.

7. I would rather win the highest award for achievement than be the highest paid

employee of a company.

8. I would rather do administration than sales.

9. I would rather provide customer service than staff training.

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

Strongly agree Mildly agree Mildly disagree Strongly disagree

FRANCHISING

Findings of the Questionnaire

1. I would rather have direct control over all operations than share

control with others.

2. I would rather work in a small company with high management

responsibility and personal exposure than in a large company with

good reliable pay and prestige.

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

STRONGLY DISAGREE

FRANCHISING

3. I would rather keep working on a problem until I solved it than seek

help from others.

4. I prefer investments with a -20% to +50% return on my money than a

5% fixed return on my money.

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

FRANCHISING

5. I would rather make decisions on my own than make them in a

committee.

6. I would rather take extra time and capital to change a techniques that

might increases sales 10% per year than avoid the risk and stay with

the present plan.

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

FRANCHISING

7. I would rather win the highest award for achievement than be the

highest paid employee of a company.

8. I would rather do administration than sales.

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

FRANCHISING

9. I would rather provide customer service than staff training.

STRONGLY DISAGREE

MONGINISBATAARCHIES

1

2

3

4

5 DISAGREE

AGREE

STRONGLY AGREE

FRANCHISING

CONCLUSION

As per the research findings it was seen that majority of the respondents gave

similar response. From this we can say that the marketing, legal framework and

financial aspects are the same in different franchises.

Franchising is a way to grow faster in the business. It requires managerial

controlling skills as the franchisee have to operate its franchise on the terms and

conditions given by the franchisor.

There is minimal risk in franchisee outlet. As compared to other business,

businessmen feel that franchising has less risk involved as compared to other

forms of business. Whereas if the franchise has a popular brand name then it

will definitely be profitable.

For franchising to be successful the product, its brand management and

franchising system need to be clearly understood and defined as they form the

basis on which the franchise is operated.

Franchising is upcoming in India. India is so la Think Global Act Local”

policy should be followed for maximization of outlets and sales.

“Large and diverse that franchising is the only viable alternative for retail

operation that want to expand their reach quickly and cost-effectively.

FRANCHISING

Bibliography:

Books:

How to open a franchise business? (Sendra Burt)

Franchising- The Route Map to Rapid Business Excellence (Pramod Khera)

Indian franchise (Mk Gandhi)

Webliography:

www.franchise.org

Franchiseindia.com

www.wikipedia.com

www.economictimes.com

www.ifa.com