CH-1 INTRODUCTION

1.1 INTRODUCTION TO THE PROJECT

Franchising business has already proven to be one of the fast growing areas of
development for entrepreneurs in India as well as abroad. There is a growth in the nontraditional areas such as professional services and hair care services. Franchising is
growing because the system provides self-employment with less capital.
Franchising permits businesses to grow more rapidly than other method. By increasing
the efficiency by which goods and services are distributed, it brings impressive gains to
any economy. On a cultural level, franchising is one of the few developments that
generate employment, earnings and entrepreneurship at the same time. It disseminates
ownership rights and decision-making power to thousands of small unit operators. For
developing countries, or countries shifting to a market economy, franchising has the
effect of creating relationships between one economy and another. It promotes sharing of
technologies, trademarks, marketing, intellectual property and even architectural designs.
My aims of studying Franchising in the food and restaurant sector is to learn the
various policies and procedures that are followed while setting up a franchise and ho far
has this business the development of economic growth in India.

1.2 OBJECTIVE OF THE STUDY

The subject of franchising is generally obscure to many people in India. We can no longer
afford to be ignorant of the dimensions of the topic or its implications for the Indian
economic development. Hence the main objective of the study is to gain an insight into
the various aspects of franchising in the food and restaurant sector

1.3 METHODOLOGY
Secondary data collected from libraries like IMC British council in the form of articles
from newspaper, magazines, websites, books and various publishes data found were
useful for the study.
Primary data obtained from the authorities of the various outlets of McDonalds and by
the means of a survey through Questionnaires and interview sessions with the people who
frequently visit McDonalds helped to study the to her details of the topic in depth which
wouldnt have been possible with secondary data alone.

1.4 EMERGENCE OF FRANCHISING

Franchising is one of the methods of marketing a proven business concept. In order to
understand the role played by franchising, one has to look at the marketing organization.
There are several options open for marketing channel decisions. One of them is
Branchising. Branchising in turn leads to franchising. The areas of operations of
franchising, nature of its operation and management is given here. In addition, one can
see the recent trend of American and other franchisers expanding their operations
overseas. There are different modes of internationalization. Some of them are successful
and some unsuccessful.

1.5 HISTORICAL PRECEDENCE OF FRANCHISING

The franchise model is traced to the practice of Roman Catholic Church, which used to
grant local clergy the right to collect tithes (church taxes) in exchange for passing a
portion of it to Rome. This implied that the Catholic Church was franchising the right to
run a parish.
During the middle ages, there was feudalism where noblemen were the landowners and
peasants were the slaves of the noblemen. Some serfs were given additional rights subject
to fees paid to nobles. These fees were called Royal Tithes which is the root of modern
royalties. These serfs were granted the status of freemen. In France, they were called
Francis. The French word Francis modified into the English term to efranchise.
Similarly, colonialism based on the traditions of feudalism European monarchs gave,
what may be described as franchises to commercial ventures. These ventures agreed to
establish colonies under the protection of the monarch in the exchange for payment or
royalties.
Franchising started as a form of dealership. The franchiser owned the trademark for a
product and for a fee produced and distributed the product to the dealer. In the 1950s,
business format franchising becomes popular. This is governed by some rules relating
to the business relationship. The franchiser first creates a successful business relationship
and creates a format, which can be duplicated.

The franchiser grants rights to the franchisee to engage in the business of distributing the
franchisers products or services using the franchisers trademarks, trade names and
marketing systems.

CH-3 CONCEPTUAL FRAMEWORK

INTRODUCTION TO FRANCHISING
3.1 WHAT IS FRANCHISING?
When we talk about franchising, it covers a very broad term, and covers various aspects
of collaborations and investments, which we have had in this country for various
manufacturing processes and for making various products. We also have had various
investments coming along with us various technology transfers for the last four decades
and which is generally called Industrial Franchising. But, the generally accepted term
or word Franchising, which is being used today, relates to certain business techniques
that even have been quite recent, and what is generally called as business format
franchising. Franchising in general means granting of certain rights by one party (the
franchiser) to another (the franchisee) in return for a sum of money. The franchisee then
exercises those rights under the guidance of the franchiser.
The International Franchise Association (IFA) defines franchising as a
continuing relationship in which the franchiser 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 vertical-cooperatively organized paragraph system of legally
independent enterprises on the basis of a contractual continuous obligation. This
system arises at the market uniformly and coined/shaped by the arbiters the
performance program of the system partners as well as by an instruction and a
control system to the safety device of a system-conformal behavior.
The performance program of the franchise giver is the franchise package. It consists
procurement of paragraph and organization concept, the right to use the patent rights, the
training of the franchise taker and the obligation of the franchise giver to support the
franchise taker actively and constantly and constantly develop the concept further.
Within a relatively short period, modern-day franchising, more fully described as
"business format franchising" which was basically adopted in the western world, mostly

after World War II thus, making it the most popular concept all over the world.
Essentially, franchising is a marketing and distribution system. It has its roots in the
United States, where it has been in evidence since the early 1950's and now commands a
market share approaching 50% of all retail sales. Although other parts of the world lag
somewhat behind, franchising is well established in every free market economy across
the globe, and with good reason. Statistics show that the success chances of any small
business operated under franchise are infinitely higher than those of a business that is
operated by a lone entrepreneur in isolation.
In the words of Bill Cherkasky, past president of the International Franchise Association
(IFA), perhaps franchising is not perfect, but it is the best method known to mankind to
put people with no prior experience into a business of their own and help them to
succeed." As with most things in life, careful preparation and meticulous execution is the
key to success.
Franchising has served as a vehicle for small businesses to grow successfully into
national chains and as a way for individuals to win their own businesses. There is a shift
in the traditional economic paradigm, which is giving support to the franchise movement.
Retro franchising is used to transform traditional company owned retailers and service
providers into franchisers. The established retailers are considering franchising as a
means of entering overseas markets.
Franchising provides goods and services varying from hotels, convenience stores, travel
agencies, auto dealership, residential real estate brokers, gas stations, hair salons, etc.
This has become the single most successful marketing concept ever; its the wave of
the future. The success of franchising depends on the relationship between the
corporation, supplier and franchises. Ones success depends on the success of all.
Franchising is an effective way for individual businesses to grow while providing mutual
self-help and support.

3.2 MODES OF FRANCHISING

The following are basically 5 types of international franchising mediums:

1. Direct Franchising:
Under this system, the franchiser grants franchises to individual franchisees in the
foreign country through the execution of an international contract. The main
problems associated with this type of franchising is the difficulty of franchisers to
control the performance of the franchisees as these are located in another country,
the assistance to be provided to the franchisee during the operation of the
contract. The question of intellectual and industrial property rights in the foreign
country also needs to be considered. There is a tendency for franchisers 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 franchiser, is a separate legal entity
whereas a branch office is not. Whatever be the difference, an advantage of this
approach is that the franchiser 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 franchiser 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 agreement traditionally involves 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 noncomplying of the schedule. In such arrangements, the developer will need to have
substantial financial 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 franchiser grants a person in another country, the sub-franchiser, and 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 franchiser and the sub-franchiser (the master franchise agreement)
and a national franchise agreement between the sub-franchiser and each of the
sub-franchisees (the sub-franchise agreement). The franchiser transmits all its
rights and duties to the sub-franchiser, 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 franchiser will be able to do is to sue the subfranchiser 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-franchiser is familiar with the local
habits, tastes, culture and laws of its country and that it will know ways about the
local bureaucracy for necessary permits as and when necessary. The
disadvantages include that the financial returns of the franchiser will be reduced

by the amount due to the sub-franchiser and also that the franchiser will have to
rely on the sub-franchiser for the performance of the franchise system.

5. Joint Ventures:
In the case of joint ventures, the franchiser and a local partner create a joint
venture. This venture then enters into a master franchise agreement with the
franchiser, and proceeds to open franchise outlets and to grant sub-franchises just
as a normal sub-franchiser 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 franchiser. 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 franchiser 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

3.3 MARKETING ORGANIZATION:

The decision regarding marketing channels is similar to make versus buy decisions.
The make decision relies in the marketing channels is similar to vertical integration and
buy decision on independent agencies. The vertical integration depends on the
transaction cost analysis, which emphasizes the importance of the product/service to the
company and the nature of the service required.
Conventional: In this, the membership is diffused. Coordination is normally
achieved through bargaining and negotiation. There is easy entry and exit of the
members. The network is unstable.

Administered: Autonomous units agree for ad hoc division of labor. This started
with the programmed merchandising agreement. Manufacturing companies who have
developed a programmed system normally starts this. Examples of such systems
adopted are General Electric Credit Corporation for its financing plans for
wholesalers.

Retailers: McDonalds purchasing arrangements with its suppliers, etc. This system
is based on trust of the administrator and his expertise.

Contractual: The locus of decision is done at one level and is ratified by other
units. The vertical integration is done through contractual agreements. There are
many variations. Some of the more common and widespread systems are wholesaler
sponsored voluntary groups, retailer sponsored cooperative groups and franchise
system.

3.4 BRANCHISING
David. D. Salts use the term Branchising as a generic term, which includes franchising.
Branchising covers many methods used by the company to expand its operations. This is
the method for rapid market dominance, with minimum capital outlay and results in

immediate and ongoing cash flows. It adopts the OPM (Other Peoples Money) principle
of financing.
Branchising is a method of rapid expansion of market for goods and services. The term
Branchising is generic. It comprises various methods of expansion such as direct sales,
leasing, joint ventures, franchising, etc. Franchising is one of the options of Branchising
i.e.; is expansion.

3.5 CONCEPTS OF FRANCHISING

1. FRANCHISER
Franchising transactions can involve different levels in the manufacture and distribution
of goods and services. In this respect, there are four types of franchisers:
1. Manufacturers and wholesalers
2. Manufacturers and retailers
3. Wholesalers and retailers
4. Retailers and retailers
Coca-cola and Pepsi can note the manufacturers and the wholesalers franchising in the
case of bottling arrangements. The manufacturers and the retailers arrangements are
typical in the arrangements between petrol companies and their filling station proprietors
or motor vehicles manufacturers and their dealers. The arrangement between wholesalers
and retailers is more popular in the motor vehicle accessory in U.S.A.
The franchiser is the grantor (giver) of the franchise. To be deserving of the title, the
franchiser should: Know every facet of the business and have a hands-on approach to problem
solving.
Be honest and forthright in all dealings.
Have operated the business he wishes to franchise for a reasonable period.
Agreement exists that the minimum period should be one to two
Years but research has shown that most companies wait for six years or more
before they roll out a franchise.

 Have adequate financial resources to develop the concept and make the necessary
investment into the brand.
Want to grow through others, and be prepared to share the rewards resulting from
teamwork with franchisees.
Strive for excellence in every facet of the business and determined to grow.

2. FRANCHISEE
Franchisee is the one who is willing to invest money and time on the proven concept of
the franchiser. A franchisee (recipient of a franchise) is an individual with a burning
desire to succeed in a business of his own but reluctant to operate in isolation, more often
re-inventing the wheel in the process as it was. Franchisees should be: Capable of absorbing new concepts quickly.
Willing to follow the franchisers blueprint to the letter.
Positive people-persons imbued with the necessary enthusiasm to market the
business and motivate staff.
Adequately resourced to meet the initial (capital investment) and ongoing
(working capital) financial requirements of the business.
Able to manage and control the business, and willing to drive the brand at local
level.
Prepared to co-operate with the franchisers team as well as with fellow
franchisees, and play an active part in programs offered by the network.
Determined to build the business into the best and most successful in the territory.
Convinced of the merits of the franchise and the brand, and prepared to defend
both against possible attack by competitors or others.

Depending on the rights granted, franchisees can be classified into:

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.

 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.
Regional Franchisee: In a geographically large area a franchiser, 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.
Multiple Franchises: Some unit franchisees operate not just one unit, but
also several. These are referred to as multiple franchises and usually have a large
number of individual unit franchise arrangements one for each unit.
Developers: 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.

3.6 WHAT IS FRANCHISE FEE?

A fee paid by franchisee to a franchiser. US standard accounting practice requires that
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.

3.7 PRODUCT AND BUSINESS FORMAT FRANCHISING

In practice, franchising has become synonymous with two specific ways of doing
business, namely product franchising and business format franchising.
A product franchise, as the name suggests, focuses almost exclusively on a product or
service. The franchiser offers the product and some corporate identity, but in conducting
the business, the franchisee is largely left to its own devices.

Format Franchising: Under this the franchiser can enter the market rapidly at
relatively low cost using motivated entrepreneurs. And the franchisee has an opportunity
to enter a business with a proven product, service or brand name at less cost.
The first generation business franchisees are known as tied-house systems. It
started among German brewers who contracted with taverns to sell their brands
exclusively.
The second-generation business franchisees started when Singer Sewing Machine
Company sold its products to its sales force in the 19 th century. This is known as
product-trademark. This pattern is adopted in automobiles sales, retail gasoline
and soft drink distribution.
The third-generation of franchising is known as the business format franchise
developed by A&W Restaurants in the 20th century. This entails replication of an
entire business including product or service, trade name and methods of
operation.
Under business format franchise, the franchiser can enter the market rapidly at a
relatively low cost using motivated entrepreneur. And the franchisee has an opportunity
to enter a business with a proven product; service or brand name at less cost although it is
based on a product or service, revolves around the way the business is conducted. The
franchiser will have developed a comprehensive blueprint for the successful operation of
the business. The franchisee will receive initial and ongoing training and strict adherence
to the blueprint will be mandatory, so much so that the franchiser will carry out regular
inspections to ensure that all facets of product and service delivery conform to prescribed
standards.
The franchisers close ongoing involvement enhances the franchisee's success chances
considerably. Furthermore, an increasing number of product franchises have recognized
that business format franchising is the better way, and are converting to this concept.
There is a difference between business format and product franchisees. A product
manufacturer needs to develop a distribution network to sell his products. Gasoline

service stations were purely product franchisees. One can ascertain a product franchise
through its quality of the product, its availability and its value. Business format
franchisers are marketing a style of doing business; this is based on the quality of the
trademark, the reputation for quality and service, the quality of training and support
provided by the franchiser as well as the amount of royalties and other fees.

3.8 TYPES OF FRANCHISING

Territorial Franchising: In this the franchisee has the authority over a territory,
which may be a city, state or a country.

Operating Franchising: This refers to an independent business, which has a

franchise.

Mobile Franchise: It is a type of franchise for selling products on moving vehicles.

Distributorship: An exclusive coverage of a geographical area for
distributing the products and also acts as a supply house for the franchisees.
Co-Ownership: Here, both the franchiser and the franchisee share in the investment
and form partnership.

Co-Management: In this the franchiser has a majority of investment and he/she and
the partner manager share profits proportionately.

Leasing: The franchiser can lease the land, building and equipments to the franchisees.
Licensing: In this the franchise has a license to use the franchisers trademarks and
business techniques.

Manufacturing: The franchisee has a license to manufacture and distribute the

franchisers product.

Service: in this type, the franchiser provides a pattern of professional service, which a
franchisee supplies.

3.9 ADVANTAGES AND DISADVANTAGES OF FRANCHISING

Advantages for the franchisee

One of the main advantages for the franchisee is the fact that it enters into a
business, which already has a well-known trademark or trade name. The
franchisee in other words does not have to spend time, money and efforts trying to
make it known and appreciated in the market. In effect the franchisee already has
a potential clientele.
As the franchisee is not required to invest to make an entirely new trademark
known and profitable, the investment it has to make will normally be of an
advantageous size, as compared with the investment, which would be required for
an entirely new business.
Of particular importance for franchisees who enter a business with which they are
completely unfamiliar is the training and assistance provided by the franchiser.
The franchiser will provide initial training in the business method it has
elaborated, but often in basic business skills such as accountancy. Furthermore,
for the whole term of the agreement it will provide any assistance that the
franchisee might need to solve the problems, which the running of the business
gives, rise to. Some large franchisers will infact have a twenty-four hour service at
the disposal of the franchisees of the network.
Advertising is an effective means to spread a unitary image of the network and, at
a national level, is therefore often conducted by the franchiser for the whole
franchise network, the expense being shared by all participants.
Local advertising is often left the local franchisees, even if there is a certain coordination and it sometimes has to be approved by the franchiser.

 Lastly, in some businesses a network can obtain preferential rates for bulk
purchases.

Disadvantages for the Franchisee

To be weighed against the advantages described above is the fact that the
franchisee is not completely independent and is therefore not in a position always
to decide the policy of the business. Any major decisions will be taken either by
the franchiser or by the franchiser in concert with the whole network of
franchisees.
Furthermore, the control exercised by the franchiser might appear to be excessive,
indeed might on occasion be excessive. This will weigh heavily on the franchisee
once it begins to know the business and to feel that it can manage without the
franchiser.

The franchise is granted for a fixed period of time, which normally is renewable.
There is, however, no absolute guarantee that the contract will always be renewed
upon expiry. The franchisee therefore runs the risk of setting up an effective and
profitable business only to see it being taken over by the franchiser at the expiry
of the agreement.

It is very difficult to estimate what the financial return of the business will less
than expected. Added to this fact the fees that the franchisee has to pay to the
franchiser might be considerably huge and can also reduce at times.

To be reiterated is the consideration that the franchisee has to bear the financial
risk of the activity; if it fails it is the franchisee that loses the money it has
invested.

Advantages for the franchiser

For the franchiser the main advantage is the possibility to expand the business
over a relatively short period of time without having to make direct investments in
a new place of business, and also without being liable for the acts of the
franchisee as the two are and remain independent entrepreneurs.

Disadvantages for the franchiser

If the relationship does not work the damage suffered by the franchiser, indeed by
the whole network, could be quite considerable. In fact, as the owner of the
trademark or the trade name the franchiser is ultimately the one who will suffer
(by, for e.g. a reduction in sales throughout the network) if any of the outlet does
not conform to the quality standards set.
A disadvantage of the franchise agreement is that the degree of control the
franchiser has over the unit is less than if they were company owned outlets.

Lastly, the financial returns of the franchiser will be lower than would be the case
with a subsidiary or a wholly owned outlet, as it will not receive all the financial
returns of the enterprise but only a percentage thereof.

3.10 FRANCHISING AGREEMENT:

It is a written agreement that details the expectations and requirements of the franchiser.
It describes the franchisers commitment to the franchisee and includes information about
territorial rights of the franchisee, location requirements, training schedule, fees, general
obligations of the franchisee, general obligations of the franchiser, etc. It is usually set up

for a fixed period, which requires renewal after expiry. The agreement should however
include the following:
The rights granted by the franchiser.
Rights granted to the individual franchisees as against the corporate
franchisees.
The goods/services to be provided with manuals and also guidelines for
dissemination.
Obligations of the franchiser.
Obligations of the franchisee.
Terms of payment after fixing the fees by the franchiser
Duration of agreement.
Basis of renewal and/or termination.
The nature and usage of brand name of the franchiser by the franchisee.
Provisions relating to the pre-emption rights in respect of franchising.
Adaptation of franchise systems to the environment.
Surrendering terms in case of termination.
Additional legal points for successful running of this business.

3.11 SOURCES OF REVENUE

The different sources of revenue available for the franchiser are:
Initial franchise fees.
Royalty fees.
Advertising fees.
Sales of products.
Rental ad lease fees.
License fees.
Management fees.

3.12 FRANCHISING PACKAGE

There are three types of franchising packages available to an entrepreneur who decides to
enter into a franchising agreement:

The first package: The franchiser is interested in supplying equipment or part of the
product. He provides his trade name and offers some services including training. The
franchisee is free to run the business. There is independence for the franchisee.

The second package: The franchiser is interested in selling his products/services on

a continuing basis. The franchisee depends on supply of services from the franchiser who
will have centralized purchasing, product development, information flow, ongoing
training and guidance. There is interdependence between franchiser and franchisee.

The third package: The units operate under a single trade name. There is more
interdependence between the franchiser and the franchisee; and also among franchisees.

3.13 FINANCING AND PLANNING

Franchising is a viable route to have an independent business. It is devoid of the usual
risks and pitfalls of starting a new business. The franchisee, in effect, is buying a business
concept, which is established and proved. Financers consider the following criteria for
evaluating a loan application of franchisees:

Capital: Kind of capital required and sources

Capacity: Leadership and experience of the people in business.
Character: Entrepreneurial bent of the person, whether proactive or reactive

 Commitment: Loyalty and dedication to the business.

Customers: Competition, the image of the business and market share.
Community: Business in relation to the community particularly job creation or
environmental impact.

Collateral: Protection for the financer.

The plan will have the following parts:
Business objectives
Business description
Franchise description. This will give:
The number of franchisees sold
The terms of the franchise
Training program
Product description. This will provide the
Product/service mix by range and category
List of precise categories, revealing the income derived out of individual
businesses.
Customer description would clarify the:
Market category, whether consumer, commercial and institutional.

3.14 EXPANSION ARRANGEMENT

There has been a definite shift from owning a single unit franchise to multi unit,
area development and master franchise agreements to multi concept arrangements. These

provide expansion opportunities for all franchisees. The common growth strategies
employed are:

Multi-unit Franchise: In this, the franchise acquires one or more units of a

single franchise concept. This enables the franchisee to have control over its
operation and cost structure.

Area Development and Master Franchise Arrangements: This

allows the franchisee to quickly develop the business concept in a wide area. The
franchisee will have exclusive rights to develop a specific number of units within
an area in a given time frame. Franchisees can either open the units themselves or
sub- franchises them to other franchisees.

Multi-concept Arrangements: The franchise would have compatible

concepts. This benefits both the franchiser as well as the franchisee. The
franchiser, on the other hand, benefits having a franchise that is already in
business. While the franchisees benefit by combining complementary concept.
Currently, the successful multi-unit and multi-concept franchisees are in the food
sector. The food sector gives opportunities of building an infrastructure similar to the
franchiser. It also makes it possible to have multi-unit operation through alternative
distribution methods such as Kiosks and mini-shops. The expansion is possible in places
where customers are saying in supermarkets, gas stations, sporting events or retail stores.
However, it is estimated that there is scope such development in industries that specialize
business-to-business services, childrens services, and computers.

3.15 MYTHS
Some franchises operate under certain myths such as:
Conflicts can be avoided through effective communication. The arrangement is
based on contract, and problems should be addressed quoting the contract and

proposed legal action.

Good franchises are those who follow the system and bad ones are those who
always call the corporate office questioning the policies and practices.
Franchisers should take a position and stick to it.
Franchisers never do something without receiving something in detail.

3.16 PROBLEMS
It is assumed that the franchisee benefits as an entrepreneur in a pre-packaged program, a
super efficient distributor of services and goods through a decentralized network. The
franchise has the freedom to evolve new methods and headquarters will provide data and
support to fellow franchisees. Many franchisers like Alpha Graphics and Taco John have
created a new co-operative relationship with franchisees.
The International Franchise Association claims that only 5% of franchisees are
terminated annually. But some think that the failure rate is far higher and touch almost
35%. There are attempts in reducing the troubles through the setting up of franchisee
advisory council and improving communication between the franchiser and the
franchisees.

3.17 FRANCHISEE ADVISOR COUNCIL

It is formed by a group of franchisee owners who meet regularly to discuss among
themselves and with company executives. Franchisees need to start a FAC as soon as
there are 50 to 100 of them in business. This will allow franchisees to affect
constructively the way a company interacts with its franchisees. FACs are valuable when
they encourage joint decision making, encourage feedback from all the franchisees, and
open two-way communication. The success of FACs depends on some key factors such
as - follow-up, effective communication, accountability, and positive team attitude.

CH-4
4.1 FRANCHISING IN INDIA
Executives of western franchise companies immediately become excited over the
numbers of potential customers and franchise owners possible in India. The reality is that
franchising has only begun to take hold in India, the largest democracy in the world with
over 1 billion people.
Franchising is not a new concept in India. Soft drinks and hotel franchises arrived in
India in the 1960s, but in the 1970s and 1980s, the government expelled foreign brands
from India. Some international franchises have recently come back to India and are doing
well. Hotel business like Best Western Group and the Quality Inn Group have established
themselves. Also, Walt Disney has been successful in having its label in all sorts of goods
for children, whether they are clothing, toys, and school equipments. Fast food chains
like McDonalds, Slice of Italy, Dominos, Taco Bell have also come in. Pepsi and Coke
have re-captured the soft drinks market. Raymond has used franchising extensively to
reach the market place - so has Titan more recently. The recent entry of a host of
multinationals has seen franchising gain prevalence. More and more companies seem
inclined to go in for the let someone do your business for you.
Given the diversity of existing formats in India, there is some confusion as to which ones
can be termed to fall under the definition of a franchise. While Bata, which has only a
handful of their 1,500-odd stores, franchised, McDonalds operates through a JV and
Color Plus has all almost all of its retail outlets franchised. However, the following issues
are broadly agreed upon as forming the heart of franchising:
The principle of standardization.
The principle of formalized revenue sharing.
The principle of operational control.
The principle of continuity typically, a franchiser perfects a business system,
develops a product or a marketing mix, and then franchises it. Franchisers

provide supports such as training, management system, advertising and

marketing.

4.2 FRANCHISING: A TOOL FOR ECONOMIC GROWTH IN INDIA

Franchising permits businesses to grow more rapidly than any other method. By
increasing the efficiency by which goods and services are distributed, it brings impressive
gains to any economy. On a cultural level, franchising is one of the few developments
that generate employment, earnings and entrepreneurship at the same time. It
disseminates ownership rights and decision- making power to thousands of small-unit
operators. For developing countries, or countries shifting to a market economy,
franchising has the effect of creating relationships between one economy and another. It
promotes sharing of technologies, trademarks, marketing, intellectual property and even
architectural designs.
Franchising is a particularly good developmental tool in any part of the world where
financial resources are short and the need to stimulate individual initiative is acute. There
are no tariff barriers to be dealt with. It puts little strain on the receiving country's balance
of payments. Thus, not surprisingly, awareness of the benefits of this business formula is
growing at an international level.
Franchising is one of the world's fastest growing and most lucrative industries. Franchise
businesses will be turning over an estimated $ 1 trillion (which is roughly equal to ten
times the size of Indias current GDP). Today, there are over 40,000 franchisees existing
in India. The annual turnover of these franchisees is between Rs.8, 000-10,000 crores.
Franchising awards 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 away, which
ensures that the equity of the business remains in India, so avoiding the politically
desirable situation whereby foreign corporations own successful domestic businesses.
Franchising in India is dominated by the IT education sector, which alone accounts for 40
per cent of the Indian franchising business. According to Gaurav Marya, CEO of The
Franchising World, IT education can be termed the pioneers in the franchise industry in
India. NIIT and Aptech are two Indian IT franchise companies that have successfully
expanded to 2400 outlets and they have a presence in almost 52 countries.

4.3 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.

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 1.9% 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. Empowering participants in the distribution system by granting them
an equity interest in it (i.e. by granting a franchise) can substantially improve the
efficiency in the distribution system.

 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 franchiser.
Franchising allows them to reconcile these conflicting ambitions.
Harnessing local market knowledge: Indian master franchisees offer the
foreign franchisers 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 Punjab may not be relevant for Kerala. Franchising provides a sure and
easy way of accessing the right level of relevant local market knowledge.

4.4 BASIC NORMS TO BE FOLLOWED WHILE FRANCHISING IN

INDIA
Permission of the Central Bank in India- The Reserve Bank of India is required
to bring in capital and set up a base for carrying on such activities. The standard
method of setting base in India would be to depute a foreign national to India as
an advisor or make him take up employment in the Indian partner. This cuts a lot
of red tape as there would be no burden of remitting foreign exchange to the
franchisers country and the concerned foreign national may earn his pay in
Indian currency and utilize it in India itself. All expenses of the concerned
foreign national will also be borne by the Indian partner in local currency.

A foreign franchiser not wishing to make a direct investment but merely

intending to render technical assistance for a recurring franchise fees will have
to secure the Reserve Bank of India's approval. The Master Franchise agreement
has got to be approved by the apex bank, which regulates the inflow and outflow
of foreign investments.

 A foreign franchiser can generally own upto 51% of the share capital leaving the
rest to the Indian side. There is an automatic approval mechanism to enable such
investments. Since the apex bank's permission is required to repatriate profits,
this matter should be clearly incorporated in the Master Franchise agreement.

Foreign technicians can visit India to train Indian partners for an initial period of
three months. This can be extended to a further period of three months. Indian
visas can be obtained from the Indian embassy and Consulates in the
franchisers country.

Remuneration to such foreign technicians has also to be incorporated in the

Master Franchise Agreement so that it can be approved up front. All payments
made to foreign technicians will bear an additional of 5% under the Indian
Research & Development Act.

4.5 franchising of food and restaurants sector in india

The franchise economy is heating up India. A new breed of players is moving in with an
exciting array of business concepts. This grounds well of activity is throwing up new
opportunities for entrepreneurs and also creating new jobs.
Although in a nascent stage, franchising is gaining popularity in the retail segment in
India, more particularly in the areas of food products, drinks and fast food chains.
The food services and products franchise industry has dramatically increased its presence
within the world of franchises over the past decade. Contributing to its growth is the
rampant expansion of food related franchises throughout the nation. The number of fast
food chains, restaurants, coffee shops, and hotels is huge. The hospitality business
records billions of dollars annually in beverage sales and there are thousands of new
establishments opening every day. Franchising is one of the most effective systems for
the distribution of goods and services.
There are a number of homegrown & foreign brands that are developing in India under
the food and beverage industry some of the well-known brands which have adopted
franchising as a mode of business are Pizza Hut, McDonalds, Domino's Pizza, Hot

Breads, Barista, Qwiky's Nirulas, Sagar Ratna, Pizza Corner etc and among these there
are many international brands which have fast food chains like Taco Bell, Subway,
McDonalds, Dominos Pizza, and Kentucky Fried Chicken.
Food segment has always been the favorite franchisees in India and it is expected that
roughly USD 2.5 million will flow into this sector in this year, through franchising. The
potential is immense in the specialized food segment.

4.6 STUDY OF THE FOOD & RESTAURANTS SECTOR

It has been proven that franchise, if administered in an appropriate package can help
rapid growth of business. Mc Donald's, Dominoes, Pizza Hut, etc., are live examples of
stupendous growth through franchise. The following statistics, relating to the year 2002,
give an idea of the magnitude of their businesse.

Fig: - 1

Firm

No. Of Units

Sales in $
millions

Mc Donald's

11,120

17,535

Dominoes

7,945

4.900

Pizza Hut

7,684

3,330

Source: S.Shiva Ramu, Franchising, Wheeler Publishing Co., New Delhi, 2004.

4.6 PEPSI AND COCA-COLA

We find that both Pepsi and Coca-Cola, franchise giants in the domain of food and
beverages, found India to be a potential market. They launched vigorous advertising
campaigns with a view to increase the market share. In 1993, after a sixteen-year absence
from India, Coca-Cola re-entered the Indian market for soft drinks via Parle, which
accounted for 60% of the $400 Million Indian soft drinks market. A joint venture
agreement ensured for Coco-Cola that Parle would make available to Coca-Cola all of its
60 franchises for production, bottling and distribution. As of the first quarter of 1997
Coke had a 13% market share in the cola segment and Pepsi had 27%. These two
companies by now have a substantial presence in India, thanks to the aggressive
advertising, which they do especially during the increasingly popular cricket events.
Incidentally, the competition between Coke and Pepsi led to a revitalization of the local
Cola brand ie Thumps- Up.
According to the US dept. of Commerce, the retail sales of the franchised companies
amounted to about $2.1 Billion in 1991 thus increasing the sales of the franchised
companies almost by three times.

4.7 DOMINOS

Dominos Pizza, which opened a small restaurant in one of the New Delhis drive areas in
1996, serves pizzas and cokes. The right to open Dominos franchises in India belongs to
the Bhartiya family, the industrialists who are better known for chemicals and fertilizers.
It was opened on New Years Eve with no advertising, has helped dominos escape
confrontation with fast food critics. Domino has omitted pepperoni, the beef-based

topping popular with Americans, from its menu here. Vegetarian offerings dominate nonvegetarian ones in the menu.

4.8 american tricon restaurants and yum restaurants international

The first outlet of Pizza Hut was set up in India in 1996, and Global Investment Partners,
a retail-focused investment firm based in Bangkok and Geneva, set
it up but the company found the going tough initially. Things eased
out when Pizza Hut, similar to other fast food restaurants like
McDonalds and Dominoes, started Indianising the menu. Hence,
first in its history, a 100-per cent vegetarian restaurant was
established in Ahmedabad, with plans for similar all-veggie ones in other cities.

At present, Tricon operates about 29 Pizza Hut outlets across 11 cities and has a single
KFC restaurant, in Bangalore, in India. Among Tricons three brands, Pizza Hut has the
maximum number of outlets worldwide, followed by KFC and Taco Bell Mexican food
outlets. The company believes that India, owing to its size and growing aspirations of an
upwardly mobile middle class, is a critical market in its overall scheme of things. The
main the focus for Tricon is the growth of the Pizza Hut chain of restaurants, and then it
will soon introduce the Taco Bell chain of Mexican restaurants here and focus on
expanding the Kentucky Fried Chicken (KFC) chain of outlets. It is also planning to have
about 100 Pizza Hut restaurants, across 20 cities in India by 2004. Pizza Hut marks its
presence in fresh markets like Surat and Baroda.
Today, the Pizza Hut chain operates through four franchisees Devyani International in
the north, Favorite Food India in Mumbai, Dodsal Indmag in Gujarat, Andhra Pradesh
and Karnataka, and Pizzeria Pure Foods Restaurants in Tamil Nadu and the rest of
Maharashtra. Tricon provides the marketing support and supply chain management.

CH-5
MCDONALDS FRANCHISING
5.1 INTRODUCTION
We have an obligation to give back to the communities that gives us so
much Ray Kroc, 1955.
McDonalds started in 1931 and today has a franchisee network spanning across the
globe. Today McDonalds international presence is such that the Big Mac Price is based
on the price of the Big Mc Burger.
McDonalds has accomplished its vision of providing quality, service, cleanliness and
value, which would be a dream of every organization. It focuses on continuous
process and product innovation. McDonalds has carved a niche for itself in the
global market and has built up the reputation of being one of the most
prestigious MNCs in the world. It has today a franchise network of more than
30,000 outlets across the globe.
The phenomenal growth for a firm which had modest start as a drive-in restaurant

promoted by Dick & Mac in 1940 goes to prove that franchise is the sky rocketing path to
attain rapid growth in business. Their motto of In business for you, not by yourself is
the watchword in these days of intense competition and huge requirements of capital to
be invested.
Their business principles are:
Quality
Service
Cleanliness
Values

Being in vast fast food business, they gave priority to the aforesaid four principles, which
include cleanliness, which is perceived by many a customer to be a very important
pre-requisite for them to eat at a restaurant.
McDonald's success is often attributed to the unique partnership among the "McFamily" frequently described as a three-legged stool. This means that the company, the
franchisees and the suppliers each support the weight of McDonald's system equally.

5.2 MCDONALD'S COMMITMENT TO THEIR EMPLOYEES

McDonald's and its independent owner/operators have made a commitment to our
employees that we strive to achieve with our actions every day. And to make sure we
deliver on this promise, we have in place five people principles. These people principles
reflect McDonald's values and describe the culture we embrace.
To the 1.5 million people who work at McDonald's in 119 countries around the world,
and to all future employees, we want you to know that: "We Value You, Your Growth and
Your Contributions", this is their People Promise they believe in:

1.

Respect and Recognition

Managers treat employees, as they would want to be treated.

 Employees are respected and valued.

Employees are recognized formally for good work performance, extra effort, and
teamwork and customer service.

2.

Values and Leadership behaviors

All of us act in the best interest of the Company.
We communicate openly, listening for understanding and valuing diverse
opinions.

3.

Competitive Pay and Benefits

Pay is at or above local market
Employees value their pay and benefits.

4.

Learning, development and Personal Growth

Employees receive work experience that teaches skills and values that last a
lifetime.
Employees are provided the tools they need to develop personally and
professionally.

5. Resources to Get the Job Done

Employees have the resources they need to serve the customer.
Restaurants are adequately staffed to allow for a good customer experience as
well as to provide schedule flexibility, work-life balance and time for training.

5.3 MCDONALD'S COMMITMENT TO QUALITY AND SAFETY

Over the years, McDonald's has been a leader in setting and strictly enforcing high
quality and safety standards-often exceeding those established by industry and
governments. Quite simply, quality and safety are the most important items on their
menu, so their customers can have confidence in McDonald's. They are aligned with
world-class suppliers that share their high standards, and the restaurant staffs are
equipped to deliver on them every day.

5.4 FOOD QUALITIES AND SAFETY

McDonald's Quality Assurance Board, along with the Global Safety and Security
Department, provides strategic global leadership for all aspects of food quality and safety.
Further, their quality assurance and supply chain, and safety specialists around the world,
work with the McDonalds suppliers to ensure compliance with their standards. They
operate quality assurance labs around the world, where ongoing product reviews and
enhancements take place. In addition, they work closely with their suppliers to encourage
innovation, assure best practices and drive continuous improvement. Further reinforcing
their commitment to quality, they have been recognizing exceptional excellence among
their suppliers since 1990 with the Sweetney Quality Award. This award was named in
honor of a supplier who exemplified a commitment to their high standards. Clearly, their
criteria for recognizing excellence has been validated by the fact that their Sweeney
Quality Award winner in 1998 Sunny Fresh Foods, a supplier of egg products to the
McDonald's System-won the prestigious Malcolm Baldrige National Quality Award the
following year.
High standards also are essential to the operations of their restaurants. Proper food
storage, handling and cooking practices are an integral part of their training materials and
a food safety check list is used daily in their restaurants to validate that food safety
standards and procedures are in place. In addition, their restaurants are inspected for
safety compliance.

5.5 SAFE FUN FOR CHILDREN

Parents can be confident that McDonalds Happy Meal toys and Play Places are safe. For
years, they have been using state-of-the-art technology to scientifically analyze the safety
of toys and other promotional items for the McDonald's System. They also have been
working with the world's leading manufacturers and installers of fun and safe playground
equipment and renowned safety consultants so that playtime at McDonald's meets their
strict specifications.

5.6 MCDONALDS COMMITMENT TOWARDS ENVIRONMENT

McDonalds believes it has special responsibility to protect the environment for future
generations. This responsibility is derived from their unique relationship with millions of
consumers worldwide- whose quality of life tomorrow will be affected by their
stewardship of the environment today. McDonalds have realized that in todays world, a
business leader must be an environmental leader as well.
McDonalds environmental commitment and behavior is guided by the following
principles:

Effectively Managing Solid Waste: They are committed to taking a total

life cycle approach to solid waste, examining ways of reducing materials used in
production and packaging, as well as diverting as much waste as possible from the
solid waste stream. In doing so, they follow three courses of action: reduce, reuse
and recycle.

Conserving and Protecting Natural Resources: McDonalds will

continue to take aggressive measures to minimize energy and other resource
consumption through increased efficiency and conservation. This policy is strictly
enforced and closely monitored.

Encouraging Environmental Values and Practices:

With the

relationship with local communities around the world, they believe they have an
obligation to promote sound environmental practices by providing educational
materials in their restaurants and working with the teachers in the schools. They
intend to continue to work in partnership with their suppliers in the pursuit of
these policies. Their suppliers will be held accountable for achieving mutually
established waste reduction goals, as well as continuously pursuing sound
production practices, which minimize environmental impact. Compliance with the
policies will receive consideration to other business criteria in evaluating both
current and potential McDonald's suppliers.

 Ensuring Accountability Procedures: McDonald's understands that a

commitment to a strong environmental policy begins with leadership at the top of
an organization. Therefore, their environmental affairs officer will be given broadbased responsibility to ensure adherence to the environmental principles
throughout the system. This officer will report to the board of directors on a
regular basis regarding progress made toward specific environmental initiatives.

5.7 MAC IN INDIA

India opened its doors to McDonalds in October 1996. Ever since, family restaurants in
Mumbai, Delhi, Pune, Jaipur, and many other cities have been developing.
McDonald's India is a synergy of globally acclaimed skills with Indian expertise.
McDonalds ventures are owned and managed by Indians namely Amit Jatia with
Hardcastle restaurants pvt. Ltd. owns and manages McDonalds restaurants in Mumbai
and Pune. In Delhi, Jaipur and Mathura, i.e.; mainly the northwestern part of India,
McDonalds is owned and managed by Vikram Bakshis Connaught Plaza Restaurants
Pvt. Ltd.

A Recognized Premier Franchising Company

McDonald's continues to be recognized as a premier franchising company around
the world. Perhaps the fact that McDonald's management listens so carefully to its
franchisees has something to do with McDonalds is perennially named as
Entrepreneur Magazine's number one franchise.

A Partnering Relationship
Our franchising system is built on the premise that the Corporation can be
successful only if our franchisees are successful first. We believe in a partnering
relationship with our owner/ operators, suppliers and employees. Success for
McDonald's Corporation flows from the success of its business partners.

5.8 supply and distribution of raw materials to the various outlets

Supply

McDonald's India's local suppliers provide the highest quality, freshest ingredients to
make their products. Complete adherence to the Indian government regulations on food,
health and hygiene is ensured, while maintaining their own recognized international
standards.
McDonald's has spent few years setting up a unique Cold Chain. The Cold Chain is
necessary to maintain the integrity of food products and retain their freshness and
nutritional value. It refers to the procurement, warehousing, transportation and retailing
of food products under controlled temperatures. Setting up the Cold Chain has involved
the transfer of state-of-the-art food processing technology by McDonald's and its
international suppliers to pioneering Indian entrepreneurs, who have now become an
integral part of the cold chain.

5.9 Vital Links in the McDonalds Cold Chain

All suppliers adhere to Indian government regulations on food, health and hygiene while
continuously maintaining McDonald's recognized standards. As the ingredients move
from farms to processing plants to the restaurant, McDonalds Quality Inspection
Program (QIP) carries out quality checks at over 20 different points in the Cold Chain
system. Setting up of the Cold Chain has also enabled them to cut down on operational
wastage.
Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety
that emphasizes prevention within their suppliers facility and restaurants.

DISTRIBUTION
Vista Processed Foods Pvt. Ltd.
Supplier of Chicken and Vegetable range of products (including Fruit Pies)
A joint venture with OSI Industries Inc; USA, McDonald's India Pvt. Ltd. and
Vista Processed Foods Pvt. Ltd., produces a range of frozen chicken and vegetable
foods. A world-class infrastructure at their plant at Taloja, Maharashtra, has:
Separate processing lines for chicken and vegetable foods.
Capability to produce frozen foods at temperature as low as 35 degree Celsius to
retain total freshness.

 International standards, procedures and support services.

DYNAMIX DAIRY
Supplier of Cheese:
Dynamix has brought immense benefits to framers in Baramati, Maharashtra by
setting up a network of milk collection centers equipped with bulk coolers. Easy
accessibility has enabled farmers augment their income by finding a new market for
surplus milk.

AMRIT FOOD
Supplier of long life UHT Milk and Milk Products for Frozen Desserts, Amrit Food is an
ISO 9000 Company. The factory has:
State-of-the-art fully automatic machinery requiring no human contact with
product, for total hygiene.
Installed capacity of 6000 liters/hr for producing homogenized UHT (Ultra High
Temperature) processed milk and milk products.
Strict quality control supported by a fully equipped quality control laboratory.

5.10 BUSINESS QUALIFICATIONS MCDONALDS SEEK IN ITS

POTENTIAL FRANCHISEES:
The following qualifications, among others, are essential to be considered for a
McDonalds franchise:
High personal integrity.
An entrepreneurial spirit and strong desire to succeed.
A proven ability to motivate and train people.
The ability to manage finances.
A willingness to personally devote full time and best efforts to the day-to-day
operation of the restaurant as an on-premise owner-operator.
A willingness to complete a comprehensive training program and become
proficient in all aspects of operating McDonalds restaurant business.

5.11 OFFERS GIVEN TO THE FRANCHISES BY MCDONALDS:

Support in the areas of operations, training, advertising, marketing, real estate,
construction, purchasing and equipment.
Personal satisfaction both as an owner/operator and as a member of McDonalds
worldwide organization.
Personal growth and business knowledge from McDonalds extensive training.