About us

Indian Franchise Association (IFA) is India's premier, non-political, not-forprofit body representing Indian Franchise Sector. IFA's endeavor is to promote, promulgate and popularize the concept of franchising as a mode of doing business across the industry verticals and to nurture the entrepreneurial skill of every Indian. IFA catalyses change by working closely with stakeholders and policymakers on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for franchise sector through a range of specialized services and global linkages. IFA also provides a platform for Franchise sector consensus building and networking. Partnership with counterpart chambers across the world carry forward our initiatives of inclusive development in franchise business, which encompasses entrepreneurship, training, governance, skill development, etc. IFA serves as the first port of call for Indian franchise sector and the international franchise business community.

Acknowledgement
An extensive survey of over 1500 franchisees across the country helped us to identify the opportunities and challenges of an entrepreneur owning a franchisee. This report is an important piece of information on the current trends of franchising in India. We wish to express deep sense of gratitude to the franchisees of esteemed brands like Aditya Birla Retail Ltd., Subway, IMS, Reliance Money and many others for their views, experiences and useful suggestions, which helped us in accomplishing this task with perfection. We would like to acknowledge the honest efforts by Ms Suman Verma and Mr. T Ginvanglian, from Indian Institute of Management, Bangalore (IIMB) for a systematic survey and compilation of the facts for the report. Indian Franchise Association

Foreword
India, with a thriving consumer population, coupled with sustained economic growth, is an exciting destination for the franchising fraternity. Indian franchise scenario has offered excellent opportunities to the new international and local brands entering the market with the prospect of expanding their business. New age Indian generation has realized the scope of growth in franchising and in today's race for success, many of the aspiring entrepreneurs have decided to join the franchising bandwagon because it is easier, safer and more profitable than struggling for brand identity while running a small enterprise of their own. I would like to congratulate Indian Franchise Association (IFA) for the Franchisee report. This is a maiden attempt involving an exhaustive survey of Indian franchisees and identifies their challenges, opportunities and profiles of the entrepreneurs running franchise outlets. I wish all the success to the endeavour and hope that this report becomes a benchmark for the industry and unveils new facets of franchising in India.

UDAY MATHUR
Managing Director Euro Kids International

Contents
PROLOGUE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 LIST OF FIGURES AND TABLES . . . . . . . . . . . . . . . . . . . . . . . . .15 CHAPTER 1

THE ENTREPRENEUR'S SPUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

CHAPTER 2
IDENTIFYING FRANCHISEE ATTRIBUTES: AN ANALYSIS . . . . . . . . . . . . .21

CHAPTER 3
FRANCHISEE PROFILING: A STATISTICAL MODEL . . . . . . . . . . . . . . . . .25 Franchisee profiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

CHAPTER 4
FRANCHISEE LIFE CYCLE: Key to franchisor-franchisee relationship . . . .29 Search phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Joining phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Growth phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Maturity phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Declining phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Franchisor -Franchisee relationship: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

CHAPTER 5
FRANCHISEE MOTIVATION-Understanding challenges . . . . . . . . . . . . . . .36 1. Inadequate Communication by franchisor . . . . . . . . . . . . . . . . . . . . . . .37 2. The Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 3. Staff Training & Attrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 4. Shrinkage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 5. Cannibalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 6. Irresponsible franchisees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

CHAPTER 6
THE INDIAN FRANCHISEE SURVEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 1.Ideal age of a successful franchisee . . . . . . . . . . . . . . . . . . . . . . . . . . .42 2.Ideal educational background for a Franchisee . . . . . . . . . . . . . . . . . . .43 3.Franchisee Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 4.Ideal time for contract terms review . . . . . . . . . . . . . . . . . . . . . . . . . . .45 5.Franchisor- Investor relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 6.Salaried vs. self employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

CHAPTER 7
TRENDS, OPPORTUNITIES AND FUTURE PROSPECTS . . . . . . . . . . . . . . .48

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
A typical Franchise Policy in India (Courtesy Sagar Ratna) . . . . . . . . . . . .49

PROLOGUE
Unanswered questions in the franchise world
"If you're in a comfort zone, afraid to venture out, Remember that all winners were at one time filled with doubt. A step or two and words of praise can make your dreams come true. Reach for your future with a smile; success is there for you" Seems to be an encroaching speech by a politician - Isn't it? No way. These are simple words uttered by a successful franchisee - one who owns a franchise business. This speech portrays the confidence and charisma of the speaker. An entrepreneur who is a franchisor, always searches for a trusty and efficient Partner or franchisees like - a bride's father looking out for a bridegroom. The comparison is indeed authentic because the franchisor and franchisee relationship is similar to a marriage - long term and symbiotic and trustworthy. Imagine that you have got a brain reading gadget which would display the ongoing thoughts of a human brain, if you use it to read the mind of a franchisor you will observe following thought universally in his/her mind:How should I choose a franchisee for my brand? What qualities and attributes I should look for? What would be an ideal franchisee profile for my business? How to manage my already running franchisees? On the other hand, success of a franchisee is also not a cake walk. "Making your mark on the world is hard. If it were easy, everybody would do it. But it's not. It takes patience, it takes commitment, and it comes with plenty of failure along the way" Barrack Obama
Let's use the brain reader again for a franchisee and you will hear: Am I the only one facing issues/challenges in my industry? Is there any one to suggest me with solutions for the issues faced by me? Does franchisor understand that I have certain unique challenges for my region? I am performing extraordinary, but franchisor is not acknowledging the same, so can I leave him at point of time? I have learned all the business; can I go ahead with my own brand? The questions which the brain reader has given us are the true reflections of both the franchisor and franchisee in the franchise world. Are there any answers to these questions? The franchise mode of business expansion in India is into its growth phase and is catching fast. These questions need solutions to make the growth of this business mode healthy. This Study aims to answer these questions and many other queries based on a wide survey and discussion with seasoned franchisees & franchisors.

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THE ENDEAVOUR
It all started on Indian Franchise Association's platform with intellectual inputs by Indian Institute of Management, Bangalore's management students. It was never easy to provoke thoughts of a franchisee and gather intellect output from them, they were busy in their business & overcoming challenges. An online survey was the starting point to establish the role of this study, a well drafted online questionnaire to capture all the primary issues first hand; this was circulated to a database of 1500 franchisees across the country. Scope of this study was unlimited so its area of research was limited to the sectors with maximum pie size in franchising - Education, Food and Retail. A carefully chosen sample of 70 franchisees spread across the country from these sectors was interviewed by the team. The insights from the in-depth interviews were used to analyze the philosophy of Indian franchisee. Numbers speak the truth! - The data collected from the survey was fed to statistical tools like factor analysis and regression to yield meaningful results. The results were used to find out a model which facilitates a franchisor to optimize their franchisee search, manage superior relationship with its existing franchisees and increase franchisee retention.

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INTRODUCTION

xperts claim that franchising is the fastest growing retailing format in the world. The International Franchising Association (IFA) predicts that future growth in franchising is likely to come from developing markets such as China, India, Pakistan and Russia. This trend is expected to accompany the rapid shifts toward market driven economic reforms.

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India's liberalization begun in 1991, has brought about far-reaching changes in its economy, the Foreign Direct Investment (FDI) has increased sharply boosting business opportunities and leading to exciting entrepreneurial endeavours . Franchising is in the midst of a market revolution in India and the prospects of the growth in franchising are boosted by an ample supply of energetic, homegrown entrepreneurs making India an exciting market place. Have you ever wondered how so many IMS institutes are located in every part of India and provide the exact same kind of faculty and material throughout the country? How management of this huge chain of institutes is executed? And how the systems and human resource are maintained? The answer is in just one word"Franchising". It is through a well managed chain of franchisees operating across the country. IMS acts as the franchisor and provides supervision, training, content and brand name to the franchisees for a fixed fee and royalty. IMS carry a trust of quality education for the students preparing for management institutes and as a franchisor their endeavour is to make sure that same quality of education shall be imparted in all the IMS centers across the country. But challenges are there in managing this arrangement. Franchising in India is still in its nascent stage. Only 10% of the businesses in India are franchised as compared to 70% in the United States. Education sector which accounts for the maximum portion of the total franchised business in India is only 38% franchised as a sector as a whole. Other sectors like like retail, food, healthcare etc. go on similar lines. Indian franchising story has just started and it has a long way to go, India would be able to do so with its huge population, the growing aspirations and prosperity of the middle class, changing lifestyles, growing entrepreneurial culture, and the shifting of gears to small cities and towns. All these factors will lead to the growth of a WINWIN partnership between the brand and franchisee.

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In an emerging market like India, the trend of business expansion through franchising is gaining popularity and it has now become crucial to identify various economic aspects of this business model. A successful franchise business depends on the understanding between franchisor & franchisee. For example in education sector we have seen that various professional course coaching (MBA, Medical, Engineering etc.) franchisees are paying about 35-40% royalty while a pre-school franchisee and similar franchisees are paying about 1518% but still the former is more contented as compared to the latter. What are the factors that decide satisfaction level of a franchisee? What steps do they follow before taking the big decision of buying a brand? What are the current trends in the franchising business in India? How many franchisees are planning to continue this business for a long term and what percentage of them are planning to start up their own businesses since they have gained enough expertise and exposure through this opportunity? Who could be an ideal franchisee? These are some of the important questions with which every franchisor is struggling. This report has tried to answer these questions by analysis including depth interviews, data analysis tools and behavioral study of franchisees all over India across the major franchising sectors Education, Retail, Food and Professional Services which together constitute 89% of the franchising business in India. A franchisor has to be observant while selecting an appropriate partner for his business. On the other hand a franchisee too has apprehensions and expectations, they want profitability, cooperation, better communication and understanding from the franchisor. To achieve this, the report lays out a simple framework which a franchisor will follow to filter out the incompatible and unfitting buyers and hence select the most suitable franchisee. Various categories in franchisees have identified like Loyals, switchers and leavers through a structured process. Now the franchisor has to fill few basic information of the investor like age, education, relationship with the employer and similar parameters of in a formula and he will be able to find out the suitability of the particular franchisee he is planning to have a deal with.

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LIST OF FIGURES AND TABLES

LIST OF TABLES
Table 1: KMO and Barlett's Test Table 2: Division of Factors into components Table 3: Rotated component matrix Table 4: Eigen Values for Factor Analysis

LIST OF FIGURES
Fig 1: Factor Analysis Fig 2: Age range of switchers Fig 3: Educational background of switchers Fig 4: Previous occupation of switchers Fig 5: Age range of loyals Fig 6: Educational background of loyals Fig 7: Previous occupation of loyals Fig 8: Franchisee Revenue vs. Time (General case) Fig 9: The Franchisee Lifecycle Fig 10: Reference Sources for franchisees Fig 11: Fate of a franchisee after the declining phase Fig 12: Case of an Extraordinary Franchisee Fig 13: Motivation curve for a franchisee Fig 14: Franchisee classification based on Motivation levels Fig 15: Maximum Royalty across Sectors Fig 16: Attrition Rate across sectors Fig 17: Age group of Successful Franchisee Fig 18: Sector-wise age group Fig 19: Educational qualification of Franchisees Fig 20: Streams of Post graduate franchisees Fig 21: Range of Royalty across sectors Fig 22: Telescopic franchise royalty rate Fig 23: Years of Operation and Future Plans Fig 24: Year-wise break-up of 1-5 years of Operation Fig 25: Previous Relationship with the franchisor Fig 26: Relation-wise Future Plans of Franchisees Fig 26: Previous Work-Experience of franchisees Fig 27: Estimated growth rates in 2011-15 by franchisee

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16

CHAPTER 1

THE ENTREPRENEURS SPUR

ne of the embodiments of franchising is "consistency The ." very term "franchising" has come to be regarded as synonymous with consistency There is a change in the . philosophy of the investor and convenience is his first preference and franchising has become a very convincing business model for him to start a business conveniently with all the primary risks covered. Why an entrepreneur chooses franchise business model? In order to find out what were the underlying factors that affected their decision as an entrepreneur to choose franchise business model, we have asked the respondents to rate the following factors on a scale of 1 to 5. V1: Franchising is the safest way to start a business V2: Franchising is the best way to run a business V3: Franchising is the easiest way to start a business V4: I choose franchising because there is lower risk of failure V5: I want an established brand than starting on my own V6: There is higher growth opportunity in franchising than 17

own brand V7: Franchising gives a good learning experience V8: I have realized that starting my own brand would have been better V9: I choose a franchise that gives me the best return [Profit] V10: I choose a franchise that suits my personality and experience V11: I have the same interest with my franchisor V12: I choose franchising because I want to start a brand of my own later Based on the responses given by the franchisees the above mentioned factors were analyzed using factor analysis. The KMO and Barlett's test gives us a Sampling Adequacy value of 0.643 which is greater than 0.5 which means that factor analysis is appropriate for analyzing the data. KMO AND BARTLETTS TEST
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartletts Test Approx. Chi-Square of Sphericity df Sig.
Table1. KMO and Barlett's Test

.643 201.545 66.000 .000

Principal Component Analysis (PCA) is then used with a Varimax rotation and Kaiser Normalization. On further analysis the above variables can be grouped into three major components.
Factors Franchising is the safest way to start a business Franchising is the best way to run a business Franchising is the easiest way to start a business I choose franchising because there is lower risk of failure I want an established brand than starting on my own Franchising gives a good learning experience I choose a franchise that suits my personality and experience I choose franchising because I want to start a brand of my own later There is higher growth opportunity in franchising than own brand I have realized that starting my own brand would have been better I choose a franchise that give me the best return [Profit] I have the same interest with my franchisor
Table2. Division of Factors into components

The 3 components of motivation behind an entrepreneur's choice of franchising format found above could be further assigned the following headings:
Component 1: Lesser risk than a new startup, Component 2: Expectations of higher return on investment, and Component 3: The growth opportunity or future prospect

Components Component 1

Component 3 Component 2

ROTATED COMPONENT MATRIXa

Variables 1 Component 2 3
Franchising is the safest way to start a business .813 Franchising is the best way to run a business .797 Franchising is the easiest way to start a business .871 I choose franchising because there is lower risk of failure .679 I want an established brand than starting on my own .849 There is higher growth opportunity in franchising than own brand Franchising gives a good learning experience .824 I have realized that starting my own brand would have been better I choose a franchise that give me the best return [Profit] .729 I choose a franchise that suits my personality and experience .547 I have the same interest with my franchisor .517 I choose franchising because I want to start a brand of my own later .763 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 6 iterations.
Table3: Rotated component matrix

.514

.951

A franchisee looks for the growth opportunity in the business. He is being attracted by the return that is being offered by joining the franchise. There can be three sets of Investors on the basis of what they are looking for in a franchising business. They are: Business oriented: This is a set of Investors who choose franchising because it is safe, the risk of failure is low, and the return is always assured. Short-sighted Investors: This is the third set of Investors who are bothered mostly by what is being offered in the business. Their main interest is the return on the investment. Other set of investors are also interested in the ROI but this type of investors gives more importance to the ROI than anything else. Growth Oriented: This set of Investors is looking for a long-term relationship. They are more concerned about the growth opportunity and the future prospects in the business. Therefore a franchisor should communicate clearly what are the growth opportunities available for a franchisee. Monetary gains in terms of profit are important, but for an Indian franchisee the growth opportunity is something that keeps him in the business. The following are the factors behind an entrepreneur's preference for a franchising business format from the franchisor's perspective:
Ongoing

-.856 .576 .531 .611

.420

operational support Franchisor has dedicated team to providing ongoing assistance to franchisees. A new franchisee will receive all kind of operational support when they're building and running the franchisor's brand. The support system includes online access to corporate staff and national network of other franchisee owners. This support is extended through meetings, refresher trainings, annual convention and

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trade shows etc.

Marketing

support Marketing support to a franchisee is very important and the biggest motivation to join a franchise network. More the marketing options a franchisor offer, the more effective a franchisee will be in maximizing its business. Most franchisors have the unique ability to

launch large-scale marketing campaigns that are beyond the reach of individual businesses within the franchise. In addition to the geographic scope of these campaigns (many are nationwide), the quality of franchisor ads is usually top-shelf - a big plus when competing with smaller, independent businesses whose ads look substandard in comparison.
Bulk

buying advantage A franchisee can take advantage of the bulk buying capacity of the entire system to negotiate on the prices for everything they need at significantly lower levels than they could achieve as an independent operator. This applies not only to initial infrastructure and equipment purchases, but also to the supplies, inventory and everything else a franchisee , need on an ongoing basis. of Brand Identity Success of each unit in a franchise system, as well as the overall competitive strength of the franchise, is due to the presence of strong brand identification covering both the products offered and the services. And assuming that a significant brand recognition factor can be established and maintained in the minds of consumers, benefits will flow for the Franchisees Infrastructure Existing infrastructure can be leveraged upon in a franchising option. Distribution, Buildings, machinery, people, systems, customers, suppliers, employees are the benefits which is received in exiting business and would give a chance to the buyer to concentrate on running the business smoothly with an existing set-up. cash flow: After starting franchising business positive cash flows is possible in a relatively shorter time due to the already established fame of the existing brand. It usually takes more than a year to get the buildings constructed and a proper set-up to be maintained which is available beforehand in case of an existing brand.

Advantage

Existing

Immediate

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CHAPTER 2
AN ANALYSIS

IDENTIFYING FRANCHISEE ATTRIBUTES

hoosing the right franchisee is one of the most important aspects of franchising. It involves a lot of interaction between the franchisor and the franchisee followed by a judicious decision by the franchisor. Though there are various ways one can go about choosing a franchisee but a franchisor should try and avoid those franchisees that meet only a few criterion say for instance financial requirements but fail to meet the other criterion that are equally important. He should rather have a clear set of guidelines in his mind detailing the characteristics/ attributes that a franchisee ought to have. On studying the franchisees in India, the following are the attributes of an Indian franchisee taken into consideration:

AGE Age is a significant factor that a franchisor looks for in his franchisee. The reason being it determines the mindset of a person. The cognitive ability of a young person is very much different from that of an old person. A young person would have more of energy, vigour and risk taking abilities. While on the other hand, an old person would be more complacent

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and subservient in nature. He might also lack the zeal to achieve more in life. EDUCATION Education may not be a determinant in a business success, but it can be an essential element in the overall combination of factors. It is a commonly used selection criterion to assess the likely future chances of success of potential franchisees. However, the franchisee should not be completely ignored for lacking the education factor. The educational background of the franchisees in India is further classified into three levels: Basic education or +2 level of education Graduate level of education Post-graduate level of education It may be noted that having the level of education is not just enough; having the right kind of education is more important and more desirable. MANAGEMENT SKILLS Franchisors tend to look for franchisees that have developed certain business and management skills. These skills assist in dealing with people, leading a team, communicating with others, managing the operations etc. WORK EXPERIENCE Perhaps one of the basic elements that a franchisee should have is prior experience. It may or may not be in the related field, though. This would give him an opportunity to make use of his abilities which he had learned earlier in his previous job. In addition, it would also let him not commit the same mistakes which every amateur is expected to make on starting a new business (franchise). FINANCIAL FITNESS Having adequate capital is necessary to minimize the financial risk associated with starting a new business. The franchisee might be required to source any required financing prior to and after the final approval of the contract. 22

NETWORKING ABILITIES The ability to network and to manage customer and business relationships effectively forms an important role of a franchisee. Loyalty and trust are vital features when it comes to managing staff and customers. These need to be maintained in order for the franchise business to succeed. MOTIVATION/FAMILY SUPPORT A strong family support invariably (always) acts as a stimulant for a franchisee to run his business. It not only motivates him but also helps him ease off his strain. The role which a family plays in making a business a successful venture can never be undermined. RISK TAKING CAPACITY A person may be a high risk taker but the difference among the risk takers is that whether the high risk yielded a return, it may be a high return or a low return. One needs to have the ability as well as the skill to take risk. ANALYTICAL ABILITY It is the measure of the concentration and specificity of the franchisee. If a person is specific to every minute detail then there are less chances of making errors or mistakes. FAMILY BUSINESS Family business can act as an asset while a franchisee embarks on his journey as an entrepreneur. The involvement of their business ideas and thoughts and communicating with them in respect to the business challenges can sometimes do wonders. TECHNICAL SKILLS Technical skills indicate the education of an individual in specialized field like Engineering, Law, Accountancy, Finance etc. PROFIT ORIENTATION What is the expectation of the franchisee from the business? It is the return on the

money invested by the franchisee in the business. A survey was run across on more than 1500 franchisees and they were asked to rate these factors in their order of preference. These 12 variables were further classified or clubbed into 4 broad factors eliminating the maximum variance among them. These 4 factors will now help us decide which factor is the most important for a franchisor to choose his franchisee.

family support which he receives from time to time.

Age Education Work experience Management skills Technical skills Networking skills Financial fitness Risk taking capacity Profit orientation Analytical ability Family Business Family support/Motivation
Fig1: Factor Analysis

Profile /Qualification

Skills

Business expertise

THE FACTOR ANALYSIS

The research has shown that there are four broad attributes that are important for becoming a successful franchisee. These factors are the attributes that differentiate one franchisee from the other. These four major factors are then used to identify the underlying variables on which to group the franchisees. PROFILE/ QUALIFICATION This includes age, education background and the experience of the individual. The education background is further categorized into basic education, graduation and postgraduation level. The experience of the individual, be it in the same field or in other also forms a part of this factor. SKILLS These are the attributes that can be regarded as the scaffoldings required by the franchisor for running the franchise. Management skills, how motivated the individual is and the emotional as well as financial support of the individual that he received from family and friends. BUSINESS EXPERTISE This attribute includes the financial status of the individual, his analytical skills, his risk taking ability and his profit expectation from the business. INHERENT ADVANTAGES This includes the family business and the 23

Inherent advantages

INITIAL EIGEN VALUES

Component A B C D Total 2.593 2.451 2.317 1.784 % of Variance 23.678 21.996 20.284 10.247 % of contribution 28% 27% 25% 20%

Table4: Eigen Values for Factor Analysis

From the data analysis we have found the above values corresponding to each of the component represented by the English alphabets A, B, C and D. So we can say that out of these 4 factors the franchisor will give 28% importance to the franchisee's background details, 27% focus will be given to franchisee's skills, 25% to business expertise and the remaining 20% to the inherent advantages. Therefore a franchisor can calculate the franchisee's potential by the following formula:

Investor Potential = .28 A +.27 B +.25 C +.2 D

Key* A - Profile/Qualification B - Skills C - Business expertise D - Inherent Advantages The franchisor's consideration for background, skills and business expertise is almost the same. So instead of focusing more on any one of the factors the franchisor can focus on all of them equally .

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CHAPTER 3

FRANCHISEE PROFILING: A STATISTICAL MODEL

here are several ways to project the long-term behavior of the franchisee by using various questions relating to the psychological behaviour of the Investor. The Model developed here has tried to analyze a franchisee on the basis of the most obvious factors like age, education and previous experience of the franchisee. We have come up with the following equation from our analysis where y is based on the future plans of the franchisee
Y=0.311 x1-0.273 x2+0.01 x3+0.232 x4 +0.084 x5

HOW TO USE THE MODEL? As mentioned earlier, the variables used in the formula are to be converted to an ordinal scale. There are three categories for the previous occupation. The categorized occupations of the franchisee are: Occupation Salaried employee Self employed Student Category 1 2 3

Where x1 is the previous occupation of the franchisee x2 is the relationship that the franchisee has with the franchisor x3 is the years of operation of the business, if the franchisee is an existing one x4 is the present age of the franchisee x5 is the educational qualification of the Investor or franchisee From the analysis shown above, the previous occupation is the most important factor in a franchisee's profile followed by the present age of the franchisee. All the variables taken above are considered in an ordinal scale. This formula will help to analyze the riskiness of the franchisee. It can be used to analyze a prospective as well as an existing franchisee. 25

Similarly for the other variables they are categorized as: Previous relationship Relationship No relation Friend Relative Employer-employee relation Repeat franchisee Category 1 2 3 4 5

Years of operation of the business: (if it is an existing one) Years of operation 0-1 year 1-5 years 5-10 years 10 and more Category 1 2 3 4

Present age of the franchisee Age <20 years 20-30 years 30-40 years 40-50 years 50-60 years >60 years Category 1 2 3 4 5 6

in the franchisors' business and provides a potential risk.

Educational qualification of the franchisee or the investor Qualification Matriculation Graduate Post Graduate Category 1 2 3

Franchisee starting own business: A franchised outlet provides the proper experience and exposure which is needed to establish one's own business. Once you get to know the nitty-gritty of an existing successful brand you gain the confidence for establishing your own business and that's what a franchisee does and provides risk to the franchisor.

Replacing the variables that the franchisee or the prospective franchisee has with the categories and substituting the values in the model provided will give the riskiness score of the franchisee. A franchisee with a higher score is always more desirable.

Franchisees going into service sector from franchising: A very rare possibility is that the franchisee leaves the franchising business altogether and goes into a salaried job. It occurs very often with these franchisees that have jumped from service sector to franchising. Those who are from the premier schools like IITs and IIMs are more likely to get a job which pays them more than the franchise and hence move out to the service sector. After discussing various options in front of the franchisees and analyzing their profile mathematically, we can now divide the franchisees into following categories: SWITCHER: A type of franchisee who will switch from the existing brand to a franchise of some other brand. The following are the characteristics of such a franchisee: This franchisee is not satisfied by the growth opportunities, the standards or the return on investment provided by the current franchise. They always crave for new ideas, want to set their own rules, keep looking for other opportunities. The major features of such franchisees are: Age: The lowest range, the age bracket of 20-30 years. Education qualifications: Highly educated-Charted Accountants, IIT, IIM graduates. 26

FRANCHISEE PROFILING
The survey has shown that there are certain issues relating to franchisee retention. From a franchisor's perspective a long lasting relationship with the franchisee is the most desirable aspect. Survey has shown that there are a number of franchisees who are not interested in a long lasting business relationship with the franchisor. Based on the interviews and analysis, we came to know that the following are the various options present before a franchisee which make their retention by the franchisor a difficult task:

Franchisee leaving the brand and taking a new brand: There is a trend that due to stagnancy in sales or the brand value going down, franchisees close their previous brand franchisee and set up a new franchisee of some other brand. This leads to a decrease

 Prior experience: In terms of prior experience they are quite at the lower side.

brand. The following are the characteristics of such a franchisee. They want a safe business i.e., the one they are already experienced in and believe in. They make the franchising format successful by reaping a good amount of profit out of it. The major features of such franchisees are: Age: They are mostly in the late years of their life, around 40-45 years of age. Education qualifications: These include lower education bracket, those who work hard and strive to prove their worth. Prior experience: They are operating for a long period in franchising and have gained the tricks to become successful in this business.

Fig2: Age range of switchers

Fig3: Educational background of switchers

Fig5: Age range of loyals

Fig4: Previous occupation of switchers

The franchisor can retain him by providing proper incentives, working environment, variety in work and some amount of flexibility .

LOYAL: Those franchisees that will not leave a franchise and will continue same brand and take other franchises for the same
27

Fig6: Educational background of loyals

dire necessity like extreme losses. They want to get out of the system and are trying to wrap up their franchises. The major features of such franchisees are: Age: The middle range, the age bracket of 35-45 years. Education qualifications: These include Post graduates and graduates, who are qualified enough to take up a salaried job and have earned money and experience to start up their own business. Prior experience: They have a fair amount of work-experience in franchising as well as other fields.

Fig7: Previous occupation of loyals

These are the most loyal customers for franchisors and hence good prospective franchisors. A third category is of leavers who include those franchisees that will leave franchising altogether to start their own business or become an employee of some company. The following are the characteristics of such a franchisee: They have lost their faith in franchising model or have some 28

LEAVER:

A franchisor can't stop such type of franchisees who have already made up their minds to leave. These are categorized as the most risky franchisees.

CHAPTER 4

FRANCHISEE LIFE CYCLE:

Key to franchisor-franchisee relationship

ranchisees move through phases of growth, development, maturity and decline. This lifecycle is same for most businesses, however, in franchising, the resources available to a franchise business network to plan an inclusive offering is generally able to ensure the ongoing significance of the franchise brand and franchise business model, effectively extending the business lifecycle and providing longevity in the market.

An entrepreneur who has opted to expand through franchise is like head of the family wherein his franchisees are his family members. Unlike a family every franchisee is different from the other but share a common brand and business model. The franchisor & franchisee relationship is always a matter that requires regular attention from both the ends. To understand and explore a franchisee franchisor relationship and recommend best practices to be adopted by a franchisor, we have to first understand the life cycle of a franchisee, his challenges and

29

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apprehensions which depend on that fact that in which phase of his business cycle he is?

FRANCHISOR SUPPORT
Franchisor's support to the franchisee makes a big difference to the franchisee's own life cycle. High levels of support early in the franchise relationship will accelerate a franchisee's growth and facilitate their early maturation. Similarly, support provided by franchisees to one another adds strength to the franchise business network and also assist in the early maturation of each other's franchise businesses. Franchisors usually find that the nature of support provided to a franchisee during the course of their lifecycle in the franchise business changes from highly technical and operationally focused at the start, to management, financial and marketing expertise as the franchisee matures.

Fig9: The Franchisee Lifecycle

SEARCH PHASE
In this phase the unit is an entrepreneur and he needs to go through the necessary introductory stage to ascertain whether or not this is the correct time, product, and/or service to begin operating a franchised unit. There are various ways in which an entrepreneur looks out for a suitable franchise. In India, most of the franchisees applied directly for the franchise through Internet. A franchisee gets to know of the franchise through close friends, or close business associates. Around 20% of the franchisees get to know of the opportunity through his brother or family members. A typical Indian entrepreneur rarely consults an existing franchisee before taking the decision.

FRANCHISEE LIFE CYCLE

There are five important stages in the life cycle of a franchisee. These are: Search phase Joining phase Growth phase Maturity phase Closure phase or extended growth phase / Critical phase

R E V E N U E

TIME
Fig8: Franchisee Revenue vs. Time (General case) Fig10: Reference Sources for franchisees

31

Strong brand name is the luring feature which attracts most of the franchisees-so the first step for every franchisor or every businessman for that matter to follow is brand promotion and all other things will follow. Websites of various brands are the topmost resources which the prospective franchisees use to gain information about the brand and franchise information. Brand promotion events are also ways through which franchisees come to know about the different brands. Relatives and friends' advice who are in the same business is usually considered to be a reliable source. Very rarely they contact the existing franchisees of the brand to know about the franchisor unless they are their relatives having franchisees of the same brand. Generally, this phase lasts from one month to one year.

develop a strong level of business performance for their unit. The initial business volume of the unit may be off and it may require several months of diligent effort to properly promote and develop. Other organizations may begin very rapidly and are forced to struggle to maintain a high initial business volume. The growth stage often levels off after a period of several months or a few years.

MATURITY PHASE
In the S-curve, this phase appear when the growth stabilizes. The growth has come to a point when it is steady and the scope of growth in the franchise is limited. The franchisee will often meet with the franchisor to discuss different products or services which will enhance the volume of the business. The franchisee may seek to increase the sales level through the addition of new products or expanded services. It is this phase when the level of franchisee motivation could be significantly affected; the volume of the business remains more or less the same.

JOINING PHASE
In this phase the franchising deal is signed between the franchisor and the franchisee. This phase may last from one month to two years depending upon the type of business, the agency helping them to strike the deal and the franchisee. Generally, this phase is completed within a short period of time in a domestic/single-unit franchise and may take longer in an international/multi-unit/master franchise. This is the most potential stage when the franchisee's enthusiasm is at its peak. To help maintain the level of enthusiasm, it is therefore advisable to strike the deal in a short span of time.

DECLINING PHASE
During the declining stage, the franchisee generally starts to relax their compliance with the rules, regulations, and standards which have been established by the franchisor. Franchisees who have become dissatisfied with the franchisors often seek to terminate the franchise. Alternately, the franchisor may realize the problem and seek to provide remedies as solutions. The franchisor may improve the communication and may be able to provide greater services and more value to the franchisee. The franchisor may develop additional promotional, marketing, and advertising programs which enhances the franchisee's opportunity for success. The franchisor then has the opportunity to turn around the franchise business and to instill within the franchisee, once again, the 32

GROWTH PHASE
The growth stage occurs from the time of the grand opening generally through the first year or two of operations. At this time, the franchisee works very diligently in order to

Fig11: Fate of a franchisee after the declining phase

desire for mutual success and prosperity .

UNIQUE CASE
Franchisee performing extraordinary well during its lifecycle Franchisees showing strong entrepreneurial tendencies and doing extraordinary business are a boon to the franchise but at the same time pose a challenge of retention in the system. These are franchisees whose performance is much above the average franchisees and have an exponential growth at this stage. The following figure depicts the stage in the lifecycle where such a condition occurs.

Fig12: Case of an Extraordinary Franchisee

Life cycle of an extraordinary performing franchisee is different and they become critical much before the declining phase (as shown in the figure) and require special attention from the franchisor. Identifying these players in the early growth 33

phase is very important. A franchisor could invite them to participate in a bigger role in the system and thereby satisfying their entrepreneurial skills. The franchisor should do everything to make its star performer franchisee realize that their role is of prime importance to the franchisor, and that such an outstanding performance is acknowledged and appreciated by the franchisor. Following could be the possible initiatives Elevating franchisee status to a master franchisee: Adding responsibility of developing the region and recruit individual franchisees under its supervision by providing all training and support they need would be an incentive for the outperformer. Being a master franchisee is both prestigious and it leads to financial independence. Inviting them for policy making process: The franchisor can invite performing franchisees to contribute in the policy making process of the whole system. It would inculcate a sense of responsibility; importance and motivate them to explore their potential. Acknowledging the performance & preferential treatment: Franchisor should acknowledge the performance of his franchisees, especially those who are performing extraordinarily well. This acknowledgement should be done in the meetings in the presence of all the franchisees. A preferential treatment to the franchisee's requirement would be a great motivation. Offering Shareholding: This is the most important policy decision for a franchisor, making its franchisee shareholder in the company. If the franchisee becomes indispensible and

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demonstrates extraordinary entrepreneurial skills, it becomes crucial to retain this unit and the entrepreneur in the system. This unit later become a leader to other franchisees in the system and may soon consider detaching itself from the system due to the simple reason of higher aspirations, lesser freedom and revenues or better opportunities. At this juncture offering shareholding in the company would be an appropriate solution and a WinWin situation for both the players.

Franchisor-Franchisee relationship:
Apart from the above mentioned suggestions which are for an extraordinary performer who need extra attention, there are certain practices which a franchisor can do to enhance and develop the franchisee/ franchisor relationship. Sharing the Vision: Franchisor should share the personal vision of opportunity and success which the franchise system offers. A franchisee being a family member of the franchise system, deserve to be a part of the vision, which will becomes a life-long project for them. This vision should include a high desire to receive the rewards of one's work. This shared vision will become the focal point of the franchisee/franchisor relationship as they build to mutually develop in a harmonious and successful franchise experience. Active Communication: A regular line of communication from the franchisor acts as a guiding light for the franchisee. They often seek to develop new products or services which might enhance the growth and prosperity of the business. This communication line would facilitate a bilateral flow of information thereby improving the franchisor -franchisee relationship. This communication could be in the form of mails, letters, newsletters, conference calls, video conferencing etc. Passionate marketing support: A 35

franchisee requires effective market presence of the brand both on a local and national basis. A balanced marketing and brand positioning strategy would help franchisee to reap the gains. Franchisor's balanced strategy to address its national and regional players equally is a fruitful relationship building exercise. "Total" Training Program: Training is the fundamental ingredient of a strong franchisee/franchisor relationship. Almost all franchisees require initial training to start the business. In addition, refresher courses, as well as new training programs should be provided to help improve the abilities of the franchisees and the franchisees' staff. Franchisees often are desirous of obtaining self-improvement programs for themselves as well as for their staff. The franchisor should provide training and improvement programs which will enhance the abilities and capacities of the franchisee. Developing & sharing an aggressive growth plan: Both the franchisee and the franchisor desire the company to grow, albeit some franchisees are ambitious and would like to become multi-unit franchisees after opening their first unit. They would like to open a second or third unit in the same city or state. Franchisor should be able to offer a plan for growth so that they can induce the enthusiasm of a vibrant and growing organization in the franchisee. Growth is an elixir to the desires and appetites of people wishing to become better. For a franchisor, it is important to manage franchisee relations in order to align their expectations and perceptions. Mostly perceptions play their role in a different way and higher expectations are not fulfilled easily but a healthy and ongoing communication with all other measures mentioned above would help franchisor to keep the francisee motivated and ultimately lead to the overall growth in business.

CHAPTER 5

FRANCHISEE MOTIVATION1 Understanding challenges

Motivation in franchisee lifecycle

A human being, at different stages of his life, has different moods and motivation levels. Sometimes he feels motivated to do something great in life and achieve success. At other times he feels dejected. The franchisee, ultimately, has human characteristics and so his motivation level undergoes various ups and downs. For instance, the motivation level begins to increase during the initial phase when the franchisee is on the lookout for a new opportunity After being in the joining phase . for some time, the motivation level begins to decline. This is because it takes time for the business to breakeven. After crossing the breakeven, the franchisee now begins to make profits. This acts as a propeller and brings him to the zenith of motivation level.

But with the passage of time, as the growth of the business reaches the maturity phase, the motivation level begins to decline again. This motivation level curve is applicable for most of the franchisees across all the sectors. The reasons for such a changing level of motivation could be manifold and in the next section we will discuss some of these.

INITIAL PHASE

JOINING PHASE

GROWTH PHASE

MATURITY PHASE

Motivation level

Motivation curve

Fig13: Motivation curve for a franchisee

1 All issues identified are based on from a primary survey and personal interviews with franchisees based across the country from all industry verticals.

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INADEQUATE COMMUNICATION BY FRANCHISOR As already stated the franchising business is a relationship between two parties and for the success of franchising a proper communication and understanding is required from both the sides. But the lack of effective, honest and open communication leads to chaos and differences between the two. For instance, often it is seen that the franchisor doesn't communicate to the franchisee his decisions in respect to the contract, policies, royalty etc owing to which the business at the end suffers a setback. Hence, a continuous effort should be made to fix the communication breakdown, if it exists. It should however be noted that communication not only involves the passing of the decisions but also motivating the franchisee and exchanging ideas with him. Let us now be enlightened with the help of a graph on how a good communication channel can help a franchisee flourish.

The first curve throws light on the most commonly witnessed situation when the franchisor's support decreases slightly and so does the motivation level. Nevertheless, the franchisee is still able to maintain a certain level of growth. The second situation arises when a lot of support is provided from the franchisor's side and the franchisee is also motivated enough to keep the level of the sales and profit high enough. Though a slight decrement in the motivation is observed when the business reaches the maturity phase and the sales become saturated.

The third case shown in the curve is a very avoidable situation. The franchisor becomes complacent after the agreement and the receipt of a percentage of franchising fees. He stops paying heed to the various issues of the franchisee. Whereas the franchisee, being at the crucial stage of his business, has to make arrangements for opening the outlet, maintaining enough supply, managing the staff etc. During this phase he does not get enough support and assistance from the franchisor During the launch, if he is unable to get a good business which is quire possible then his motivation level is decreased further. This acts as a disincentive effect leading to a loss in business and finally in the depths of despair the franchisee decides to quit.

INITIAL PHASE

JOINING PHASE

GROWTH PHASE

MATURITY PHASE

2
Motivation level

1
Motivation curve

3
Branding Agreement Launch Negative sales

The repercussions of a situation shown in part 3 can be fatal for the franchisor as well as for the franchisee. A successful franchising business requires the franchisee to be motivated at every stage of the lifecycle. For this a franchisor has to remain alert and attentive towards the various psychological needs of the franchisee. The franchisor should Manage a line of communication through various means like conference call, mails, personal visits etc. Identify the stages where the franchisee needs maximum support which normally happens to be just before the launch period and after the maturity phase. Share success stories and sales data of other franchisees. Maintain a healthy relationship with the franchisee through: Regular visits to the franchisee unit. 37

Fig14: Franchisee classification based on Motivation levels

In the initial stage of the relationship between franchisee and franchisor the response by franchisor is at its maximum. He provides him all the required information and keeps visiting the locations till the contract is signed. Once the franchisor is assured of the agreement and royalty fee, the level of support provided by him decreases, which leads to a slight decrease in the motivation level of the franchisee. So, from the point where the agreement is signed the curve splits into 3 parts.

revenue in coaching institutes to 7% in food service sector and as low as 3-4% in retail.

Fig15: Maximum Royalty across Sectors

STAFF TRAINING & ATTRITION Staff attrition or turnover rate is the ratio of the number of employees who left in the year to the average number of employees in the year, multiplied by 100. One of the biggest issues franchisees face is to identify and retain good employees. However, it is very hard to attract new applicants if a company's high turnover rate is a common knowledge among people.

Regular interaction with the management team that takes care of the individual franchisees. A consulting firm that will acts as a facilitator between franchisor and franchisees.
Fig16: Attrition Rate across sectors

THE ROYALTY2 High royalty can severely affect the profits of the franchisee, especially during its initial years. And it will be the biggest hindering factor during the maturity of a franchisee. The percentage of royalty varies across the sectors from as high as 40% of the gross

He would be demoralized because he would be compelled to pick up the slack of those employees who either left or were terminated. He may also have to deal with the stress of welcoming the new employees, only to lose them a few weeks later.

2 Please refer the "Franchisee Survey" for details and suggestion for this issue.

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High turnover rate, on the other hand, can be detrimental for a company too. It interrupts the inner working of any operation; it makes managing harder, and it leads to exuberant cost. Restaurant attrition rate is one of the highest in business, which is why most dining establishments are always on a hiring spree. They do not even have proper training procedures but just keep on employing new people. Some restaurants lose up to 40 percent of their staff within first 2 weeks of hiring. The reason is that most of them (employees) do not want to be a part of the unorganized chaos which is often witnessed in food industry In addition, new employees feel that . they are being set up for failure instead of success. Next to food sector is the retail franchising where the attrition rate is close to 30%. Both retail and food sector employs low quality labor. The salary is also very meager and almost the same for all the brands. So there is a tendency to switch even if a small increment is offered in any other outlet. Thus, it is very essential for a company to leave a good and long lasting impression on its potential employees because if the employees do not feel themselves an asset, then will go to some other better place.

customer theft. Shoplifting: The second form of shrinkage is shoplifting. Customer theft occurs through concealing goods, altering the price tags, or transferring things from one container to another. While shoplifting remains a smaller inventory loss source than employee theft, stealing by shoppers still costs retailers a large amount of money . Administrative Error: Administrative and paper work errors make approximately 15% of shrinkage. Simple pricing mistakes can cost retailers quite a bit. Vendor Fraud: The smallest percentage of shrink is vendor fraud. Vendor fraud spans a broad range of abuse - from fraudsters who create fictitious companies and submit bills for payment to trusted suppliers who pad invoices and charge you more than they are due. Vendors involved in fraudulent activity may even collude with your own employees to help them navigate through your company's internal controls.

SHRINKAGE A common problem that bothers the franchisees the most is the shrinkages and pilferages. It is the difference in the value of stocks as per books and the value of actual stock at the store on any given date. The average shrinkage in the retail industry is about 2% of the sales. Here are the four major sources of inventory shrinkage in retail. Employee Theft: One of the biggest sources of shrinkage in a retail business is internal or employee theft. Some of the types of employee theft include discount abuse, refund abuse and even credit card abuse. Unfortunately, this is one important loss prevention area that generally doesn't receive as much monitoring as
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CANNIBALIZATION Many franchise operations generally face the issue of cannibalization, the tendency for new franchise operations to become successful, in part or in whole, merely by stealing business from existing franchises in the same market. It's an issue of vital concern existing franchisees. Some interviewees mentioned the competition among franchisees of the same brand resulting due to concentration of franchisees in the same area/ region.

Case Study: An example showing how to approach the challenge of cannibalization is presented by a Jamshedpur franchisee wherein 5 similar schools were opened by a single brand in the same city The school . brand X had only one franchisee owned by Mr. A. in Jamshedpur in the year 2008. It was a famous brand, the

franchisee was successful. The problem started when the area developed economically the franchisor allotted 4 more franchisees in the same region. The revenue and profits declined significantly for A and at one point he had to face losses in the business too. Solution: Mr. A handled the issue tactfully and decided to have a meeting with the other franchisees in the region and suggested them to share their local marketing costs and they also divided their geographical territories.

and the competition reduced significantly . Thus the issue of cannibalization can be addressed decently by the cooperation among franchisees. The franchisees, instead of competing with each other could share their operation costs and territories to make a Win-Win situation for the brand. IRRESPONSIBLE FRANCHISEES There are franchisees that compromise on the quality of products and services in order to reduce costs, harming the brand image as well as other franchisees' business. Franchisors provide standardized products/ services and detailed guidelines for operations, but some franchisees do not implement them thoroughly and consistently primarily due to improper training or they want to save on costs and this leads to inconsistency in the operations. 40

So from then onwards admissions were based on the residence of the student, if the student was not in the defined territory of one franchisee he was referred to the franchisee nearer to the student's residence. This was adopted by the other franchisees

CHAPTER 6

THE INDIAN FRANCHISEE SURVEY

ABOUT THE SURVEY

An extensive survey was conducted to analyze an average Indian franchisee's background which includes its age, education, family background, average royalty he is paying, his aspirations regarding the business and loyalty towards the franchisor. These franchisees belong to different sectors and geographical regions in India. 41

Major business verticals were food, retail, education, real estate, telecom, financial services etc. and franchisees from Metro cities like Delhi, Mumbai, Bangalore, Tier-I like Hyderabad, Ahmedabad Tier-II like Jaipur, Indore, Goa and Tier III like Jodhpur, Varanasi, Nasik etc were included for the survey purpose. Apart from online survey, personal interviews and telephonic interviews were conducted to collate the desired information.

Some of the important brands who took part in this survey were Subway, Koutons, IMS, Kid-Zee, EuroKids, Aptech, Veta, Sagar Ratna, Puma, Levis, Raymond's, Bachpan, Liliput, Aditya Birla Retail, Titan Industries Ltd, Vodafone, Zee interactive learning systems, Shaadi.com, Cox & Kings, Reliance Money, Fab Mall, K Jewellery, Educare, Aptech, The following is the qualitative analysis which provides the key insights about franchisees in India: IDEAL AGE OF A SUCCESSFUL FRANCHISEE It is interesting to note that 18% of the total franchisees were owned by investors belonging to the age group of 20-30 years and a major chunk of 48% of the franchisees belong to the age group of 30-40 yrs, 22% belongs to 40-50 yrs and only 12% were more than 50 years.

Age Group 30-40 Years

Age Group 40-50 Years

Fig17: Age group of Successful Franchisee

An ideal successful franchise owner belongs to the age group of 30 - 40 years. The young franchisees being aggressive and speculative in nature often feel restrained by the rules & regulations laid down by the franchisor. They desire to start their own business after gaining sect oral experience and this trend was prominent in food service franchisees as they believe the franchisor's standards were stringent and acting as hindrance to their business acumen. 42

Fig18: Sector-wise age group

Next step of the analysis suggested in the age group of 30-40 years majority (40%) of the franchisees were in education sector and the other prominent sectors were Food & Retail (total 40%). The interesting fact about the older franchisees owners of 40-50 years was that 73% of this group prefers education franchisee that too in pre- school and primary school franchisee. Making them an ideal target audience/ investor for pre-school and other education franchisors.

school/Primary education) franchise hence should be given preference among the other investors. IDEAL EDUCATIONAL BACKGROUND FOR A FRANCHISEE According to the survey, 54% of the franchisees are post graduates followed by graduates who constitute 31% of the pie.

Educational qualification

Recommendation Ideal franchisee/ investor in franchise business belong to the age group of 3040 years; therefore it is recommended that a franchisor should prefer prospective investors belonging to this age group. Older (40-50 years) investors have more inclination towards education (pre43

Fig19: Educational qualification of Franchisees

It is important to note that 58% of the postgraduate franchisee belong to management studies which includes MBA/PGDBM or similar degree with

specialization in finance, marketing, operations retail and food technology . Recommendation Post graduate degree in management creates good Franchisee/Investors. But we would like add a caveat here; these are the first to move out of the franchisee system because they have more options available. (Please refer Chapter 3 for more details). A healthy franchisor- franchisee relationship is crucial to retain them. Second biggest category is professionals, who are potential investors in specific sectors like pharma, financial services, technology etc. For a franchisor from any of these specific categories, it is important to identify/choose investor from the professional category . FRANCHISEE ROYALTY Royalty is the most important question from a franchisor's point of view and is crucial for the sustenance of a franchisee. Royalties are paid for the continuous use of a piece of work and it is in addition to any one time initial fees. The payments are usually lower than upfront fees since they are a continuous regular expense. With regard to franchise royalty payments, the franchisee experiences daily sales as his or her main source of revenue. However, the regular monthly/quarterly income that the franchisor earns is based on royalty payments from each franchisee. The recurrent royalty fees are the essence contributions to the entire organization. The payments are used to maintain the system and ensure that all avenues flow smoothly between the franchisor and franchisee. It is difficult to find out the exact royalties paid by the franchisees in various sectors but based on the survey findings, following chart would provide a fair idea about the range of royalties paid in different sectors. These royalties are based on the brand value, location and industry sector. It is quite evident that royalty range for a 44

Post graduate profile

Fig20: Streams of Post graduate franchisees

Professional Coaching pan industry varies maximum from as low as 10% to as high as 48% of the gross revenue. On the other hand this fluctuation is less in other industry verticals. Recommendation A business format franchisor's key part of revenues comes from franchise royalties, which are typically a fixed percentage of franchisee gross sales/ revenue. When a fixed royalty rate is used and the marginal costs of operating the franchisee system are increasing, the franchisee does not have an incentive to increase revenue beyond a certain optimal value. Also after a certain time period (saturation), franchise owner is not motivated to renew the contract on the same royalty rates, at this juncture he needs an

incentive to continue because he has already gained the business expertise and the aspirations to earn more are higher. A telescopic franchise royalty rate3 is therefore suggested, for giving him a scope to increase the optimal revenue which will also act as an incentive for the franchisee to renew the contract. Adopting a telescopic rate increases franchisor royalty revenues and franchisee profits.

Fig22: Telescopic franchise royalty rate

Fig21: Range of Royalty across sectors

IDEAL TIME FOR CONTRACT TERMS REVIEW 4 The concept of franchising itself is new to the Indian market. Majority of the franchisees are within the first decade of their operation. 52% of the respondents of the franchisee survey were in their 1-5th year of operation. This shows that the franchise

3 Gradual decrease in the royalty rate with the time 4 Based on primary survey findings

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business model is in its nascent stage in the country .

Years of Operation

Year-wise break-up Future plans

Fig23: Years of Operation and Future Plans Fig24: Year-wise break-up of 1-5 years of Operation

The interesting fact that came up in survey was that out of those respondents who were in their 1-5th year of operation 48% were planning to setup their own business or want to quit from franchise business model because of the issues/challenges they have faced.5 Further, majority (38%) of the franchisees who were planning their own setup are in their 4-5th year of operation.
5 Please refer Chapter 5 "Franchisee Motivation: Understanding the challenges

This shows that the franchisees are becoming critical in their 4th to 5th year of operations. This year of operation is hence important for a franchisor to concentrate of the relationship with its franchisee. This could be the ideal time period to review the contract terms to increase the franchisee retention.

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FRANCHISOR- INVESTOR RELATIONSHIP The survey came across a unique finding that says that majority (64%) of the successful franchisees have no personal or professional relationship before they have entered in the contract with franchisor. It was also noticed during the interviews that those franchisees that have any personal or professional relationship with the franchisor are less successful in business operations.

contract with them and franchising business, deciding about royalty etc. is all about negotiating. The relatives and friends may not take the terms of contract seriously and they would take the business for granted. It may lead to disputes in relationship which is not good for either party . SALARIED VS. SELF EMPLOYED

Previous Work Experience

Previous Relationship

FUTURE PLANS
Relationship Employer-employee relation Friend No relation Relative Repeat franchisee Total Change your franchisor 25.00% 25.00% 50.00% 100.00% Continue with same franchisor 10.00% 80.00% 5.00% 5.00% 100.00% Do not want to disclose 25.00% 50.00% 12.50% 12.50% 100.00% Set up a new business 28.60% 9.50% 57.10% 4.80% 100.00% Total 20.40% 3.70% 63.00% 3.70% 9.30% 100.00%

Out of those who are planning to continue 80% are not related to the franchisor while only 5% were the employees of the franchisor. Similarly among those who want to start their own business 50% were employees of the franchisor. So, it's not a surprise that franchisors should be are giving their franchises to those who are not in any way related to them. During the discussion with respondents we have found that doing business with relative or friend is never a good choice because: You will not have a properly negotiated 47

From the survey, 70% of the franchisees were salaried employees earlier. So it is quite clear that salaried employees are more attracted toward franchising business model as compared to businessmen or fresher. The reason is that the salaried employees are risk-averse and they are comfortable working in a set up where system is set. Recommendations: While selecting a franchisee, the salaried employees should be given preference over non-salaried ones because they will not take the risk of starting their own venture.

CHAPTER 7

TRENDS, OPPORTUNITIES AND FUTURE PROSPECTS

ore than eighty percent of the respondents interviewed are looking for an expansion of their operation. The survey has shown that a franchisee who owns an outlet would like to expand the business by taking another franchise from the same franchisor, from a different franchisor. Thirty-eight percent of the interviewees indicated that they would like to expand mainly through self-owned outlet while preserving the existing franchise. Another thirty-four percent of the franchisees interviewed would like to continue with the same franchisor. At the same time they would like to increase the number of outlets from the same franchisor. In sum, the growth of the number of self-owned outlet would be faster than a franchised outlet in the next few years.

The survey also shows that there are instances where there is forward 6 integration by the franchisor. Franchisees located in prime locations and in metro cities are more prone to a being bought back. Even though majority of the franchisors provided standardized procedures and detailed standard operating procedure, standardization is not implemented thoroughly across the franchised outlet. There is need to ensure that the operating procedure is standardized irrespective of the type of business the franchise deals with. In terms of the end products or the service rendered, it can be either customized or standardized. In food and beverages franchise, customized products are catching up fast. In education sector where the materials are standardized, customized material for the student creates a whole new opportunity of standardized operation with custom products. The industry has a strong growth momentum and most franchisees are quite confident about their growth prospects. Therefore, we have reasons to expect that franchising in India will continue to grow.

6 Franchisor acquiring the franchisee

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APPENDIX

A typical Franchise Policy in 7 India (Courtesy Sagar Ratna)

modest effort that started in 1986 spiraled to a revolutionary style growth in culinary delights. Sagar Ratna restaurants have made a place for themselves due to popular demand of a "branded" quality and menu. The reputation carries the revolutionary vision and drive of the legendry Jayaram Banan whose touch endorses the Sagar Ratna quality . Sagar Ratna the flagship outlet at Defence Colony in the capital of India started with a 40 seat south Indian restaurant with the simple philosophy based on honesty Today the . ever growing demand has translated into 24 outlets in and around Delhi and 29 Franchise outlets in India and 1 outlet outside India offering a range of multi cuisine options boast the Jayaram touch. Having won every laurel, every respectable mention in the world of Gastronomy the legend proceeded to the finest , chain of fine dining restaurants with honourable mentions in the media, newspapers and amongst the highest circles. BASIC REQUIREMENTS Space: Approximately 5000 square feet in popular commercial zone preferably ground floor and ample parking space. Experience: Basic knowledge of catering and aptitude for hard work. Transparent business ethics. Investment: Largely dependant on city and class but
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approximately Rs. 52-60 lac. OBLIGATION OF SAGAR RATNA Sagar Ratna will allow the use of its brand name as per usage Manual Give complete know-how for set up of Restaurant Provides specialty raw materials on chargeable basis a per rate schedule OBLIGATION OF FRANCHISOR Entire investment of construction, interiors, air- conditioning, Kitchen, Fixtures, gadgets, equipment, appliances, cutlery, linen in accordance with the specifications stipulated by Sagar Ratna. Procurement of perishables like milk, vegetables, Groceries as per specifications provided. High standards of cleanliness in kitchen, toilets and restaurant shall be maintained along with pest control as per our schedule. Shall observe and comply with all the rules and regulations of the shops and establishment Act, Entertainment Act and regulations that may be applicable by law from time to time, including obtaining licenses as may be required in the state. Manpower/ Management shall be on Franchisee's roll and all related laws shall be honoured in respect of payment of salaries, EPF, ESI, Bonus, Gratuity, Compensation & minimum wages act as may be applicable from time to time. Sagar Ratna will bear no responsibility

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on this behalf. Uniform to be provided to staff as per our specification and design manual. Shall personally be liable for the quality and purity of ingredients used for the preparation of Food and in case any adulteration or defect found used in the preparation of the said food, the Franchisee is personally be liable for civil and criminal action under prevention of Food & Adulteration Act 1954. The Franchisee shall nominate one of representative as per the requirement of Food & Adulteration Act 1954 for this purpose The Franchisee shall be responsible for operational expenses for running the business, staffing and maintain adequate manpower. Shall be responsible for collection and timely deposit of sales Tax/other applicable taxes. Shall maintain books of Accounts as per the requirements of Sales Tax/Income tax and other Government bodies. The Franchisee shall provide bank Guarantee for Rs. 5 Lakhs at the time of signing the Franchise agreement.

ROYALTY/MONETARY IMPLICATION An amount of Rs. 15lacs plus applicable service tax will be paid as reimbursement for staff training expenses at the time of signing the agreement. 15.00% recurring royalty plus service tax as applicable, will be payable monthly on total net sales inclusive of outdoor catering, counter packing, home delivery (exclusive of sales tax). GENERAL The duration of Agreement is initially for a period of 10 years renewable for a further period on mutually agreed terms. The name of the restaurant "Sagar" or "Sagar Ratna" is exclusive Property of the Franchisor, and the Franchisee has no Lien on it. On Expiry of/ termination of the Franchise agreement the Franchisee can not use identical names or their likeliness their-of what-so-ever. 50

The Franchisee or their associates are restricted to open on their own any other similar outlets in the same city or other cities in any part of India. The Menu rates decided by the Franchisor can not altered by franchisee without authorization Sagar Ratna has the right to inspect all books of accounts by its authorized representative. Sagar Ratna has the right to inspect all food items and raw materials through its representatives and point out deficiencies for correction at all times. The Franchisee cannot ever represent as the Franchisor to any Government or other body or individual what so ever for any business promotion or otherwise without written authorization. Any amendment to Franchise agreement has to be in writing with the endorsement of both parties. Any disputes/or differences arising between this agreement shall be settled by arbitration in accordance with the provisions of the Indian Arbitration Act 1940 as amended from time to time. The agreement can be terminated by the Franchisor in the event of any violation of the clauses by issuing one month notice.

SITE VISIT If the Franchisee is satisfied with the above terms & conditions and desires to take up the Franchise, then he shall arrange for the site visit of Franchisor or their authorized representatives for final approval of the site. Before the site visit the Franchisee shall arrange to deposit with Franchisor a Demand Draft for Rs. 30,000.00 drawn in favour of "M/s. Sagar Ratna Hotels Pvt. Ltd." payable at Delhi towards travelling/Incidental Expenses on site visit. It is optional on part of Franchisor either to approve or disapprove the site depending upon the requirements of the business. In case the site is disapproved for any reason the site visit fee of Rs. 30,000.00 paid is not refundable.