Indian Franchise Association (IFA) is India's premier, non-political, not-for-

profit 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.

About us

5

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

Acknowledgement

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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 MATHURManaging Director

Euro Kids International

Foreword

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PROLOGUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

LIST OF FIGURES AND TABLES . . . . . . . . . . . . . . . . . . . . . . . . .15

CHAPTER 1 THE ENTREPRENEUR'S SPUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

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

CHAPTER 3FRANCHISEE PROFILING: A STATISTICAL MODEL . . . . . . . . . . . . . . . . .25

Franchisee profiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

CHAPTER 4FRANCHISEE 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

Contents

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CHAPTER 5FRANCHISEE 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 6THE 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 7TRENDS, OPPORTUNITIES AND FUTURE PROSPECTS . . . . . . . . . . . . . . .48

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

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

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Unanswered questions in the franchise world"If you're in a comfort zone, afraid to venture out, Remember that allwinners were at one time filled with doubt. A step or two and words ofpraise 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 whoowns a franchise business. This speech portrays the confidence andcharisma of the speaker. An entrepreneur who is a franchisor, alwayssearches for a trusty and efficient Partner or franchisees like - a bride'sfather looking out for a bridegroom. The comparison is indeed authenticbecause the franchisor and franchisee relationship is similar to a marriage- long term and symbiotic and trustworthy. Imagine that you have got abrain reading gadget which would display the ongoing thoughts of ahuman brain, if you use it to read the mind of a franchisor you will observefollowing thought universally in his/her mind:-

How should I choose a franchisee for my brand? What qualities andattributes I should look for? What would be an ideal franchisee profile formy 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 woulddo it. But it's not. It takes patience, it takes commitment, and it comes withplenty 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 oneto suggest me with solutions for the issues faced by me? Does franchisorunderstand that I have certain unique challenges for my region? I amperforming extraordinary, but franchisor is not acknowledging the same,so can I leave him at point of time? I have learned all the business; can Igo ahead with my own brand? The questions which the brain reader has given us are the true reflectionsof both the franchisor and franchisee in the franchise world. Are there anyanswers to these questions? The franchise mode of business expansion inIndia is into its growth phase and is catching fast. These questions needsolutions to make the growth of this business mode healthy. This Studyaims to answer these questions and many other queries based on a widesurvey and discussion with seasoned franchisees & franchisors.

PROLOGUE

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It all started on Indian Franchise Association's platform with intellectualinputs by Indian Institute of Management, Bangalore's managementstudents.

It was never easy to provoke thoughts of a franchisee and gather intellectoutput from them, they were busy in their business & overcomingchallenges.

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 firsthand; this was circulated to a database of 1500 franchisees across thecountry. Scope of this study was unlimited so its area of research waslimited to the sectors with maximum pie size in franchising - Education,Food and Retail. A carefully chosen sample of 70 franchisees spreadacross the country from these sectors was interviewed by the team. Theinsights from the in-depth interviews were used to analyze the philosophyof Indian franchisee.

Numbers speak the truth! - The data collected from the survey was fed tostatistical tools like factor analysis and regression to yield meaningfulresults. The results were used to find out a model which facilitates afranchisor to optimize their franchisee search, manage superiorrelationship with its existing franchisees and increase franchisee retention.

THE ENDEAVOUR

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Experts claim that franchising is the fastest growing retailingformat in the world. The International Franchising Association(IFA) predicts that future growth in franchising is likely tocome from developing markets such as China, India,

Pakistan and Russia. This trend is expected to accompany the rapidshifts toward market driven economic reforms.

INTRODUCTION

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India's liberalization begun in 1991, has brought about far-reachingchanges in its economy, the Foreign Direct Investment (FDI) hasincreased sharply boosting business opportunities and leading toexciting entrepreneurial endeavours . Franchising is in the midst of amarket revolution in India and the prospects of the growth infranchising are boosted by an ample supply of energetic, homegrownentrepreneurs making India an exciting market place.

Have you ever wondered how so many IMS institutes are located inevery part of India and provide the exact same kind of faculty andmaterial throughout the country? How management of this hugechain of institutes is executed? And how the systems and humanresource are maintained? The answer is in just one word-"Franchising".

It is through a well managed chain of franchisees operating acrossthe country. IMS acts as the franchisor and provides supervision,training, content and brand name to the franchisees for a fixed feeand royalty. IMS carry a trust of quality education for the studentspreparing for management institutes and as a franchisor theirendeavour is to make sure that same quality of education shall beimparted in all the IMS centers across the country. But challenges arethere in managing this arrangement.

Franchising in India is still in its nascent stage. Only 10% of thebusinesses in India are franchised as compared to 70% in the UnitedStates. Education sector which accounts for the maximum portion ofthe total franchised business in India is only 38% franchised as asector 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 growingaspirations and prosperity of the middle class, changing lifestyles,growing entrepreneurial culture, and the shifting of gears to smallcities and towns. All these factors will lead to the growth of a WIN-WIN partnership between the brand and franchisee.

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In an emerging market like India, the trend of business expansionthrough franchising is gaining popularity and it has now becomecrucial to identify various economic aspects of this business model. Asuccessful franchise business depends on the understandingbetween franchisor & franchisee. For example in education sector wehave seen that various professional course coaching (MBA, Medical,Engineering etc.) franchisees are paying about 35-40% royalty whilea pre-school franchisee and similar franchisees are paying about 15-18% 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 abrand? What are the current trends in the franchising business inIndia? How many franchisees are planning to continue this businessfor a long term and what percentage of them are planning to start uptheir own businesses since they have gained enough expertise andexposure through this opportunity? Who could be an ideal franchisee?These are some of the important questions with which everyfranchisor is struggling. This report has tried to answer thesequestions by analysis including depth interviews, data analysis toolsand behavioral study of franchisees all over India across the majorfranchising sectors Education, Retail, Food and Professional Serviceswhich together constitute 89% of the franchising business in India.

A franchisor has to be observant while selecting an appropriatepartner for his business. On the other hand a franchisee too hasapprehensions and expectations, they want profitability, cooperation,better communication and understanding from the franchisor.

To achieve this, the report lays out a simple framework which afranchisor will follow to filter out the incompatible and unfittingbuyers and hence select the most suitable franchisee. Variouscategories in franchisees have identified like Loyals, switchers andleavers through a structured process. Now the franchisor has to fillfew basic information of the investor like age, education, relationshipwith the employer and similar parameters of in a formula and he willbe able to find out the suitability of the particular franchisee he isplanning to have a deal with.

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LIST OF TABLESTable 1: KMO and Barlett's TestTable 2: Division of Factors into componentsTable 3: Rotated component matrixTable 4: Eigen Values for Factor Analysis

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

LIST OF FIGURES AND TABLES

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One of the embodiments offranchising is "consistency." Thevery term "franchising" has cometo be regarded as synonymous

with consistency. There is a change in thephilosophy of the investor and convenienceis his first preference and franchising hasbecome a very convincing business model forhim to start a business conveniently with allthe primary risks covered.

Why an entrepreneur chooses franchisebusiness model? In order to find out what were the underlyingfactors that affected their decision as anentrepreneur to choose franchise businessmodel, we have asked the respondents to ratethe following factors on a scale of 1 to 5.

V1: Franchising is the safest way tostart a business

V2: Franchising is the best way torun a business

V3: Franchising is the easiest way tostart a business

V4: I choose franchising becausethere is lower risk of failure

V5: I want an established brand thanstarting on my own

V6: There is higher growthopportunity in franchising than

own brandV7: Franchising gives a good

learning experienceV8: I have realized that starting my

own brand would have beenbetter

V9: I choose a franchise that givesme the best return [Profit]

V10: I choose a franchise that suits mypersonality and experience

V11: I have the same interest with myfranchisor

V12: I choose franchising because Iwant to start a brand of my ownlater

Based on the responses given by thefranchisees the above mentioned factorswere analyzed using factor analysis. TheKMO and Barlett's test gives us a SamplingAdequacy value of 0.643 which is greaterthan 0.5 which means that factor analysis isappropriate for analyzing the data.

KMO AND BARTLETT’S TEST

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .643

Bartlett’s Test Approx. Chi-Square 201.545

of Sphericity df 66.000

Sig. .000

Table1. KMO and Barlett's Test

THE ENTREPRENEUR’S SPUR

CHAPTER 1

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Principal Component Analysis (PCA) is thenused with a Varimax rotation and KaiserNormalization. On further analysis theabove variables can be grouped into threemajor components.

The 3 components of motivation behind anentrepreneur's choice of franchising formatfound above could be further assigned thefollowing 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

A franchisee looks for the growthopportunity in the business. He is beingattracted by the return that is being offered byjoining the franchise. There can be three sets ofInvestors on the basis of what they are lookingfor in a franchising business. They are:■■ Business oriented: This is a set of Investorswho choose franchising because it is safe, therisk of failure is low, and the return is alwaysassured. ■■ Short-sighted Investors: This is the thirdset of Investors who are bothered mostly bywhat is being offered in the business. Theirmain interest is the return on the investment.Other set of investors are also interested in theROI but this type of investors gives moreimportance to the ROI than anything else. ■■ Growth Oriented: This set of Investors islooking for a long-term relationship. They aremore concerned about the growth opportunityand the future prospects in the business.

Therefore a franchisor shouldcommunicate clearly what are the growthopportunities available for a franchisee.Monetary gains in terms of profit areimportant, but for an Indian franchisee thegrowth opportunity is something that keepshim in the business.

The following are the factors behind anentrepreneur's preference for a franchisingbusiness format from the franchisor'sperspective:

■ Ongoing operational supportFranchisor has dedicated team to providingongoing assistance to franchisees. A newfranchisee will receive all kind of operationalsupport when they're building and running thefranchisor's brand. The support systemincludes online access to corporate staff andnational network of other franchisee owners.This support is extended through meetings,refresher trainings, annual convention and

Factors Components

Franchising is the safest way to Component 1start a businessFranchising is the best way to run a businessFranchising is the easiest way to start a businessI choose franchising because there is lower risk of failureI want an established brand than starting on my ownFranchising gives a good learning experienceI choose a franchise that suits my personality and experienceI choose franchising because I want to start a brand of my own later

There is higher growth opportunity in Component 3franchising than own brand

I have realized that starting my own Component 2brand would have been betterI choose a franchise that give me the best return [Profit]I have the same interest with my franchisor

ROTATED COMPONENT MATRIXa

Variables Component1 2 3

Franchising is the safest way to start a business .813Franchising is the best way to run a business .797Franchising is the easiest way to start a business .871I choose franchising because there is lower risk of failure .679 .514I want an established brand thanstarting on my own .849There is higher growth opportunity in franchising than own brand .951Franchising gives a good learning experience .824I have realized that starting my own brand would have been better -.856I choose a franchise that give me the best return [Profit] .729 .576I choose a franchise that suits my personality and experience .547 .531I have the same interest with my franchisor .517 .611 .420I choose franchising because I want to start a brand of my own later .763Extraction Method: Principal Component Analysis.Rotation Method: Varimax with Kaiser Normalization.a. Rotation converged in 6 iterations.

Table2. Division of Factors into components

Table3: Rotated component matrix

trade shows etc.

■ Marketing supportMarketing support to a franchisee is veryimportant and the biggest motivation to join afranchise network. More the marketingoptions a franchisor offer, the more effective afranchisee will be in maximizing its business.Most franchisors have the unique ability to

launch large-scale marketing campaigns thatare beyond the reach of individual businesseswithin the franchise. In addition to thegeographic scope of these campaigns (manyare nationwide), the quality of franchisor adsis usually top-shelf - a big plus when competingwith smaller, independent businesses whoseads look substandard in comparison.

■ Bulk buying advantageA franchisee can take advantage of the bulkbuying capacity of the entire system tonegotiate on the prices for everything theyneed at significantly lower levels than theycould achieve as an independent operator. Thisapplies not only to initial infrastructure andequipment purchases, but also to the supplies,inventory, and everything else a franchiseeneed on an ongoing basis.

■ Advantage of Brand IdentitySuccess of each unit in a franchise system, aswell as the overall competitive strength of thefranchise, is due to the presence of strongbrand identification covering both theproducts offered and the services. Andassuming that a significant brand recognitionfactor can be established and maintained inthe minds of consumers, benefits will flow forthe Franchisees

■ Existing Infrastructure Existing infrastructure can be leveraged uponin a franchising option. Distribution,Buildings, machinery, people, systems,customers, suppliers, employees are thebenefits which is received in exiting businessand would give a chance to the buyer toconcentrate on running the business smoothlywith an existing set-up.

■ Immediate cash flow:After starting franchising business positivecash flows is possible in a relatively shortertime due to the already established fame of theexisting brand. It usually takes more than ayear to get the buildings constructed and aproper set-up to be maintained which isavailable beforehand in case of an existingbrand.

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CHAPTER 2

IDENTIFYING FRANCHISEEATTRIBUTES

AN ANALYSIS

Choosing the right franchisee is one of the most importantaspects of franchising. It involves a lot of interactionbetween the franchisor and the franchisee followed by ajudicious decision by the franchisor. Though there are

various ways one can go about choosing a franchisee but afranchisor should try and avoid those franchisees that meet onlya few criterion say for instance financial requirements but failto meet the other criterion that are equally important. Heshould rather have a clear set of guidelines in his mind

detailing the characteristics/ attributes that a franchiseeought to have. On studying the franchisees in India,

the following are the attributes of an Indianfranchisee taken into consideration:

AGEAge is a significant factor thata franchisor looks for in his franchisee. Thereason being it determines the mindset of a person.The cognitive ability of a young person is verymuch different from that of an old person. A young

person would have more ofenergy, vigour and risk takingabilities. While on the other hand, anold person would be more complacent

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and subservient in nature. He might alsolack the zeal to achieve more in life.

EDUCATIONEducation may not be a determinant in abusiness success, but it can be an essentialelement in the overall combination offactors. It is a commonly used selectioncriterion to assess the likely future chancesof success of potential franchisees. However,the franchisee should not be completelyignored for lacking the education factor. Theeducational background of the franchiseesin 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 ofeducation is not just enough; having theright kind of education is more importantand more desirable.

MANAGEMENT SKILLSFranchisors tend to look for franchisees thathave developed certain business andmanagement skills. These skills assist indealing with people, leading a team,communicating with others, managing theoperations etc.

WORK EXPERIENCEPerhaps one of the basic elements that afranchisee should have is prior experience. Itmay or may not be in the related field,though. This would give him an opportunityto make use of his abilities which he hadlearned earlier in his previous job. Inaddition, it would also let him not committhe same mistakes which every amateur isexpected to make on starting a new business(franchise).

FINANCIAL FITNESSHaving adequate capital is necessary tominimize the financial risk associated withstarting a new business. The franchiseemight be required to source any requiredfinancing prior to and after the finalapproval of the contract.

NETWORKING ABILITIESThe ability to network and to managecustomer and business relationshipseffectively forms an important role of afranchisee. Loyalty and trust are vitalfeatures when it comes to managing staffand customers. These need to be maintainedin order for the franchise business tosucceed.

MOTIVATION/FAMILY SUPPORTA strong family support invariably (always)acts as a stimulant for a franchisee to run hisbusiness. It not only motivates him but alsohelps him ease off his strain. The role whicha family plays in making a business asuccessful venture can never be undermined.

RISK TAKING CAPACITYA person may be a high risk taker but thedifference among the risk takers is thatwhether the high risk yielded a return, itmay be a high return or a low return. Oneneeds to have the ability as well as the skill totake risk.

ANALYTICAL ABILITYIt is the measure of the concentration andspecificity of the franchisee. If a person isspecific to every minute detail then there areless chances of making errors or mistakes.

FAMILY BUSINESSFamily business can act as an asset while afranchisee embarks on his journey as anentrepreneur. The involvement of theirbusiness ideas and thoughts andcommunicating with them in respect to thebusiness challenges can sometimes dowonders.

TECHNICAL SKILLSTechnical skills indicate the education of anindividual in specialized field likeEngineering, Law, Accountancy, Finance etc.

PROFIT ORIENTATIONWhat is the expectation of the franchiseefrom the business? It is the return on the

money invested by the franchisee in thebusiness.

A survey was run across on more than 1500franchisees and they were asked to rate thesefactors in their order of preference. These 12variables were further classified or clubbedinto 4 broad factors eliminating themaximum variance among them. These 4factors will now help us decide which factoris the most important for a franchisor tochoose his franchisee.

THE FACTOR ANALYSISThe research has shown that there are fourbroad attributes that are important forbecoming a successful franchisee. Thesefactors are the attributes that differentiateone franchisee from the other. These fourmajor factors are then used to identify theunderlying variables on which to group thefranchisees.

PROFILE/ QUALIFICATIONThis includes age, education backgroundand the experience of the individual. Theeducation background is further categorizedinto basic education, graduation and post-graduation level. The experience of theindividual, be it in the same field or in otheralso forms a part of this factor.

SKILLSThese are the attributes that can be regardedas the scaffoldings required by thefranchisor for running the franchise.Management skills, how motivated theindividual is and the emotional as well asfinancial support of the individual that hereceived from family and friends.

BUSINESS EXPERTISEThis attribute includes the financial status ofthe individual, his analytical skills, his risktaking ability and his profit expectation fromthe business.

INHERENT ADVANTAGESThis includes the family business and the

family support which he receives from timeto time.

From the data analysis we have found theabove values corresponding to each of thecomponent represented by the Englishalphabets A, B, C and D. So we can say that outof these 4 factors the franchisor will give 28%importance to the franchisee's backgrounddetails, 27% focus will be given to franchisee'sskills, 25% to business expertise and theremaining 20% to the inherent advantages.Therefore a franchisor can calculate thefranchisee's potential by the following formula:

The franchisor's consideration forbackground, skills and business expertise isalmost the same. So instead of focusing moreon any one of the factors the franchisor canfocus on all of them equally.

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AgeEducation Profile /Qualification AWork experience

Management skillsTechnical skills Skills BNetworking skills

Financial fitness Risk taking capacity Business expertise CProfit orientation Analytical ability

Family Business Inherent advantages D Family support/Motivation

Fig1: Factor Analysis

INITIAL EIGEN VALUESComponent Total % of Variance % of contribution

A 2.593 23.678 28%

B 2.451 21.996 27%

C 2.317 20.284 25%

D 1.784 10.247 20%

Table4: Eigen Values for Factor Analysis

Investor Potential = .28 A +.27 B +.25 C +.2 DKey*A - Profile/QualificationB - Skills C - Business expertiseD - Inherent Advantages

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There are several ways to project thelong-term behavior of thefranchisee by using variousquestions relating to the

psychological behaviour of the Investor. TheModel developed here has tried to analyze afranchisee on the basis of the most obviousfactors like age, education and previousexperience of the franchisee. We have come up with the following equationfrom our analysis where y is based on thefuture plans of the franchisee

Y=0.311 x1-0.273 x2+0.01 x3+0.232 x4 +0.084 x5

Wherex1 is the previous occupation of the

franchiseex2 is the relationship that the franchisee

has with the franchisorx3 is the years of operation of the

business, if the franchisee is anexisting one

x4 is the present age of the franchiseex5 is the educational qualification of the

Investor or franchisee

From the analysis shown above, theprevious occupation is the most importantfactor in a franchisee's profile followed by thepresent age of the franchisee.

All the variables taken above areconsidered in an ordinal scale. This formulawill help to analyze the riskiness of thefranchisee. It can be used to analyze aprospective as well as an existing franchisee.

HOW TO USE THE MODEL?As mentioned earlier, the variables used inthe formula are to be converted to an ordinalscale. There are three categories for theprevious occupation. The categorizedoccupations of the franchisee are:

Similarly for the other variables they arecategorized as:Previous relationship

Years of operation of the business: (if it is anexisting one)

Occupation CategorySalaried employee 1Self employed 2Student 3

Relationship Category

No relation 1Friend 2Relative 3Employer-employee relation 4Repeat franchisee 5

FRANCHISEE PROFILING: A STATISTICAL MODEL

CHAPTER 3

Years of operation Category

0-1 year 11-5 years 25-10 years 310 and more 4

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Present age of the franchisee

Educational qualification of the franchiseeor the investor

Replacing the variables that the franchiseeor the prospective franchisee has with thecategories and substituting the values in themodel provided will give the riskiness scoreof the franchisee. A franchisee with ahigher score is always more desirable.

FRANCHISEE PROFILINGThe survey has shown that there are certainissues relating to franchisee retention. Froma franchisor's perspective a long lastingrelationship with the franchisee is the mostdesirable aspect. Survey has shown thatthere are a number of franchisees who arenot interested in a long lasting businessrelationship with the franchisor.

Based on the interviews and analysis,we came to know that the following are thevarious options present before a franchiseewhich make their retention by the franchisora difficult task:

■ Franchisee leaving the brand andtaking a new brand: There is a trend thatdue to stagnancy in sales or the brand valuegoing down, franchisees close their previousbrand franchisee and set up a new franchiseeof some other brand. This leads to a decrease

in the franchisors' business and provides apotential risk.

■ Franchisee starting own business: Afranchised outlet provides the properexperience and exposure which is needed toestablish one's own business. Once you get toknow the nitty-gritty of an existingsuccessful brand you gain the confidence forestablishing your own business and that'swhat a franchisee does and provides risk tothe franchisor.

■ Franchisees going into service sectorfrom franchising: A very rare possibility isthat the franchisee leaves the franchisingbusiness altogether and goes into a salariedjob. It occurs very often with thesefranchisees that have jumped from servicesector to franchising. Those who are from thepremier schools like IITs and IIMs are morelikely to get a job which pays them more thanthe franchise and hence move out to theservice sector.

After discussing various options in front ofthe franchisees and analyzing their profilemathematically, we can now divide thefranchisees into following categories:

❖❖ SWITCHER: A type of franchisee whowill switch from the existing brand to afranchise of some other brand. The followingare the characteristics of such a franchisee:

◆◆ This franchisee is not satisfied bythe growth opportunities, thestandards or the return oninvestment provided by thecurrent franchise.

◆◆ They always crave for new ideas,want to set their own rules, keeplooking for other opportunities.

The major features of such franchiseesare:✮✮ Age: The lowest range, the age

bracket of 20-30 years.✮✮ Education qualifications: Highly

educated-Charted Accountants, IIT,IIM graduates.

Qualification Category

Matriculation 1Graduate 2Post Graduate 3

Age Category

<20 years 120-30 years 230-40 years 340-50 years 450-60 years 5>60 years 6

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✮✮ Prior experience: In terms of priorexperience they are quite at thelower side.

The franchisor can retain him by providingproper incentives, working environment,variety in work and some amount offlexibility.

❖❖ LOYAL: Those franchisees that will notleave a franchise and will continue samebrand and take other franchises for the same

brand. The following are the characteristicsof such a franchisee.

◆◆ They want a safe business i.e., theone they are already experiencedin and believe in.

◆◆ They make the franchising formatsuccessful by reaping a goodamount of profit out of it.

The major features of such franchiseesare:✮✮ Age: They are mostly in the late

years of their life, around 40-45years of age.

✮✮ Education qualifications: Theseinclude lower education bracket,those who work hard and strive toprove their worth.

✮✮ Prior experience: They areoperating for a long period infranchising and have gained thetricks to become successful in thisbusiness.

Fig2: Age range of switchers

Fig5: Age range of loyals

Fig3: Educational background of switchers

Fig4: Previous occupation of switchers

Fig6: Educational background of loyals

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These are the most loyal customers forfranchisors and hence good prospectivefranchisors.

❖❖ LEAVER: A third category is of leaverswho include those franchisees that will leavefranchising altogether to start their ownbusiness or become an employee of somecompany. The following are thecharacteristics of such a franchisee:

◆◆ They have lost their faith infranchising model or have some

dire necessity like extreme losses.◆◆ They want to get out of the system

and are trying to wrap up theirfranchises.

◆◆ The major features of suchfranchisees are:✮✮ Age: The middle range, the age

bracket of 35-45 years.

✮✮ Education qualifications:These include Post graduatesand graduates, who arequalified enough to take up asalaried job and have earnedmoney and experience to startup their own business.

✮✮ Prior experience: They have afair amount of work-experiencein franchising as well as otherfields.

A franchisor can't stop such type offranchisees who have already made up theirminds to leave. These are categorized as themost risky franchisees.

Fig7: Previous occupation of loyals

Franchisees move throughphases of growth,development, maturityand decline. This

lifecycle is same for mostbusinesses, however, infranchising, the resourcesavailable to a franchisebusiness network to plan aninclusive offering is generallyable to ensure the ongoingsignificance of the franchisebrand and franchise businessmodel, effectively extending thebusiness lifecycle and providinglongevity in the market.

An entrepreneur who has opted toexpand through franchise is like head

of the family wherein hisfranchisees are his familymembers. Unlike a family everyfranchisee is different from theother but share a common brandand business model. Thefranchisor & franchiseerelationship is always a matter

that requires regular attentionfrom both the ends.

To understand and explore afranchisee franchisor relationship and

recommend best practices to be adoptedby a franchisor, we have to first

understand the life cycle of afranchisee, his challenges and

CHAPTER 4

FRANCHISEE LIFE CYCLE: Key to franchisor-franchisee relationship

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

FRANCHISOR SUPPORT Franchisor's support to the franchisee makesa big difference to the franchisee's own lifecycle. High levels of support early in thefranchise relationship will accelerate afranchisee's growth and facilitate their earlymaturation. Similarly, support provided byfranchisees to one another adds strength tothe franchise business network and alsoassist in the early maturation of each other'sfranchise businesses.

Franchisors usually find that the natureof support provided to a franchisee during thecourse of their lifecycle in the franchisebusiness changes from highly technical andoperationally focused at the start, tomanagement, financial and marketingexpertise as the franchisee matures.

FRANCHISEE LIFE CYCLEThere are five important stages in the lifecycle of a franchisee. These are:■ Search phase■ Joining phase■ Growth phase■ Maturity phase■ Closure phase or extended growth phase /

Critical phase

SEARCH PHASEIn this phase the unit is an entrepreneur andhe needs to go through the necessaryintroductory stage to ascertain whether ornot this is the correct time, product, and/orservice to begin operating a franchised unit.There are various ways in which anentrepreneur looks out for a suitablefranchise. In India, most of the franchiseesapplied directly for the franchise throughInternet. A franchisee gets to know of thefranchise through close friends, or closebusiness associates. Around 20% of thefranchisees get to know of the opportunitythrough his brother or family members. Atypical Indian entrepreneur rarely consultsan existing franchisee before taking thedecision.

REVENUE

TIME

Fig8: Franchisee Revenue vs. Time (General case)

Fig9: The Franchisee Lifecycle

Fig10: Reference Sources for franchisees

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■ Strong brand name is the luringfeature which attracts most of thefranchisees-so the first step forevery franchisor or everybusinessman for that matter tofollow is brand promotion and allother things will follow.

■ Websites of various brands are thetopmost resources which theprospective franchisees use to gaininformation about the brand andfranchise information.

■ Brand promotion events are alsoways through which franchiseescome to know about the differentbrands.

■ Relatives and friends' advice who arein the same business is usuallyconsidered to be a reliable source.

Very rarely they contact the existingfranchisees of the brand to know about thefranchisor unless they are their relativeshaving franchisees of the same brand.Generally, this phase lasts from one month toone year.

JOINING PHASEIn this phase the franchising deal is signedbetween the franchisor and the franchisee.This phase may last from one month to twoyears depending upon the type of business,the agency helping them to strike the dealand the franchisee.

Generally, this phase is completedwithin a short period of time in adomestic/single-unit franchise and may takelonger in an international/multi-unit/masterfranchise. This is the most potential stagewhen the franchisee's enthusiasm is at itspeak. To help maintain the level ofenthusiasm, it is therefore advisable to strikethe deal in a short span of time.

GROWTH PHASEThe growth stage occurs from the time of thegrand opening generally through the firstyear or two of operations. At this time, thefranchisee works very diligently in order to

develop a strong level of businessperformance for their unit. The initialbusiness volume of the unit may be off and itmay require several months of diligent effortto properly promote and develop. Otherorganizations may begin very rapidly andare forced to struggle to maintain a highinitial business volume. The growth stageoften levels off after a period of severalmonths or a few years.

MATURITY PHASEIn the S-curve, this phase appear when thegrowth stabilizes. The growth has come to apoint when it is steady and the scope ofgrowth in the franchise is limited. Thefranchisee will often meet with thefranchisor to discuss different products orservices which will enhance the volume ofthe business.

The franchisee may seek to increasethe sales level through the addition of newproducts or expanded services. It is thisphase when the level of franchiseemotivation could be significantly affected;the volume of the business remains more orless the same.

DECLINING PHASEDuring the declining stage, the franchiseegenerally starts to relax their compliancewith the rules, regulations, and standardswhich have been established by thefranchisor. Franchisees who have becomedissatisfied with the franchisors often seekto terminate the franchise. Alternately, thefranchisor may realize the problem and seekto provide remedies as solutions.

The franchisor may improve thecommunication and may be able to providegreater services and more value to thefranchisee. The franchisor may developadditional promotional, marketing, andadvertising programs which enhances thefranchisee's opportunity for success.

The franchisor then has the opportunityto turn around the franchise business and toinstill within the franchisee, once again, the

desire for mutual success and prosperity.

UNIQUE CASEFranchisee performing extraordinarywell during its lifecycleFranchisees showing strong entrepreneurialtendencies and doing extraordinary businessare a boon to the franchise but at the same timepose a challenge of retention in the system.These are franchisees whose performance ismuch above the average franchisees and havean exponential growth at this stage. Thefollowing figure depicts the stage in thelifecycle where such a condition occurs.

Life cycle of an extraordinaryperforming franchisee is different and theybecome critical much before the decliningphase (as shown in the figure) and requirespecial attention from the franchisor.Identifying these players in the early growth

phase is very important. A franchisor couldinvite them to participate in a bigger role inthe system and thereby satisfying theirentrepreneurial skills.

The franchisor should do everythingto make its star performer franchisee realizethat their role is of prime importance to thefranchisor, and that such an outstandingperformance is acknowledged andappreciated by the franchisor. Followingcould be the possible initiatives

■ Elevating franchisee status to amaster franchisee: Addingresponsibility of developing theregion and recruit individualfranchisees under its supervisionby providing all training andsupport they need would be anincentive for the outperformer.Being a master franchisee is bothprestigious and it leads to financialindependence.

■ Inviting them for policy makingprocess: The franchisor can inviteperforming franchisees tocontribute in the policy makingprocess of the whole system. Itwould inculcate a sense ofresponsibility; importance andmotivate them to explore theirpotential.

■ Acknowledging theperformance & preferentialtreatment: Franchisor shouldacknowledge the performance ofhis franchisees, especially thosewho are performingextraordinarily well. Thisacknowledgement should be donein the meetings in the presence ofall the franchisees. A preferentialtreatment to the franchisee'srequirement would be a greatmotivation.

■ Offering Shareholding: This isthe most important policy decisionfor a franchisor, making itsfranchisee shareholder in thecompany. If the franchiseebecomes indispensible and

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Fig11: Fate of a franchisee after the declining phase

Fig12: Case of an Extraordinary Franchisee

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demonstrates extraordinaryentrepreneurial skills, it becomescrucial to retain this unit and theentrepreneur in the system. Thisunit later become a leader to otherfranchisees in the system and maysoon consider detaching itselffrom the system due to the simplereason of higher aspirations,lesser freedom and revenues orbetter opportunities. At thisjuncture offering shareholding inthe company would be anappropriate solution and a Win-Win situation for both the players.

Franchisor-Franchisee relationship: Apart from the above mentioned suggestionswhich are for an extraordinary performerwho need extra attention, there are certainpractices which a franchisor can do toenhance and develop the franchisee/franchisor relationship. ■ Sharing the Vision: Franchisor shouldshare the personal vision of opportunity andsuccess which the franchise system offers. Afranchisee being a family member of thefranchise system, deserve to be a part of thevision, which will becomes a life-long projectfor them. This vision should include a highdesire to receive the rewards of one's work.This shared vision will become the focalpoint of the franchisee/franchisorrelationship as they build to mutuallydevelop in a harmonious and successfulfranchise experience.■ Active Communication: A regular line ofcommunication from the franchisor acts as aguiding light for the franchisee. They oftenseek to develop new products or serviceswhich might enhance the growth andprosperity of the business. Thiscommunication line would facilitate a bi-lateral flow of information therebyimproving the franchisor -franchiseerelationship. This communication could bein the form of mails, letters, newsletters,conference calls, video conferencing etc. ■ Passionate marketing support: A

franchisee requires effective marketpresence of the brand both on a local andnational basis. A balanced marketing andbrand positioning strategy would helpfranchisee to reap the gains. Franchisor'sbalanced strategy to address its national andregional players equally is a fruitfulrelationship building exercise. ■ "Total" Training Program: Training isthe fundamental ingredient of a strongfranchisee/franchisor relationship. Almostall franchisees require initial training tostart the business. In addition, refreshercourses, as well as new training programsshould be provided to help improve theabilities of the franchisees and thefranchisees' staff. Franchisees often aredesirous of obtaining self-improvementprograms for themselves as well as for theirstaff. The franchisor should provide trainingand improvement programs which willenhance the abilities and capacities of thefranchisee. ■ Developing & sharing an aggressivegrowth plan: Both the franchisee and thefranchisor desire the company to grow, albeitsome franchisees are ambitious and wouldlike to become multi-unit franchisees afteropening their first unit. They would like toopen a second or third unit in the same cityor state. Franchisor should be able to offer aplan for growth so that they can induce theenthusiasm of a vibrant and growingorganization in the franchisee. Growth is anelixir to the desires and appetites of peoplewishing to become better.

For a franchisor, it is important tomanage franchisee relations in order to aligntheir expectations and perceptions. Mostlyperceptions play their role in a different wayand higher expectations are not fulfilledeasily but a healthy and ongoingcommunication with all other measuresmentioned above would help franchisor tokeep the francisee motivated and ultimatelylead to the overall growth in business.

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CHAPTER 5

FRANCHISEE MOTIVATION-Understanding challenges1

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

Motivation in franchisee lifecycle A human being, at different stages of his life,has different moods and motivation levels.Sometimes he feels motivated to dosomething great in life and achieve success.At other times he feels dejected. Thefranchisee, ultimately, has humancharacteristics and so his motivation levelundergoes various ups and downs. Forinstance, the motivation level begins toincrease during the initial phase when thefranchisee is on the lookout for a newopportunity. After being in the joining phasefor some time, the motivation level begins todecline. This is because it takes time for thebusiness to breakeven. After crossing thebreakeven, the franchisee now begins tomake profits. This acts as a propeller andbrings him to the zenith of motivation level.

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

Mo

tiva

tio

n le

vel

GROWTH PHASE MATURITY PHASE

JOINING PHASE INITIAL PHASE

Motivation curve

Fig13: Motivation curve for a franchisee

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❖ INADEQUATE COMMUNICATIONBY FRANCHISOR

As already stated the franchising business isa relationship between two parties and forthe success of franchising a propercommunication and understanding isrequired from both the sides. But the lack ofeffective, honest and open communicationleads to chaos and differences between thetwo. For instance, often it is seen that thefranchisor doesn't communicate to thefranchisee his decisions in respect to thecontract, policies, royalty etc owing to whichthe business at the end suffers a setback.Hence, a continuous effort should be made tofix the communication breakdown, if itexists. It should however be noted thatcommunication not only involves the passingof the decisions but also motivating thefranchisee and exchanging ideas with him.Let us now be enlightened with the help of agraph on how a good communicationchannel can help a franchisee flourish.

In the initial stage of the relationshipbetween franchisee and franchisor theresponse by franchisor is at its maximum. Heprovides him all the required informationand keeps visiting the locations till thecontract is signed. Once the franchisor isassured of the agreement and royalty fee, thelevel of support provided by him decreases,which leads to a slight decrease in themotivation level of the franchisee. So, fromthe point where the agreement is signed thecurve splits into 3 parts.

The repercussions of a situation shown inpart 3 can be fatal for the franchisor as wellas for the franchisee. A successfulfranchising business requires the franchiseeto be motivated at every stage of the life-cycle. For this a franchisor has to remainalert and attentive towards the variouspsychological needs of the franchisee.

The franchisor should -■ Manage a line of communication

through various means like conferencecall, mails, personal visits etc.

■ Identify the stages where the franchiseeneeds maximum support whichnormally happens to be just before thelaunch period and after the maturityphase.

■ Share success stories and sales data ofother franchisees.

■ Maintain a healthy relationship withthe franchisee through:◆ Regular visits to the franchisee

unit.

Mo

tiva

tio

n le

vel

GROWTH PHASE MATURITY PHASE

JOINING PHASE INITIAL PHASE

Motivation curve

1

3

2

Branding Agreement Launch Negative sales

Fig14: Franchisee classification based on Motivation levels

■ The first curve throws light on the most commonlywitnessed situation when the franchisor's supportdecreases slightly and so does the motivation level.Nevertheless, the franchisee is still able to maintain acertain level of growth.

■ The second situation arises when a lot of support isprovided from the franchisor's side and the franchisee isalso motivated enough to keep the level of the sales andprofit high enough. Though a slight decrement in themotivation is observed when the business reaches thematurity phase and the sales become saturated.

■ The third case shown in the curve is a very avoidablesituation. The franchisor becomes complacent after theagreement and the receipt of a percentage of franchisingfees. He stops paying heed to the various issues of thefranchisee. Whereas the franchisee, being at the crucialstage of his business, has to make arrangements foropening the outlet, maintaining enough supply, managingthe staff etc. During this phase he does not get enoughsupport and assistance from the franchisor

During the launch, if he is unable to get a good businesswhich is quire possible then his motivation level isdecreased further. This acts as a disincentive effectleading to a loss in business and finally in the depths ofdespair the franchisee decides to quit.

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◆ Regular interaction with themanagement team that takes careof the individual franchisees.

◆ A consulting firm that will acts asa facilitator between franchisorand franchisees.

❖ THE ROYALTY2

High royalty can severely affect the profits ofthe franchisee, especially during its initialyears. And it will be the biggest hinderingfactor during the maturity of a franchisee.The percentage of royalty varies across thesectors from as high as 40% of the gross

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

❖ STAFF TRAINING & ATTRITIONStaff attrition or turnover rate is the ratio ofthe number of employees who left in the yearto the average number of employees in theyear, multiplied by 100. One of the biggestissues franchisees face is to identify andretain good employees. However, it is veryhard to attract new applicants if a company'shigh turnover rate is a common knowledgeamong people.

He would be demoralized because hewould be compelled to pick up the slack ofthose employees who either left or wereterminated. He may also have to deal withthe stress of welcoming the new employees,only to lose them a few weeks later.

Fig15: Maximum Royalty across Sectors

Fig16: Attrition Rate across sectors

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. Itinterrupts the inner working of anyoperation; it makes managing harder, and itleads to exuberant cost. Restaurant attritionrate is one of the highest in business, whichis why most dining establishments arealways on a hiring spree. They do not evenhave proper training procedures but justkeep on employing new people.

Some restaurants lose up to 40 percentof 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 unorganizedchaos which is often witnessed in foodindustry. In addition, new employees feel thatthey are being set up for failure instead ofsuccess. Next to food sector is the retailfranchising where the attrition rate is closeto 30%. Both retail and food sector employslow quality labor. The salary is also verymeager and almost the same for all thebrands. So there is a tendency to switch evenif a small increment is offered in any otheroutlet.

Thus, it is very essential for a companyto leave a good and long lasting impressionon its potential employees because if theemployees do not feel themselves an asset,then will go to some other better place.

❖ SHRINKAGEA common problem that bothers thefranchisees the most is the shrinkages andpilferages. It is the difference in the value ofstocks as per books and the value of actualstock at the store on any given date. Theaverage shrinkage in the retail industry isabout 2% of the sales. Here are the fourmajor sources of inventory shrinkage inretail.■ Employee Theft: One of the biggest

sources of shrinkage in a retailbusiness is internal or employee theft.Some of the types of employee theftinclude discount abuse, refund abuseand even credit card abuse.Unfortunately, this is one important lossprevention area that generally doesn'treceive as much monitoring as

customer theft.■ Shoplifting: The second form of

shrinkage is shoplifting. Customer theftoccurs through concealing goods,altering the price tags, or transferringthings from one container to another.While shoplifting remains a smallerinventory loss source than employeetheft, stealing by shoppers still costsretailers a large amount of money.

■ Administrative Error: Administrativeand paper work errors makeapproximately 15% of shrinkage.Simple pricing mistakes can costretailers quite a bit.

■ Vendor Fraud: The smallestpercentage of shrink is vendor fraud.Vendor fraud spans a broad range ofabuse - from fraudsters who createfictitious companies and submit billsfor payment to trusted suppliers whopad invoices and charge you more thanthey are due. Vendors involved infraudulent activity may even colludewith your own employees to help themnavigate through your company'sinternal controls.

❖ CANNIBALIZATIONMany franchise operations generally face theissue of ‘cannibalization’, the tendency fornew franchise operations to becomesuccessful, in part or in whole, merely by‘stealing’ business from existing franchisesin the same market. It's an issue of vitalconcern existing franchisees. Someinterviewees mentioned the competitionamong franchisees of the same brandresulting due to concentration of franchiseesin the same area/ region.

■ Case Study: An example showing howto approach the challenge ofcannibalization is presented by aJamshedpur franchisee wherein 5similar schools were opened by a singlebrand in the same city. The schoolbrand X had only one franchisee ownedby Mr. A. in Jamshedpur in the year2008. It was a famous brand, the

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franchisee was successful. The problemstarted when the area developedeconomically the franchisor allotted 4more franchisees in the same region.The revenue and profits declinedsignificantly for A and at one point hehad to face losses in the business too.

■ Solution: Mr. A handled the issuetactfully and decided to have a meetingwith the other franchisees in the regionand suggested them to share their localmarketing costs and they also dividedtheir geographical territories.

So from then onwards admissionswere based on the residence of the student, ifthe student was not in the defined territoryof one franchisee he was referred to thefranchisee nearer to the student's residence.This was adopted by the other franchisees

and the competition reduced significantly. Thus the issue of cannibalization can

be addressed decently by the cooperationamong franchisees. The franchisees, insteadof competing with each other could sharetheir operation costs and territories to makea Win-Win situation for the brand.

❖ IRRESPONSIBLE FRANCHISEESThere are franchisees that compromise onthe quality of products and services in orderto reduce costs, harming the brand image aswell as other franchisees' business.Franchisors provide standardized products/services and detailed guidelines foroperations, but some franchisees do notimplement them thoroughly andconsistently primarily due to impropertraining or they want to save on costs andthis leads to inconsistency in the operations.

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ABOUT THE SURVEY An extensive survey was conducted toanalyze an average Indian franchisee'sbackground which includes its age,education, family background, averageroyalty he is paying, his aspirationsregarding the business and loyalty towardsthe franchisor.

These franchisees belong to differentsectors and geographical regions in India.

Major business verticals were food, retail,education, real estate, telecom, financialservices etc. and franchisees from Metrocities like Delhi, Mumbai, Bangalore, Tier-Ilike Hyderabad, Ahmedabad Tier-II likeJaipur, Indore, Goa and Tier III like Jodhpur,Varanasi, Nasik etc were included for thesurvey purpose. Apart from online survey,personal interviews and telephonicinterviews were conducted to collate thedesired information.

CHAPTER 6

THE INDIANFRANCHISEE SURVEY

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Some of the important brands whotook part in this survey were Subway,Koutons, IMS, Kid-Zee, EuroKids,Aptech, Veta, Sagar Ratna, Puma, Levis,Raymond's, Bachpan, Liliput, AdityaBirla Retail, Titan Industries Ltd,Vodafone, Zee interactive learningsystems, Shaadi.com, Cox & Kings,Reliance Money, Fab Mall, K Jewellery,Educare, Aptech,

The following is the qualitativeanalysis which provides the key insightsabout franchisees in India:

❖ IDEAL AGE OF A SUCCESSFULFRANCHISEE

It is interesting to note that 18% of the totalfranchisees were owned by investorsbelonging to the age group of 20-30 years anda major chunk of 48% of the franchiseesbelong to the age group of 30-40 yrs, 22%belongs to 40-50 yrs and only 12% were morethan 50 years.

■ An ideal successful franchise ownerbelongs to the age group of 30 - 40 years.

■ The young franchisees being aggressiveand speculative in nature often feelrestrained by the rules & regulationslaid down by the franchisor. They desireto start their own business after gainingsect oral experience and this trend wasprominent in food service franchiseesas they believe the franchisor'sstandards were stringent and acting ashindrance to their business acumen.

Fig17: Age group of Successful Franchisee

Age Group 30-40 Years

Age Group 40-50 Years

Fig18: Sector-wise age group

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■ Next step of the analysis suggested inthe age group of 30-40 years majority(40%) of the franchisees were ineducation sector and the otherprominent sectors were Food & Retail(total 40%).

■ The interesting fact about the olderfranchisees owners of 40-50 years wasthat 73% of this group prefers educationfranchisee that too in pre- school andprimary school franchisee. Makingthem an ideal target audience/ investorfor pre-school and other educationfranchisors.

Recommendation■ Ideal franchisee/ investor in franchise

business belong to the age group of 30-40 years; therefore it is recommendedthat a franchisor should preferprospective investors belonging to thisage group.

■ Older (40-50 years) investors have moreinclination towards education (pre-

school/Primary education) franchisehence should be given preferenceamong the other investors.

❖ IDEAL EDUCATIONALBACKGROUND FOR A FRANCHISEE

According to the survey, 54% of thefranchisees are post graduates followed bygraduates who constitute 31% of the pie.

Fig19: Educational qualification of Franchisees

Educational qualification

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It is important to note that 58% of thepostgraduate franchisee belong tomanagement studies which includesMBA/PGDBM or similar degree with

specialization in finance, marketing,operations retail and food technology.

Recommendation■ Post graduate degree in management

creates good Franchisee/Investors. Butwe would like add a caveat here; theseare the first to move out of thefranchisee system because they havemore options available. (Please referChapter 3 for more details). A healthyfranchisor- franchisee relationship iscrucial to retain them.

■ Second biggest category is‘professionals’, who are potentialinvestors in specific sectors likepharma, financial services, technologyetc. For a franchisor from any of thesespecific categories, it is important toidentify/choose investor from theprofessional category.

❖ FRANCHISEE ROYALTY Royalty is the most important question froma franchisor's point of view and is crucial forthe sustenance of a franchisee. Royalties arepaid for the continuous use of a piece ofwork and it is in addition to any one timeinitial fees. The payments are usually lowerthan upfront fees since they are a continuousregular expense. With regard to franchiseroyalty payments, the franchiseeexperiences daily sales as his or her mainsource of revenue. However, the regularmonthly/quarterly income that thefranchisor earns is based on royaltypayments from each franchisee. Therecurrent royalty fees are the essencecontributions to the entire organization. Thepayments are used to maintain the systemand ensure that all avenues flow smoothlybetween the franchisor and franchisee.

It is difficult to find out the exactroyalties paid by the franchisees in varioussectors but based on the survey findings,following chart would provide a fair ideaabout the range of royalties paid in differentsectors. These royalties are based on thebrand value, location and industry sector. It is quite evident that royalty range for a

Post graduate profile

Fig20: Streams of Post graduate franchisees

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Professional Coaching pan industry variesmaximum from as low as 10% to as high as48% of the gross revenue. On the other handthis fluctuation is less in other industryverticals. RecommendationA business format franchisor's key part ofrevenues comes from franchise royalties,which are typically a fixed percentage offranchisee gross sales/ revenue.

When a fixed royalty rate is used andthe marginal costs of operating thefranchisee system are increasing, thefranchisee does not have an incentive toincrease revenue beyond a certain ‘optimal’value. Also after a certain time period(saturation), franchise owner is notmotivated to renew the contract on the sameroyalty rates, at this juncture he needs an

incentive to continue because he has alreadygained the business expertise and theaspirations to earn more are higher. Atelescopic franchise royalty rate3 istherefore suggested, for giving him a scope toincrease the optimal revenue which will alsoact as an incentive for the franchisee torenew the contract. Adopting a telescopicrate increases franchisor royalty revenuesand franchisee profits.

❖ IDEAL TIME FOR CONTRACTTERMS REVIEW 4

The concept of franchising itself is new tothe Indian market. Majority of thefranchisees are within the first decade oftheir operation. 52% of the respondents ofthe franchisee survey were in their 1-5th yearof operation. This shows that the franchiseFig21: Range of Royalty across sectors

Fig22: Telescopic franchise royalty rate

3 Gradual decrease in the royalty rate with the time4 Based on primary survey findings

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business model is in its nascent stage in thecountry.

The interesting fact that came up insurvey was that out of those respondents whowere in their 1-5th year of operation 48% wereplanning to setup their own business or wantto quit from franchise business model becauseof the issues/challenges they have faced.5

Further, majority (38%) of thefranchisees who were planning their ownsetup are in their 4-5th year of operation.

This shows that the franchisees arebecoming critical in their 4th to 5th year ofoperations. This year of operation is henceimportant for a franchisor to concentrate ofthe relationship with its franchisee. Thiscould be the ideal time period to review thecontract terms to increase the franchiseeretention.

5 Please refer Chapter 5 "Franchisee Motivation: Understanding the challenges

Years of Operation

Year-wise break-up

Future plans

Fig23: Years of Operation and Future PlansFig24: Year-wise break-up of 1-5 years of Operation

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❖ FRANCHISOR- INVESTORRELATIONSHIP

The survey came across a unique findingthat says that majority (64%) of thesuccessful franchisees have no personal orprofessional relationship before they haveentered in the contract with franchisor. It was also noticed during the interviews thatthose franchisees that have any personal orprofessional relationship with the franchisorare less successful in business operations.

Out of those who are planning to continue80% are not related to the franchisor whileonly 5% were the employees of thefranchisor. Similarly among those who wantto start their own business 50% wereemployees of the franchisor. So, it's not asurprise that franchisors should be aregiving their franchises to those who are notin any way related to them.

During the discussion withrespondents we have found that doingbusiness with relative or friend is never agood choice because:■ You will not have a properly negotiated

contract with them and franchisingbusiness, deciding about royalty etc. isall about negotiating.

■ The relatives and friends may not takethe terms of contract seriously and theywould take the business for granted.

■ It may lead to disputes in relationshipwhich is not good for either party.

❖ SALARIED VS. SELF EMPLOYED

From the survey, 70% of the franchisees weresalaried employees earlier. So it is quite clearthat salaried employees are more attractedtoward franchising business model ascompared to businessmen or fresher. The reason is that the salaried employees arerisk-averse and they are comfortableworking in a set up where system is set.

Recommendations: While selecting afranchisee, the salaried employees should begiven preference over non-salaried onesbecause they will not take the risk ofstarting their own venture.

Previous RelationshipPrevious Work Experience

FUTURE PLANSRelationship Change your Continue with Do not want Set up a new Total

franchisor same franchisor to disclose business

Employer-employee relation 25.00% 10.00% 25.00% 28.60% 20.40%

Friend - - - 9.50% 3.70%

No relation 25.00% 80.00% 50.00% 57.10% 63.00%

Relative - 5.00% 12.50% - 3.70%

Repeat franchisee 50.00% 5.00% 12.50% 4.80% 9.30%

Total 100.00% 100.00% 100.00% 100.00% 100.00%

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More than eighty percent of therespondents interviewed arelooking for an expansion oftheir operation. The survey has

shown that a franchisee who owns an outletwould like to expand the business by takinganother franchise from the same franchisor,from a different franchisor. Thirty-eightpercent of the interviewees indicated thatthey would like to expand mainly throughself-owned outlet while preserving theexisting franchise. Another thirty-fourpercent of the franchisees interviewedwould like to continue with the samefranchisor. At the same time they would liketo increase the number of outlets from thesame franchisor. In sum, the growth of thenumber of self-owned outlet would be fasterthan a franchised outlet in the next fewyears.

The survey also shows that there areinstances where there is forwardintegration6 by the franchisor. Franchiseeslocated in prime locations and in metro citiesare more prone to a being bought back.

Even though majority of thefranchisors provided standardizedprocedures and detailed standard operatingprocedure, standardization is notimplemented thoroughly across thefranchised outlet. There is need to ensurethat the operating procedure is standardizedirrespective of the type of business thefranchise deals with. In terms of the endproducts or the service rendered, it can beeither customized or standardized. In foodand beverages franchise, customizedproducts are catching up fast. In educationsector where the materials are standardized,customized material for the student creates awhole new opportunity of standardizedoperation with custom products.

The industry has a strong growthmomentum and most franchisees are quiteconfident about their growth prospects.Therefore, we have reasons to expect thatfranchising in India will continue to grow.

CHAPTER 7

TRENDS, OPPORTUNITIESAND FUTURE PROSPECTS

6 Franchisor acquiring the franchisee

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Amodest effort that started in 1986spiraled to a revolutionary stylegrowth in culinary delights. SagarRatna restaurants have made a

place for themselves due to popular demand ofa "branded" quality and menu. The reputationcarries the revolutionary vision and drive ofthe legendry Jayaram Banan whose touchendorses the Sagar Ratna quality.

Sagar Ratna the flagship outlet atDefence Colony in the capital of India startedwith a 40 seat south Indian restaurant with thesimple philosophy based on honesty. Today theever growing demand has translated into 24outlets in and around Delhi and 29 Franchiseoutlets in India and 1 outlet outside Indiaoffering a range of multi cuisine options boastthe Jayaram touch.

Having won every laurel, everyrespectable mention in the world ofGastronomy, the legend proceeded to the finestchain of fine dining restaurants withhonourable mentions in the media,newspapers and amongst the highest circles.

BASIC REQUIREMENTSSpace:Approximately 5000 square feet in popularcommercial zone preferably ground floor andample parking space.

Experience:Basic knowledge of catering and aptitude forhard work. Transparent business ethics.

Investment:Largely dependant on city and class but

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 thespecifications stipulated by Sagar Ratna.

■ Procurement of perishables like milk,vegetables, Groceries as perspecifications provided.

■ High standards of cleanliness in kitchen,toilets and restaurant shall bemaintained along with pest control as perour schedule.

■ Shall observe and comply with all therules and regulations of the shops andestablishment Act, Entertainment Actand regulations that may be applicable bylaw from time to time, includingobtaining licenses as may be required inthe state.

■ Manpower/ Management shall be onFranchisee's roll and all related laws shallbe honoured in respect of payment ofsalaries, EPF, ESI, Bonus, Gratuity,Compensation & minimum wages act asmay be applicable from time to time.Sagar Ratna will bear no responsibility

A typical Franchise Policy inIndia (Courtesy Sagar Ratna)7

APPENDIX

7 http://www.sagarratna.in/Franchisee.php

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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 thepreparation of Food and in case anyadulteration or defect found used in thepreparation of the said food, theFranchisee is personally be liable for civiland criminal action under prevention ofFood & Adulteration Act 1954.

■ The Franchisee shall nominate one ofrepresentative as per the requirement ofFood & Adulteration Act 1954 for thispurpose

■ The Franchisee shall be responsible foroperational expenses for running thebusiness, staffing and maintain adequatemanpower.

■ Shall be responsible for collection andtimely deposit of sales Tax/otherapplicable taxes.

■ Shall maintain books of Accounts as perthe requirements of Sales Tax/Incometax and other Government bodies.

■ The Franchisee shall provide bankGuarantee for Rs. 5 Lakhs at the time ofsigning the Franchise agreement.

ROYALTY/MONETARY IMPLICATIONAn amount of Rs. 15lacs plus applicableservice tax will be paid as reimbursement forstaff training expenses at the time of signingthe agreement. 15.00% recurring royalty plusservice tax as applicable, will be payablemonthly on total net sales inclusive of outdoorcatering, counter packing, home delivery(exclusive of sales tax).

GENERAL■ The duration of Agreement is initially for

a period of 10 years renewable for afurther period on mutually agreed terms.

■ The name of the restaurant "Sagar" or"Sagar Ratna" is exclusive Property of theFranchisor, and the Franchisee has noLien on it. On Expiry of/ termination ofthe Franchise agreement the Franchiseecan not use identical names or theirlikeliness their-of what-so-ever.

■ The Franchisee or their associates arerestricted to open on their own any othersimilar outlets in the same city or othercities in any part of India.

■ The Menu rates decided by theFranchisor can not altered by franchiseewithout authorization

■ Sagar Ratna has the right to inspect allbooks of accounts by its authorizedrepresentative.

■ Sagar Ratna has the right to inspect allfood items and raw materials through itsrepresentatives and point out deficienciesfor correction at all times.

■ The Franchisee cannot ever represent asthe Franchisor to any Government orother body or individual what so ever forany business promotion or otherwisewithout written authorization.

■ Any amendment to Franchise agreementhas to be in writing with the endorsementof both parties.

■ Any disputes/or differences arisingbetween this agreement shall be settledby arbitration in accordance with theprovisions of the Indian Arbitration Act1940 as amended from time to time.

■ The agreement can be terminated by theFranchisor in the event of any violationof the clauses by issuing one monthnotice.

SITE VISIT If the Franchisee is satisfied with the aboveterms & conditions and desires to take up theFranchise, then he shall arrange for the sitevisit of Franchisor or their authorizedrepresentatives for final approval of the site.Before the site visit the Franchisee shallarrange to deposit with Franchisor a DemandDraft for Rs. 30,000.00 drawn in favour of "M/s.Sagar Ratna Hotels Pvt. Ltd." payable at Delhitowards travelling/Incidental Expenses on sitevisit. It is optional on part of Franchisor eitherto approve or disapprove the site dependingupon the requirements of the business. In casethe site is disapproved for any reason the sitevisit fee of Rs. 30,000.00 paid is not refundable.