Indian Franchisee

8/2/2019 Indian Franchisee

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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

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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 2

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

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

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

CHAPTER 4

FRANCHISEE LIFE CYCLE: Key to franchisor-franchisee relationship . . . .29

Search phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Joining phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Growth phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Maturity phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Declining phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Franchisor -Franchisee relationship: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Contents

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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .396. 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

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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 and

charisma of the speaker. An entrepreneur who is a franchisor, alwayssearches for a trusty and efficient Partner or franchisees like - a bride's

father 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 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 andattributes 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 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 franchisor

understand 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 any

answers to these questions? The franchise mode of business expansion inIndia 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 widesurvey and discussion with seasoned franchisees & franchisors.

PROLOGUE


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It all started on Indian Franchise Association's platform with intellectual

inputs 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 & 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 thecountry. 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 philosophyof Indian franchisee.

Numbers speak the truth! - The data collected from the survey was fed to

statistical tools like factor analysis and regression to yield meaningfulresults. The results were used to find out a model which facilitates a

franchisor to optimize their franchisee search, manage superiorrelationship with its existing franchisees and increase franchisee retention.

THE ENDEAVOUR


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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 toexciting 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 humanresource 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 WIN-

WIN 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. Asuccessful 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 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 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 unfittingbuyers 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 TABLESTable 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 FIGURESFig 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 FranchiseeFig 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

LIST OF FIGURES AND TABLES


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One 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 allthe 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 tostart 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

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 mypersonality 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 SamplingAdequacy 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. .643

Bartletts Test Approx. Chi-Square 201.545

of Sphericity df 66.000

Sig. .000

Table1. KMO and Barlett's Test

THE ENTREPRENEURS SPUR

CHAPTER 1


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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.

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

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 thirdset 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 shouldcommunicate 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 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

Factors Components

Franchising is the safest way to Component 1start a business

Franchising is the best way torun a business

Franchising is the easiest way tostart a business

I choose franchising because thereis lower risk of failure

I want an established brand thanstarting on my own

Franchising gives a good learning experience

I choose a franchise that suits mypersonality and experience

I choose franchising because I wantto 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 better

I choose a franchise that give me thebest return [Profit]

I have the same interest with my franchisor

ROTATED COMPONENT MATRIXa

Variables Component1 2 3

Franchising is the safest way tostart a business .813

Franchising is the best wayto run a business .797

Franchising is the easiest way tostart a business .871

I choose franchising because there islower risk of failure .679 .514

I want an established brand thanstarting on my own .849

There is higher growth opportunity infranchising than own brand .951

Franchising gives a good learning experience .824I have realized that starting my own brandwould have been better -.856

I choose a franchise that give me thebest return [Profit] .729 .576

I choose a franchise that suits mypersonality and experience .547 .531

I have the same interest with my franchisor .517 .611 .420

I choose franchising because I want tostart a brand of my own later .763

Extraction 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


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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 franchiseeneed on an ongoing basis.

Advantage 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 forthe Franchisees

Existing 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 smoothlywith an existing set-up.

Immediate 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.

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CHAPTER 2

IDENTIFYING FRANCHISEEATTRIBUTES

AN ANALYSIS

C

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 arevarious 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:

AGEAge 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 theoperations 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 committhe 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.

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 andspecificity 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 thebusiness 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


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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.

THE FACTOR ANALYSISThe research has shown that there are four

broad attributes that are important for

becoming a successful franchisee. Thesefactors 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 post-graduation 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 asfinancial 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

family support which he receives from time

to time.

From the data analysis we have found the

above values corresponding to each of thecomponent 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:

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.

23

Age

Education Profile /Qualification A

Work experience

Management skillsTechnical skills Skills B

Networking skills

Financial fitness

Risk taking capacity Business expertise C

Profit orientation

Analytical ability

Family Business Inherent advantages D

Family support/Motivation

Fig1: Factor Analysis

INITIAL EIGEN VALUES

Component 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 D

Key*A - Profile/QualificationB - SkillsC - Business expertiseD - Inherent Advantages


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There are several ways to project the

long-term behavior of the

franchisee by using variousquestions 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

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 theInvestor 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.

HOW TO USE THE MODEL?

As mentioned earlier, the variables used in

the formula are to be converted to an ordinalscale. There are three categories for the

previous occupation. The categorized

occupations of the franchisee are:

Similarly for the other variables they arecategorized as:

Previous relationship

Years of operation of the business: (if it is an

existing one)

Occupation Category

Salaried employee 1

Self employed 2

Student 3

Relationship Category

No relation 1

Friend 2

Relative 3

Employer-employee relation 4

Repeat franchisee 5

FRANCHISEE PROFILING:A STATISTICAL MODEL

CHAPTER 3

Years of operation Category

0-1 year 1

1-5 years 2

5-10 years 3

10 and more 4


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Present age of the franchisee

Educational qualification of the franchisee

or the investor

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.

FRANCHISEE PROFILINGThe 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

in the franchisors' business and provides a

potential risk.

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.

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 thesefranchisees 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.

Qualification Category

Matriculation 1

Graduate 2

Post Graduate 3

Age Category

60 years 6


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Prior experience: In terms of prior

experience they are quite at the

lower side.

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

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

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 prospective

franchisors.

LEAVER: 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

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 suchfranchisees 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 startup their own business.

Prior experience: They have a

fair amount of work-experience

in franchising as well as other

fields.

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.

Fig7: Previous occupation of loyals


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Franchisees move through

phases of growth,

development, maturity

and decline. This

lifecycle is same for most

businesses, however, infranchising, 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 theother 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 afranchisee, his challenges and

CHAPTER 4

FRANCHISEE LIFE CYCLE:Key to franchisor-franchisee relationship

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apprehensions which depend on that fact that

in which phase of his business cycle he is?

FRANCHISOR SUPPORTFranchisor'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 franchisebusiness changes from highly technical and

operationally focused at the start, to

management, financial and marketing

expertise as the franchisee matures.

FRANCHISEE LIFE CYCLEThere 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

SEARCH PHASEIn this phase the unit is an entrepreneur andhe 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 closebusiness 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.

R

EV

E

N

U

E

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 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 usuallyconsidered 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.

JOINING PHASEIn this phase the franchising deal is signedbetween 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 stagewhen 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.

GROWTH PHASEThe 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

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 PHASEIn 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 thefranchisor 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.

DECLINING PHASEDuring 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 seekto 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


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desire for mutual success and prosperity.

UNIQUE CASEFranchisee performing extraordinary

well during its lifecycleFranchisees 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.

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

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 anincentive 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 andmotivate 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 donein 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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Fig11: Fate of a franchisee after the declining phase

Fig12: Case of an Extraordinary Franchisee


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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 Win-

Win 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 thevision, 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 aguiding 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 bi-

lateral 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

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-improvementprograms 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 toopen 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. Mostlyperceptions 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.

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CHAPTER 5

FRANCHISEE MOTIVATION-Understanding challenges1

1All 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 lifecycleA 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 thefranchisee 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.

Motivationlevel

GROWTH PHASE MATURITY PHASEJOINING PHASEINITIAL PHASE

Motivation curve

Fig13: Motivation curve for a franchisee


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INADEQUATE COMMUNICATIONBY 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 passingof 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.

In the initial stage of the relationshipbetween 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.

The repercussions of a situation shown in

part 3 can be fatal for the franchisor as well

as for the franchisee. A successfulfranchising business requires the franchisee

to be motivated at every stage of the life-

cycle. 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.

Motivationlevel

GROWTH PHASE MATURITY PHASEJOINING PHASEINITIAL 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 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 andprofit 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.


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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.

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

revenue in coaching institutes to 7% in food

service sector and as low as 3-4% in retail.

STAFF TRAINING & ATTRITIONStaff attrition or turnover rate is the ratio of

the number of employees who left in the yearto 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.

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.

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. 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 retailfranchising 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.

SHRINKAGEA 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 fourmajor 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

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 ofabuse - 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.

CANNIBALIZATIONMany 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 franchiseesin 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


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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 meetingwith the other franchisees in the region

and suggested them to share their local

marketing costs and they also divided

their geographical territories.

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

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 FRANCHISEESThere 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.


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ABOUT THE SURVEYAn 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.

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.

CHAPTER 6

THE INDIANFRANCHISEE SURVEY


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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 SUCCESSFULFRANCHISEE

It is interesting to note that 18% of the total

franchisees were owned by investorsbelonging 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.

An ideal successful franchise ownerbelongs 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.

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 in

the age group of 30-40 years majority

(40%) of the franchisees were ineducation 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 educationfranchisors.

Recommendation

Ideal franchisee/ investor in franchise

business belong to the age group of 30-

40 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 (pre-

school/Primary education) franchise

hence should be given preference

among the other investors.

IDEAL EDUCATIONALBACKGROUND FOR A FRANCHISEE

According to the survey, 54% of the

franchisees are post graduates followed by

graduates 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 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 thesespecific categories, it is important to

identify/choose investor from the

professional category.

FRANCHISEE ROYALTYRoyalty 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 lowerthan 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. Thepayments 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

Post graduate profile

Fig20: Streams of Post graduate franchisees


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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 toincrease 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.

IDEAL TIME FOR CONTRACTTERMS 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 franchiseFig21: Range of Royalty across sectors

Fig22: Telescopic franchise royalty rate

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.

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.

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.

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 Plans

Fig24: Year-wise break-up of 1-5 years of Operation


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FRANCHISOR- INVESTORRELATIONSHIP

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.

Out of those who are planning to continue

80% are not related to the franchisor while

only 5% were the employees of thefranchisor. 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

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

From the survey, 70% of the franchisees were

salaried employees earlier. So it is quite clear

that salaried employees are more attractedtoward 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.

Previous Relationship

Previous 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 the

respondents interviewed are

looking for an expansion of

their operation. The survey has

shown that a franchisee who owns an outletwould 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 thesame 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

integration6 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 foodand 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 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 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 ofthe 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 popularcommercial 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

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 perspecifications 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, includingobtaining 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

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 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 cri

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