Feasibility of retail franchising

Indian retail industry is in full boom. Every big retailer whether it is Reliance Retail, Future Group, Birlas, Tatas, RPG, or Rahejas in a hunger to grab the maximum share of retail space and industry, is announcing major expansion plans. This expansion is possible by opening company owned and company operated (COCO), company owned and franchise operated (COFO), and franchise owned and franchise operated (FOFO) outlets.

Looking at the latest retail trends it is observed that a large number of national and international brands are opting for ‘Retail Franchising’, for expansion of the business far and wide. At the same time no one can deny the fact, that there still are retail brands that have not opted for retail franchising as a mode of expansion but have managed to not only open a large number of outlets but also run them successfully. Future Group, Subhiksha, Spencer’s etc. are the best examples.

Though some retail companies have managed to run company owned stores successfully there are still certain challenges in opening company owned stores.  

 

Ingredients required for retail store

Before going into the details of the challenges of opening a retail outlet, it is important to first understand what all it takes to open a store. We have identified four major elements:

  • Formats
  • Funding
  • Operations
  • Real estate

 In India, various retail formats are available like mom-n-pop stores, departmental stores, specialty stores, hypermarts, shop-in-shop, malls etc. Retailers can opt for any of the formats depending upon the kind of investment and location. The second element is the funding or finance. The financial options available are: banks, private equity, IPOs, etc. The next major element is the real estate and a detailed survey of the location is required before opening a retail store. The options available are malls, high streets, stand alones, etc. The last and the most significant element for the success of the store is the operation. Opening a retail outlet is not much of a problem but running it successfully is a major challenge.

 

Store opening challenges

Having discussed the ingredients, let us glance through the challenges of running a company owned retail outlet.

  • Retail Company is to bear the financial burden from opening to running the store
  • Finding the right location is also a company’s headache
  • Company is to manage large network of stores and it is difficult to maintain the quality of the store
  • Lack of skilled and loyal professional

 

Retail franchising as solution

To overcome these challenges, retail companies across the country discovered a way out in the form of retail franchising.

Now let’s see, how has franchising proved to be retail business booster for various companies? Franchisees understand the dynamics of markets better as they gel with the local flavour of the market and the franchising model provides a better network and control over operations. Franchising as a concept has been of immense value in building the Levi Strauss & Co. business in India to more than 300 exclusive stores, spread across 50 towns. Liberty Retail Revolutions is looking at real franchise partners who are serious about business and are willing to take joint initiative to estimate the market rather than looking at renting the property. Retail franchising has helped Titan scale the business within a short period and helped the company become one of the largest specialty retailers in the country. Welspun Retail Ltd has successfully opted for retail franchising as an acceptable mode of expansion.

It has definitely placed brands like Samsonite very well in the Indian consumer’s mind.

Office one Superstore opted for retail franchising and it has helped the company in multiplying the store locations faster, which in turn led to brand visibility.

Franchising has given Gitanjali various advantages such as a quick build-up of reach as well as a sharp learning curve, the ability to leverage global jewelry expertise while incorporating local knowledge in their operations and the ability to obtain economies of scale while keeping the entrepreneurial spirit at the core of its operations.

Franchising contributes around 25 per cent of the total turnover to Vishal Retail.

Koutons operates its exclusive brand outlets (EBOs) through the franchise route. The phenomenal success of the brand can be attributed to the successful franchisee model adopted by Koutons.

 

Industry feedback on retail franchising

Retail franchising has helped companies in retail to realise there dream of expansion across the nation in a short span. Industries and companies that have successfully implemented retail franchising have been forthcoming in expressing their views.

Mr Anshuman Barve, Senior Executive, Retail, Jones Lang LaSalle Meghraj highlights, “Retailers are exploring franchising options to not only reduce their investment on store designing and real estate but also to harness local expertise and a motivated management team. Especially for T-II & III cities, many brands don’t have enough brand width to manage the stores effectively. Having a franchisee solves this problem; it brings in national scale and marketing with a local entrepreneurial spirit together.”  The views of the retailers having opted for retail franchising are similar. Elaborating on the advantages of franchising, Mr Shumone Chatterjee, Country Manager, Levi Strauss India Pvt. Ltd says, “In a country where FDI is not yet an enabling factor for operating retail, the only route is franchising.” Mr Ashutosh Garg, Chairman and Director, Guardian Lifecare opines, “Franchising is an excellent strategy for expansion. However, the franchisor must be fully ready with his value proposition for the franchisee before offering a franchise.”

Elaborating on the benefits of franchising, Mr V Govind Raj, Vice President, Integrated Retail Services, Titan Industries says, “ Franchising offers a great opportunity for scaling up operations in a short period of time. Franchisees can help the brand gain knowledge of local conditions and avoid costly errors and also in bringing in capital.” On similar lines, Mr NP Singh, Director Retail Projects, Samsonite South Asia Pvt. Ltd says, “Yes, it is an interesting business proposition as it does not require much previous experience. Sharing his opinion on increasing trend for retail franchising Mr Ashok Srivastava, Chief Operating Officer, Office 1 Superstore, Indo Rama Retail Holdings Ltd says, “Franchising helps in extending similar brand experience across all locations and helps an entrepreneur in procuring a proven business model which gives him a kick start in his/her respective field.”

Mr Mehul Choksi, Chairman, Gitanjali opines, “Retail franchising as a concept has always existed for companies that have a successful business model and they seek to grow discontinuously utilising the strengths of their channel partners.” In this context, Mr Ambeek Khemka, Group President, Vishal Retail Limited says, “Franchising helps in expansion in terms of area and growth. The company will have less debt equity ratio.” Mr Sahil Malik, Da Milano believes, “Retail franchising helps in contributing in finances and in terms of management it gets easier to do a franchisee and the growth definitely gets much more faster.” Mr D P S Kohli, Chairman and MD, Koutons opines, “With all the retailers trying to expand their base across India, the franchise model is the best to opt for.”

 

Real estate matters

It is generally believed that selecting a location for a retail outlet is very difficult. However, it is easier to convert an existing retail outlet into a franchisee.

While retailers like Subhiksha and Neelkamal who are not expanding through franchising believe that selecting a location for a retail outlet is not too difficult, it depends upon whether a thorough study has been conducted by the retailer looking for a space in a mall or a stand alone. They agree that finding a good location is expensive but not impossible.

On the other hand, retail franchisors opine that standard checks and measures are considered while selecting a location for a franchised outlet. The final key considerations are the ability of the store to generate the necessary ROI for the business, and the location’s ability to allow getting in touch with consumers.

Akshay Seth, COO, Stadia Group says, “We definitely prefer company owned stores but also offer space to the franchised stores, where the company backs the franchisee with a minimum guaranteed rent. Primarily, we follow the fixed rental option; however, for our new supercentre malls, we are open to discussing the model of revenue sharing with minimum guaranteed rent. Although, in general, space is being offered to branded retailers, our malls do cater to neighbourhood retailers, in a separate section on the upper floor; known as the ‘Haat’. Company owned stores are generally run by salaried employees, hence personal interest is lacking. Franchised stores on the other hand are run by the store owners and they put in the extra effort needed to make them profitable. We can accommodate over 200 outlets in our upcoming mall and supercentres. Our presumption being 70 per cent would be franchise stores and 30 per cent company owned.”    

Mr Sunil Bedi, Chairman & Director, JMD, Group informs, “It is true that international and national retailers are getting into retail franchising and the brands will now have the environment needed for multi-fold expansion with minimum capital investment. So far, most of the developers have preferred company owned stores. However franchise format is gaining popularity and acceptability now. JMD can have a revenue sharing model with an F&B outlet with a bottom line as they are the footfall drivers in any mall. We generally associate with brands that are not present in neighbouring areas to give the optimum brand mix in our malls. As of now, the ratio of franchise outlet to company owned in our malls has been low. However, as mentioned earlier the outlook is changing and becoming favourable.”

 

Non-franchise retailers’ feedback

Since the benefits of retail franchising have been discussed above, it would be significant to see how retailers who do not prefer franchising, justify being in their business format. One of the big retailers says that the company mostly operates large format stores and even globally, there is hardly any large format retail model that runs on a franchisee network. The fast pace of expansion requires quick decision-making, constant adaptation to changing requirements of customers, managing unexpected challenges in different markets and steady-flow of funds to finance these expansion. Each of these factors is best addressed through a business model based on company-owned stores. More importantly, modern retail is a nascent business and requires huge investments in training manpower, into using appropriate technology and developing a robust sourcing mechanism, most of which are tough to build through a franchisee network. The success of retail operations depends upon a company’s ability to create value through economies of scale. And these are best achieved when there is a well-coordinated and concentrated effort put together through company-owned stores.  
Expressing his opinion on retail franchising Mr Mohit Khattar, President Marketing, Subhiksha says, “If there are retailers opting for retail franchising then there are also retail companies who are not opting for franchising as a mode of expansion. We are able to manage the speed of expansion that we want without opting for franchise model. There is no point in diluting the quality of efforts by involving a third party. Moreover by opting for franchising, the company has to pass on the margins to franchisee.” Similar are the views of Mr Manish Parekh, Director, Neelkamal who believes, “Most of the retailers are focused in developing the brand themselves because a lot of things go into building a brand. And while franchising is a fast way to expand and skill up your model, I personally feel that the brands have to do everything cohesively themselves instead of doing franchising.”  Mr Samar Singh Shekhawat, Vice- President Marketing, Spencer’s Retail, informs, “Retail franchising is happening in certain categories of products. It depends upon the business model because within franchising, one of the key value areas is quality control. The right choice of franchisee is the most important factor.”

 

Possibility of franchising

As for the possibility of retail companies opting for retail franchising in the near future, a majority of companies that are already following retail franchising are happy and satisfied with the success of their businesses through the franchise route. However, as for the non franchise retailers concerned, certain companies are totally against opting for franchising as a business model whereas there are certain others who do see the possibility of opting for the franchise route in the near future. Mr Parekh informs, “No we do not see any possibility for opting for retail franchising as of now.”

On similar lines Mr Khattar says, “We have managed to open 1500 plus stores in a span of three years through company owned outlets and we are not in any mood of diluting our focus.”

Mr Shekhawat, “We believe an ownership in food and grocery retail quality control is extremely important. The attention required to retail is extremely important and therefore we decided not to franchise.”

 

View point

As per Reliance Retail’s announcement a few months back, it is exploring the possibility to opt for the franchise route for some of its specialty formats like jewellery. This move is influenced by the objective of getting hold over existing retail bank with existing small retailers. Reliance Fresh stores were franchised initially; however, the company has remodeled it into company owned stores with franchisees given the option to become the company’s employees.

Some justifications given by the companies for not opting for the franchise route are:

  • Brand building is very important: Before any company could take up a franchise route, it is very important to do brand building.
  • Independent decision making: In case of franchising, the third party is involved and that is franchisee; so no one can take independent decision.
  • Importance of business understanding: While new formats are being introduced for the growth of the company, the owners are themselves in the learning phase. So, how can they give it to the franchisee?
  • Lack of transparency in the business: The franchising model lacks transparency.
  • Lack of control: The company cannot keep a watch on each and every movement of the franchisee.
  • Sharing from thin margins: In a company owned store, everything is owned by the company, whereas in case of franchising, the company has to share its margins with the franchisee.

Having discussed various aspects of retail franchising and non franchise retail, it would be pertinent to conclude that both have their advantages and disadvantages. Franchising is more suitable for small and specialty retail formats as compared to big formats. Also, franchising is more appropriate for certain categories of retail like apparel, footwear, jewellery, whereas in case of FMCG, franchising is not happening at all.

There is a continuous debate going on among retail, franchise and real estate experts whether companies should opt for franchising as a mode of expansion or expand through company owned outlets. Pallavi Majha examines the negative and positive aspects of retail franchising and non franchise retail
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