RETAIL FRANCHISING

Introduction

One of the major business model in the present business era. It is an integral part of the strategy of many retail companies like McDonalds, Subway, Pizza hut etc. It acts as catalyst for growth and survival of the companies. Franchising is creating new business life forms, building new partnership and relationships and creating job opportunities and economic growth. Franchising is a method used by businesses for the marketing and distribution of their products/services. Franchising began in US in 1851, when Singer Sewing Machine first franchised dealers.

Concept

Authorisation granted by a manufacturer to a distributor or dealer to sell his product. As per International Franchise Association - a franchise is the agreement or license between two legally independent parties which gives

A person or group of people (franchisee) the right to market a product/service using the trademark or trade name of another business (franchisor) The franchisee uses the operating methods of the franchisor. The obligation of franchisee is to pay the franchisor a fee for these rights. The obligation of franchisor is to provide rights and support to franchisee.

Types of Franchising

Franchising can be divided into two formats

Product/Trade name Franchise Business Format Franchise Product/Trade name Franchise It concentrates on one manufactures product and thereby acquires the manufacturers identity to some extent. Examples :- Automobile dealership & Gas Service Stations Business Format Franchise It has been defined as the granting of a license for a predetermined financial return, by a franchising company (the franchisor) to its franchisees, entitling them to make use of a complete business package, including training, support and corporate name and enabling them to operate in exactly same standard and style as other units.

Types of Franchising

A franchising system may be

A Single Unit Franchise: Right is being granted to operate one unit or outlet of the franchised business A Master Franchise: The franchisee is granted the rights to a substantial territory usually a whole country. A Regional Franchise: In a geographically large area, a franchisor or master franchisee may decide to divide the territory up into separate region and grant master franchise for each separate region; it is then known as regional franchise

Franchise Relations
FRANCHISOR MASTER

REGIONAL

FRANCHISOR

UNIT FRANCHISING

Forms of Franchise

Manufacturer Retailers:

Manufacturer gives rights to franchise to sell goods through licensing agreement. Conditions imposed on retailers like exclusively stocking the manufacturers brands, standardization of store dcor, reimbursement of Ad and promotion expenses. Examples: Liberty, Raymonds etc It is voluntary system operated under cooperative system. When service provider offers license to retailer like in the case of VLCC, Habibs etc.

Wholesaler Retailers:

Service Sponsor Retailers:

Advantages of Franchising

Low risk

As franchisor has not entering the market complete newly. As franchisee grows, the parent company will also grow. The franchisee is also grow depending upon good brand name of franchisor.

Growth

Ease of Financing & Operation Support

Franchisor assists franchisee in obtaining financing for setting up of the business. Location, interior & exterior of business, training and consultancy etc are provided by the franchisor to the franchisee.
Ad costs are shared by both franchisor and franchisee. National exposure can be attained at an affordable price by the franchisee.

Advertising

Disadvantages of Franchising

Royalty/Fees

Relatively higher royalty/franchisee fees have been charged by the reputed brand. The franchisee fee is one time required at the time of starting or renewing the franchise agreement. Royalty is a recurring cost which has to be paid to the franchisor at a predefined frequency.

Short duration of agreement Lack of Control

Franchisee required adherence to the terms and conditions as laid down by the franchisor

Franchising in India

As per industry sources, franchising in India has been clocking a 60% year on year growth and is likely to accelerate to 100% over next five year. There are close to over 40,000 franchisees with an annual turnover between Rs8000 Rs10000 crores. Total investment made by the franchisees is over Rs5000 crores and over 300000 people are directly employed in the business. th

The Economics Times, 24 Feb 2008

Franchising in India

The franchise showrooms of various categories

Readymade garments Colour Plus, Koutons, Gini & Jony Accessories Titans, Tanisque, Himalaya Opticals, Fastrack Beauty & Saloon Shahnaz Hussain Parlour, Habibs, Lakme Education NIIT, Aptech, Eurokidz, Bachpan Play School, IMS Restaurants Mc Donalds, Pizza Hut, Subway, Dominos, Mr & Mrs Idli etc. Health & Fitness VLCC, Others Ferns n Petals, Shaadi.com,

Legal Issues in Franchising in India

The franchise agreement is a legal document which governs the relationship between the two parties. The key elements mentioned in this legal documents are

The duration of the agreement Obligation/duties of the franchisor Obligation/duties of the franchisee The territory of operation The franchise fee & the right to use the franchisors trademark/brand/patent Training & support that will provided by the franchisor Royalties payable Support in terms of advertising and other promotions. Terms of renewal & termination/cancellation policies

Legal Issues in Franchising in India

As franchising relationship is a contractual one in India, the Indian Contract Act 1872 is applicable. Consumer complaints and legal action would fall under the purview of Consumer Protection Act 1986. The rules under Standard of Weights and Measures Act 1976 would be applicable. Foreign Exchange Mgmt Act 1999 would be applicable incase of international and domestic franchise arrangement. Royalties for Intellectual Property Right is taxable. Leasing of real estate, labour laws, Internet franchising are also coming under the purview of different laws in India.