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Profit from franchises

Easier than starting a business and more rewarding than a job. Here's if and why you should consider franchising and how to go about it.

Rajshree Kukreti        Print Edition: May 15, 2008

In Chennai, Vinay G Nagpal juggles cookies, hot dogs and steamed corn and comes up with a delicious profit. In Vadodara, Shamini Patel provides personalised matchmaking services at Shaadi Point, the real-world version of matrimonial website www.shaadi.com. In Delhi, Pragati Rao of BrainOBrain teaches kids mathematics using the abacus. In Mumbai, Shabbir Poonawala sells Monginis cakes to tired commuters. Not one of the people mentioned are entrepreneurs in the strict sense of the word. Nor are they really businessmen. Rather, they are members of the country’s growing tribe of franchisees.

Vinay G Nagpal, Chennai

Franchisee: Cookie Man (since 2002), Hot & Juicy (since 2005), HogDog (since 2006)

Business: Fresh-baked cookies, sweet corn and hot dogs

Initial investment: Rs 25 lakh

Franchisee for Cookie Man; master franchisee of Hot & Juicy and HogDog

"I realised the huge potential of food retail. It took two years of hard work to make a mark. Since then we have been growing"

 

Shilpa Sarin, Meerut

Franchisee: Ferns ‘n’ Petals (since 2002)

Business: Boutique florist that caters to requirements of all kinds of bouquets and flower decoration

Initial investment: Rs 3 lakh

Took two years to make profit. Also provides designer packaging

"The training helped me set up the business in no time. Also I am not bound to purchase flowers from the company. This flexibility has helped me grow"

 

Pragati Rao, Delhi

Franchisee: BrainOBrain (since 2004)

Business: Trains children (5-15 years) in advanced abacus, neuro linguistic
programming and personality development skills

Initial investment: Rs 1.2 lakh

At any given time, there are at least 100 students at her two centres

"I was a bit nervous venturing into a business, but the franchiser played a
key role in helping me make it a success"

 

Shabbir Poonawala, Mumbai

Franchisee: Monginis (since 2003)

Business: A confectionery shop that retails branded bakery goods

Initial investment: Rs 5 lakh

Cashed in on the lack of competition in the area and developed a loyal clientele. The company helped in setting up the business from scratch

"I was a distributor for Monginis for a year. But it wasn’t very profitable. Then Monginis suggested that I become their franchisee"

 

Rama Bhatia, Delhi

Franchisee: Archies Gallery (since 1993)

Business: Sells Archies cards and gifts from four outlets

Initial investment: Rs 20,000

The annual turnover is now Rs 50 lakh

"Without hesitation I can say that as first time entrepreneurs, we had never imagined that partnering would help us achieve this much with little hassle"

 

Shamini Patel, (centre) Vadodara

Franchisee: Shaadi Point (since 2003)

Business: A brick and mortar centre of matrimonial website Shaadi.com’s services. It includes uploading profiles and help select a suitable match

Initial investment: Rs 10 lakh

Closed her designer card business to manage this centre

"Since the company takes care of the heavy marketing overheads and planning, I am free to concentrate on building the business"

 

Nandita Sinha, Jamshedpur

Franchisee: Erudite (started in 2006, closed in 2007)

Business: A pre-MBA coaching institute

Initial investment: Rs 3 lakh

Closed the centre after a year as terms of agreement were not clearly spelt, leading to sustained losses. Lesson: know what you are getting into

"I wanted to foray into the field of education and thought could manage it. But the nitty gritty of running a business can fray your nerves"

 

Vikas Taneja, Faridabad

Franchisee: MRF Tyres (since 2002)

Business: A MRF Tyres’ service centre with state-of-the-art equipment

Initial investment: Rs 45 lakh

The company converted their tyre retail shop into a swank service centre. They are all set to renew their six-year agreement in 2008

"It does make a lot of difference working with a professional company. Our business has been very good, better than what we were doing earlier"


“India has literally millions of individuals who would prefer to be their own boss and run a business, rather than being an employee. There are joint families, where resources may be available in the form of some real estate and family members who can be part of the business. Personal loans are available from family and friends, in the close social fabric of our communities. This is ideal ground for franchising,” says Devangshu Dutta, chief executive, Third Eyesight, a consulting firm focused on the retail and consumer products sector.

People like Nagpal, Rao and many other franchisees are proving Dutta right. As the case studies profiled through this story proves, people running franchises come from varied backgrounds—former employees, homemakers, shop or showroom owners and even retired professionals and employees. Nagpal was an executive with Rediffusion before he dabbled into franchising, Rao was a homemaker who liked mathematics, Shamini Patel of Vadodara was a graphic designer-turned-wedding card maker who found her calling in franchising for Shaadi Point.

An interesting feature of the franchising market in India is that while a large chunk of it is taken by franchises of foreign, mainly American, brands, small investors and small enterprises are happier to take franchises of home-grown companies. The McDonald’s, KFC, Nike and Pizza Hut franchisees are those who can afford to pay the huge franchisee fee and start-up costs that these companies demand. Smaller franchisees look at domestic companies or relatively unknown foreign brands in areas such as computer education, restaurants, health care, courier logistics, beauty parlours and apparel.

It doesn’t matter what your educational or professional background is; chances are that you’ll find a franchise to suit you. “Since I am no businessperson, I thought a franchise would help me do what I love best—teach in an ambience and system that was to my liking,” says Jamshedpur’s Nandita Sinha, once a franchisee of Erudite, a pre-MBA coaching institute.

A report released by Franchising Association of India (FAI) says that while franchising as a business model has been known in India for decades, “there is clearly an unprecedented interest in adopting this model in recent times as is evident from the growth rate of 30-40% per year as witnessed in the last four to five years. There are already more than 600 franchising systems operating in the country”. Adds Dutta: “The Indian market is at a stage where franchising is a great model that allows both franchiser and franchisee tremendous potential for growth.”

According to the FAI, the global franchise industry grew by over 18% between 2001 and 2005. In a report, the president of the FAI, CY Pal, says: “In spite of the rapid growth of franchising in the recent years, it constitutes as of now about 2% of the total retail sale of about $405 billion, while in developed markets, such as the US, franchising accounts for more than 50% of total retail sales. This is indicative of the enormous potential that lies ahead for the growth of franchising in India.”

Why Franchising

Given that the survival rate of a franchised business is more than twice the survival rate of independent small businesses, it makes sense to start your own business riding on the back of an established and proven model. The franchise model is a great way for a franchiser to expand operations rapidly, with relatively low overheads and expenses, coupled with the local expertise that franchisees provide. Says marketing and brand consultant, Harish Bijoor: “The ship works primarily in three formats: where both players are small, when the franchiser is big and the franchisee is small, and when the franchisee is big and franchiser is small.”

For the franchisee, this business model makes sense, since he will have to spend less on infrastructure and processes than he would have in an independent business. The franchiser helps the franchisee establish and get over teething troubles and franchisees are free to grow their operation. Expanding business and revenues is what matters the most. Chennai’s Nagpal, for instance, started with one Cookie Man franchise. Today, in addition to Cookie Man he has added HogDog and sweet corn Hot & Juicy franchises to his kitty.A franchisee is in an ideal position to make profits, since the business he is entering has already been proven to be successful. The success or failure of the franchise will then largely depend upon the franchisee. Of course, if a franchisee takes on a franchise without conducting adequate due diligence, he might find himself a far sight poorer.

Investments Required

Says Dhawal Shah, executive officer, FAI: “This is one business opportunity that you can start with Rs 50,000 onwards.” However, a good franchise costs a bit more—at least Rs 3 lakh, going up to over Rs 25 lakh, and sometimes running into crores of rupees (see tables: Franchising Options for All).

The good news is that the seed capital is shared between the franchisee and franchiser. You will ideally bring in the premises and some working capital, but the intellectual property (in case of educational/software businesses) and stocks are provided by the brand owner on soft credit. Even better, franchisees can benefit from the cost savings associated with bulk purchasing power that the mother company has access to. They can also benefit from the pooling of resources into effective local, regional or national marketing programmes.

Depending on the franchise, stock and equipment is likely to be supplied to you, along with decor and help with accounting and any other training that you may need to get started. Says Pragati Rao, a BrainOBrain franchisee in Delhi: “The franchiser provided me with intensive training to set up the business. Initial investments included the franchise fee of Rs 65,000.” By doing this, the franchiser ensures that the franchisee has few commitments, leaving him free to run the business. Shabeer Poonawala, a Monginis franchisee in Mumbai, says: “Monginis assisted me in the entire set-up, right from identifying a location, buying a suitable property and arranging a contractor for interior designing. They made sure everything was as per their standards.”

Compared to starting your own business, this kind of financial burden is light. You are paying for a part of an established company’s brand—effectively ensuring a head start on someone starting from scratch. Says Pavan Gadia, vicepresident, Ferns ’n’ Petals: “We provide products worth Rs 2 lakh when a person opts for our franchisee model. We also help and facilitate loans for those who looking at borrowing money and not dipping into their reserves.”

Some companies use the initial sum to help the franchisee in building the business. Those taking up the franchise of Lakme Salons get the benefit of start-up fee being invested back into the business in the form of support.

The drawback is that the franchiser will demand a percentage of the profits you achieve, as well as fees to retain the franchise licence (see box: Who Gets What). Vivek Seigell, country head, retail, e-tail and consumer finance, HCL Infosystems, explains this: “The vision for the business is set by the promoter. It is like paying a royalty for using someone else’s intellectual property.” (see box: The Fundamentals) Surviving the gestation period is the biggest test.

Payment to the franchiser starts before one can record the first profit. Some companies defer fee till the turnover is substantial. This initial handholding makes certain franchising options quite attractive.

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