Collaborating For Growth

CONSUMER MARKETS
Collaborating for Growth

Report on Franchising Industry in India 2013
kpmg.com/in
Message
I am pleased that as a part of our services and activities for the benefit of members and the Franchising Community at large we initiated a study of the Indian Franchising Industry in partnership with KPMG in India about six months ago. The result in the form of a 'Report on Indian Franchising Industry'- 2013 prepared by KPMG in India is in your hands. As you will notice this is the first and the most authentic study report on the Franchising Industry in India and KPMG in India have done an excellent job of covering a lot of ground in term of the rapid progress made by this Industry in India so far in the context of the International scene and otherwise. The context of growth of the modern retail trade has been an important driving force. The issues and challenges before this Industry including the required Government support are well brought out. The Franchising Industry has great potential going forward and is going to be a significant contributor to GDP growth. Franchising is clearly a rapidly growing model for business expansion in the retail sector and is going to be an increasingly important part of the growing services sector of the Indian economy in the years to come. Franchising has also got a huge potential for job creation, direct and indirect, particularly for our young and educated class besides of course providing immense entrepreneurial opportunities for young and not so young people wanting to be their 'own boss I hope this report will stimulate further and faster growth of the Franchising concept and the related best practices to ensure healthy growth of the Franching Industry in India.
Mr. CY Pal President Franchising Association of India
2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Message
The World Franchise Council (WFC) is an association of 45 National Franchise Associations, whose purpose is to encourage international understanding and cooperation in the protection and promotion of franchising worldwide. Communication between representatives of world franchise organisations helps assist the members of each nations franchise association and in turn the economies and wellbeing of the people involved in franchising at the local and national level. This independent analysis of the past, present and future of franchising in India will assist in a clearer understanding of the opportunities to develop the franchise business model, which can play a major role in the countrys economic development, as well as the potential to become an agent of social change. Franchising, with its multiplier effect in terms of enterprise creation and job generation, has the power to produce the needed sustainable jobs that can provide a better future for hundreds of millions of individuals all over the world. With the evidence from more than 30,000 franchise systems generating at least 2,000,000 business enterprises worldwide, franchising is a proven business strategy worldwide that can have immense positive impact on the Indian economy. We hope that this report prepared by KPMG in partnership with Franchising Association of India, our only recognized member Association from India, will add a lot of value and be of great help for healthy and faster growth of the Franchising Industry in a large market like India.
Graham Billings Executive Director Franchise Association of New Zealand World Franchise Council General Secretariat
Message
The International Franchise Association is excited to see this research on Franchising in India and commends the Franchising Association of India and KPMG on assembling the data to tell the success story of franchising in India. U.S. Franchisors count India as one of their growth markets. This research will help educate the media, government officials and the public about the potential of franchise business to spur economic growth in India. The Franchising Association of Indias partnership with the International Franchise Association and the Institute of Certified Franchise Executives (CFE) program further shows FAIs commitment to the growth of franchising in India.
John Reynolds, CFE President IFA Educational Foundation
Foreword
According to KPMG India estimates, the franchising industry is expected to quadruple between 2012 and 2017 . There is scope for Franchising industry to contribute almost 4% of India GDP in 2017 (assuming 6% Y-o-Y GDP growth between 2012 and 2017), growing from a current estimated contribution of 1.4 percent of GDP . This is also expected to create job opportunities (including both direct and indirect) for an additional 11 million people by 2017 . While increasing consumption, willingness to spend, growing preference for branded products, global exposure and use of international brands is driving the demand side of franchising, increasing set of opportunity-driven competent entrepreneurs, growing awareness of Franchising as a business opportunity and its relative low risk profile are driving the supply of new franchisee units. Services sector which includes Consumer services such as Financial Services, Courier Services, Health & Wellness and Food Service subsegments is expected to contribute to majority of the growth in Franchising in the next half decade. KPMG India estimates suggest that franchisees in these areas are expected to form around 55 percent of total estimated Franchisees in 2017 . Franchising in Health & Wellness sub-segment is expected to grow to almost 6 times the current penetration. Retail (which includes sectors such as Apparel, Jewelry, Neighborhood stores, Food & Grocery) and Education are expected to be the other major areas where there is huge scope for franchising to succeed. Allowing Foreign Direct Investment (FDI) in single brand & multi-brand retail is expected to generate interest among large international players to adopt the franchising route to enter and expand in the country. While certain operating models with-in franchising such as Area development and Regional Master Franchisee - appear more attractive than others, diversity in Indian consumer preferences and degree of localization are expected to impact the choice of final model to be adopted. Today, India does not have any franchising specific laws; however various generic Indian laws such as Competition laws, Indian contract Act etc are applicable on Franchising operations. Any future consolidation with formulation of franchise specific regulations in this area should allow conducive growth of franchise systems along with protection of franchisee rights. Success of franchising is also dependent on role financial institutions can play in promoting franchising. Changing dynamics in franchising industry would warrant a mindset change as well. A collaborative approach involving Franchisees, Franchisors, Financial institutions and industry associations is the need of the hour. The analyses and point of view presented in the report have been validated through extensive discussions with industry players. We take this opportunity to thank the industry players for making this endeavor possible.
Ramesh Srinivas Head, Consumer Markets KPMG in India
Executive Summary
Franchising Market Potential

India, by witnessing huge demographic transformation fuelled by the consumption led growth, stands as an attractive destination globally for the franchising fraternity. Consumerism is growing rapidly aided by high population, increasing household incomes over the last two decades. Overall, the Indian economy has witnessed a structural shift from an agricultural based economy to a service based economy. Franchising as a concept has been prevalent in India since a long time. However, shifting consumer trends including growing preference for
Contribution of Franchising to GDP and Employment (2012)
12.0% 10.0% Franchise Sales/ GDP (%) 8.0% 6.0% 4.0% 2.0% 0.0% 0.0% Malaysia 8 India 13.4 1.0% 78 Germany 20 UK 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Brazil 103 131 Australia
branded products, global exposure and use of international brands is driving adoption of the franchising route to growth. According to KPMG in India estimates, the franchising industry is expected to quadruple between 2012 and 2017 . There is scope for the franchising industry to contribute to almost 4 percent of Indias GDP in 2017 (assuming 6 percent Y-o-Y GDP growth between 2012 and 2017), growing from a current estimated contribution of 1.4 percent of GDP . This is also expected to create job opportunities (including both direct and indirect) for an additional 11 million people by 2017 .
Estimated franchising industry market potential (2012-2017)
60 50 168 210 180 150 120 30 20 10 0 2012 2017 (projected) 45 50.4 90 60 30 0 No. of outlets ('000)
People employed by franchising sector as a % of total workforce

Source: KPMG in India Analysis Note: Bubble size represents size of franchising sector in USD Bn in 2012 except for UK where the numbers are for 2011
Value (US$ billion)
769 USA
40
13.4
Both demand and supply side factors are expected to contribute to this growth. Demand side factors Increasing consumption and willingness to spend Increasing purchasing power of the middle class. Growing preference for branded and quality products among consumers Increased global exposure and growing aspirations to adopt western culture and use international brands.
Source: KPMG in India Analysis
Supply side factors Increasing set of opportunity-driven competent entrepreneurs Increasing awareness of Franchising as a business opportunity and its relative low risk profile Government initiatives such as the liberalization of FDI in retail which has allowed foreign brands to enter India.
Franchising Opportunity: Sector Overview

As per KPMG in India analysis, retail and consumer services sectors are expected to emerge as high potential service sectors within franchising to cater to the prevailing consumption boom. Non-traditional segments such as food service, jewellery, pre-schools etc. also present a huge opportunity for growth in franchising. Despite the challenges the country presents, there have been Estimated Sector wise Franchising growth in India (2012-2017)
12 Apparel 2017 10 Consumer Durables 2017 X% Represents the CAGR growth from 2012 - 2017 Bubbles represent the Potential number of outlets required by 2017 (This size corresponds to approx 20,000 outlets) 7.6% 10.4%
many successful case studies of franchising in India. From franchisors such as Aptech and NIIT which have pioneered the franchising model in India to new age franchisors such as Gitanjali and VLCC who are adopting innovative expansion models within franchising, many brands/companies are adopting the franchising model to expand and provide a consistent and quality experience to its end customers.
8 Franchising Market Size (USD Billion)
6 Consumer Durables 2012 4 Apparel 2012 Jewellery 2017 Consumer Services 2017
F&B 2017 Health & Wellness 2017
10% 2 2017 Food & Grocery 20% Consumer Services 2012 17% Food & Grocery 2012 Jewellery 2012 0 -10 0 10 20
6.5% F&B 2012
Education 2017 26% Education 2012 23.5% Health & Wellness 2012
30
40
50
60
70
80
Franchising Penetration -2
Franchise Business Models

Firms that have created an easily replicable business model, often choose franchising as their preferred route to expand their operations and scale their brand. However, within the realm of franchising, there are several franchising models that differ significantly in terms of operation, control and legal scope.
Factor/Degree of Attractiveness Resources For Operation Time To Market Profitability Ease Of Contracting Relationship Management Control Resources Deployed For Localisation Overall Attractiveness Low Attractiveness
While certain operating models within franchising such as area development and regional master franchisee - appear more attractive than others, diversity in Indian consumer preferences and degree of localization impact the choice of the final model to be adopted.
Area Regional Master National Master
No-franchising
Direct
Low-Medium Attractiveness
Medium Attractiveness
Medium - High Attractiveness
Very Attractive
Attractiveness of India in Global Franchising

Many international brands have already entered India and are adopting the Franchise route to growth. Global brands such as Dominos, KFC, Baskin Robbins have adopted variations of the franchise models to grow in India. Many other international brands are contemplating entry plans into India. However, Indias growing but fragmented market can seem chaotic and difficult to deal with. The international franchisors consider the following factors as challenges while entering into India:
? Transparent Legislative framework: Due to no specific rules ? India is not one market: Entering a new market
becomes more complicated in case of India where consumers hail from diverse cultural backgrounds. Several cultures, languages and socio-economic diversities make it a set of multiple markets. It becomes a challenge for an international franchisor to understand all diversified tastes and preferences, to establish and expand business in India.
? Bribe and corruption: International franchisors remain
or laws promulgated in India to address the functioning of franchisors and franchisees, international players perceive a higher risk to business continuity.
threatened with the bribe and corruption cases in India. Due to no legislation around anti-bribe in India, as in the US; it not only discourages the expansion strategies of many brands, but also impacts Indias credibility in the international market.
Franchise Industry Survey Key Highlights

While the survey carried out by KPMG in India corroborated the above key reasons for growth in franchising and operating models, it also brought out certain key findings as mentioned below:
? Franchisors believe that they are providing adequate support
to their franchisees; however the latter are expecting more support particularly in the post launch phase of operations. Response to another related question in the survey suggested that almost half of those interviewed were not willing to take up additional franchisees with the existing franchisors suggesting certain level of dissatisfaction.
? While franchisors adopt franchising model for growth, many
primarily offers a safe and relatively easy way of establishing business and is expected to offer higher than market levels of profitability. This trend necessitates the need for franchisors to educate the franchisees on potential profitability and investment returns from the business. Sectors such as jewellery where payback periods could range between a minimum of four to five years are particularly vulnerable to such mismatch in outlook.
? Real estate rentals are posing a major challenge for the
entrepreneurs are opting for the franchising route as it
success of franchising. Collaborative efforts between franchisors and franchisees in structuring business models that are sustainable even under such conditions could address this concern.
Regulatory Scenario
While franchising sector in India, per se is not regulated, there are multiple laws which have an impact on franchise operations. Any future regulations in this area should allow conducive growth of franchise systems along with protection of franchisee rights. KPMG Indias comments on a few areas of regulations have been highlighted in the table below: Parameter Specific franchising Law KPMG Comments
Franchising focused rules & regulations are expected to send a positive message to both Indian and global franchising community about the seriousness of Indian government in promoting franchising as a mainstream sector that can contribute to overall GDP growth and employment generation. This will not only protect franchisee rights but also ensures that only serious players consider franchising as a business model. This is expected to reduce overall risk to business continuity.
Pre-contractual disclosure norms Control on royalty payments and franchisee fees Conflicts resolution
Free market pricing should be encouraged while making sure that royalty and fee payments lie within industry standards It is critical to have a transparent dispute resolution mechanism and an independent body to address conflicts that may arise between a franchisor and franchisee
Intellectual property protection

It is important to protect intellectual property rights of all the franchisors to discourage counterfeiting brands.
Financing the Franchise Business

One of the key criteria of franchisors while selecting a franchisee is investment capability and financial strength. This in itself is an indicator of how difficult it is for a franchisee to tap the debt route to investment. Most lenders do not treat franchisees as a separate customer segment and usually cover them under the ambit of the broader Small & Medium sized Enterprise (SME) sector classification. This gets particularly magnified in case of services franchising where there is an absence of asset base on which a collateral can be taken to provide a loan. A comprehensive and collaborative mechanism is once again needed to address this issue. While lending institutions can offer innovative financial products to franchisees, adequate support from the franchising ecosystem including that of franchisors and industry associations is necessary to make this a success.
Enhancing Funding Ecosystem in Franchising Franchisor

Provide increased support in explaining the business concept and business plan to banks when franchisee is availing loan Should consider providing first loss default guarantee to the lending institutions to bear losses up to a certain specified limit, say the first 5-10% of loss on a franchisee loan portfolio. Should come forward to support promising entrepreneurs by offering initial funding or by reducing the franchising fee
Franchisee
Needs to prepare a robust business plan document describing the business concept, business viability, risk mitigation strategy Franchisees should insist on a First Loss Default Guarantee by the franchisor as it would be affected adversely right from the start
Lending Institutions
Build and offer innovative financial products suited to the needs of franchisors Enhance their knowledge of innovative business models which are different from traditional business models and build policies and processes to fund such business ventures Need to develop detailed understanding of the franchise intellectual property, associated value and underlying cash flow while evaluating franchisee business
Franchising Industry Associations

Could spearhead formation of collective and mutual credit guarantee consortia comprising of franchisors, franchisees, lending institutions and government Provide greater reassurance to the lending institutions by offering services such as due-diligence of the franchisee business plans Increase awareness of innovative asset-light business models amongst lending institutions Provide a common platform for the interaction of franchisors, franchisees and lending institutions
Contents
Franchising - Pushing India Ahead Current market landscape for franchising in India Case studies in the Indian Franchising Space International Franchising Scenario Franchise Industry Survey Franchising Regulatory Scenario Business Models in Franchising Employment potential in the Franchising Industry Financing Franchising Business Franchising Success: Role of the government Conclusion Appendix Acknowledgement
01 05 15 27 37 47 53 61 63 69 75 79 83
01
Franchising Industry in India
02
Franchising
Pushing India ahead
02
Franchising Pushing India ahead

With a potential to push the Indian economy forward, franchising has been playing a significant role in generating new employment (both in terms of numbers and job quality), provide revenue options for the government in the form of taxes, duties etc. Along with its contribution to the country's gross domestic product (GDP), it has also helped many national and international brands to spread their presence in the country. International Scenario Franchising, though as a concept is western, is not limited to the developed nations only. It has spread its mark to developing countries like India, Brazil, and China etc. Even the African nations, over the last few decades have started tasting the flavors of franchising. Nigeria is one such country which is attracting a lot of attention in the Franchising space given the huge consumer class. Foreign brands such as KFC, Dominos etc have already set up franchisee outlets in the country to tap this potential. Franchising accounts for almost 1025 percent of the GDP of most of the OECD (Organization for Economic Cooperation and Development) countries.1
A brief look at the chart indicates the contribution franchising made to GDP and employment of various countries. While US stands relatively high on generating employment through the franchising mode, Australia has been able to generate significant income for the country through the franchising route. Close to 10% of Australian GDP is contributed by Franchising in Australia.
Contribution of Franchising to GDP and Employment (2012)

12.0% 10.0% Franchise Sales/ GDP (%) 8.0% 6.0% 4.0% 2.0% 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% People employed by franchising sector as a % of total workforce
Source: KPMG in India Analysis Note: Bubble size represents size of franchising sector in USD Bn in 2012 except for UK where the numbers are for 2011
131 Australia
Brazil 103 Malaysia 8

India 13.4
769 USA
78 Germany 20 UK
The following table illustrates the growth of franchising in a few countries Country Franchisors in 2012 Growth in the last 5 years (CAGR) n.a ~4.2% ~15.2% ~2.8% ~7.4% ~5.5% ~1.1% Franchisee Establishments in 2012 ~7,50,000 ~73,000 ~100,000 ~40,000 300,000-350,000 ~13,000 ~66,000 Growth in the last 5 years (CAGR) -0.6% 2.8% 9% 2.1% 22.4% 7.6% 3.4% Franchisees / Franchisor Ratio (2012) ~213 ~62 ~41 ~43 ~24 ~69 ~66
USA Australia Brazil UK China Malaysia Germany
~3500 ~1200 2426 929 5000 550 960
1 Report on Microfranchises as a Solution to World Poverty sourced from website http://marriottschool.byu.edu". "http://www.smartbrief.com/03/06/13/growing-nigerian-middle-class-spurs-franchise-expansion"
03
Though US has seen a major closure of establishments during 2008-2011 when they decreased from 7 .74 Mn establishments in 2008 to 7 .36 Mn establishments in 2011. However the country is seeing a reversal of the trend and has grown by 1.5% in 2012 and expected to grow by 1.4% in 2013.2 Brazil and China have seen relatively higher growth both in new brands resorting to franchising as a business model for expansion as well as new franchisees.
Franchisee to Franchisor Ratio

USA Germany China Australia UK Brazil Malaysia 0.0 24 50.0 100.0 150.0 Franchisee / Franchisor Ratio 200.0 250.0 43 41 69 66 62 213
US leads other countries when it comes to number of Franchisees for every Franchisor (Brand) operating in the country. This suggests the
relative maturity of the concept and widespread acceptability of franchising as a business model. A higher number of franchisees for
every franchisee also enables company to leverage economies of scale and scope.
United States of America

Franchising Growth In USA
850 Sales (in $ Billion) 800 750 700 650 600 2007 2008 -3.2% 2009 3.1% 2.2% -1.8% -0.05 2010 2011 2012 2013 4.9% 3.7% 4.9% 4.9% 0.1 4.3% 0.05 0
Employment through Franchising

8.40 8.25 8.10 7.95 7.80 7.65 7.50 2007 2008 0.50% -0.26% 1.93% 0.04 0.02 0 -0.02 -0.04
2.14% 2.00%
3.8% 3.5%
-2.86%
2009
2010
2011
2012
2013
Sales ( in $ Billion) GDP Growth Rate (Y-O-Y)
Franchising Growth (Y-O-Y)
Direct Employment by Franchising Sector Franchise Employment Growth Rate
Source: The Franchise Business Economic Outlook report:2012 prepared by IHS Global Insight for The International Franchise Association Educational Foundation
USA Leader in the world of franchising with around 84 of the top 100 franchised brands globally, has seen a continuous growth as is evident in the following figure. Except for the recession years of 2008 - 09, franchising growth has exceeded the GDP growth rate. Employment generated by the franchising sector also has been growing over the last 4 years in the US suggesting the immense potential for the sector to contribute to job creation.
Source: http://www.tradingeconomics.com/unitedstates/gdp, Report on The Franchise Business Economic Outlook:2012 by International Franchise Association
2 "The Franchise Business Economic Outlook: 2012 prepared by IHS Global Insight" and "http://www.franchise.org/Franchise-News-Detail.aspx?id=58916"
04
Brazil
Franchising Growth in Brazil
120 100 80 60 40 20 Sales ( in $ Billion) 19.5% 5.1% 20.4% 14.7% 7.5% -0.3% 30.0% in million 16.2% 0.9% 20.0% 10.0% 0.0% -10.o%
Employment in the Franchising sector

1.00 0.80 0.60 0.53 0.40 0.20 0.061 0.063 0.065 0.072 0.080 0.086 0.093 0.1 2011 2012 0.56 0.59 0.65 0.72 0.77 0.84 0.94
13.2% 11.0% 15.6% 3.2% 4.0% 5.7%
17% 2.7%
2005
2006
2007
2008
2009
2010
2011
2012
2005 2006 2007 2008 2009 2010
Franchising Growth (Y-O-Y) Sales ( in $ Billion) Brazillian GDP Growth Rate (Y-O-Y)
Source: Brazilian Franchise Association
Direct Employment by Franchising Sector (in million) Number of unit franchises (franchisees) (in million)
Source: Brazilian Franchise Association
Brazil has seen a tremendous growth in franchising over the last decade with a CAGR of around 16% from 2005 to 2012. The total turnover of the franchising sector in 2012 stood at $103 Billion, which is around 4.16% of the Brazilian GDP in 2012 ($2476 Billion). The double digit growth of franchising far exceeds the GDP growth rate as can be seen in the figure which is a proof of popularity and acceptance of franchising in this country.
Source: http://www.tradingeconomics.com/brazil/gdp
United Kingdom
Franchising Growth in UK
25.0 20.0 in $ Billion 15.0 10.0 5.0 2005 2006 2007 2008 2009 2010 2011 15.7 16.4 17.3 18.9 17.9 18.9 20.0% 10.0% In Lakhs 0.0% -10.0% -20.0% -30.0% 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.33 2005 0.34 2006 0.36 2007 0.366 2008 0.365 2009 0.386 2010 0.4 2011 3.65 4.31 4.80 4.67 4.65 5.21
Employment in the Franchising sector

5.94
20.4
Franchise Sales (in $ Billion) GDP Growth Rate (Y-O-Y)
Franchising Growth (Y-O-Y)
Number of unit franchises (franchisees) Total Employment by Franchising Sector
Source: http://www.thebfa.org/about-franchising/franchising-industry-research (Website of British Franchise Association)
Franchise sales in the United Kingdom have seen a continuous rise over the last couple of years. According to the British Franchise Association, the total sales from the franchising sector stood at $20.4 Billion in 2011, up from around USD 19 Billion in 2010. The growth of the UK's franchising sector, except in 2005 and 2008, exceeds the country's GDP growth rate. With a growth rate of around 8% in 2011, franchising has helped the country increase revenue for the government as well as creates more jobs for the public. With an employment potential of close to 6 lakhsin 2011, this sector holds a lot of promise for the UK economy.
Source: http://www.thebfa.org/about-franchising/franchising-industry-research (Website of British Franchise Association)"
As corroborated by the above analysis, there is a large scope for franchising to contribute to India's economic growth while generating employment (both direct and indirect). Franchising as a business model also allows efficient flow of capital from the unorganized segment into organized business. Such a model is well suited for an emerging economy like India where there is wide spread distribution of capital.
05
Current market landscape for franchising in India
06
Current market landscape for franchising in India

Since liberalization, the Indian economy has witnessed steady evolution. Consumerism has risen on account of a growing young population, high disposable income and growing urbanization. Structural shift in Indian economy Consequently, retail and service sectors are expected to play a major role in this consumption boom. The macro statistics reveal that agriculture is no longer the chief contributor to the Indian economy. The country is gradually moving towards being a manufacturing and service-based economy in last the two decades.
42% 59%
Today India is home to more than 3000 brands which adopt the franchising model. Bata, one of the leading footwear companies, was among the first franchisors in India. Other pioneers of Indian franchising were NIIT, Apollo Hospitals and Titan Watches. In addition, today several leading global franchise companies, such as Dominos, McDonald's, Yum Brands, Baskin Robbins and Subway, have already established a presence in India. The franchise industry is expected to continue to benefit greatly from government support across various sectors through various measures including allowing foreign direct investments (FDI) in single brand and multi-brand retail.
This growth has also given impetus to a huge entrepreneurial appetite. Over the last decade, franchising has surfaced as one of the most
27%
24%
prolific and feasible ways of expanding businesses in India. Several industry verticals such as food and beverage, education, fashion, tourism and hospitality are leveraging their growth by franchising their products under various formats.
44% 17% 1991? 92 Agriculture 2012? 13 Industry Services
Source: Centre for Monitoring Indian Economy (CMIE), Ministry of Statistics and Programming Implementation (MOSPI)
Understanding franchising
Franchising is perhaps the most widely used way of business expansion method adopted by both international and domestic players. While Indian law does not officially define franchising, the term indicates a way of doing business involving the use of a person ('franchisee'), pursuant to a license, of another person's ('franchisor') business model, name, image and business identity along with his/her confidential know-how to exploit his/her intangible assets in a particular territory for a specified Product distribution franchising, involving a co-operation for the distribution of goods, mostly in the retail business period, with or without assured financial returns to the franchisor. The Black's Law Dictionary defines a franchise as a license from the owner of a trademark or trade name permitting another to sell a product or service under that name or mark. There are three distinct types of franchising: Business format franchising, a combination of the other two types of franchising, using the franchisor's trademark/ business name in order to distribute the franchisor's goods or services. Trade name franchising, where the franchisee uses the trademark / business name of the franchisor in order to sell its own products or services
07
The economic significance of Franchising market in India

Franchising contributes to the economic growth of a nation in multiple ways such as job creation, access to necessary goods and services and expansion of a country's tax base. The concept of franchising in India has been growing at an impressive rate since KPMG in India estimates suggest that the Franchising business in India was worth USD 13.4 billion in 2008, as risk-averse Indian entrepreneurs consider it as the most viable option to tap the nation's vast consumer market. 2012 and is expected to witness CAGR of 30 percent over the next 5 years. This amounts to about 1.4 percent of the country's GDP in 2012.
Estimated franchising industry market potential (2012-2017)

60 50 Value (US$ billion) 40 30 20 10 0 2012 2017 (projected)
Source: KPMG India Analysis Key assumption: KPMG in India has considered the sectors of Retail, Food Service, Health & Wellness, Education, Consumer Services and other niche areas while estimating the franchising potential in India.
210 168 180 150 120 50.4 45 90 60 30 0 No. of outlets ('000)
Franchise revenues growth - 30.2% No. of franchise outlets growth - 30%
13.4
KPMG in India expects both demand and supply side factors to contribute to this growth. Demand side factors Increasing consumption and willingness to spend Increasing purchasing power of the middle class. Growing preference for branded and quality products among consumers Increased global exposure and growing aspirations to adopt western culture and use international brands. Government initiatives such as the liberalization of FDI in retail which has allowed foreign brands to enter India Supply side factors Increasing set of opportunity-driven competent entrepreneurs Increasing awareness of Franchising as a business opportunity and its relative low risk profile
08
Franchise: Sector watch

The franchise business in India is increasingly getting popular among domestic and international players across various sectors. Several major industries credit successful franchisees for their rapid progress. The key industries that possess high prospects for the successful franchise opportunities in India are following: Retail franchising Food and beverages Health, beauty and wellness Consumer services Education and training The individual growth and potential of these industries are driving the growth of the overall franchise sector in India.
US $13.4 billion Food & beverages Health & Wellness Financial services Courier services Consumer Services (others) Education Apparel Pharmacy Jewelry Food and grocery retail Furniture & fittings Retail (others) 2012 5% 1% 3% 3% 4% 5% 13% 2% 3% 4% 11% 3% 6% 8% 32% 23% US $51 billion
No. of outlets 2012 2017 (Estimated) (Projected) Food & beverages Financial services Courier services Consumer Services (others) Education Apparel Pharmacy
21% 25% 6% 1% 3% 4% 6% 9% 2017 (Projected)
~5,700 ~5,200 ~8,600 ~1,000 ~8,100 ~2,800 ~3,000 ~1,500 ~330
~27,000 ~17,700 ~19,000 ~26,300 ~3,800 ~29,500 ~6,200 ~15,000 ~8,300 ~1,600 ~2,700 ~11,200 ~168,000
Health & Wellness ~2,750
Jewelry Food and grocery retail
Furniture & fittings ~1,250 Retail (others) TOTAL ~4,400 ~45,000
Source: KPMG India Estimates
Education and training: Owing to demographics, education is one of the most sought-after sectors by franchisors. The formal education sector includes preschools, K-12, Higher Education, and vocational services. Within education, following are the attractive subsectors that have a potential for expansion through franchising: a. Vocational training: As per the Planning Commission, in 2011, only about 2 percent of the existing workforce in India was skilled. The corresponding numbers for Korea, Germany and Japan are 96 percent, 75 percent, and 80 percent, respectively. Another report by the same agency states that India needs to create 10-15 million jobs per year over the next decade to provide gainful employment to Indian youth. By 2020, India needs to create employment for about 140 million skilled workers. Confederation of Indian Industry (CII) also has launched a Skills Development Initiative, which is aligned, to the National Skills Development Agenda to skill 500 million people by 2022.Therefore, there is a huge scope of growth in
the sector and hence investments in franchising in vocational education. IT training (vocational programs) constitutes the largest size of the education industry through franchising. The total franchise revenues from this segment in 2017 are expected to become 2.5 times of that in 2012. KPMG estimates a franchising potential of 8,500 outlets by 2017 in this segment Pre-schools: India has large population of about 158.8 million children in the age group of 06 years (~5 million since 2001).4 Currently, existing pre-school franchise businesses cater to only about one tenth of the total children in this range.5 The segment has high potential for franchising opportunities in tier 2 and 3 cities, which lack quality education services and facilities. Our estimates suggest that revenues from franchisee preschools are expected to reach almost USD 94 million from a current value of USD 16 million. It is estimated that a total of 21000 franchisee establishments may be required by 2017 to meet the growing demand for pre-schools
in the country from a current base of around 5000 (2012). 2017Franchise projections Pre-schools IT training (Vocational education) Others* Revenues in US$ million 94 2700 No. of outlets 21000 8500
86
NA
*Note: Others include the segments such as trainings in multi-media and animation Source: KPMG estimates
Franchise revenues and outlets growth projections

~4X growth US $ 2900 Million 26%
US $ 710 Million 9% 89% 2012 Pre-school Others
71%
2017 (Projected) IT Training (Vocational education)
Food service sector: The food service industry in India is estimated to be worth USD 48 billion in 2012, and expected to grow at 13 percent CAGR over the next 5 years.6
4 5 6
Major highlights of the Census 2011, The Economic Times, accessed on 23rd April, 2013 http://www.smallenterpriseindia.com/index.php?option=com_content&view=article&id=1030:potential-sectors-for-franchising-in-2013&catid=79:top-stories&Itemid=112, accessed on 23 April, 2013 KPMG Estimates
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Franchising in new concepts such as Quick service restaurants (QSR), Caf/bars and fine & casual dine is expected to see a rapid jump. Our estimates suggest an opportunity to the tune of USD 1.5 billion, USD 1.4 billion and USD 1.2 billion for franchising by 2017, in each of the three segments respectively.
Source: KPMG India Analysis
Growth projections of the franchise penetration in key segments of the food service industry over 2012-17 Food & Beverages Sub-categories Share in Food service franchising revenues (2012) 37% 35% 25% 2% 1% USD 731 million Estimated additional revenues from Franchising during 2012-17 (USD million) ~ 1,290 ~1,140 ~1,000 ~100 ~170 ~USD 4.4 billion Share in Food service franchising outlets (2012) 24% 13% 52% 3% 8% 5700 Estimated potential additional outlets during 2012-17 (Nos.) ~ 4,800 ~2,700 ~11,000 ~600 ~2,200 ~27000
Quick service restaurants Fine and casual dining Caf/Bars, Pubs Confectionary Kiosks / Street stalls Total
Source: KPMG India Estimates
Health, beauty and wellness sector: The market size of the overall beauty and wellness industry in India (organized and unorganized put together) is estimated to be USD 4.5 billion in 2012. It is expected to grow at nearly 20-25 percent annually. The key industry segments include Salons (60 percent of total market), Fitness and Slimming (25 percent) and Spa (includes alternate therapy with 16 percent industry share). The key drivers behind this exponential growth include more
awareness toward hygeine and wholesome lifestyle coupled with a surge in retail business in India. The sector is going mainstream through franchised based business models. Since the sector requires high capital investment for growth, players in this segment are increasingly relying on franchising to scale up businesses and extend reach to Tier 2 and 3 cities. The sector is largely unorganized; the organized share is primarily limited to grooming spas and
saloons. However, the same is expected to change given the expanding base and inclusion of innovative wellness themes such as stress conditioning spas and specialized segments such as Tai Chi and power yoga. Consultation, diagnostic services, health checkups and pharmacy are also some high potential and profitable franchise options in the healthcare sector.
Our estimates suggest that franchising is expected to grow by almost 6 to 7 times the current value by year 2017 both in value and volume terms. Franchising in this sector is expected to contribute around USD 3.2 billion in revenues by 2017 coming from about 17000 franchisee units.
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Retail sector: The retail industry landscape in India is changing rapidly on the back of factors such as favorable demographic profile, rising disposable income levels and the industry appetite to cater to this emerging consumption boom. The organized retail (including Food & Grocery) is estimated to be USD 24 billion in 2012, largely concentrated by retail franchisors in the Apparel, Consumer Durables and Food Groceries space with around 80 percent share. However, India drives only about 2.5 percent of total retail sales (organized and unorganized) through franchise formats, as against nearly 50 percent in the US, indicating huge potential for the market in future. KPMG estimates that over 43000 franchisee establishments (valued at USD 36
billion) may be required by 2017 to meet the growing demand in the retail sector from a current base of 13000 (valued at USD 10.6 billion).
Indian retail scenario 2017 (projected) US $ 926 billion
Indian retail scenario 2012 US $445 billion Organized retail US $24 billion Franchise retail market US $10.6 billion
Organized retail US $ 79 billion
Franchise retail market US $36 billion
Indian retail industry

Projected state of retail franchise industry in India in 2017
Jewelry grocery Boo Food & billion, US $2.9 k , .6 Sta s, Mus billion, les US $1 600 tion ic b a 1 ~ r U ~8,200 S $ ery Du s er onic mil 578 m l r e u l ~4, ion, ns ect bi on, 000 Co El Mo billi & 11 0 $ ,30 US ~7
Apparel US $10.5 billion, ~6,200
Projected franchise penetration in Indian retail industry 2017
Pharmacy US $4 billion,~15,000
Figures indicate franchising revenues and franchisee outlets respectively Source: KPMG in India Analysis
Recent FDI reforms in single brand and multibrand retail are likely to lure more global retailers to participate in India. Existing retail majors are under pressure to consolidate and increase their franchise network reach. Meanwhile, several multinationals such as IKEA, Wal-Mart are looking to establish their brands in India. Franchising is expected to continue to be one of the most popular business formats among organized retailers to tap the emerging consumption boom, specifically in the tier 2, tier 3 and smaller cities. However recent clarifications issued by the Indian government on FDI regulations in multibrand retail allowing foreign retailers to only open company owned company operated outlets could be a big blow to growth in Retail franchising in India.
ure s nit ing , Fur nish llion ur bi & f $5,3 00 7 US ~2,
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Consumer services: The Consumer services industry basically deals with customer-centric services, which means understanding new consumer trends and requirements; and generating products and services accordingly. Innovation remains the key to service the industry for the franchisors; however relatively lower investments and moderate domain knowledge suffice the business need. KPMG in India estimates that a total of around 50,000 franchisee establishments (contributing USD ~4 billion) may be required by 2017
to meet the growing demand in the services sector. Currently it is estimated that franchising in services sector contributes to almost USD 1 billion of revenues from around 15,000 outlets. With rapid growth in consumerism in India and growing brand awareness among customers, the consumer services sector is poised to leap in the future. The key consumer services in India include travel services, financial services, cleaning, and real-estate and transaction services. These segments give immense franchise
opportunities for new and existing players. Need for closer presence to end customer is driving brands/ companies to open new outlets in multiple locations/ catchment regions. Franchising is seen as a viable way to expand without compromising on service standards and quality. Customers can expect similar service levels at any outlet. Innovation driven consumer services companies/ brands are also resorting to Franchising as the route to growth.
Services industry state in India
Franchise penetration in the key service sectors

Dry cleaning 34 2 185 25 140 55 1,572 365 1,991 387 Industry size in US$ billion
6000 4500 3000 1500 0
2017 (projected) 2012
Matrimony
US$ million
Travel 36% CAGR 834 2012 2017 (projected) Financial Services 3922
Courier
Organized market - ~12% Franchise penetration in organized market - ~20%

Following are the few case studies highlighting 'innovation' as one of the key success factors in franchising in the consumer services sector in India: Segments Car cleaning and grooming segment 'Innovation' is the key 3M Car Care recently launched 'germi-clean treatment in metros, for the car owners who generally eat and spend most of their time inside their cars. This treatment ensures 99 percent decline in the microbial and bacterial growth on the mats or the upholstery of their cars. Village Laundry Services (VLS) operates under the trade name 'Chamak' and offers affordable and high quality washing, drying, and ironing services. VLS has got funding from Procter & Gamble and Calvert (a US-based fund). Both these companies aim to build a completely newservice concept (high-quality, affordable, Laundromats) and to help low-income individuals get sustainable livelihoods. Franchise spread till 2012 3M operates seventeen franchisees of its car-care centers in India.
Laundry services
The company operates through 20 franchise stores in southern India.
Source: Source: http://www.dnaindia.com/money/1748194/report-bright-as-a-new-car, accessed on 28 May 2013; http://articles.economictimes.indiatimes.com/2009-12-11/news/27652895_1_ vls-washing-clothes-clayton-christensen, accessed on 28 May 2013.
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Other niche sectors: The franchise industry in India is growing rapidly in multiple sectors. Despite strong penetration in the retail, food service, healthcare, education and services sectors, franchise operations have gained momentum in some niche sectors. Entertainment, agriculture, realestate, telecom, gaming, media, entertainment and personalized services such as home cleaning are among emerging niche sectors.
KPMG in India estimates a steady growth in the franchise penetration in aforesaid sectors. Overall, the franchising industry in India is expected to witness an above average growth rate over 2012?17 across sectors. The growth would be fuelled by rising income and expenditure levels of the young population along with the recent FDI policy changes, economic and socio-cultural developments.
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Franchising Opportunity Attractiveness

While there is huge potential for franchising to grow in the Retail, Consumer Services and Education space in India, Food Service sector and Health & Wellness sectors present a great opportunity from a profitability perspective. While payback periods for successful franchisees in these sectors range from 2 to 3 years, there is a higher degree of risk of failure. This predominantly stems from the fact that these sectors are driven by experience of end consumer and any gaps in providing the expected level of experience could result in loss of customer.
Investment VS ROI / sq ft - Volume based plot

100 90 80 70 60 50 40 Pre-schools 30 20 10 Furniture and Furnishing Spa Salon QSR Cafe/Bar Fitness and Slimming FSR Jewellery
Investment (in INR lakhs)
Consumer Durables, Food & Grocery Pharmacy IT Training Apparel Books, Music and Stationery Travel Services Financial Services
(500) -10
500
1000 ROI / sq ft (in INR)
1500
2000
2500
Source: Industry Survey, Franchising Industry in India, KPMG in India, 2013, India Retail Report 2013, Euromonitor Reports, Netscribes Report, Published Newspaper Articles, KPMG in India analysis
Bubbles represent the Potential number of outlets required by 2017 (This size corresponds to approx 3,000 outlets)
While market potential is huge in the retail sector, KPMG in India estimates that franchising opportunity would be relatively high in Consumer Services, Food Service, Education and Health & Wellness sectors. Cumulatively these sectors have a potential to add 1 lac franchisees in the next 5 years.
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Franchising growth from 2012 - 2017 (e)

12 Apparel 2017 10 Consumer Durables 2017 X% Represents the CAGR growth from 2012 - 2017 Bubbles represent the Potential number of outlets required by 2017 (This size corresponds to approx 20,000 outlets)
8 Franchisee Market Size (US $ billion) 7.6%
10.4%
6 Consumer Durables 2012 4 Apparel 2012 Jewellery 2017 Consumer Services 2017
F&B 2017 Health & Wellness 2017
10%
2 2017 Food & Grocery 20% Consumer Services 2012 17% Food & Grocery 2012 Jewellery 2012 0 -10 0 10 20
6.5% F&B 2012
Education 2017 26% Education 2012 23.5% Health & Wellness 2012
30
40
50
60
70
80
Franchisee Penetration (%) -2

ROI / sq. ft. VS Average sq. ft.

1900.00 Travel Services 1800.00
Avg sq ft
1700.00 Apparel 1600.00 Food and Grocery 1500.00 Consumer Durables Furniture and Furnishing IT Training Salon Fitness and Slimming Bubbles size represent revenue per sq. ft. (This size corresponds to INR 8,000 per sq. ft.) 500 1000 ROI / sq ft (in INR) 1500 2000 2500
FSR Cafe/Bar Spa QSR
1400.00
(500)
1300.00 -
However market potential in absolute terms is highest for sectors with-in retail. Revenue per square feet of area in this sector could range anywhere between INR 20000 to INR 50000.
15
Case studies in the Indian franchising space
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Case studies in the Indian franchising space

Despite the challenges the country presents, there have been many successful case studies of franchising in India. From franchisors such as Aptech and NIIT which have pioneered the franchising model in India to new age franchisors such as Makemytrip.com and VLCC who are adopting innovating expansion models with-in franchising, majority of the brands/ companies are adopting the franchising model to expand and provide a consistent and quality experience to its end customers. Many international brands such as McDonald's, Dominos, KFC, Subway, Booster Juice have entered the country through the franchising route.
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Siyarams
Siyarams performance
Siyaram Silk Mills (Siyaram) Area of operations Start of operations Key brands Apparel retail 2006 (franchise)
(INR 10 million) 1000 856 800 648 600 400 200 0 FY8
Source:Moneycontrol.com
925 796 590
Siyaram's, J. Hampstead, Mistair, MSD and Oxemberg 120 (as of May 2013) 9251 567
Franchise units Presence across cities Turnover (INR million) Net profit (INR million)
FY9
FY10 FY11 Sales Turnover
FY12
Siyaram has signed 27 franchise agreements from April-May 2013. It aims to sign 90 such agreements until FY14.
Key investment considerations Area requirements Investment Break-even period Expected ROI 800 - 1,000 square feet INR 2.5 - 2.8 million 2 - 3 years 15 - 16 percent Stores should be in high streets or popular shopping destination. 5 years
Siyaram seeks to increase its franchise outlets to 500 by FY17 and sales from franchise outlets to 20 percent (from 10 percent in 2012).
Other requirements Agreement validity
Tailoring success for franchisees
Accelerated growth in smaller cities Siyaram has extensive presence in larger cities and is actively targeting smaller cities for expansion. It has plans to reach all Tier II and III cities. Franchising model presents Siyaram with a low cost avenue to expand presence across India, especially beyond metros. Siyarams strong brand awareness and connect with consumers act as key enablers of growth.
Leveraging local expertise The apparel business requires extensive knowledge of local tastes and preferences, which vary widely across India. The franchise model has helped Siyaram leverage local expertise that franchisees would bring to the table. Therefore, franchisees must have a good understanding of local tastes and preferences.
360 degree support to franchisees Prior experience in the textile industry is not a must for becoming a franchisee, as the company helps franchisees in setting up operations. Siyaram supports franchisees in various areas, including marketing, advertising, software, store layout, inventory management and billing. It also assists franchisees by providing soft loans.
Source: Moneycontrol website, Siyaram website, The Economic Times, KPMG Analysis
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Lakme Salon
Lakmes performance
Lakme Salon (Lakme) Area of operations Start of operations Key brands No of outlets Presence across cities Turnover (INR million) Beauty and wellness 2000 (franchise) Lakme Salon, Lakme Ivana 135 40 307 (FY11)
How lakme grooms franchisees for success

Association with industry experts Association with industry experts is important to stay abreast with latest trends. Lakmes association with experts such as Paul Mitchell and Lucie Doughty has helped it train stylists and introduce global trends across franchisee centers. Ensuring customer loyalty Lakmes loyalty programs ensure repeat walk-ins, which accounts for about 80 percent of customers. Training and support Lakme realizes that the success of a salon largely depends on the staffs skills. Therefore, to train its stylists, Lakme has launched a beauty academy. Lakme has also tied-up with the beauty training company Pivot Point. An initiation training is conducted before a franchisee starts operations. Refresher training are carried out throughout the year to keep the staff updated. Apart from training, Lakme also extends managerial support to franchisees. It also helps them select sites, negotiate rents, understand standard operating procedures and design salons. International product portfolio and range of services Lakme is an established brand and a leading player in the beauty industry. This drives demand for Lakme products and services among consumers and strengthens its premium positioning. A constantly evolving service portfolio to suit consumer needs is a key USP of Lakme salons. The portfolio includes advanced facial services, new bridal looks, hair spas and other luxury treatments. Lakme has also launched its unisex salon format - Lakme Ivana that provides greater investment options to franchisees.
175 - Salons 2013 12 - Salons 2000
Source: Images retail, Lakme website
Lakme is expanding through the franchising route and 135 out of its 175 salons are operated by franchisees.
Thirty percent of the total franchisees own multiple salons. This reflects their brand loyalty to Lakme. Hindustan Unilever proactively ties up with unbranded players (with a minimum scale of operations) instead of setting up operations from scratch (in addition to the normal franchise route). Key investment considerations Area requirements Investment Break-even period Expected ROI Other requirements 800 - 1,200 square feet INR3 - 5 million 2.5 - 3 years More than 18 percent Lakme seeks partners who are interested in the business, have a proven business track record and are committed to local marketing. 5 years
Agreement validity
Source: Images Retail (October 2012 edition), Hindu Business Line, Lakme Salon website, Reevolv Research Report (Financials), KPMG Analysis
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VLCC
VLCCs performance
VLCC Area of operations Start of operations Key brands Beauty and wellness 2007 (franchise) VLCC Salon (VS), VLCC Centre (VC) 56 (as of August 2012) 4760 (FY12) 260 (FY12) Key investment considerations Area requirements
500 400 (INR 10 million) 300 200 100 0 FY11 Sales Turnover
Source: ICRA
How VLCC shapes success amongst franchisees

Training and support VLCC provides free startup training to franchisee staff in areas such as products, services, operations and client handling. VLCC also supports them in other areas such as selecting sites, developing projects, recruiting staff, launching centers, procuring equipment and marketing. VLCC maintains a stringent system of quality control through its team of dieticians, beauticians and operations experts, who visit franchisee centers regularly to conduct checks and audits.
No of outlets Presence across cities Turnover (INR million) Net profit (INR million)
1,700 - 1,800 square feet (VC) 900 - 1,000 square feet (VS) INR4.1 - 4.4 million (VC) 900 - 1,000 square feet (VS) 16 - 18 months (VS) 14 percent of sales (payable monthly) 40 percent in the initial 4 - 5 years, improves thereon Streamlined franchisee approval process Filling out application forms
Investment
Break-even period Royalty
Expected ROI
FY12
Quick expansion of network is a key reason for adoption of franchising route by VLCC.
Reviewing application forms Reviewing financial capability
As of August 2012, 25 percent of VLCCs 160 slimming, beauty and fitness centers were franchisee run. VLCC plans to setup 300 wellness centers by 2015.
Interviewing franchisees Understanding their conviction and business

The selection procedure is quite streamlined and plays an important role in the selection of franchisees. It involves gauging franchisees understanding of the business and their conviction to ensure that VLCCs brand value is maintained.
As of August 2012, 12 out of 51 VLCC Beauty and Nutrition Institutes were operated by franchisees.
Approving franchisees Signing agreements
VLCC is present in countries such as UAE, Nepal, Sri Lanka and Bangladesh. It is exploring new franchise opportunities in Pakistan, Sri Lanka and Bangladesh.
Source: Company website
Awarding licenses
Source: Images Retail (October 2012 edition), Hindu Business Line, ICRA (Financials), VLCC website, KPMG Analysis
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Aptech
Aptechs performance
Aptech Area of operations Start of operations Key brands Computer education 1990 (franchise) Arena Animation, Aptech Hardware and Network Academy, Aptech Aviation and Hospitality Academy 1186 909.5 (FY12) 182 (FY12)
90.95
Why Aptech clicks with partners

Formalizing systems to support scalability To ensure quality service delivery, Aptech put the processes and systems for service delivery were in place before adopting the franchising model. Aptech started operations in 1986 but its first franchisee center opened in 1990. Aptech centers serve as models for franchise centers and help them adopt established processes. It has also established mechanisms to control and monitor franchisees. These include conducting financial audits, closely controlling course material and training instructors regularly. Flexibility to choose from among a wide range of brands Aptech imparts professional training through a range of brands such as Aptech Computer Education and Arena Animation. It provides several options to prospective franchisees to choose from, depending on local demands, investment potential and partners interests.
No of outlets Presence across cities Turnover (INR million) Net profit (INR million)
100 (INR 10 million) 50 0 FY11
Sales Turnover
Source: Moneycontrol.com
94.15
FY12
Operating Profit Reported Net Profit
This has been a critical factor for Aptechs growth within India as well as in 40 countries. Aptech updates courses and trains instructors regularly to meet the requirements of the dynamic IT industry.
Aptechs fast expanding franchisee network has helped it establish the brand in five continents. It is one of the few franchisers that has over 20 years of experience of starting and operating more than 1,100 franchise centers globally, growing from 754 centers in April 2010. Key investment considerations Area requirements Investment ROI Break-even period Other requirements 1200 - 2000 square feet INR1.5 - 2.2 million depending on city tier 18 - 23 percent 12 - 18 months Management of day to day operations and marketing Aptech courses in city. Model Master franchisee Master franchisee and individual center Master franchisee Joint venture Master franchisee Subsidiary
Concerted efforts to get the business running Franchisees are supported in many areas including formulating business plans, selecting sites, designing centers, selecting equipment and staff sand imparting technical training. Strong selection process For a competent and consistent service delivery, Aptech follows a strict recruitment process that requires franchisees to adhere to about 40 parameters, including investment potential, area, location and passion for education.
Country Vietnam Nepal Indonesia China Sudan Bangladesh
Different business models for global expansion Due to various legal and regulatory issues in different countries, Aptech has adapted its existing franchise model (where all centers are independently owned) to expand abroad through: Master franchise model where all centers are owned by Aptech Joint ventures and wholly owned subsidiaries
Source: Moneycontrol website, Aptech website, Building social capital with Aptechs Vidya (USAID publication), KPMG Analysis
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Makemytrip.com
Makemytrips performance
Makemytrip.com (MMT) Segment Start of operations Key brands No of outlets Presence across cities Turnover (INR million) Net profit (INR million) Online travel portal 2009 (franchise)
000 US $ 500000 20000
The number of franchise outlets have grown from 0 in 2009 to 51 in 2012. 30-35 percent of MMTs holiday packages are sold through offline outlets, majority of which are franchise outlets (72 percent of the outlets in 2012). MMT is looking for overseas expansion in regions such as south east Asia through growing number of franchisees in India.
Makemytrip.com 51 (2012) 196.6 (FY12) 8.9 (FY12)
000 US $ 0
FY 11
FY 12
Sales turnover Adjusted operating profit Adjusted net profit

Understanding MMTs flight to success

Successfully targeting the clickaverse consumer MMTs franchise partners are a part of MMTs hybrid expansion model to help serve those consumers who are more comfortable planning holidays offline. These are typically consumers looking for personal interaction and would not have ideally opted for the online option. Key investment considerations Area requirements Investment Break-even period Royalty Strategy for geographic expansion Franchising has given MMT access to key Indian markets such as Ahmadabad, Kolkata and Bangalore. As on May 2013, MMT is looking to expand further in cities such as Mangalore, Gandhidham, Kohlapur and Patiala through the franchising route. Other requirements Agreement validity 500700 square feet INR11.5 million 11.5 years INR0.41 million depending on city tier. Preferably located on main road or high street. 3 years
Focus on quality
Service quality is one of the most important factors that differentiates MMTs franchise partners with key competitors such as offline travel agents. This is enabled through franchisee training which includes: Standard training on products and destination guides. Close involvement if MMTs service delivery team with the franchisee. Periodical trainings before peak holiday season. Consistency in service quality is maintained through regular audits at the franchise outlets. Focus on recruiting the right set of partners is the key to success of a franchising model. This becomes even more important in a specialized service sector like travel. Few important criteria for MMTs franchisee appointment include: Passion for travel industry. Proven business track record and management skills. Ability to invest the necessary capital. To enhance demand, MMT supports its franchise partners through: Designing stores optimally Managing store launch and creating awareness in the area. Carrying out local promotional activities such as road shows and mall events.
Associating with the right partners
Other support
Source: Huffington post, Cspnet website, News Articles, KPMG Analysis
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DTDC
DTDCs performance
DTDC Area of operations Start of operations Key brands Franchise units Presence across cities Turnover (INR million) Net profit (INR million) Courier and cargo 1990 (franchise) DTDC More than 5800 4250 (Fy12) 200 (Fy12)
500 (INR 10 million 307.5 239.5 220 193 0 424
Close to 6,000 franchise partners growing in number at 5-10 percent per annum, form the backbone of DTDCs success. DTDC has presence across 12 countries with 300 offices in countries such as the UK, the US, Australia and Singapore driven by growth in franchisees. It is looking to expand network into countries such as Pakistan, Indonesia, Malaysia and Thailand.
FY 8
FY 9
FY 10
FY 11
FY 12
Sales turnover
How DTDC delivers success Low-cost entrepreneurship model DTDCs USP is the low-cost franchise opportunity it offers prospective partners. Its franchise model is focused on enhancing geographical reach through partnerships with small businessmen across India. The investment requirement is INR75,000-100,000* In addition, DTDC tries to ensure that its partners start getting cash inflows from the first month itself. Educational qualifications is not a barrier to partnership as in other sectors like education. Tapping growth opportunities DTDCs international expansion aims to create logistics channels with countries which are Indias top trade partners or are home to large Indian diaspora. The resultant two-way traffic is intended to benefit the domestic partners as well. DTDC has also realized the potential of upcoming growth opportunities such as e-commerce and is actively pursuing the same. It has created a specialist entity DotZot to cater to e-tailers by actively promoting premium services such as 24 hour delivery to drive business growth. Leveraging local expertise DTDCs franchising model sits well with its area of operation, since it utilizes the expertise and knowledge of local partners. This has resulted in: Timely delivery of parcels Credible service Reduced costs for DTDC Robust structure to complement access DTDC has established a robust pan-India presence through a mix of different franchise types: Super/master/single franchise: Deal with day to day logistics operations. Corporate franchise: Consist of experienced industry individuals who promote DTDC product and services. This format requires office space for operations. Area Investment
Key investment considerations 75300 square feet Category A: INR150,000 Category B: INR100,000 Category C: INR 50,000 (A Metros; B,C Smaller cities) 49 months More than 20 percent Premises should be ground floor. 24 depending on category
Break-even period Expected ROI Other requirements Staff
Super franchise: Carries out additional responsibilities such as business development and client servicing. Typically represent a district within a region. Master franchise: Handles the reporting of one or more of single units and typically represent an area within the city. Single units: Cover a small territory or a pin code. These constitute 95 percent of network and 75 percent of revenues.
Source: Moneycontrol website, DTDC website, The Economic Times, Business Today Magazine, KPMG Analysis
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Jumbo King
Jumbo kings performance
Jumbo King (JK) Area of operations Start of operations Key brands No of outlets Presence across cities Food retailing
INR 10 million 8 6 4 2 0 FY 10 FY 11 Revenues 4.83 5.85
The number of franchise outlets has grown from 45 (in October 2012) to over 50 (as of May 2013). The company plans to grow to 200 stores by 2015 and is focusing on the master franchising model to establish presence in cities such as Bangalore, Aurangabad, Nagpur, Bhopal and Surat.
2004 (franchise) Jumbo King 50 58.5 (FY11)
Recipe for success Location JK targets prime locations with high footfalls, such as railways stations for setting up outlets. JKs franchisee relation team offers support in site election and rent/price negotiation to ensure best locations at optimum costs. JK also supports a joint ownership model where multiple individuals can open a franchise outlet. This also helps in overcoming the cost constraint typically associated with owning/renting prime locations. Standardizing quality The USP of Jumbo King is hygienic food, and with pan-India presence it is important that consistency in food quality is maintained across outlets. To ensure consistency, Jumbo King has outsourced all manufacturing so that there is no difference in quality of food offered. Key investment considerations Area requirements Investment Staff requirement Other requirements 300 square feet (Single franchise) INR1.2 million (Single franchise) About 7 Shop should be in prime location with high footfalls as the format is of on-the-go service.
Core factor Jumbo Kings master franchise model
Jumbo Kings Master Franchisee (MF) model 1
Innovative royalty system After expanding through single-unit franchises in areas such as Mumbai, Jumbo King, in 2008, decided to focus on master franchising rather than single-unit franchising. A master franchisee is required invest in a minimum of 5 single-unit outlets (directly under his control). A key reason for opting for MFs is the business stability that larger players can offer compared to smaller players. The small outlet size also permits franchisees to diversify investment (by investing in multiple outlets) and minimize risk unlike other QSR formats where franchisee invests in a single outlet. Increasing ownership of partners Jumbo King follows a more decentralized franchisee model, unlike most other players in the sector. A master franchisee can get the right to sub-license Jumbo King in his area and expand his presence. A master franchisee also contributes to Jumbo Kings regional marketing program and localization of the menu.
MF required for a city with population over one million. 2 30 stores to be opened in five years, 5 store stores to be retained remaining can be sub-franchised. 3 MF should be able to support 10-30 stores in the city. 4 MF to act as companys sole representative for the region.
Source: Hindu Business Line, ISI Company Profile (Financials), Jumbo Kong website, KPMG Analysis
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Archies
Archies performance
Archies Area of operations Retailer (cards and gifting)
(INR 10 million
250 200 150 100 50
202 188 156 139 118

FY 8 FY 9 FY 10 FY 11 Sales turnover FY 12
Archies has more than 350 franchisee stores in more than 100 cities. Archies plans to add about 25 franchisees to its network each year. Archies revenue has doubled from INR1.17 billion in FY08 to INR2 billion in FY12 driven by growth in the franchise business.
Start of operations Key brands
1992 (franchise) Archies, Hallmark, Paper Rose More than 350 (franchise) More than 100 cities 2018.6 (FY12) 95 (Fy12)
No of outlets
Presence across cities Turnover (INR million) Net profit (INR million)
How archies unwrapped success with its franchise model

360 degree support The franchisee is given support in all possible areas relevant to setting up of a store location assessment, advertising, training, store launch, IT support , setting up supply chain, etc. Key investment considerations Area requirements Minimum 500 square feet, with minimum 15 feet frontage (Archies) Minimum 300 square feet, with minimum 10 feet frontage (Paper Rose) INR1.4 million (Archies) INR0.9-1 million (Paper Rose) 3 years 3040 percent on MRP 34 Prime location in the city/mall 3 years
Targeting the right size and location Location is important for retailers belonging to a niche segment such as gifting. Archies franchisees have been critical to growth of the company because of their ability to overcome problems typically associated with acquiring the right property needed for a store. To provide greater options to franchisees, Archies operates through two formats with different store size and investment requirements Archies Gallery (requiring a minimum of 500 square feet) and Paper Rose (requiring a minimum of 300 square feet). Hand-holding franchisees during incubation phase Archies invests a lot of time and effort to support the franchisees during the incubation period, especially since the franchisee may not have huge experience in a niche segment such as retailing. About 45 days spent to develop shop layout and interiors. Visits to best Archies stores to understand best practices Experienced employees assist in operations during initial days. Exclusive offerings to drive business growth Archies has exclusive tie-ups with global players such as Cow Parade, Russ Barrie, Keel Toys, Carte Blanche and Paper Island which provides its franchisees with a unique product range to support business growth.
Investment Break-even period Expected ROI Staff requirement Other requirements Agreement validity
Source: Moneycontrol website, Archies website, KPMG Analysis
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NIIT
NIITS performance
NIIT Area of operations Start of operations Key brands No of outlets Computer education 1986 (franchise) NIIT More than 1000 (as of April 2012) 7381.3 (FY12) 962.5 (FY12)
(INR 10 million) 600 800
400
200
Presence across cities Turnover (INR million) Net profit (INR million
FY 8
FY 9
Sales Turnover
FY 10
Operating Profit
FY 11
Reported Net Profit
FY 12
Key investment considerations Franchise presence of about 1000 education centers across 40 nations. NIIT provides computer-based learning to over 15000 government schools through the franchise model. Area requirements Investment Break-even period Expected ROI Other requirements 15003000 square feet INR1.52 million 12 years Need to carefully consider which offerings to go for. These include NIIT Yuva, NIIT Imperia, etc. 3 years
Agreement validity
NIIT has laid down processes to ensure quality standards are adhered to, and all partners are required to be certified in these processes. Specific norms regarding space, furniture, lighting, etc. have been laid down in detail. Partners go through a number of trainings in areas such as technology, marketing and leadership. NIIT has established standardized teaching methods to deliver a consistent level of quality across centers globally. NIITs association with leading technology vendors such as IBM and Wipro also enables standardized service delivery.
Low break-even period of 1-2 years* coupled with service and marketing support from NIIT encourages partners to open multiple centers. Snowballing growth Service quality Cautious recruitment
Customizing offerings
Marketing support
The franchisee selection ratio for NIIT is typically 1:10. Few important selection criteria include: 1-3 years of experience preferably in middle management Knowledge of regional market First time entrepreneur who can devote 50-60 percent of their time to the business. Capability to invest about 50-60 percent of the project cost. Following a cautious approach, NIIT slowed down its recruitment process during the slowdown period of 2009-10 despite high franchisee interest.
The driving force behind NIITs success is the wide range of need-driven offerings. Franchise partners have played an important role in helping NIIT adapt its curriculum, delivery, marketing and communication to suit local tastes.
NIIT supports franchisee growth through marketing at national level. Given its vast presence in smaller towns, NIIT also provides region-specific marketing/advertising support to partners at a charge. NIIT provides partners with brochures and promotional material.
Source: Moneycontrol website, NIIT website, KPMG Analysis
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Sankalp
Sankalps performance
Sankalp Recreation Pvt Ltd (Sankalp) Area of operations Launch of operations Key brands Restaurants 2003 (franchise) Investment Sankalp (south India), Saffaron (barbeque), Sams Pizza (others) (India + broad) In fine dining; and Sankalp Express & (25) in QSR 135 restaurants, six of which are abroad (as on June 2013) More than 30 cities INR72.9 million (FY10) Area Key investment considerations About 250 square feet (QSR) and about 2,000 square feet (fine dine/casual dine) About INR100,000150,000 (QSR) and about INR600,000700,000 (fine dine/casual dine). This excludes property costs. INR150,000 per month (QSR) and INR1 million per month (fine dine/casual dine) Within 2 years About 2030 percent EBITDA 10 percent of sales (after the impact of capital cost) Rentals 10 percent of sales (510 percent)* About 23 for QSR and about 20 (45 skilled and 15 unskilled) for other formats 5 years
Average revenue Break even period Expected ROI Franchise fee Royalty Staff Agreement period
No of outlets
Presence Turnover (INR million)
Sankalp plans to expand to 500 restaurants by 2018 through its franchise model (QSR 200, remaining 300).
It also plans to launch outlets in cities such as Bhuj and Ontario to strengthen the brand outside India.
Though Gujarat remains Sankalps traditional stronghold, it has already expanded to other India states such as UP and Haryana.
A bite of success
360-degree support to franchisees Sankalp supports its franchisees in selecting sites and accessing their potential, designing outlets layouts and selecting equipment. Sankalp deploys its team at new outlets during the initial stages to minimize operational issues. Additionally, it provides training support for the staff in its head office in Ahmadabad. A dedicated support team at each franchisee provides ad-hoc support on several areas such as quality, operations and cost. Strict control on quality To ensure high service quality, important in the food service industry, Sankalps audit team conducts monthly checks on standard recipe and portion sizes. To ensure food tastes the same across outlets, an export oriented unit is supplies raw materials to all franchisees. Sankalp ensures that franchisees are aware of these processes before starting operations. Franchise model Sankalp follows a franchisee owned, franchisee operated Master Franchisee model according to which territories are allocated to franchisees for development. Master franchisees are an important part of the organization and participate in the companys strategy and policy meetings.
Note: *refers to the figures quoted by Sankalp representative to KPMG Source: Sankalponline website, KPMG Analysis
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International Franchising Scenario
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International Franchising Scenario

Global Franchising Brands
The following section lists a set of global franchising case studies.
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Subway
Subways performance
Subway Area of operations Launch of operations Key brands No of outlets Presence Turnover Franchisees form the backbone of Subways network, as all Subway restaurants are individually owned and operated by independent franchisees. Quick service restaurants 1974 (franchise) Subway 39,402 outlets (as on June 2013) 102 countries (as on June 2013) US$18.1 billion (2012) Subway plans to open 1,000 outlets in India by 2017 and 5,000 by 2022. Currently, there are 260 outlets in the country. Royalty Advertising Equipment lease Other requirements Investment Key investment considerations Initial franchise fee of US$ 15,000 and minimum total investment of US$78,600*. This can go up to US$ 260,350** 8 percent of gross sales 4.5 percent of gross sales US$2.7 per month per US$100 Franchisees should display entrepreneurial spirit and commitment toward the success of the business. Subway also expects active management from franchisees. 20 years
Agreement period
A bite of success
Innovative location strategy Besides traditional store formats, Subway franchisees can also opt for non-traditional locations such as satellite towns, school lunch programs, airport terminals, theme parks and national parks. The non-traditional formats have been driving Subways growth. These include automobile showrooms, appliance stores, ferry terminal and churches. In 2011, Subway had about 8,000 restaurants in such locations. Usually, franchisee decide store locations and operations. However, in some cases (such as new markets with low brand awareness) the decision is taken jointly. 1 Prospective franchisee conducts research with existing franchisees 2 Finds the desired location with Subways field developers 3 Contacts Subways real estate department for site approval Training and assistance Subway has a comprehensive training and assessment program to impart skills among franchisees. All franchisees are required to successfully complete Subways Worldwide Training Program. Franchisees are not mandated to supervise outlets operations. However, there is a separate Person-in-Charge program for supervisors. Subway also provides equipment leasing support to restaurants in the US subject to certain conditions. It has also tied-up with several franchisee financing companies. 4 Subways proprietary mapping system analyzes the sites potential 5 Subway negotiates the lease with the owner and sublets the space. This allows it to introduce new franchisees if the existing one underperforms.
A franchisee-driven setup process Subway does not discloses the return on investment; it expects prospective franchisees to invest after learning about cost control, sales volumes, food and labour costs from the existing franchisees. Subway also encourages franchisees to interact with consumers to get feedback on outlets. It also relies on the existing franchisees to motivate new partners. Submitting application forms Securing a location and building the store Meeting the local development agent Reviewing the disclosure document Conducting local research
Attending a training
Signing the agreement
Securing financing
Note: *refers to the figures quoted in the Subway global website, **refers to figures quoted in the Franchisedirect website Source: Franchisedirect website, Subway global website, Wall Street Journal, Forbes, Nreionline.com, KPMG Analysis
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Hertz
Hertz performance
Hertz Area of operations Launch of operations Key brands No of outlets Presence Turnover Car rental 1925 (franchise) Hertz Over 9,000 locations 145 countries US$9 billion (FY12)
2008
8,100 locations
Over 9,000 locations
2013
Hertz is a global car rental company that is present in 81 airports in Europe. It is the largest airport car-rental company in the US which operates from over 1,900 locations.
Key investment considerations Investment Franchise fee Royalty Other requirements Agreement period US$0.34 million* US$25,00055,000 10 percent of gross revenue subject to a minimum amount Minimum net worth of US$500,000 and liquid capital of US$150,000 5 years
The revenue of Hertz Global Holdings (HGH) increased by 8.7 percent during FY1112 to reach US$9 billion.
HGHs net income increased by 38 percent during FY1112 to reach US$243 million.
Driving success through franchising

Transitioning from the corporate to franchisee markets for rapid growth In 2011, Hertz increased growth by focusing more on the franchising model in some key US market to rapidly expand its airport and off-airport network. To expand in key markets, Hertz has entered into franchise agreements with players such as Penske Automotive in Indiana and the Emil Frey Group in Switzerland. Scale and brand name foster franchisee growth A 75 year old company, Hertz is a well-known brand in the car rental industry which gives it good leverage to attract franchise partners. The large scale of Hertzs operations helps it in fleet procurement through the Hertz Fleet Remarketing department, which is leveraged by franchisees to get vehicles in the form of discounts. Hertz also provides franchisees access to various booking channels such as GDS, Amadeus, Galileo, Sabre and the Hertz Reservation System.
Other support Comprehensive training, which include an initial (setup oriented) 36-week-long training, online training, webinars and refresher training. Support for roadside assistance. A dedicated global sales force operates in various formats such as radio, TV, print, hotel partners, airports and the internet.
Note: *refers to figures quoted in the Franchisedirect website Source: Franchisedirect website, Hertzs global website, PRNewswire website, Yahoo finance website, KPMG Analysis
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Ripleys
Ripleys performance
Ripleys Area of operations Key brands Entertainment Odditorium. Other brands include the Guinness World Records Museum, Louis Tussauds Wax Museum, Ripleys Moving Theaters, Ripleys Mirror Mazes, Ripleys Haunted Adventures Over 90 attractions 10 countries With a 90-year-old brand heritage, Ripley operates the worlds largest chain of walkthrough attractions.
No of outlets Presence
Over the past 25 years, the number of attractions has grown from 12 in four countries to over 90 in 10 countries.
Key investment considerations Odditorium Area Investment Site development fee Royalty Other requirements 10,00020,000 square feet US$0.36 million US$75,000 Guinness World Record 2,000 square meters US$815 million US$100,000
15 percent of gross sales subject to a minimum limit The site should be located in high visibility areas with high tourist footfalls
Breaking new records

Unique and wide variety of product offering Franchisees have the luxury to choose from a wide range of brands. For example, they have the freedom to either invest in an Odditorium, which typically requires 929 1858 square meters space, or in a Guinness World Record Challenge, which requires about 2,000 square meters space. The former follows the format of a museum and the latter is an innovative format which offers all guests the opportunity to break an existing Guinness World Record. Additionally, brand Ripleys is about 90 years old and commands strong brand equity, which makes it popular among consumers. Other media, such as books and TV series, have expanded Ripleys presence to70 countries. The company has been designing and building museums since 1950s. This gives it an unmatched expertise in this niche entertainment segment. Procurement and other support Ripleys supports franchisees in procuring exclusive artifacts and exhibits by providing loans. A typical Ripleys museum has over 300 exhibits/artifacts, which cost about US$750,000. It also supports franchisees in selecting sites, designing the layout of attraction, recruiting staff, advertising and administrating the attraction. Innovative concepts to drive footfalls Ripleys innovative concepts have helped it re-invent entertainment offerings and maintain novelty, which drive footfalls. For example: In February 2013, Ripleys celebrated the World Swallowers Day in Ripleys Odditoriums by organizing swordswallowing events. The worlds tallest man, Sultan Kosen, attended the launch of Guinness World Records in Hong Kong in year. The 20th anniversary celebrations of Ripleys Orlando Odditorium (Oddtoberfest) included a show by Lizardman and several unique carnival games - all free of cost. Ripley's organized the Gimme Five food drive to combat hunger and encourages the donation of five food items for the discounted entry.
Source: Ripleys website, News Articles, KPMG Analysis
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7 - Eleven
7-elevens performance
7-Eleven Area of operations Start of operations Key brands No of outlets Presence Turnover Convenience stores 1964 (franchise) 7-Eleven 50,254 (as of March 2013) 16 countries
2000 2006 2013 Over 30,000 stores Over 20,000 stores
Achievement of key milestones

Over 50,000 stores
The company is focused on growth through the franchising route. Out of 6790 stores in in the US, 5,800 are franchisee operated.
7-Eleven opened 4,600 and 5,000 new stores in 2011 and 2012 respectively.
JPY9 trillion (end of May 2012)
Source: Corporate website (accomplishments section)
Two-fold franchising model Key investment considerations Investment Franchise fee Royalty Agreement period US$34,7501,121,000* US$10,0001,000,000 (depending on store type) Royalty is based on gross profit 10 years Traditional model The franchisor acquires the land, building and equipment and provides a fully equipped store to franchisees. The company offers the singleunit route for new entrepreneurs and multi-store opportunity for entrepreneurs with established business backgrounds. Country US Conversion model The company also adopts or converts independent convenience stores to its franchise network partners. This program is meant for independent entrepreneurs interested in leveraging the 7Eleven brand name and systems.
Assisting franchisee markets for rapid growth 7-Eleven provides significant support to get franchisee operations up and running. 7-Eleven takes care of several operational issues, which include: Scoping and buying the real estate Handling the zoning approval process Bearing the ongoing costs of - rent, real estate taxes, utilities, certain building maintenance and equipment replacement Model and strategy Operates under the ownership of 7-Eleven Inc. and 3 licensees (controlling 429 locations). The company has boosted the franchisee network by converting several company-operated and independent stores to franchisee run stores. Operates under the ownership of Dairy Farm Management Services, which has acquired the license to open 7-Eleven stores. Hong Kong and Macau have amongst the highest 7-Eleven store densities globally. Operates under the ownership of Dairy Farm Management Services, franchised under a licensing agreement with 7-Eleven Inc. Another agreement with Shell was signed by 7-Eleven in 2006 for petrol station outlets. Owned and operated by 7-Eleven Malaysia Sdn. Bhd., a part of Berjaya Group Berhad. Japan is a key market and has over 15,000 7-Eleven outlets, operating under the ownership of 7-Eleven itself.
Innovative royalty system 7-Eleven has an innovative royalty system, which is based on gross profit rather than sales. This system intrinsically links franchisers growth to the profit making ability of its franchisees.
Hong Kong and Southern China
Singapore Process automation using technology 7-Eleven promotes the use of technology to enable profitable operations of the store. Examples of technologies include payroll processing, invoice payments, taxes, store audits, monthly financial statements and inventory management. .
Malaysia Japan
Note: *refers to the figure quoted in the Franchisedirect website Source: Franchise.7Eleven website, Franchisedirect website, Huffington post, Cspnet website, News Articles, KPMG Analysis
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Curves
Curves performance
Curves* Area of operations Launch of operations Key brands No of outlets Presence Turnover Women fitness centre 1995 (franchise) Curves Over 10,000 locations Over 50 countries US$20 billion (from the US alone) Key investment considerations
Over 10,000 locations
Curves, the largest fitness franchise in the world with 10,000 locations. Curves Clubs are present in over 50 countries, including the US, Canada, Europe, The Caribbean, Mexico, Australia, New Zealand, South Africa and Japan.
Investment Franchise fee Royalty
US$0.0370.45 million US$29,900 5 percent of gross revenue subject to a minimum amount 3 percent of gross revenues as advertising fee; US$5,000 transfer fees and US$200 per month as monitoring fees 5 years, renewable Net worth US$75,000 and cash US$50,000
50 locations
Other requirements
Agreement period
1995 2012
Financial requirements
Driving success through franchising

Assisting franchisee markets for rapid growth Since 2011, Curves increased growth by focusing more on the franchising model in some key US market to rapidly expand its network and close down loss making units. Curves also assist in financing operations of its franchisees. Such assistance limits up to 50 percent of the initial franchise fee for a period not exceeding 24 months. Initially, Curves organize 2-5 days training to all the franchisees under the guidance of a designated manager. Other support Comprehensive training camps, which include special training filled with information from experts at locations around the US & Canada. Area Directors and Corporate Help Staff: These area directors act as the franchisees direct link with the corporate office. Franchisees get help in managing any issues that arise while operating your club. Scale and brand name foster franchisee growth A 30 year old company, Curves is a well-known brand in the women fitness industry which gives it good leverage to attract franchise partners. The large scale of Curves operations helps it in getting various franchise requests from various countries. The franchisee offer thirty minute fitness and weight reduction instruction to the general public as an independently owned and operated entity using Curves system of operations, logos and trademarks.
Note: *refers to figures quoted in the Franchisedirect website Source: Franchisedirect website, Curves global website, The Economic Times website, KPMG Analysis
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Inbound Franchising - International Franchisors in India

India's has rapidly emerged as an attractive target market for international brands, as is evident from the number of launches in the last few years. Major International players already in India Name Baskin Robbins Domino's KFC Jockey International Maple Bear C&J Clarks International FRETTE TGIF Starbucks California Pizza Kitchen Howards Storage Industry Food service Quick service restaurants Quick service restaurants Apparel Education Footwear Home furnishing Food service Food service Food service Retail Partner/franchisee in India Graviss foods Jubilant foodwrks Yum Restaurant India Page Industries Modi Group Future Group Regency Retail Private Limited Bistro Hospitality Tata Group JSM Corporation Skanda Retail Business model Master Franchise model Master Franchise model Master Franchise model Master Franchise model Master Franchise model Master Franchise model Multi-unit franchise model Joint venture Franchising Joint venture Franchising mode Master Franchise model Master Franchise model
Source: Published Reports, Franchising Association of India
The following international brands have either recently entered or have announced plans of entering India in the near future. Food & Beverages Muffin Break P P Starbucks P Dunkin Donuts P Winkworth P Yoforia P Yogen Fruz P Pollo Tropical P Di Bella Coffee P Mad over Donuts P Pink Berry P Sbarro
Sources: Spring Air Mattress: http://www.business-standard.com/article/press-releases/spring-air-announcesits-rs-500-cr-investment-into-the-indian-market-112042500073_1.html C & J Clarkes: http://articles.economictimes.indiatimes.com/2012-12-18/news/35890963_1_ceomelissa-potter-clarks-future-footwear-joint-venture BG Cleaning: http://www.bg-cleaning.co.in/ Willy Winkies: http://www.willywinkies.com/franchise.html Armani Junior: http://www.indusbusinessjournal.com/ME2/dirmod.asp?sid=&nm=Archive&type=Publishing&mod=P ublications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=ED633C51056 04BBF8C610DE6E852BDDE Panaria: http://www.thehindubusinessline.com/companies/panaria-group-asian-granito-enter-into-jtventure/article3734222.ece Triangle: http://articles.economictimes.indiatimes.com/2012-07-25/news/32848685_1_indian-luxurymarket-french-market-production-lines Luxeyard : http://www.indusbusinessjournal.com/ME2/dirmod.asp?sid=&nm=Archive&type=Publishing&mod=P ublications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=ED633C51056 04BBF8C610DE6E852BDDE Lipsy : http://www.financialexpress.com/news/uks-fashion-brand-lipsy-partners-with-bmi-to-enterindia/1001648 Marc Cain : http://www.business-standard.com/article/companies/german-luxury-brand-marc-cain-toopen-5-more-stores-in-fy13-112050100101_1.html Roberto Cavalli: http://articles.economictimes.indiatimes.com/2012-02-17/news/31071299_1_italianfashion-brand-roberto-cavalli-luxury-retail-space
Consumer Services
Lifestyle/ Healthcare/ Beauty
Retail
P C & J Clarks P BG Cleaning P Willy Winkies P Spring air P Armani Junior P Panaria P Triangle P Luxeyard P Lipsy P Marc Cain P Roberto cavalli
Muffin Break: http://muffinbreak.com.au/images/press/MB%20Media%20Release_MB%20Continues%20Internatio nal%20Expansion.pdf Starbucks : http://timesofindia.indiatimes.com/business/india-business/Starbucks-to-open-outlets-inmore-Indian-cities/articleshow/19431213.cms Dunkin Donuts: http://www.business-standard.com/article/companies/dunkin-donuts-enters-india112050900069_1.html Winkworth: http://www.estateagenttoday.co.uk/news_features/Winkworth-launches-into-Indiaproperty-market Yoforia: http://yoforia.in/franchise Yogen Fruz: http://articles.economictimes.indiatimes.com/2012-08-20/news/33287822_1_yogen-fruzfirst-store-first-outlet Pollo Tropical:http://pollotropical.com/press-releases/pollo-tropical-expands-india-opening-restaurantwestern-hemisphere/ Di Bella Coffee:http://www.dnaindia.com/money/1620084/report-after-starbucks-australias-di-bellaplans-coffee-chain Mad over donuts:http://www.thehindubusinessline.com/companies/mad-over-donuts-bakes-plans-toscale-up-biz/article4784907 .ece Pink Berry:http://www.business-standard.com/article/companies/pinkberry-to-vie-with-india-scocoberry-112050900067_1.html Sbarro:http://www.newsday.com/business/inside-long-island-business-1.811933/sbarro-plans-35franchise-locations-in-india-1.5582769
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Indias growing but fragmented market can seem chaotic and difficult to deal with. The international franchisors consider the following factors as challenges while entering into India: Transparent Legislative framework: Due to no rules or laws promulgated in India to address the functioning of franchisors and franchisees, international players perceive a higher risk to business continuity. They expect prevailing
laws should be transparent and easy to comply with. India is not one market: Entering a new market becomes more complicated in case if India, where consumers hailing from diverse cultural backgrounds. Several culture, language and socioeconomic diversities make it a set of multiple markets. It becomes a challenge for an International franchisor to understand all diversified tastes and preferences,
to establish and expand business in India. Bribe and corruption: International franchisors remain threatened with the bribe and corruption cases in India. Due to no legislation around anti-bribe in India, as in the US; it not only discourages the expansion strategies of many brands but also impacts the Indias credibility in international market.
Outbound Franchising - Indian brands going Global

While there is surely an active interest in India by international brands, there is immense potential for Indian brands to go global. Not only can Indian brands look at leveraging the Indian Diaspora present across the world but also use this as an opportunity to spread Brand India. Indian Brands Saravana Bhavan Khana Khazana Sankalp Caf Coffee day Malabar Gold Gitanjali Shahnaz Husain VLCC Karvy Eurokids Shemrock Sector Food Services Food Services Food Services Food Services Retail Retail Health & Wellness Health & Wellness Consumer Services Education Education Global presence through franchising route United States, Canada, Singapore, West Asia, United Kingdom, China Dubai Australia, Canada, UK, USA, UAE Pakistan, Austria (Vienna) Gulf region, Singapore, Malaysia, UK USA, Japan, Dubai Australia, UK, Middle East UK, Middle East, Singapore, Malaysia Dubai, New York Gulf region Nepal
Indian cuisine gaining world-wide acceptance is prompting Food Service brands to expand globally through the franchising route.
While Indian Diaspora is widespread in the USA and Middle east countries, there is scope for Indian companies to go beyond these countries and can particularly target
countries where franchising industry is well regulated.
Source: http://articles.economictimes.indiatimes.com/2012-11-03/news/34892146_1_restaurant-chain-saravana-bhavan-hospitality-sector http://www.way2franchise.com/resource/article/__cafe_coffee_day_takes_over_cafe_emporio http://www.franchise-plus.com/Fullstory.asp?news_id=6824&cat_id=3 http://investors.gitanjaligroup.com/phoenix.zhtml?c=196729&p=irol-faq_pf http://www.shahnaz.in/company.asp vlccjobs.com/futureplans.htm? www.karvyfinance.com/aboutus/aboutus.aspx? http://www.thehindubusinessline.com/industry-and-economy/info-tech/educomp-solutions-sheds-entire-stake-in-eurokids/article4551004.ece http://www.shemrock.com/branches.php
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Country USA Malaysia Saudi Arabia UAE Srilanka UK South Africa Canada Mauritius Oman Singapore Nepal Kuwait Qatar Australia Bahrain Total
Total Indian Overseas population = 2.2 crores
Number of Indians (in lakhs) 23 20.5 18 17.5 16 15 12.2 10 8.8 7.2 6.7 6 5.8 5 4.5 3.5 180
As a % of total overseas population 10 9 8 8 7 7 6 5 4 3 3 3 3 2 2 2 82
Source: Ministry of Human Resource Development release: Population of NRI - Country wise, June 2012 report
However it is critical for Indian brands going global to note the differences in local competition, demographics, price points, pay structures, labor laws etc before taking a strategic decision. Industry associations such as Franchising Association of India and other such bodies could leverage their relationships with global franchising councils in assisting such companies for a soft landing into other countries.
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Franchise industry survey
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Franchise industry survey

KPMG in India carried out a survey of Franchisors and Franchisees to solicit their perspectives on outlook for growth and how overall dynamics between Franchisor and Franchisee community is shaping up. The results of the survey have been broadly categorized under the following heads Growth drivers for Franchising in India Franchise Operating Models Franchisee Satisfaction Franchisee Support & Relationship Management Challenges in Franchising Conflict Management
Growth drivers of franchising in India

India, with its large population has always been a consumption story and will continue to remain so for the years to come. Burgeoning consumer class with an increasing appetite for consumption is considered as the biggest growth driver, both by franchisors and franchisees. Increase in entrepreneurial drive coupled with risk taking abilities has steered a number of people, especially those with no-specific business background, take a plunge into franchising based business models. Franchising as a business model has achieved stability over the course of time, giving new entrepreneurs increased confidence on the success of their ventures. Besides these, availability of investments and increased investment capability has also been a key factor driving the growth of the industry, especially when investment support from franchisors is minimal. Businessmen predominantly choose franchising route as it helps increase the scale of operations while reducing the time to market. This also aids in brand building process through value creation. Franchising imparts uniformity of product / service offering thereby leading to increased standards and quality. This is mainly the reason for franchisors not willing to customize their offerings for various franchisees, an aspect which most franchisees are not very comfortable with. It is often the uniqueness of the concept and value of the brand of the franchisor business that attracts franchisees to invest in them. While promises on investment returns made by franchisors are another key parameter that attracts the franchisee, their ability to understand and operate the business dominates the decision making process. Franchisors also believe that providing a well-defined operating structure enables franchisees to learn quickly and implement the same.
Franchisor View - Growth Drivers of Franchising in India Both franchisors and franchisees opine that the consumption story coupled with the increasing entrepreneurial spirit of Indians is the prime factors leading to the growth of Franchising in India. Franchisees in addition feel that availability of robust concepts and investment availability is also driving franchising growth in India
High disposable Incomes High ROI Availability of robust concepts Investment Availability Entrepreneurial Spirit Huge consumer class 0
1 1 3 2 10 8 5 10
Source: Industry Survey, Franchising Industry in India, KPMG in India, 2013
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Franchisee View - Growth Drivers

Availability of Robust Concepts Investment Availability Entrepreneurial Spirit Exposure to global media, fashion trends Growing Preference for branded and quality products amongst consumers Huge consumer class 3 5 5 0 1 2 3 4 5 6 7 8 9 10 11 12
5 10 8
Franchising Operating Model

While many brands and companies would view franchising as a key operating model for expansion from a scale and time perspective, they also believe franchising model allows them keep the brand relevant to their target consumers and result in better profitability for the system (franchisor and franchisee community) as a whole.
Franchisors Reasons for Franchising There are many reasons for business persons to
Talent acquisition Capital Constraints Higher RoCE for the franchisor Quicker time to market Value creation Higher profitability Uniformity in Quality Scale building Brand Building 0 5 7 10 15 4 13 3 6 1 9 3 3
consider franchising as a business model. Predominant of the reasons are related to capacity expansion, scale building and brand building, in a shorter span of time. While there are other choices, scale building and brand building and Faster Time to Market emerge as dominant choices with 26 percent, 16 percent and 17 percent responses.
Franchisee View - Reasons for Franchising Option

Higher profitability Better ROI Good learning experience Higher growth and expansion opportunity Investor friendly Lesser risk than a new start up Franchising is a safe, best and easiest way to start a business 0 2 4 6 8 10 1 2 2 8 11 12
While Franchisors believe franchising as a good option

6
to grow, many entrepreneurs are opting for the franchising route primarily due to it offering a safe and easy way of establishing business and offering higher than market levels of profitability. Franchising is also seen as a less-riskier option given that the business concept has already been pre-tested in the market and the entrepreneurs get to see the results of the franchisors as well as other franchisees.
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Customization of Franchise Proposals However while Franchisors believe in the concept of

No Yes minor changes Yes major changes 0 2 2 4 6 8 3 8
franchising, most franchisors are not willing to alter the terms and conditions of their proposal, in order to protect the brand value.
Business Differentiators Increasing growth in franchising is also reflected in the

Ease of operations Brand/Support Standardised processes ROI Business concept 0 2 4 6 1 1 5 5
increasing competition within the industry, with a constant stream of new franchisees starting their businesses. Increasing competition intensifies the need to develop unique selling proposition that can differentiate one brand from the other Business concept turns out to be the biggest
7 8
differentiator in business for 37 % of the respondents; it was closely followed by return on investment and standardized processes at 26 % each.
Business Models in Franchising While majority of franchisors adopt the Franchisee

Joint Venture Franchise Owned Company Operated (FoCo) Company Owned Franchise Operated (CoFo) Franchise Owned Franchise Operated (FoFo) 0 5 1
Owned and Franchisee Operated model for expansion, few franchisors have also mentioned the need for co2
existence of Company Owned Franchisee Operated models. This was particularly necessary in high streets
5
of metro cities where the rentals negatively impact the business viability for the franchisee. Also there are
10 10
cases where franchisors want to have a few large format flagship stores. In both these cases, franchisors preferred investing initially.
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Franchisee Satisfaction
Out of the 20 franchisees surveyed, were either satisfied or satisfied to a certain extent with franchisor business, both in terms of operations and financial returns. Amongst the 50% franchisees who were satisfied to a certain extent, the biggest cause of concern was the inadequate operational support. But they still continue with the franchisor, mainly, due to the financial returns obtained. There were also around 14% of the franchisees who were entirely unhappy with the financial returns and operational support provided.
May be 23% No 54% Yes 23%
Franchisee View Preference for additional franchisees
Franchisee View Is Franchisor Business upto your expectations
In terms of franchisee interest for undertaking additional franchisees, almost half of those interviewed were not willing to take up additional franchisees with the existing franchisors. This is primarily due to friction in the relationship between franchisors and franchisees on
No 14%
Yes 36% To an extent 50%
various aspects, especially in financial revenue sharing aspects in comparison to the nature of operational support provided. Such a situation is more relevant in the services franchising business where franchisor support is seen as critical. Most of the franchisees who were willing to undertake further franchisees were in
product franchising business.
Franchisee Support & Relationship Management

Collaboration between franchisor and franchisees is critical to success of franchising businesses. There are several avenues for collaboration between franchisors and franchisees such as project set up, marketing, employee training, operational management, revenue management, cost management and risk management.
Franchisee View Initial Expectations from Franchisor
Franchisee View Areas of Franchisor Support
Marketing and PR support Support in equipment procurement Employee Recruitment Support Training support Initial set up support 0 2 4 6 8 10 12 5 9 8
12
Bulk Buying Support Marketing Support Operational Support Human Resource Support 13 14 Project Support 0 2 4 6 8 3 6 7
10
12 10 12 14
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Project Start-Up Support is the first area of collaboration between franchisor and franchisee. Most franchisors are involved in demographic analysis of the location, site evaluation, survey and approval, facility planning and architectural design of the store and store opening (retail clients). Franchisees also acknowledge the importance of franchisor contribution in getting the basics of the project right. Marketing Support Functions such as advertising and promotions, regional and local publicity and event based promotion schemes have been the most important support provided to franchisors. Such activities build the brand, increase credibility of the offering and ensure increased product awareness amongst the target clientele. Majority of the franchisors have indicated marketing function as the key support provided for the franchisees, which is also recognized by most franchisees. This is specifically true in the case of national level brands and large regional brands. Few of the regional brands expect the franchisees to separately share cost of regional/local marketing. However, amongst smaller brands, marketing support has been usually restricted to advertisements with nothing specific being done for local publicity. Franchisees of local brands have also indicated the diminishing of marketing support once the store/product has been launched. Employee Training and Development is taken as a focus area amongst national brands, especially those in services franchising. Well planned employee development program encompassing well-defined processes for recruitment and selection, continuous training and up gradation of skills to the technical, operational, sales teams adds to the success of franchisee operations. Of the key challenges that new franchisees face, hiring and training of employees is the key. The challenge is particularly severe at retail concepts, where front-line employees are the face of the brand, dealing directly with each customer every day. While most franchisors have well-defined training programs, a large number of franchisees particularly
find it difficult to hire good candidates and retain them. While the expectations from franchisees on this front are not as high as others, franchisors could surely improve their support in this critical area given the current shortage of skilled manpower in India. Operational Support is an apparent area of collaboration whereby the franchisor provides defined guidelines for operations, employee management, product/service pricing guidelines, trouble-shooting support, supply chain and procurement support. Immediately after signing of the franchising agreement, operating guidelines are shared with the franchisees. Large brands deploy dedicated teams to respond to operational requirements of franchisees but the case is not the same with smaller and regional brands. Few franchisees, while appreciating the good intentions of support from franchisors, are disappointed with the pace of response for operational challenges. Franchisee View Pre & Post Launch Support
Post Launch Support is better than Pre Launch Support 9%
Post Launch Supportis as good as Pre Launch Support 18%
Post Launch Support is not as good as Pre Launch Support 73%

73 percent of the franchisees interviewed opined that the support provided by franchisors diminishes once the initial project set up activity is completed. Franchisees are often left to take care of the businesses entirely by themselves, with minimal support from franchisors. But by then, most franchisees learn the ropes of the trade and are, hence, able to manage their business. Despite this, franchisees still seek greater involvement of the franchisors in return for the revenues shared.
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Financial Returns Management

Financial returns management comprises of managing revenues and costs at the franchisees to ensure high profitability. Revenue Management is a mutually critical area of collaboration, which is often ignored by most franchisors, both big and small. Franchisee growth is not only important for the franchisee but also for the franchisor. However, besides high level marketing support, most franchisors fail to recognize the need to monitor and train the franchisees to manage business growth, or at least so is what the franchisees believe. Most franchisees opine that franchisors are only interested in the revenue share, irrespective of the overall financial performance of the franchisees. This is predominantly the reason why several franchisees, despite achieving promised financial returns, are not willing to consider expanding with the same franchisor. However, some of the leading national brands are making conscious efforts in augmenting the franchisee revenues and are handholding the businesses till stability is achieved. Cost Management is another emerging area which franchisors are focusing on keeping a tab on the overall costs incurred by the franchisees, thus assuring them the returns. However, very few brands, especially those at national level, are interested in undertaking cost management of franchisees to improve their profitability. This is primarily because franchisors usually get a share of the revenues and not of the profits and hence, the low interest level. High store rentals at franchisor approved locations coupled with increasing cost of hiring and retaining employees eat into the margins of franchisees. Franchisors, concerned about the under reporting o sales and other theft activities at the franchisee stores, undertake periodic audits to obtain evidence of under reporting, unauthorized transfer, unauthorized distribution and supply channels. Having a mutually trust oriented business model subjected to disciplined audit process, would lead to better revenue management for the franchisors.
Areas of Collaboration The relationship between a Franchisor and Franchise is

Risk management Cost management Revenue Management Employee Training Marketing & Promotions 0 5 10 8 10 13 15 5 9
dynamic and composite. Most of the franchisors opined that they support their Franchisees in more than one ways. While most common form of support is in marketing and brand promotion, help is also extended in areas of employee training and management of risk, cost and revenues.
Franchisee motivation In terms of the common practices followed by

Share sales data and success of other franchisees Offer shareholding in company to star performers Involve franchisees in new product development Invite franchisees to strategy & policy making meetings Give option to franchisee to become master franchisee 0 2 4 5 5 6 1 6 6
franchisors, most franchisors are practicing a host of collaborative efforts with franchisees except offering shareholding in the company to high performers.
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Key challenges in Franchising

Both franchisors and franchisees face certain challenges before and during operations. From the survey it is clearly evident that rentals are impacting profitability of franchisees and overall business viability. Franchisors too are concerned about consistent royalty payments by franchisees in such a scenario where business viability is being threatened. The survey also indicated that one of the key reasons for attrition in the franchising space is due to falling profits.
Franchisor View - Franchisee Challenges in Operations The biggest of the franchisee challenges in operations
Capital Constraints Retaining employees Recruitment of right talent Rentals Location 0 2 4 6 7 8 10 2 4 8 5
are related to real estate. Setting up businesses in the desired locations and paying high rentals is on the top of the challenges. Besides these, deploying the right talent and funding the business operations are also other challenges faced by the franchisees
Franchisee View - Operational Challenges of Franchisees While location and rentals are biggest problems faced
Ongoing Market Support Appraisal system followed by the franchisor Capital Constraints Retaining employees Recruitment of right talent Rentals High real estate prices Location 0 1 2 3 4 5 6 7 7 8 9 10 5 9 2 8 4
by franchisees, recruitment of right employee & retaining them is also suggested as a key concern by franchisees.
Operational Challenges in Franchising

Recruitment of skilled employees by Franchisees Payment related concerns Maintaining stock at agreed levels Getting the Franchisee to maintain brand & quality standards at agreed levels 0 1 2
There are various challenges in franchising operations

4
such as aspects related to day to day operations (inventory keeping, employee recruitment etc).
6
However, the biggest concern amongst the franchisors is related to payment of revenue shares as agreed in the initial phase of the business. Sometimes, few franchisees tend to under-report the revenues which might lead to loss for the franchisors.
2 3 4 5 6
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Reasons for Franchisee Attrition Attrition was found to be fairly common in the franchise
Personal problems Dissatisfaction in relationship Falling profits 0 1 2 3 4 5 6 2 2 6 7
business with the major reason being falling profits for the business.
Conflict Management
There are several causes of friction between the franchisors and franchisees, which if not addressed in the beginning, could cause a rift between them which might eventually lead to severance of relationship. While most franchisors are aware of the problems with franchisees, matters become worse, when then turn blind eye to the problems. Some of the key areas of conflict between franchisors and franchisees include:
? Low expenditure on regional marketing and
advertising
? Additional marketing fee for regional publicity,
Franchisors need to evolve amicable strategies to address various risks that could emerge during the course of business relationship. Such strategies are essential in the long run for the sustenance of the franchisor-franchisee network. Several of the national brands have developed a proactive, positive and a disciplined culture that rewards franchisees in a fair manner. Greater communicative collaboration between franchisors and regulators will improve the perception of equity in franchising relationships and promote superior perception of trust in franchising as a business model.
despite a high revenue share allocation

? Transcending geographical exclusivity or reducing
radius of coverage
? Lack of empathy by franchisor employees handling
franchisees
? Poor training of franchisees and inadequate
handholding during initial stages of operation

? Financial pressures leading to short term decision
making by franchisors
? Not considering franchisees as the critical part of the
franchisee ecosystem
? Lack of effective communication system with one
sided communication to franchisees

? Lack of on-par treatment with franchisees leading
to decisions being thrust on them

? Lack of professional approach to franchisee
relationship management
? Rumor mongering amongst franchisees ? Non-sharing of financial stakes in the franchisor
organization, especially when going public
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Franchising Regulatory Scenario
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Franchising Regulatory Scenario

International scenario for franchising regulations
Every country follows different regulatory models for the franchising industry, which are guided by varying domestic factors. Therefore, there are various sets of disclosure laws, relationship laws and competition, infringement and registration laws, as depicted in the following figure.
EU (competition law) Within EU: Belgium Estonia France Lithuania Italy Romania Spain Sweden
Mongolia Kazakhstan Kyrgyzstan China Japan Macau South Korea Taiwan Vietnam Saudi Arabia (Commercial agency law)
Brazil Canada Mexico United States Federal State laws Venezuela (Competition law) South Africa
Albania Belarus Georgia Moldova Russia Ukraine
Australia Indonesia Malaysia
Very high degree of control through laws and government interventions
Disclosure Law
Relationship Law
Disclosure and relationship law
Other
Source: International Franchising Association, KPMG India analysis
Undoubtedly, this lends more credibility to the franchise business in every country. The US is considered to be a highly regulated market, as it regulates franchise operations at federal and state levels. The focus is to curb potential infringement in franchising. These include pre-contractual disclosure, in-term relationship between franchisors and franchisees and consumer protection laws.
The franchising laws in other markets such as Australia, Brazil and Malaysia, are also similar to those in the US. The few differences among them are a result of situational modifications in the various aspects based on domestic factors, which are unique to each country. A combination of disclosure and relationship laws make Malaysia and Australia highly regulated markets. Malaysia has a comprehensive
hybrid franchise model, which includes a dedicated law for franchising and a protectionist trade policy that gives the government complete control over foreign trade. The UK, on the other hand, does not have any dedicated legislation for the franchising industry. However, it regulates franchise operations under existing general laws governing business operations.
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A comparison of franchising regulations in selected countries with high degree of control through laws and legislations: Australia
Law governing Franchising Disclosure norms Franchising Code of Conduct, under the Trade Practices Act 1975 Additionally. Other laws relating to fair trading and business operations are also applicable Mandatory - Franchisors must provide a copy of the Franchising Code of Conduct (the Code) and a disclosure document to prospective franchisees prior to a franchise sale, renewal, or extension. A 7-day cooling off period is given to the franchisee once the franchise agreement has been signed. The Code has specific provisions regarding breach, termination, mediation, and transfers of the franchise. None Registration of the agreement (translated into Portuguese) with the Brazilian Patent and Trademark office (INPI) and Central Bank is required.
Brazil
The Brazilian Franchise Law (Law No. 8955 of December 15, 1994) Pre-contractual disclosure is mandatory to submit.
Relationship laws
None
Registration laws
Dispute resolution
The Code establishes a dispute resolution scheme for parties to a franchise agreement. However, in case a satisfactory outcome is not reached, the Office of the Franchising Mediation Adviser (OFMA) provides a mediation service, to ensure timely address to all disputes. A breach of the Franchising Code is a breach of the Competition and Consumer Act 2010 (CCA).
Not specified separately
Intellectual property and infringement issues
Trademarks, know-how and trade secrets are all protected by following laws: Patents Act 1990 Patents Regulations 1991 Trade Marks Act 1995 except Part 13, administered by Australian Customs Service (ACS) Trade Marks Regulations 1995 Designs Act 2003 - this came into force on 17 June 2004 Plant Breeder's Rights Act 1994 sfsfbsfbsfbsefbsfb
Brazil adopts the first to file system, a trademark is protected only after registration at the INPI. Any trademark has to be registered in order to be valid and enforceable. Further, the National Institute of Industrial Property (INPI) requires that the franchised trademarks have been at least filed with the INPI, in order to enable the parties to record a franchise agreement in Brazil.
Governance Mechanism
Failure by the franchisor to supply Franchising Disclosure Document (FDD) in time renders the agreement voidable. It penalizes the franchisor with the refund of all amounts paid by franchisee in connection with the franchise, plus recovery of damages.
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MALAYSIA
Franchise (Amendment) Act 2012
US
The Federal Trade Commission (FTC) Franchise Rule and state specific laws. At the federal level, pre-sale disclosure is required. At the state level, there are 15 states that have laws requiring pre-sale disclosure.
Mandatory to submit by the Franchisor
A 7 working days of cooling off period after the agreement has been signed, has been given to franchisees. Minimum term for franchise agreement is five years. Compensation to franchisee if franchisor refuses to renew, while no termination of the agreement except for good cause. In pursuant to the Act, registration is also compulsory for companies / businesses registered with the Prime Minister's Department or the former KPuN (Ministry) prior to the introduction of the Franchise (Amendment) Act 2012.
Types of Registration Section 6 - Franchisor (Local) - Master Franchisees (Local) Section 54 - Foreign Franchisor (Local) Section 55 - Franchisees to Foreign Franchisor (Local) Definition Registration for a Franchisor before offering to sell its franchise to any party Registration for a Foreigners Intending to sell its franchise in Malaysia or to any Malaysian Citizen Registration for Franchisees of a foreign Franchisors
At the federal level, no relationship law is applicable to franchise relations. However more than 15 states regulate some aspects of the franchise relations (e.g., termination, renewal).
No disclosure document is required to be filed or registered under federal act. However, different states need the documents to be thoroughly reviewed and registered at the state levels.
Conducting the same business ('cloning' the business): Act requires the franchisee and its employees to comply with their non-competition covenants during the term of the franchise agreement and for a period of two years after the expiration or termination of the franchise agreement. A non-competition would otherwise be considered void under the Malaysian Contracts Act 1950 is regarded as enforceable under the Franchise Act.
Franchisor must disclose in the FDD whether the franchisor owns rights in, or licenses to, patents or copyrights that are material to the franchise.
Section 20 of the Act prohibits the franchisor to discriminate its franchisees in matters i.e. the franchise fees, royalties, supply of goods and services, rentals, and advertising services Violation of the Act does not give rise to a private right of action. In addition to these powers afforded by the Franchise Act, all or any of the powers relating to police investigation in sizeable cases pursuant to the Malaysian Criminal Procedure Code shall also apply
Most common types of violations of franchise laws Offering or selling an unregistered franchise Failing to provide a The Uniform Franchise Offering Circular (UFOC) on time Making misrepresentations to franchisee prospects Improperly terminating or not renewing a franchise The violation of state laws typically treated under the statutes as either a fraudulent and deceptive trade practice. It causes money damages (including punitive damages and attorney's fees), or cancellation of the franchise agreement and reimbursement of all fees paid to the franchisor.
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Franchising legal framework in India

The entry of international brands in India is guided by foreign exchange laws which include the Foreign Exchange Management Act (FEMA), 1999, which was replaced by the Foreign Exchange Regulation Act (FERA), 1973, in June 2000 and several other important laws and regulations. At times, adhering to multiple laws creates challenges for global franchisors. The lack of effective disclosure norms which is otherwise present in countries such as the US, Malaysia, Australia, Indonesia and Japan proves to be disadvantageous for prospective franchisees and franchisors, as they are not obligated to make all the required disclosures. Moreover, both parties are never certain of their rights and duties due to the absence of legal documents. All this underlines the need to formulate comprehensive rules and laws to check infringement. Following are the key laws governing the franchising operations in India:
The Indian Contract Act, 1872: To govern all aspects of
franchise contracts such as offer, acceptance, validity, breach and termination and act as an ultimate point of reference to determine the rights and obligations of the various parties of a franchise agreement.
Competition laws: All restrictive terms and regulations in
pursuant to the franchising operations in India fall under the purview of the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act). It restricts unfair and restrictive trade practices in the franchising industry. Further, the Competition Act, 2002, promotes healthy competition among all the players in the industry. The act governs practices such as resale price maintenance, tie-in products arrangement and the consequences of mismatching registration requirements.
Intellectual property laws: The Trademarks Act, 1999, the
Designs Act, 2000, the Patents Act, 1970, and the Copyright Act 1957 , govern the Intellectual Property Rights (IPRs) in India. These include trademarks, patents, registered designs and technical assistance required for franchising agreements.
Consumer protection laws: These laws protect consumers
Source: Reserve Bank of India (RBI) website
against the inconvenience caused due to defective goods and unsatisfactory service. The Consumer Protection Act, 1986, encourages Indian consumers to file complaints with the consumer forums for any defects/deficiencies in the goods or services supplied by the trader/franchisor. However, in such cases, whether consumers have recourse to franchisors, franchisees or both depends on the degree of control they have on the business. Additionally, the following statutes and laws also apply to franchise operations in India:

Foreign Exchange Management Act 1999 (FEMA) Labour laws Income Tax Act 1961 Provincial Insolvency Act 1920 All rules issued by the RBI
Source: Published reports, discussions with legal experts
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FDI in Multi-brand Retail

India has recently made amendments to its FDI policy allowing up to 100 percent FDI in single brand retail and up to 51 percent FDI in multi-brand retail. However a recent clarification issued by Department of Industrial Policy and Promotion (DIPP) suggests that foreign retailers may not be allowed to franchise their
Source: http://thefirm.moneycontrol.com/story_page.php?autono=905844 - 2nd paragraph
stores and will have to own and operate the stores (CoCo Model) in India. This change is expected to have a major impact on foreign multi-brand retailers such as Carrefour, 7-Eleven etc which predominantly operate on a franchise model for global expansion.
Foreign Retail Chain Circle K 7-Eleven
Format
Predominant Global Expansion model FoFo FoFo
Convenience Store Convenience Store
Ikea
Furniture & Furnishing Store
FoFo
Howards
Source: 1. Discussion with Howard's
Storage Solutions
FoFo
2. 7-Eleven ->http://www.nec.com/en/case/7-eleven/ 3. Ikea - http://inter.ikea.com/en/divisions/franchise/ 4. Circle K - http://www.franchise-circlek.com/site/faqs
Conclusion: India has become an attractive destination for business investments due to the rapid growth of consumerism, globalization and liberalization. However, unlike several countries, India lacks a comprehensive policy to govern franchising operations. This weakens foreign players' confidence in the country and often leads to instances of deceit and infringement. A detailed study of countries such as Australia, Brazil, Malaysia and the US demonstrates the importance of rules and regulations to regulate franchising operations. Every country has formulated these rules keeping in mind domestic factors and requirements.
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Business Models in Franchising
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Business Models in Franchising

Firms that have created an easily replicable business model, often choose franchising as their preferred route to expand their operations and scale their brand. However within the realm of Franchising, there are several franchising models that differ significantly in terms of operation, control and legal scope. This section details these models and compares their relative attractiveness. Further, by accounting for certain unique success factors within a sector, this section attempts to recommend certain models for each sector. Direct Franchising: Direct or unit franchising is the classic form of franchising. In the Direct franchising model, the franchisor enters into an agreement with the franchisee allowing for one franchised-outlet to be open by the franchisee that is typically protected by guarantee of exclusivity for a certain geographical area. In most cases the franchisee will not be obligated to achieve certain sales or growth targets. The franchisor is usually expected to provide ongoing product and marketing support to the franchisee. In return the franchisor typically commands a percentage of profits as royalties in addition to the initial franchising fee. The direct franchising model offers a significant amount of control for the franchisor and entails a twoparty contractual agreement between franchisor and franchisee. Master Franchising: Under the Master franchising model, the franchisor appoints a Master franchisee for a broad geographical area with the responsibility of opening and Area Development: In the Area development model, Area developers are granted exclusive rights for a broad geographical location to own and operate their own franchise outlets and develop further franchisees for the franchisor. Typically, area developers are set certain targets in terms of number of outlets within the region. Most are often obligated to own and operate an outlet of their own. In most Area development models, the franchisor still enters into a two-party agreement with the franchisee and is still expected to provide ongoing support to the franchisee thus offering a good degree of control to the franchisor. However the franchisor will likely share a percentage of the royalties with the Area developer. Many companies offer this type of franchise model within their home country including brands such as Maui Tacos and Salad Creations. Some of the original pioneers of Franchising such as Mcdonald's had begun their Franchising operations with this model. Today many brands offer this model including Talwalkars HiFi, Lakme and VLCC in India.1 supporting franchisees within the area. The Master franchisee is typically expected to own and operate some of their own outlets and is usually set certain sales and growth targets. The franchisees within this area, often referred to as sub-franchisees, enter into a tripartite agreement with the Master franchisee and the main franchisor. Typically, the Master franchisee will command royalties from the subfranchisees and will pay a percentage of these royalties to the franchisor. Further, the Master franchisee is expected to provide ongoing support to the subfranchisees. The Master franchisee route is typically used by foreign brands to enter international markets as they seldom have the regional knowledge and cultural acumen to successfully carry out business and franchising operations. Typically the Master Franchisee is granted at a National Level. But given Indias size, cultural diversity and economic stratification a hybrid model between an Area Developer and a National Master Franchisee such as a Regional Master Franchisee, covering smaller areas like West India or Karnataka and Andhra Pradesh, merits serious consideration in a country like India. In India, International brands such as Golds Gym and Hard Rock Caf and domestic brands such as Jumbo King and Chocolate Room have pursued this route.
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Below is a table that compares the relative degrees of attractiveness of each model.
Factor/Degree of Attractiveness Resources For Operation Time To Market Profitability Ease Of Contracting Relationship Management Control Resources Deployed For Localisation Overall Attractiveness Low Attractiveness
No-franchising
Direct
Area
Regional Master
National Master
Low-Medium Attractiveness
Medium Attractiveness
Medium - High Attractiveness
Very Attractive
In addition to the franchise models listed above, there exist various hybrids and conversions between the models. For example, Area developers often start with the Direct franchising model upon
which they build the trust to acquire rights for an area. Similarly, National Master Franchisees are given country-wide rights only upon showcasing success as a Regional Master Franchisee. There have been
cases where Franchisors acquire back the direct franchising rights of an area upon certain criteria, such as cultural acumen or numbers of outlets, being met.
Sector amenity to franchise models

This section explores the amenability of certain sectors to certain franchise models. From the franchisor's perspective, prioritization among factors such as Quality control, Process Standardization, Inventory costs and Time to Market are likely to change depending on the chosen sector and this is then likely to have an impact on the choice of the franchise model. Food & Beverage sector The critical success factor of a brand within the F&B sector is the brand's ability to standardize a unique experience across several outlets while localizing its tastes and products. Simultaneously, food safety and quality standards are critical as well as an efficient supplychain that usually carries the brand's unique produce. There is an Retail sector Within the retail sector, distribution/supply chain is of utmost importance given the level of competition. In addition, securing franchisee loyalty is crucial and thus relationship management and franchisee profitability is critical. Further, Time to market and scale are important as they build on brand optimum balance between quality control and sensitivity to local tastes. In such a scenario a wellappointed Regional Master franchisee with detailed local knowledge and business acumen would be ideal. It bridges the cultural gap that exists between the franchisor and the market while ensuring standardized process and customized distribution avenues without the resources usually expended in overseeing several individual outlets. Education sector - Franchising within the education sector is characterized by the need to maintain excellent relationships with the franchisee. Constant feedback from the franchisee will help improve the product while constant support from the franchisor is paramount. Localization is limited to National sphere and thus in these circumstances, a National Master Franchisee is preferred, especially for an International brand, as this layered approach ensures minimum resource expenditure for oversight presence. With the franchisor preferring control over logistics, bargaining power with the franchisee and a quick Time to market, an Area developer is ideal in these circumstances.
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while ensuring a effective delivery mechanism for any product upgrades. Service sector Customer experience is paramount within the service industry. This coupled with tight quality controls are critical success factors. Control over franchisees is an important factor and in this scenario, direct franchising is expected to yield the most favorable results. Beauty, Health and Wellness Similar to the general service sector,
quality service experience is essential in the Beauty, health and wellness segment. Many of the business within this segment employ machinery, often patented, to service their customers. In these scenarios, the franchisor is keen to avoid the upfront Inventory and holding costs to efficiently support and service a large network of potential franchisees and thus a Regional Master Franchisee is often employed as they are able to effectively deploy quality control mechanisms within the area while catering to the inventory needs of
franchisees. Below is a table that summarizes the choice of franchising model for an industry. As mentioned before several hybrids exist within these models and firms often switch or convert between models as their own expertise within a market increases over time. Further the size of an Area developer/ Regional Master Franchisee's geographical area is determined by the specific business and the goals of the franchisor.
Direct Food and Beverage
Area
Regional Master
National Master
Success Factors Standardized Experience, Localized Tastes, Quality control and Supply chain efficiency Supply chain efficiency, Relationship Management, Franchisee Loyalty, Time to Market
Retail
Education
Relationship management and Product upgradation Quality control and Standardized Experience Standardized Experience, inventory Management and Quality control
Service Wellness and Health
Key operating business models for franchising

A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, cultural, or other forms of value)8. There are different kinds of business operating models globally across various industries of which franchising is a key business model, for those who aim to facilitate rapid expansion in short time by using limited resources and minimizing risks. Any company can operate through the following business models: Franchise owned outlets: This business model involves franchisees own investment for setting up the store. It shifts the risk of investment of the company to the franchise holder. Franchise operator, is generally aware about the local market dynamics, hence strategically plans operations such as purchase, recruitment, marketing, distribution and endconsumer services. It tends to operate better than the company and delivers faster growth to the business. Company owned stores: This business model involves company's own investment for setting up the store. The outlets involve higher capital, and relatively slower business growth for the business. However, with no middle-men involvements, company tends to generate higher RoI and avoid instances of theft and shop-lifting etc.
Analyzing the Business Model Concept A Comprehensive Classification of Literature, T. Burkhart, J. Krumeich, D. Werth, and P. Loos
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A detail study of existing business models related to franchising in India: Company owned company operated (CoCo) Company owned franchise operated (CoFo) and Franchise owned company operated (FoCo) In both these operating models, a company invests in a franchisee but not necessarily monetarily. Minimal investment from a franchisor and significant interest from a franchisee ensures impressive growth. A franchisor might invest along with a franchisee or support him in the financial profitability of the business. Faster business growth in terms of increased market share, while maintaining control over stores. Franchise owned franchise operated (FoFo)
Pros
Company has complete control over business operations. Complete onus of supply chain management due to no middle-men involvement, leads to less wastages and shrinkages. The company gains better understanding on the regional growth dynamics which could help in long term sustainability and scalability of business.
All operational rights and responsibilities lies with the franchisee, hence the franchisor (company) can invest more time on the strategy development of the business. Here, a franchisee makes the investment. As a result, he/she is self-motivated and does everything possible to ensure the success of his/her business. It is possible to grow exponentially, as multiple outlets provide economies of scale and increase margins
Cons
Maximum time is spent on the thorough compliance with operations manual on a dayto-day basis. Understanding the regional culture and diversities may delay break-even for the business. Business gains scale at a relatively slower pace. Training and managing manpower in such stores remains a big challenge. Applicable to all the industries.
The franchisor-franchisee relationship could be critical. The onus of supply chain gets split among franchisor and franchisee, leading to higher chances of wastages and shrinkage.
The franchisor-franchisee relationship could be critical. The onus of supply chain gets split among franchisor and franchisee, leads to higher chances of wastages and shrinkage.
Key sectors
F&B, Health and wellness
Retail industry- apparels specially, consumer services such as courier business.
Source: KPMG in India analysis
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Franchising - Route to Growth in Tier 2 & Tier 3 locations

Tier 2 and 3 growth and potential
Over the last couple of decades the Indian growth story has been phenomenal, uplifting millions out of poverty, significantly increasing the size of the middle class and bringing opportunity and aspiration to India's smaller towns and cities, frequently labeled as Tier 2 and Tier 3. With strong economic growth, Incomes have risen rapidly across Indian households leading to the creation of a larger middle class and an increasing spending per-capita. Not only have incomes increased but the proportion of spending on discretionary items as against basic necessities has also increased. Through this continued growth India's smaller cities and rural areas have emerged as increasingly attractive markets. Rural households are collectively the larger share of the consumer base and currently Given current GDP growth forecasts, Indian disposable incomes will triple by 2025 with the middle class accounting for 41% of the population (~ 583 Mn. people).This middle class will begin to move beyond Tier 1 cities and spread into Tier 2, 3, and 4 cities with 45 to 58 percent of middle class consumers residing in Tier 3 and 4 cities and towns by 2025 Tiers 2 and 3 cities together account for 24 percent of India's households and 23 percent of India's disposable income, a whopping 1.7 Lakh Crore Rupees. Interestingly, Tier 3 towns have almost as many middle-and upper-class citizens as Tier 2 cities but are smaller in size and thus slightly richer. These figures are only set to grow and present an immense opportunity for franchising in Tier 2 and Tier 3 India. the challenges of accessing these markets are being served by the informal/unorganized economy and this presents a huge opportunity for the franchising industry.
Classification of Towns and Cities in India
Tier 1 Major Cities (8)

on
Po
pu
>4 Mumbai, M illi on Delhi, Kolkata
lat
ion
Po
la pu
tio
M >1
illi
Nagpur, Surat, Agra, Patna, Rajkot, Jaipur, Lucknow, Bhopal, Kanpur, Ludhiana, Nasik, Dhanbad
Tier 2 Mainstream Cities (26)

Po pu lat ion
Tier 3 Climbers (33)
Bhubaneswar, Raipur, Jamshedpur, Vizag, Mangalore, Goa, Jodhpur, Gwalior, Amritsar, Faridabad, Gorakhpur, Bhavnagar, etc.
>0
.5
illi
on
Cuttack, Rourkela, Balasore, Bukharo, Shillonn, etc.
Tier 4 Small Towns (5094)
Number of Households in Millions Income per Household in 000 of INR

186 129 135 114
Share of Disposable Income

INR 00 Cr. INR 00 Cr. 3034 3009 50% 39% 39% INR 00 Cr. 40% INR 00 Cr. 1064 30% 670 14% 20% 9% 10% 0% Tier 1 Tier 2 Tier 3 Tier 4
30 Millions 20 10 0 Tier 1 16.3 8.3 4.9 Tier 3
26.5 INR ('000)
200 150 100 50
Tier 2
Tier 4
Tier 1
Tier 2
Tier 3
Tier 4
Source: Census Data, NCAER Economic Survey, KPMG INDIA Analysis
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Below are some of the many reasons that make franchising attractive in Tier 2 and Tier 3 cities: Disposable incomes As mentioned in the preceding paragraph, disposable incomes areset to triple by 2025 and the proportion of incomes spent on
Sector Food and Beverage Brand Domino's
discretionary spending is set to grow, with current proportion of spending on basic necessities set to fall by almost half. Some brands have already made a foray into this
Activity
lucrative market with many more planning to leverage this growth opportunity
50% of the current operating stores are in Tier 2 and Tier 3 cities
Retail
Van Heusen
Van Hesun plans to open 40-50 stores in FY14 with 70% in Tier 2 cities
Service
The MobileStore
To adopt a Franchising model to penetrate Tier 2 & 3 cities with 500-600 stores in 3 years
Education
Aptech
Aptech's English Express plans to set up 80-100 centres inthe next 12 months with 80% of the centres in Tier 2 and Tier 3 cities.
Beauty and Wellness
Shahnaz Husain
About 20% of group sales are from small markets such as Kohlapur, Panchkula and Saharanpur
Source: Dominoes - Published reports Van Heusen - Published reports The Mobile Store - http://www.way2franchise.com/resource/article/the_mobile_store_to_penetrate_india_tier_2_and_3_cities_with_600_franchise_stores_this_year Aptech - http://www.moneycontrol.com/news/cnbc-tv18-comments/upgrade-your-english-skillsaptech_417573.html Shahnaz Husain - Published reports
Brand and lifestyle awareness A rising number of consumers in India's smaller cities and towns are acutely aware about international brands and lifestyle choices and many wish to adopt similar ones. With rising advertising and internet penetration, consumers increasingly wish to associate themselves with successful International and Indian brands and this association is often a source of prestige. Unlike the West where boutique retail stores are often looked upon as the source of trends in consumers, in India established brands face no such threat. A further source of success for brands in Tier 2 and 3 cities is that consumers here are more likely to stay loyal in comparison to Tier 1 consumer
Lower costs Another huge incentive for brands to pursue franchising in Tier 2 and 3 cities is the lower costs involved. These cities have much lower property prices and lower set up costs when compared to the metros. Further, service-based brands can avail of skilled manpower at much lower costs. Many brands often face little or no competition from the organized sector and thus regular marketing and advertising expenditures are also lower compared to Tier 1 cities. Prestige and attractiveness In addition to the inherent opportunity available to Franchisors and brands, entrepreneurs in Tier 2 and Tier 3 cities are also increasingly attracted to franchising as compared to their peers in Tier 1 cities. From a financial perspective
Franchisor's often provide them with a set of processes and brands that have a high chance of success in these cities. Many franchisees are serial entrepreneurs and franchising provides them a chance to convert their business to the organized segment. From a nonfinancial perspective it is often a source of pride and prestige in small towns to be associated with wellacclaimed successful brands. It is seen as a mark of respect that an International brand has opted to partner with a franchisee. Many franchisees in Tier 2 and 3 cities are also young, affluent persons who have a point to prove to their parents and society. This commitment to succeed from a franchisee is often very helpful to the parent brand and franchisor
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Homogeneity and local connect Entrepreneurs and franchisees in Tier 2 and Tier 3 cities often have a better connect to their markets and customers as compared to Tier 1 franchisees. Their local knowledge and consumer understanding can result in successful franchising operations. Further, markets in Tier 2 and 3 cities are often more homogenous than Tier 1 cities. This can make operations and product planning easier for the franchisee and franchisor.
Key Challenges Venturing into franchising in Tier 2 and 3 cities are not without its pitfalls. Franchisors must customize their products/services to suit local needs and markets. The tolerance for initial failure is also much smaller in these scenarios. Franchisees in their turn often require education in terms of business communication. This can be a source of disconnect between franchisor and franchisee. Many franchisees also lack the discipline in following standard
processes and procedures entailed in franchising . Thus it is essential that the franchisor thoroughly understands how to adapt and sustain franchising and franchising relationships in the Tier 2 and 3 contexts.
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Employment potential in the franchising industry
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Employment potential in the franchising industry

Projected number of employees required in Franchising by 2017 The franchising industry is expected to employ 1.4 crore people by 2017 , which is almost 10
Number of employees 90 80 70 60 50 40 30 20 10 0 Retail 10 lakhs Food & Beverage Consumer Services 1% 31 lakhs 77 lakhs 2.2% 1.5% 5%
percent of the total estimated workforce in that year. Given such a large need for skilled resources, it is absolutely imperative to identify the skill gaps and work towards bridging the same. 1
20 lakhs Education
Percentage of total workforce

Source: Industry Survey, Franchising Industry in India, KPMG in India, 2013, Athena Infonomics, National Skills Development Corporation (NSDC)
Sector
Estimated employment potential

77 lakhs (5% of total workforce)
Skills requirement
Retail
Good communication skills due to high customer involvement Understanding customer behavior and having product knowledge. For stores is in smaller towns, store personnel with knowledge of vernacular language is essential. Good communication skills, ability to handle guests and supervisory skills Ability to manage F&B inventory and managing the day to day operations Maintaining high level of hospitality and cleanliness Ability to take orders from customers in a professional and courteous manner Basic understanding of the industry Knowledge of the respective products they offer Soft skills such as communication and selling skills Sector specific skills where required (example: financial services) Ability to deliver content in a simple and effective manner Good communication and observation skills to address the problems of students Ability to use Information and Communication Technology (ICT) and constantly update oneself with the knowledge of technology
Food & Beverage (F&B)
10 lakhs (1% of total workforce)
Consumer Services
31 lakhs (2.2% of total workforce)
Education
20 lakhs (1.5% of total workforce)
Source: Industry Survey, Franchising Industry in India, KPMG in India, 2013, Athena Infonomics, National Skills Development Corporation (NSDC)
Number of additional indirect jobs expected to be created by 2017 In addition to the direct employment,
Number of additional indirect jobs created (in lakhs) 10 9 8 7 6 5 4 3 2 1 0 Retail Food & Beverage Consumer Services 5.7 lakhs 3.6 lakhs 9.1 lakhs
franchising is expected to create push for indirect employment as well. It is estimated that indirect employment is expected to create an additional 1.8 million jobs by 2017 across the key franchising sectors. Services oriented franchisees including Food service sectors are expected to generate maximum indirect employment.
Source: KPMG Analysis based on Report by FRANdata titled Small Business Lending Matrix and Analysis (May 2009)
03 63
Financing franchising business
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Financing franchising business

Most franchisors look for the financial capability of the prospective franchisees before awarding them the business contract. However, several of the aspiring franchisees are hindered from undertaking the business due to financial constraints. The ease of obtaining loans for franchising business is very low in comparison to other industries. This is contrary to the reality where in franchising business, business concept is pre-tested and proven and chances for failure is lower than a start-up SME. Franchisee View - Funding Options Almost all franchisees surveyed for this report have self funded the initial investment required for the business with most of them also tapping into their family/friends network for help. In cases where franchisees were able to source funds through 3rd party lenders, they were able to do so on their personal merit and not on business merit as recognised by the lender. In cases where franchisees sourced funds from banks and other financial institutions, it was predominantly for capital asset/equipment purchase, which was mortgaged with the bank during the loan period. This clearly indicates the lack of financing options for the franchisees, who entirely depend on their personal capability in sourcing
Angel Funding Franchisor Funding Bank Loans 3rd Party Lenders Family and Friends Help Self Finance 0 2 4 6 8 10 12 2 3 9 13 14
funds. Under the existing RBI norms, the limits for investment in plant and machinery/equipment for manufacturing/ service enterprise, as notified by the Ministry of Micro Small and Medium Enterprises is as given below. Most franchisees who obtain franchising loans are covered under the same classification as that of SMEs.
Number of respondents Source: Industry Survey, Franchising Industry in India, KPMG in India, 2013
Manufacturing sector Enterprises

Micro Enterprises Small Enterprises
Franchisee View - Financial Support from Franchisor

Yes, 7%
Investment in plant and machinery

Do not exceed INR 25 lakh More than INR 25 lakh but does not exceed INR 5 crore
Service Sector Enterprises

No, 93%
Investment in equipment
Do not exceed INR 25 lakh More than INR 25 lakh but does not exceed INR 5 crore
Micro Enterprises Small Enterprises
Source: Reserve Bank of India
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7460&Mode=0
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While addressing a banking conclave, RBI Deputy Governor KC Chakrabarty, said that as much as 92.7 percent of small and medium enterprises (SMEs) are self financed. He censured the financial institutions for showing laxity in financing SMEs in the country. Most of the SMEs require working capital funding which they find very difficult to source from formal financial institutions. Significant share (~40 percent) of the credit earmarked under priority sector, is focussed towards units having investments in plant and machinery up to INR 5 lakh and micro (service) enterprises having investment in equipment up to INR 2 lakh, which is well below the requirements of an average franchisee. Only ~ 20 percent of the total advances to micro and small enterprises sector have been targeted towards Micro (manufacturing)
enterprises with investment in plant and machinery above INR 5 lakh and up to INR 25 lakh, and micro (service) enterprises with investment in equipment above INR 2 lakh and up to INR 10 lakh. Deployment of Gross Bank Credit to Industry (As of 22nd Mar 2013)
Micro & Small Industries 13% Medium Scale Industries 5%
Large Scale Industries 82%
Besides the above, INR 2842 billion has been disbursed to manufacturing under priority sector lending during the same period
Deployment of Gross Bank Credit to Services (As of 22nd Mar 2013)

Computer Software 1% Transport Operators 6% Other Services 21% Non-Banking Financial Companies (NBFCs) 18% Commercial Real Estate 9% Statement 2% Shipping 1% Professional Services 4% Trade 19% Wholesale Trade (other than food procurement)10% Retail Trade 9%
A key factor which makes Franchising ecosystem different is in the services franchising sector where there is an absence of asset base on which a collateral can be taken to provide a loan. However, financiers do believe that there is potential in the Franchising sector lending. Franchisees need funding during different stages of operations such as the start-up, growth and global expansion phase. Financial institutions are more welcoming in offering support during the growth and expansion phase of operations over the start-up phase.
Besides the above, INR 2779 billion has been disbursed to services under priority sector lending during the same period
Startup Phase Description Franchisee is ready with the business plan and is in the contract signing phase with the franchisor (or has signed the contract by making part payment of initial franchise fee)
Growth Phase Franchisee is already running the business with steady financial base and wants to expand operations (employee hiring, technology deployment, increased market coverage involving increasing asset base etc) As per the nature of requirement, finance is provided. The provision of loans is usually available for purchase of fixed assets, against security
Expansion Phase Franchisee, having established the base domestically, is looking to expand into international markets
Funding Aspects
For start-up franchisees, provision of unsecured loans is available only up to a certain extent loan against security/collateral
Project financing Facility - Provision of term loans structured to finance the project over a tenure Structured loans provided by the financial institutions participating in the expansion process, while sharing risk Moderately Easy
Level of Difficulty in sourcing external funds
Very difficult
Easy

10
http://www.indianexpress.com/news/rbi-pulls-up-banks-for-laxity-in-sme-finance/907975/
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Most lenders do not treat franchisees as a separate customer segment and usually cover them under the ambit of the broader SME sector classification. Banks such as State Bank of India and HDFC Bank have started treating Franchisees as a separate segment only during recent times. A separate mechanism for franchising ecosystem has been planned by Small
Industries Development Bank of India (SIDBI) and an Memorandum of Understanding (MoU) has been signed with Franchising Association of India, in this regard. The above situation is amply reflected in the low penetration (less than 10 percent) of bank loan funding amongst franchisee investors, with most of them using personal finances or borrowings from
relatives/friends to fund the ventures. This situation needs to undergo a sea change to augment the funding requirements in the booming franchising industry. There are several differences between a typical franchisee fund request and an SME fund request which makes the former a better candidate for support.
Parameter
SME entrepreneur Traditional Business Concepts While the business concepts are pre-existing, an SME entrepreneur starts his business from scratch, with no formal support from other industrial players (they are mostly his competitors) Equal chances for success and failure
Franchisee entrepreneur
Business Concept Business Viability
Both Innovative and Traditional Business Concepts Be it innovative or traditional concepts, the franchisee entrepreneur gets support from the franchisor throughout business operations
Probability of success
Higher chances of success given that the franchisor has already tested the market and then launched expansion through franchising Collaterals/Guarantee provided both by franchisor and franchisees
Financial Security
Usually the collaterals provided by SME Entrepreneur
Lending institutions focus on the credit worthiness of the franchisor, before assessing that of the franchisees. Lending institutions focus is on the parent brand value, financial performance of the franchisor, robustness of the business concept, level of comfort the franchisor is willing to offer to the lending institution besides evaluating the franchisee for his own merits. Financial institutions evaluate franchisees on the business viability and expected returns from business, brand and financial strength of franchisor and lastly the financial strength of the franchisee owner. Bankers prefer businesses with brand names and long track records of consistent cash flow. Ventures with few
locations are less attractive, in part because they lack proof that they can do well in all types of areas or economic climates. Hence, franchisees need to put in extra diligence in identifying the right franchise system to be a part of. Financial institutions also tend to reject funding requests from franchisees due to non-clarity of the business concept and nonpracticality of the business assumptions, such as inflated revenues or shrunken costs. Financial institutions show greater keenness in funding for business expansion of franchisees rather than during the initial investment phase. This stage requires significant involvement from the franchisors who should support the franchisees
in building a robust business plan which can be shared with the lending institutions. Key aspects lending institutions look for in franchisee funding
Prior banking relationship with franchisors Credit worthiness of the franchisors Robustness / clarity of the business concept Viability of the proposed business plan Level of comfort franchisor is willing to provide Credit worthiness of the franchisees
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A tripartite arrangement with the Franchisor, Franchisee and the lending institution is the collaborative arrangement most lending organizations such as SIDBI
are looking for. Such arrangements will ensure complete sharing of information and support thorough due diligence of the franchisee business plan. Lending institutions
also seek additional assurances from the Franchisor such as first loss guarantee, change of franchisee or location in cases of non-performance etc.
The SIDBI FAI collaboration

Details Month of incorporation Validity January 2013 Small Industries Development Bank of India (SIDBI): Corporation set up under the Act of parliament, it is the principal financial institution for the promotion, financing and development of Indias Micro, Small and Medium Enterprise (MSME) sector. It is also involved in the coordination of functions of other bodies engaged in similar activities. Franchising Association of India (FAI): Nodal Agency for the Indian franchise sector which represents franchisees, franchisors and service providers belonging to the sector. Its key objectives include establishing international best practices in the sector, disseminating information to key stakeholders and educating government about key sector issues.
For a period of 2 years from the date of signing the MoU and extendable by consent.
Key enablers for this collaboration: ? SIDBIs assistance flowing to eligible franchisees under the mentorship and guidance of Franchising Association of India (FAI) ? A good track record of the franchising in terms of success rate and a growing number of win-win arrangements between franchisors and franchisees ? Increasing inclination towards entrepreneurship, spurring new entrepreneurs to increasingly look at franchising as an option
Key features of the collaboration and areas of cooperation

Cooperation on entrepreneurship to create enabling environment for development of MSMEs Collaboration on avenues related to entrepreneurship such as policy advocacy, structuring of new risk capital and other direct credit products. Franchising Association of India (FAI) to disseminate information and create awareness
? Under the agreement,
Franchising Association of India (FAI) to screen the members initially

? Screening of
SIDBI reserves the final mandate for assistance

? SIDBI would
Franchising Association of India (FAI) to mentor Franchisees Post approval and dissemination of financial support from SIDBI, Franchising Association of India (FAI) comes into the picture by assisting and mentoring the Franchisees
Franchising Association of India (FAI) would lay the groundwork for creating a conducive business environment. ? This would include organizing meetings, workshops and other such events for dissemination of information about SIDBIs schemes. ? Franchising Association of India (FAI) would work to provide visibility and recognition to SIDBI through above events, websites, newsletters and other promotional material.
enterprises for extension of financial support is expected to be conducted by Franchising Association of India (FAI). ? The proposals are referred to SIDBI for assistance under schemes such as the Direct Credit Scheme to MSMEs and the Risk Capital Assistance Scheme.
conduct another round of assistance eligibility based on its established criterion. ? SIDBIs decision regarding extension of assistance is final and binding on all parties.
Source: Franchising Association of India
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In rare occasions, even franchisors are willing to financially support promising franchisees by providing initial funding or can considerably reduce the initial franchise fee. Regarding this MRK Menon, Aero Sports states, I want to provide employment to 1000 people so that they can earn a good living. For this I am ready to meet the aspirants halfway. If franchisees are able to provide the basic franchise fee, our company would provide them with much leverage also. Financial institutions also provide non-monetary support in the form of consultancy services, technology assistances and training
programmes which can be of use to potential franchisees. Globally, the franchising industry is witnessing increasing use of nontraditional funding methods. Franchisors are increasingly adopting direct financing route by accepting promissory notes for part or all of the initial franchise fees owed. Initial franchise fee is one of the heavy investments that franchisees incur. By lowering the initial burden, franchisors can support franchisees. Sometimes, direct financing also involves extensive lending if the franchisor is financially strong. Franchisors are also using indirect financing means
and leasing support for their franchisees with third-party lenders. In such instances, franchisors also undersign a guarantee. Angel funding, while considered an expensive option in comparison to others, is also being actively considered by both franchisors and franchisees to fund their ventures. Such funding requires equity participation as part of the overall offering. Angel investors look for advisory role which can be of advantage to the new franchisees. Options for equipment leasing reduces the need for locking up capital which can be used in other components of the business
Enhancing Funding Ecosystem in Franchising Franchisor

Provide increased support in explaining the business concept and business plan to banks when franchisee is availing loan Should consider providing first loss default guarantee to the lending institutions to bear losses up to a certain specified limit, say the first 5-10% of loss on a franchisee loan portfolio. Should come forward to support promising entrepreneurs by offering initial funding or by reducing the franchising fee
Franchisee
Needs to prepare a robust business plan document describing the business concept, business viability, risk mitigation strategy Franchisees should insist on a First Loss Default Guarantee by the franchisor as it would be affected adversely right from the start
Lending Institutions
Build and offer innovative financial products suited to the needs of franchisors Enhance their knowledge of innovative business models which are different from traditional business models and build policies and processes to fund such business ventures Need to develop detailed understanding of the franchise intellectual property, associated value and underlying cash flow while evaluating franchisee business
Franchising Industry Associations

Could spearhead formation of collective and mutual credit guarantee consortia comprising of franchisors, franchisees, lending institutions and government Provide greater reassurance to the lending institutions by offering services such as due-diligence of the franchisee business plans Increase awareness of innovative asset-light business models amongst lending institutions Provide a common platform for the interaction of Franchisors, franchisees and lending institutions
Edible Arrangements, a US firm, has a separate capital firm, Direct Capital. This financing company provides packages to the franchisors and franchisees for the following: to open franchise outlets at new locations to upgrade existing stores to buy/lease new equipments for new franchisees The Company also guarantees and services the loans to support operations at franchised stores.
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Franchising success:
Role of the government
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Franchising success: Role of the government

Different economists have expressed different views on the role of a government in any society. One school of thought, represented by John Maynard Keynes and John Kenneth Galbraith, states that an activist government is essential for the efficient growth of an economy. However, another point of view was developed by twentieth century economists Frederick von Hayek and Milton Friedman. They argued that an activist government is the key cause of economic instability and inefficiencies in the private sector. However, all economists agree that government support is critical for the operational efficiency in a private market. While India has liberalized franchise royalty/fee payments since 2011 (Foreign franchisors can now charge a lump-sum fee and royalty without any maximum limit for transfer of technology and royalty for use of trademark/brand name on the automatic route without any prior approval from the Indian The absence of a regulatory framework and formal franchise laws in India could deter potential franchisees from investing. Countries such as Singapore and the US, which offer attractive franchise opportunities due to substantial government support, are examples of how a government can facilitate and promote franchising in a country. As a first step India could look at some of the leading practices for Franchise regulations in other countries and initiate dialogue with Indian Franchising community to understand their needs and concerns. government)11 and also relaxed Foreign Direct Investment (FDI) norms in single brand and multibrand retailing, many industry stakeholders believe that the degree of government support must be far greater than what it is currently.
Figure 1: Country rankings for doing franchise business, 2012 India Expected 2013 GDP growth Market size (customers) Legal concerns for international brands Ease of setting up a new business Political risk (stability) Overall country ranking 1 1 2 3 2 1.8 Singapore 1 4 1 1 1 1.6 Malaysia 2 2 3 3 2 2.4 Brazil 2 1 2 3 1 1.8 US 3 1 2 1 1 1.6 UK 3 1 2 1 1 1.6
Country ranking : 1 is good, 2.5 is fair, 4 is worst Sources : 'The Economist';EIU;Heritage Foundation; World Bank
11
http://www.millercanfield.com/publications-articles-240.html, accessed on 7 June 2013
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Case study: Singapore government support boosts sector growth

Since 1985, the Singapore Government has been actively promoting franchising as a means of internationalizing domestic small companies. Eligible companies can leverage various schemes related to franchise consulting, the registration of trademarks, market surveys and participation in overseas exhibitions. The lead government agencies that promote franchise development in Singapore are: Standards, Productivity and Innovation Board (SPRING), Singapore International Enterprise (IE) Singapore SPRING is a statutory board under the Ministry of Trade and Industry (Singapore). It offers financial assistance to local SMEs to foster the franchise business environment, facilitate the growth of industries, and enhance innovation and enterprise capabilities domestically. Similarly, IE Singapore facilitates the overseas growth of domestic companies and promotes international trade.
SPRING
provides financial assistance to local entrepreneurs SPRING: offers and interventions Several financial incentivesin the form of cash/voucher to defray expenses, tax incentives (PIC scheme)* and grants (CDG)** support enterprising competitiveness, increase productivity and improve human resource management practices for local small enterprises in Singapore. The country supports the industry in working capital, trade finance and equipment finance activities through government - backed loans and schemes such as the Local Enterprise Finance Scheme (LEFS), the Loan Insurance scheme (LIS) and the Micro Loan Program (MLP).
*Productivity & Innovation Credit (PIC) scheme provides 400 percent tax deduction of up to US$0.4 million or 60 percent cash grant up to US$100,000 expenses in productivity improvements and innovation. ** Capability Development Grant (CDG) supports up to 70 percent of the cost of productivity improvements and capability development , which results in greater enterprise competitiveness and business growth.
Source: http://www.iesingapore.gov.sg/wps/portal and www.spring.gov.sg/
IE Singapore
facilitates franchise opportunities outside the country External economic opportunities: IE Singapore is a government agency, under the Ministry of Trade (Singapore), which facilitates the overseas growth of domestic companies and promotes international trade.
Globally Competitive Companies (GCCs): These companies facilitate international trade opportunities for potential domestic players. GCCs compete in about 35 countries in various industries. They contribute to Singapores economic buoyancy, cultivate global business leaders domestically and strengthen the countrys overall brand value.
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Case study: Brazil government support boosts sector growth

Brazil is the 7th largest economy in the world, where all the franchise operations are regulated by 'The Brazilian Franchise Law (Law No. 8955 of December 15, 1994)'. Despite the presence of this comprehensive law for franchising in the country, the government also proactively interferes in the country's franchise transactions. The following diagram exhibits the various aspects of the franchising, which are directly governed by some government agencies in Brazil:
Disclosure laws The National Institute of Industrial Property (INPI) is a goverment entity, responsible for multiple aspects related to franchise agreements such as industrial property rights, issuance of letters patent, certification of licensing agreements involving industrial property rights, and registration of domestic and cross-border franchise agreements.
Competition laws The competition laws are governed by the Brazilian Competition System (SBDC). This system comprises the Administrative Economic Defence Council (CADE), an independent agency linked to the Ministry of Justice; and the Economic Policy Bureau (SEAE), a government entity reporting to the Ministry of Finance.
Dispute resolution The conflicts and disputes in franchise transactions are obliged to follow the Brazilian Code of Civil Procedure (Law No. 5,869/1973). This law is common for all kinds of conflicts in the country, irrespective of the relation to the franchise transactions.
Source: http://www.franchise.org//uploadedFiles/F2013%20Brazil.pdf, accessed on 10 June 2013.
Learning from International franchising regulatory scenario for the GoI:

US Specific franchising Law UK Malaysia Brazil KPMG Comments Franchising focused rules & regulations are expected to send a positive message to both Indian and global franchising community about the seriousness of Indian government in promoting franchising as a mainstream sector that can contribute to overall GDP growth and employment generation. This is important to protect franchisee rights as well as will ensure only serious players look at franchising. Free market pricing should be encouraged while making sure that royalty and fee payments lie within industry standards. It is critical to have a transparent dispute resolution mechanism and an independent body to address conflicts that may arise between a franchisor & franchisee It is important to protect intellectual property rights of all the franchisors to discourage counterfeiting brands.
Pre-contractual disclosure norms Control on royalty payments and franchisee fees Conflicts resolution
Intellectual property protection
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India could take a cue based on key areas of support identified by International Franchise Association in the context of Franchising.
Identified federal legislative areas where government attention and support is required:
The GoI needs to benchmark its priority to promote franchise industry in India against the legislative priorities of the International Franchise Association (IFA).
Franchise relationship legislation Capital access Depreciation reform Business activity taxes Labor issues Lawsuit abuse reform
Private equity taxation Restaurant nutrition labeling Tax reform Small business loan program Veterans policy
Source: International Franchise Association (IFA) http://www.franchise.org/IndustrySecondary.aspx?id=10070
Expected role of the government in addressing the industry's key challenges:

Identified key issues and challenges faced by the industry Absence of a strong legal framework The absence of a dedicated regulatory framework and formal franchise laws sometimes acts as a mind block for a business investor or a prospective franchisee looking to invest in a new franchise system. Expected support from the government
Evaluate the need and urgency to formulate franchising specific laws including pre-disclosure norms, effective dispute resolution and governance mechanism. However, such laws should not be restrictive in nature Single window clearance for international franchisors
Need for financial assistance
No specific financial assistance programs or schemes for franchise market, except for the SME sector.
Government could look at setting up funding programs to encourage adoption of franchising business model by entrepreneurs Government could also look at providing guarantees to bank loans for certain identified sectors with-in franchising Counter guarantee collective mutual credit guarantee schemes
Regional diversity
A balanced and well-informed strategy is required for smooth franchise operations in a diverse country such as India.
Provide data/information to franchisors, especially on demographics, as well as growth rates and trends in various industries/regions.
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75
Conclusion
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Conclusion
In the absence of any specific law for franchising, it becomes critical for all the industry players in India to collaborate and support the industry to ensure the country's franchising potential is leveraged to its fullest. The following are some areas where the industry stakeholders could help leverage the availability of the country's entrepreneurs and the country's ability to cater to the prevailing consumption boom: Government and financial institutions: The government should play a key role in supporting all the franchise industry stakeholders including franchisors, franchisees, financial institutions, banks and industry associations. Frame policies which liberalize Indian foreign trade policies to encourage more foreign franchisors in the country. Set up regulations around the precontractual disclosures and streamline the process of entry of franchisors. Streamline approvals for the prospective franchisees by allowing single window clearance / approvals. Also look at protecting rights of franchisees by setting up a strong dispute resolution mechanism in the country. Support public agencies and financial institutions to improve laws and promote franchising. Set up a central fund to support innovative franchise models in India. Encourage banks and financial institutions to increase financial incentives for the franchisors, franchisees and concerned associations and
agencies in addition to the benefits available for SME's. Financial institutions should also come up with innovative financial products to support franchisee ecosystem. Support industry associations such as Franchising Association of India in setting up franchise incubation centres for domestic retailers aspiring to operate in India through the franchise model. Franchisor and franchisee: Franchisor should evaluate setting up financing programs to help the potential franchisees. This concept of financing franchising by franchisor has not yet emerged in India. Franchisor should collaborate and support franchisee throughout the business life cycle; specifically the start-up support, operational support, financing support and initial infrastructural support. Franchisors should share long term business goals with their franchisees Franchisors and Franchisees should discuss in detail growth opportunities and expectations on returns from franchise business
Comply with all laws and regulations to operate franchise business in India. Industry associations: Industry associations such as Franchising Association of India should act as a common platform to serve and promote all the franchise industry operations in India. Proactively engage with government, financial institutions and other industry stakeholders on policy matters that may need to be addressed to drive growth of franchising industry in India. Support government bodies and financial institutions to improve laws and promote franchising. Actively persuade industrygovernment partnerships to adopt global best practices in franchising. This is expected to enhance overall competitiveness of the sector. Partner with Franchisors and/ or Franchising industry associations to assist in screening of potential franchisees for extension of financial support.
77
Support from key industry stakeholders: Critical success factor for franchise industry in India
Franchisor Comply with all laws and codes regulating franchising in India Set up financing programs to financially help the potential franchisees Franchisors should share long term business goals with their franchisees
Government Ease FDI norms to allow retailers to adopt franchise models of entry Set up a central fund to support innovative franchise models Allow single window clearances for franchisees and protect their rights Support public agencies and financial institutions to improve laws and promote franchising
Financial Institutions Develop innovative financial products to support franchisee ecosystem Enhance their knowledge of innovative business models which are different from traditional business models and build policies and processes to fund such business ventures
Industry Associations Provide a common platform for the interaction of Franchisors, franchisees, government and lending institutions Actively persuade industry-government partnerships to adopt global best practices in franchising. This is expected to enhance overall competitiveness of the sector. Partner with Franchisors and/ or Franchising industry associations to assist in screening of potential franchisees for extension of financial support.
Franchisee Active involvement into the business and should adopt fair business practices Insist on complete disclosure by franchisors
78
79
Appendix
80
Franchisee Data Sector wise

Retail
Sector Investment (in INR lakhs) 15 20 23 26 250 350 12 15 Area required (sq. ft) 1200 1800 1000 1500 1000 1500 600 800 Revenue/ sq. ft/month (in INR) 3500 4500 3000 3500 1000 1300 200 250 Royalty (% of sales) 10 - 15 NA None NA Franchisee Fee (INR lakhs) 1 -2 NA 2-3 NA Return on Investment (%) 25 25 20 40 Paybackperiod (years) 3 4 4 3 Franchise Term (years) 5 NA 11 NA
Apparel Consumer Durables Jewelry Music, Books & stationery Furniture & Furnishing Pharmacy Food & Grocery
40 45
1200 1600
300 400
NA
NA
20
NA
8 10 20 25
400 600 1000 1500
1200 1600 1800 2300
NA NA
NA NA
20 20
5 3
NA NA
Food & Beverages

Sector Investment (in INR lakhs) 30 40 25 30 30 40 10 15 Area required (sq. ft) 500 1000 1000 1500 500 1000 250 300 Revenue/ sq. ft/month (in INR) 1000 1200 1000 1500 500 600 800 1000 Royalty (% of sales) 68 68 68 68 Franchisee Fee (INR lakhs) 2.5 5 5 10 5 10 12 Return on Investment (%) 25 20 30 30 Paybackperiod (years) 4 5 3 3 Franchise Term (years) NA NA NA NA
QSR FSR Caf/bars Kiosks
Abbreviations: QSR Quick Service Restaurants FSR Full Service Restaurants (Fine & Casual dining)
81
Franchisee Data Sector wise

Health & Wellness
Sector Investment (in INR lakhs) 40 50 40 45 70 80 Area required (sq. ft) 1400 1600 1400 1600 1500 2000 Revenue/ sq. ft/month (in INR) 500 700 1200 1400 200 600 Royalty (% of sales) 10 - 15 NA 68 Franchisee Fee (INR lakhs) 10 20 NA 8 10 Return on Investment (%) 30 35 30 Paybackperiod (years) 3 3 3 Franchise Term (years) 9 NA 10
Spa Salon Fitness & Slimming
Consumer Services
Sector Investment (in INR lakhs) 5 10 10 15 Area required (sq. ft) 1200 1600 500 1000 Revenue/ sq. ft/month (in INR) 300 500 800 1000 Royalty (% of sales) NA NA Franchisee Fee (INR lakhs) NA NA Return on Investment (%) 50 5 15 Paybackperiod (years) 2 6 Franchise Term (years) 4 NA
Travel Financial
Education
Sector Investment (in INR lakhs) 10 15 15 20 Area required (sq. ft) 1200 1600 1200 1600 Revenue/ sq. ft/month (in INR) 10 50 1200 1700 Royalty (% of sales) 10 20 NA Franchisee Fee (INR lakhs) 15 NA Return on Investment (%) 16 50 Paybackperiod (years) 1.5 2 2 Franchise Term (years) 4 NA
Preschools IT Training
Note: NA Data not available
82
83
Acknowledgements
84
Acknowledgements
In order to provide a comprehensive industry view in the study, we have interacted with various representatives from the Franchising community including Franchisors (both Indian & Foreign), Franchisees, Financial Institutions, Industry experts and Legal consultants. We would like to thank the various industry participants, whose invaluable contributions have made this study possible. The support provided by Franchising Association of India (FAI) has been instrumental in providing us with a platform to base our industry discussions. We would like to thank the team at Franchising Association of India for assisting us during the course of this study. We have interacted with the representatives of the following companies/ brands and would like to thank each of them for providing valuable inputs on the franchising sector.
AIMS Arena California Burrito Educomp Field Fisher Waterhouse LLP Gitanjali Jumbo King KBs Fairprice (Future Group) Liberty Shoes Ltd. Mocha Coffee Pitman Ripleys Siyarams Talwalkars TTK Prestige Zee Learning
Amul Arun Ice Creams Contours Euro Kids Four Fountain Spa Howards Storage World Just Books Lakme Little Millennium Naturals Beauty Salon Quiznos SIDBI South Asian Hospitality The Chocolate Room VLCC
Aptech Brainworks Donut House Ferns N Petals Franchise Mind Corporation Indian Cookery Pvt. Ltd. Kaati Zone Lexmantis Marrybrown Pink Fitness One Group Repro India SIP Academy Abacus training Sparkleminds TIME CAT coaching Way2wealth
We would also like to acknowledge the core team from KPMG in India who made this report possible: Ramesh Srinivas, Anand Ramanathan, Praveen Govindu, Priyanka Balasubramanian, Urvashi Gupta, Puneet Luthra, Sidharth Gopalan, Prasanna Venkatesan, Nirupam Das, Ankur Garg, Aditya Muralidhar, Priyanka Gupta, Jiten Ganatra, Subashini Rajagopalan, Sandeep Yadav and Priyanka Agarwal.
KPMG in India Contacts
Franchising Association of India (FAI) Contacts

C.Y. Pal President Franchising Association of India T: +91 22 2351 7185 E: info@fai.co.in Nilesh Daivadnya Senior Manager Franchising Association of India T: +91 22 2827 2490 E: nilesh.daivadnya@fai.co.in
Pradeep Udhas Head Markets T: +91 22 3090 2040 E: pudhas@kpmg.com Ramesh Srinivas Head Consumer Markets T: +91 80 3065 4300 E: rameshs@kpmg.com Anand Ramanathan Associate Director Consumer Markets T: +91 80 3065 4475 E: anandramanathan@kpmg.com Praveen Govindu Senior Consultant Consumer Markets T: +91 80 3065 4474 E: pgovindu@kpmg.com
kpmg.com/in
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein as a part of the Survey are those of the survey respondents and do not necessarily represent the views and opinions of KPMG in India. 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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CONSUMER MARKETS

Collaborating for Growth

Mr. CY Pal President Franchising Association of India

John Reynolds, CFE President IFA Educational Foundation

Ramesh Srinivas Head, Consumer Markets KPMG in India

Franchising Market Potential

People employed by franchising sector as a % of total workforce

Value (US$ billion)

Franchising Opportunity: Sector Overview

8 Franchising Market Size (USD Billion)

F&B 2017 Health & Wellness 2017

6.5% F&B 2012

Franchise Business Models

Medium - High Attractiveness

Attractiveness of India in Global Franchising

Franchise Industry Survey Key Highlights

entrepreneurs are opting for the franchising route as it

Intellectual property protection

Financing the Franchise Business

Enhancing Funding Ecosystem in Franchising Franchisor

Franchising Industry Associations

Source: KPMG in India Analysis

Franchising Industry in India

Franchising Industry in India

Franchising Industry in India

Franchising Pushing India ahead

Contribution of Franchising to GDP and Employment (2012)

Brazil 103 Malaysia 8

USA Australia Brazil UK China Malaysia Germany

~3500 ~1200 2426 929 5000 550 960

Source: KPMG in India Analysis

Franchising Industry in India

Franchisee to Franchisor Ratio

Source: KPMG in India Analysis

United States of America

Employment through Franchising

Sales ( in $ Billion) GDP Growth Rate (Y-O-Y)

Franchising Growth (Y-O-Y)

Direct Employment by Franchising Sector Franchise Employment Growth Rate

Franchising Industry in India

Employment in the Franchising sector

13.2% 11.0% 15.6% 3.2% 4.0% 5.7%

2005 2006 2007 2008 2009 2010

Employment in the Franchising sector

Franchise Sales (in $ Billion) GDP Growth Rate (Y-O-Y)

Franchising Growth (Y-O-Y)

Number of unit franchises (franchisees) Total Employment by Franchising Sector

Source: http://www.thebfa.org/about-franchising/franchising-industry-research (Website of British Franchise Association)

Franchising Industry in India

Current market landscape for franchising in India

Franchising Industry in India

Current market landscape for franchising in India

44% 17% 1991? 92 Agriculture 2012? 13 Industry Services

Franchising Industry in India

The economic significance of Franchising market in India

Estimated franchising industry market potential (2012-2017)

210 168 180 150 120 50.4 45 90 60 30 0 No. of outlets ('000)

Franchise revenues growth - 30.2% No. of franchise outlets growth - 30%

Franchising Industry in India

Franchise: Sector watch

~5,700 ~5,200 ~8,600 ~1,000 ~8,100 ~2,800 ~3,000 ~1,500 ~330

Health & Wellness ~2,750