India: Market for the Masses
Franchising World June 2008
By Dhawal Shah
Franchising in India has been consistently growing at more than 30 percent for the past five years, according to the Franchising Association of India. Several international brands have entered the country through franchising in the last few years. Franchising in India is being positively received as it creates jobs and wealth at the local level. More than 750,000 jobs are attributed directly to franchising and more than 90,000 franchisees are operational in India, says the trade group.
Liberalization and economic reforms have had an immense positive impact. The young people in India are reaping the dividends of its economic reforms. Gone are the days of slow growth, frugal lifestyles and unbranded products. Indeed, the rise of the young Indian urban consumer has been a feature of India’s economic transformation over the past decade. In their mid-twenties, members of this segment do not think twice before spending on expensive global brands. They are comfortable buying on credit, and have bought a house and a car, something their parents could never have dreamt of doing in their youth. The house is an investment for them and the car is an indulgence.
Lessons to Learn from Franchises
Food Concepts and Direct Franchising
Pizza Hut has more than 150 restaurants across 36 cities, including Delhi, Mumbai, Bangalore, Chennai, Kolkata, Hyderabad, Pune and Chandigarh. Fifty percent market share is organized in the pizza-retailing segment.
Employing economies of scale, Pizza Hut has made its offerings more affordable. Its delivery offer of U.S. $4.40 for four personal pan pizzas has been very successful, helping it grow its sales by 25 percent percent. They have recently introduced a range of vegetarian personal pan pizzas for U.S. $1.10.
Indians look for value for their money. To build a sizeable market share, it is important to be able to compete locally. Competition in several segments is mostly from the unorganized segments. These local business owners are quick to imitate and offer low-quality, personalized service at a reasonable price.
Markets in India are for the masses; volumes in most segments build profitability. A leading international fast-service chain managed to break even only after 10 years. It takes some time to get the right product mix and to click with the target audience. The master licensee should be adequately funded until the venture reaches the break-even point.
Several franchisors have appointed master franchisees for India, but have been unable to make an impact because of a mismatch between the company’s overall vision, values and goals with that of the master franchisee. Master franchisees typically consider a three-year period for positive cash flow to be achieved.
Pizza Hut has expanded into 12 to 13 new markets including Trichy, Nagpur, Bhubhaneswar, Thiruvananthapuram and Pondicherry to increase penetration. Metropolitan areas are closer to saturation, whereas markets in smaller towns and cities are open. International chains are aggressively buying into the mall mania and establishing locations with franchise partners.
Pizza Hut has increased its visibility by launching a well-received TV campaign aimed at the young crowd. It has formed partnerships with recognized brands such as Nestle and Pepsi. It also holds regular promotional campaigns targeted at children and uses these alliances to offer packages during these campaigns.
In India, it is important to consider innovative and additional sources of revenue, considering the ever-rising cost of real estate. McDonald’s in India offers advertising spots to enable cross selling. Marketers responsible for such products as PlayStation, Pixar’s film “Finding Nemo” and several other marketers focusing on the same segment have previously had alliances with McDonald’s.
India is a diverse country with several official languages and dialects. While, the media in major towns and cities are strong and homogenous, it is important to consider the importance of local newspaper and television channels. Indians are generally not comfortable accepting habits and cultures that they consider foreign.
The local supply chain for Pizza Hut was developed by Yum! Brands and currently 95 percent of the ingredients they use are locally produced. They now import very few specialty items such as pepperoni. Subway (development agent model) opened in 2001 in the Saket area of New Delhi. Today it has more than 110 locations. With the high cost of investment coming down due to localization of suppliers, raw material is no longer imported. Restaurant equipment is also sourced locally.
Respecting Local Sentiments
Pizza Hut is one of the first international pizza chains with purely vegetarian dine-ins at Chowpatty (Mumbai), Ahmedabad and Surat, which also serve Jain menus. Pizza Hut has even opened two all-vegetarian restaurants in the western state of Gujarat to cater to the Jain religious community, whose members prefer not to eat at places where meat is served. McDonald’s in India has localized more than 70 percent of its products catering to the Indian taste buds. International food chains typically offer only a few localized products in other parts of the world. However, Pizza Hut’s local menu is as large as the international one. The Indian food heritage is very rich, and hence Indians like local flavors. The Tandoori range of pizzas, which was developed locally, has a menu mix of which 20 percent or more is customized for the Indian audience.
To gain acceptance locally, McDonald’s had to modify its menu, substituting mutton for beef in the burgers, (something it had never done in any other market), choosing names like McAloo and Maharaja Mac, and introducing variations and dishes that were not available at any McDonald’s outlet anywhere in the world. From the meticulous sourcing of raw materials and the elimination of beef and pork from its Indian menu to even segregating the vegetarian and non-vegetarian workers, McDonald’s seemed to be extremely orthodox in its approach.
Retail Medicine Shoppe (master franchisee for India: Melrose Trading) started its operations in India in 1999, with shops operational in Mumbai and several cities in Maharashtra, Gujarat, Goa, Delhi, West Bengal, Andhra Pradesh and Karnataka. Currently, it has approximately 125 locations.
With the tremendous demand of professional health care in India, The Medicine Shoppe aims to open 1,000 stores by 2010, primarily growing through its sub-franchisee network. It also plans to open 350 Sehat stores (low cost clinics adjacent to the shop, primarily present in low-income areas) in the next three to four years.
US Dollar Store (master franchisee: Nanson Overseas) Single Price Shops, started operation in 2005. Some of the most popular products are sold at US Dollar Stores, cashing on the exotic appeal of imported goods in extremely small towns and cities, where it has been able to rapidly scale up its customer base and franchise plans.
Gold’s Gym (master franchisee: Valecha Engineering for South Asia) was first started in Mumbai following with centers in another five locations in Mumbai. Gold’s Gym is also in such locations as Bangalore, Chennai, Pune, Kolkotta, Surat, Ahmedabad, Baroda, Ludhiana and Noida. Centers in other parts of the country are fast spreading. Gold’s Gym is recognized for its unique experience and the authority in fitness expertise. In India, people relate fitness to yoga, meditation, dance, cycling, jogging and hence, Gold’s Gym offers tutors specializing in these areas.
Cookie Man India (Australian Food India Pvt. Ltd is a joint venture that has the master franchisee rights) started operations in 2000 and operates more than 50 franchisee-operated units across India. The franchise serves premium cookies and is presently located at several high-street malls.
Cartridge World (appointed AFL Pvt. Ltd. master franchisee for South Asia)
CW India started operations in 2006 and has grown rapidly with more than 45 franchisee locations. The company is the winner of the Indian Franchising Awards, organized by the Franchising Association of India.
Legal Aspects of Franchising in India
Most foreign-local joint ventures work on strict documentation. For franchises of strong foreign brands, the franchise structure is usually an Indian adaptation of the usual structure followed by the franchisor in his country. Although India has no franchise-specific legislation, it does have very effective statutes that govern a franchise contract. A robust franchise structure in India would have to be documented appropriately, considering the applicable local legislation.
The most common structures involve the franchisor bringing in the technology and the intellectual property rights and the franchisees contributing capital and local expertise. The franchisor owns the trademark, trade process and know-how. The franchisor is usually expected to provide training and assistance to the franchisee to enable him to operate the franchised outlet. The franchisor is required to supervise the outlet and ensure proper compliance of the franchisee to the franchise system to protect and maintain the integrity of the brand. The franchisor is also responsible for the advertisement and promotion of the franchised brand. The franchisee, on the other hand, is required to obtain and maintain the premises for running the franchised outlet. He is required to operate the franchised unit in accordance with the directions of the franchisor.
The usual revenues charged are lump-sum franchise fees or royalties, training fees, advertisement fees and so on. Following a 2004 amendment, no approval is required from the Reserve Bank of India for the remittance of fees for the use of a franchise. Subsequently, in 2006, further relaxation has resulted in remittances even for the purchase of a franchise being freely permitted. Exchange control regulations have been liberalized, thereby ensuring a level playing field for all.
It is recommended that the initial application should state a broad category of products to avoid subsequent applications. For this purpose, products are generally classified using the Indian Trade Classification based on the Harmonized Commodity Description and Coding System for reporting trade statistics issued by the government of India. Code numbers are allotted for different product categories. Chapter 85 of the ITC (HS) classification code contains code numbers for various electrical products. For example, if Apple has already obtained a license for the product category in which iPhone falls (Code No. 8525) by the initial application itself, then it need not make a fresh application.
Recruiting the Master Franchisee
Several consultants claim to assist international companies in their expansion needs. This is not necessarily cost- and time-effective. For American brands, the Gold Key Matching Service program of the U.S. Commercial Service is another worthwhile option to consider.
Franchise trade shows are also an effective platform to exhibit and promote products and services. The next premier national exhibition for the Indian franchising industry is the FAI Convention and Expo, scheduled Oct. 2 to 3. Several international exhibitors have successfully appointed India master franchisees through such platforms and these should be considered for initial market study and recruiting master franchisees.
Dhawal Shah is the deputy executive officer of the Franchising Association of India. He can be reached at firstname.lastname@example.org.