• Sept 2018

Franchised vs individual businesses

Franchised vs individual businesses

The world of entrepreneurship is one of the most socio-economically diverse ecosystems created by man. By virtue of this, it continues to grow. The matter of success or failure in such a system is controlled by factor such as brand management, resource optimization, market studies, consumer-driven practices etc.

This article attempts at understanding the causes of success and failure of individual and franchise businesses, and establishing which one is more likely to succeed in the Indian market.

Ever rising consumption, growth in preferences for branded products, high drive to spend and international brands are some of the factors that are driving a massive growth in demand for franchised businesses in India.

A KPMG estimate in 2013 stated that the industry would grow from its valuation of $13.4 billion to $51 billion in India by 2018. That comes to contributing roughly 4% of the country’s GDP. One consistency among estimates from various entities in the industry is that it is now worth over $40 billion. This leap indicates a huge potential that is continuing to be capitalized.

On the other hand, small retail businesses continue to show a steady growth rate of 11.5% annually as compared to the roughly 50% in franchising. It’s only a matter of better alternatives.

Close to 2,000 Indian startups have closed down since 2015. Currently India has 4,900 registered startups. Among the major reasons for such a humongous rate of failure are: lack of innovation, lack of/improper mentoring, inadequate funding & poor business ethics.

Franchising at its core provides a solution for each of those issues.

  1. It provides innovative & successful products and services in markets where they are needed.
  2. It provides a proven framework for business to operate in.
  3. It broadens revenue streams for a franchisor.
  4. It provides set logistics.

India has witnessed a huge demographic transformation over the last three decades as middle-income groups with rising disposable incomes, mounting aspirations and appetite for international exposure & western goods drive up the consumption.

Statistically speaking, high quality US products & services circumvent a major chunk of the demand in the industry. Simultaneously, the economy has seen a substantial rise in entrepreneurial interest from the youth.

In such a case, franchising promises a win-win ecosystem for consumers and entrepreneurs.

There was a massive hype in India before Zara, the Spanish fast fashion retailer entered the Indian market because of its massive presence in the western countries. Within the first five years of starting in the country, Inditex Trent (JV between Zara’s brand owner, Inditex and Tata’s retail arm, Trent) has crossed INR 1,000 crores in annual sales.

Individual businesses with enough resources to bring such quality to the market are also just as likely to survive and thrive, but the question is about sustainability. Being able to replicate processes is the key to success for any business. This is precisely the reason why successful brands are diligent while selecting franchisees. Combine this with the high entrepreneurship drive among youth in the country, and it does not paint a good picture. A large chunk of the high net worth individuals in the country belong to a higher age group. In such a scenario, franchising proven businesses provides the right fuel to the young entrepreneurship engine of the country. It safeguards the financial interests of aspirants.

65% of the Indian population is under the age of 35. By the end of 2017, India had amassed 4,900 startups with an estimated 2.5 billion in investments. This may just be an overarching data not specific to franchising but certainly highlighting the aforementioned entrepreneurial energy or interest.

The rise in the number of High Net worth Individuals has also ascertained a level of sustainability in various ecosystems including franchising.

These data bring forth 4 impactful demographics that are churning the franchising and other entrepreneurial domains in the country:

  1. Middle income group with increased disposable income
  2. Foreign (esp. US) brands
  3. Youth population
  4. High Net worth Individuals

The impact of each of these demographics isn’t limited to a direct causal relationship. Often the shifts are long-term and so are their impacts. Being connected or related to an established brand offers the business resilience to withstand such shifts or impacts, which may or may not be the case with individual businesses.

Franchising can help in creating larger scale without heavy investments in retail space and business structure. The Financial Times-Oct, 2014

Mr. Marya expressed hope that $500 Bn. retail sector will get a positive boost with a stable government after the current Lok Sabha elections. Statesman April 29th, 2014

White Indian restaurant brands have done well nationally, only a few of them have been successful in international markets. The presence of Indian brands/ restaurants outside the country is very fragmented. The Economic Times April 26th, 2014

In categories like electronics, there is a need to develop expertise in handling after sales trouble. With new assortments there might be disappointments and ensuring the quality would be a tall task. Business Standard-April 25th 2014

Growing at 25% annually, India is becoming the world's largest franchising marketplace after USA. New Today Chennai-Oct, 2014