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India's Franchise Industry: The road so far and way forward!

IBEF, Knowledge Centre

Aug 28, 2018 13:07

Whether you are in a big metropolitan city or a smaller town, one look around you is bound to reveal bright signage with recognisable names all around. From heading to the nearest Kentucky’s Fried Chicken (KFC) for a bite to shopping for a particular international brand of clothes, the Indian masses have helped the franchising industry rise substantially in the country in recent years.

What is a Franchise Business?

A franchise is basically a type of license given to a third party by the original owners or franchisors. This license lets the buyer or franchisee use the business name, logo, and products, etc. to conduct business under the existing brand name and business model. This has been a successful type of business expansion used all over the world.

In India, there are many international and local brands currently operating successfully on the franchise business model. Some famous names include Subway, McDonald’s Kidzee, Khadim’s, and Lakmé Salon.

An Overview of the Indian Franchise Industry

One major advantage that players in the franchise industry have is that the business model and products/services are already established. It becomes much easier to run a readymade operation, and at times, even support for training and planning of finances are provided by the owners to new franchisees. This is just one of the reasons why the sector has achieved success worldwide, including in the Indian subcontinent.

The model of franchise management began in the 1990s in India, with the start of the era of liberalisation. This system was initially adopted by a few educational institutions and IT companies for business expansion and was slow to grow at first. But today, the franchise industry in the country has several well-known brands in various cities operating under this model.

While the industry is in its nascent stages in India as compared to other trades, the growth in the sector has been strong – a figure to the tune of 30% annually. According to Gaurav Marya, Chairman of Franchise India, “The franchise industry in India is today estimated to be at USD 47-48 billion.” And going by recent trends, it seems that this figure is only set to rise in the future.

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Franchise Industry in India: Causes and Growth

The easy business model that franchising offers is a major reason why the industry is growing in leaps and bounds all over. However, there are several more reasons behind it becoming such a huge success and among the fastest-growing sectors in India:

  • Lower rate of failure: Compared to other start-up ventures, franchises have a reduced chance of failing since the business concept has already been worked out. Existing loopholes are taken care of, and there is a proven model of what works and what does not – so franchisees are more eager and confident about investing in such businesses.

  • Demand for franchised business: The rising purchasing power of the Indian middle class coupled with an increase in brand awareness has created a substantial market demand for international brands that retail primarily through the franchise system. In addition, being a country of over a billion people, the Indian market provides huge numbers in sales simply because the number of consumers are so high.

  • India as a big market: Due to the demand in India, foreign investors and brands, mostly American, view the country as a big, beneficial destination to set up franchised outlets. The franchise model also works across diverse fields like food and beverage, beauty, healthcare, and many more – thus allowing a greater number of companies with varied products and services to set up successful franchise businesses across the country. “India, being one of the fastest-growing economies in the world, offers good opportunities in this emerging business model,” believes Chackochen Mathai, founder and CEO of Franchising Rightway.

  • Privatisation in different sectors: Gone are the days of consumers having to depend on a single service. With privatisation of everything in India from education and healthcare to telecommunication, there has been a constant rise both in the arrival of international brands in the country as well as national retail chains. And with it, the scope for franchising has gone up, too. Names like EuroKids, Guardian Pharmacy, and Ferns n Petals are just a few examples of successful privatisation and franchising in India.

  • ‘Indianisation’ of products and services: Understanding the customer segment and catering to their specific needs is a key part of any successful business, and this is a major reason why franchised outlets in India have built such a massive consumer base. Most big brands in the country have customised their offerings to suit the Indian palate, such as McDonald’s, Domino’s Pizza, and even hospitality services. With the demographic makeover that India is experiencing with a middle class that has increased disposable income, there is a steady growth in the number of consumers for branded products and franchised names.

  • First-time entrepreneurs: Reports indicate that the Indian franchise industry is being driven by young people who are opting for franchising as their first entrepreneurship venture. These new entrants choose to be franchisees due to the minimised risk and already-established model, which provide almost-instant benefits and freedom in business. In fact, currently about 35% of Indian franchisees are first-time businessmen, contributing substantially to the growth of the sector in India.

Way Forward for the Indian Franchise Industry

Recently, India was projected to regain its position as the fastest-growing economy in the world, with the country’s GDP growing to 7.2% in the last quarter of 2017. According to estimates, this number will further rise to 7.8% by 2019.

This spells good news for all sectors, and particularly, for the franchising industry. According to Gaurav Marya, India has already made its place as the second-largest franchise market globally (after the United States). With around 1.5 lakh franchisees and 4,600 franchisers operating in the country, he envisions that "this industry would grow to at least about USD 140-150 billion" in the next five years.

Market watchers also believe that despite the boom in franchising, India still has untapped marketing potential within the industry. This means that the sector is set to grow even faster in the coming years.