iProduce, uSell, vEarn: The franchising business

Marketing professional Shobha Shetty often eats out, and has noticed that the sambar served at a food joint in Basavanagudi is slightly more sour than the one served in another outlet of the same chain in Koramangala.

Shetty feels that even though her son’s pre-school belongs to the same brand as the one where her sister’s child studies, the overall environment in her child’s school differs drastically from the one where her nephew goes.

“In my son’s play school, the teachers are not very patient with children, and even their teaching methods are not that effective. Only after making discreet inquiries I realised that this pre-school is a franchise (of the owner),  while the one my nephew that goes to is owned directly by the group,” reveals Shetty.

Welcome to the world of franchising.

Walk into any street, and a plethora of branded outlets will greet you. 

In this nebula of brands, only an eye for observing differences will reveal that the outlet owners are actually not the owners of the brands. They are only managing the outlets by using the brand names and trademarks, and paying the owners a royalty. Though they promise exactly the same products and services, the quality at a microscopic glance throws up a difference between the franchised outlets and those run by the parent company.

Franchising as a business model has grown by leaps and bounds: thanks to the entrepreneurial zest floating across, coupled with risk taking abilities, as well as the skyrocketing consumer demand for everything branded. Right from a dental clinic to a day care centre, and from a grocery chain to even a coffee joint; consumers are lapping up all things branded.

And in this lust for brands, both high-end and mid-range, franchisors and franchisees are laughing their way to the bank. Sometimes at the cost of slipping, substandard service.

This is so because most franchisees look for quick returns on their investment; and franchisors eye rapid expansion that is not possible if they are to set up shops on their own.

Experts say franchising works well in product categories where manufacturing happens at a centralised unit, and products are then delivered to each franchised outlet. But when it comes to personalised services, there is often a difference between the franchised outlet and that directly manned by the mother company.

Thus, franchising as a concept can work wonderfully in franchised outlets selling ice-creams, burgers, footwear, apparel or jewelry. But when it comes to services like pre-schools, hospitals, and daycare; differences are bound to occur.

“Some of the segments that have done reasonably well are quick service restaurants, (QSRs) salons. However, since managing quality has always been a problem with franchising; wellness, healthcare, hospitals specifically have struggled with this,” explains Rachna Nath, leader (retail and consumer), PwC India.

Experts further explain that though the parent company ensures that systems and processes are in place; to keep a check on the services being rendered on their behalf, maintaining quality of services in each of the franchised outlets is no mean task.

Gaurav Marya, chairman, Franchise India, contends that if there are differences in services and customer experience between the parent company and the franchise, then it is not a “well defined franchise system.”

Marya says franchising has two components — the firm and the flexible. “The model has to be firm on areas that are the basic principles of the business like providing the same kind of service and experience to customers. But they can be a bit flexible when it comes to, say, the products by customising them to suit the local population.”

Therefore, while a pre-school, whether franchise or company owned, needs to provide the same teaching methods, syllabus and ambiance anywhere in the country; an international pizza chain can have franchisees in India that serve pizzas custom made to suit the Indian palate, while simultaneously maintaining quality of service and experience like the parent company.

Hospital assures quick returns to franchisees
A Chennai-based mother and child hospital that is looking for quick expansion in Bangalore, has been eagerly scouting around for franchisees. What grabs the attention is the “guaranteed returns on investment” that this brand has been promising prospective franchisees. Stating that an investment of Rs1.25 crore will be needed for setting up a franchised outlet of the hospital in Bangalore, the owners guarantees returns within “1.3 years.”

Any new business of this scale, specially in sensitive sectors like hospitals, takes a couple of years to break-even. But the owner of this Chennai hospital reiterates that he can assist in getting returns within 15 months.

How? By promising the franchisee “at least” over 1,100 patients, or rather “customers”, every month. So, by enticing patients through various packages, he would ensure the franchisee a good return. He goes a step ahead and “promises” 10 rape casualties per month, along with five cases of hystrectomy (surgical removal of the uterus) per month. 
Sounds frightening, isn’t it?

“I still fail to fathom how someone can promise these many cases of hysterectomy or rape victims coming in every month. The franchisor did not even bother that I am a non-medical professional. All he said was that the staff would be trained and provided by him, and patients would be guaranteed by him. I have to only manage the show,” says a banker, who is now looking at getting into franchising.

It’s no child’s play
The pre-school segment is mushrooming like never before. Every nook and corner will boast of at least a handful of pre-schools advertising great play area, “best” facilities, and top-class pedagogy; all for toddlers who can barely walk or talk.

And the franchising opportunities in this segment is high, specially in tier 2 and 3 cities. KPMG estimates suggest  that revenues from franchisee pre-schools are expected to reach $94 million in a few years, from a current value of $16 million.

Mridula Shridhar of Kreedo, a preschool consultant firm, feels that the franchising model is a big failure in the education sector. For instance, she has seen cases where a preschool of same brand has been successful through one franchisee but the other one has been a flop show.

“Ultimately, pre-school boils down to services rendered by the teachers to your children. Just because someone wants to be a businessman does not necessarily mean that he has the aptitude to run a pre-school where one has to deal with really young kids,” argues Shridhar.

A case in point is that of Yogesh P (name changed), a pharmacy graduate who ran a chemist outlet for some years in Rajajinagar, before selling it off and becoming a franchisee for a pre-school brand. Yogesh entered this segment “as the margins are quit lucrative”.

And with his 10 years’ experience in running a pharmacy, Yogesh felt that he had the knack for running any type of business. But soon realisation set in that dispensing medicines and managing crying toddlers are two completely different propositions.
“Though the syllabus and teaching methods are passed on by the parent company, finding and retaining the staff is a big challenge. This then starts affecting the quality of service rendered,” reveals Yogesh, adding that toddlers need to be handled patiently, and “often the teachers are unable to handle them without losing their cool.”

Pockets of success do remain
Businesses that have been in existence for long, and have been able to develop a replicable model are following the franchising route as it works for them, says PwC’s Nath. They also support them on staff recruitment, site selection, supporting marketing campaigns and conduct audits, surprise visits to ensure standardised quality service across outlets. “Thus where the parent company has been able to ensure quality and consistent experience, the arrangement has worked well,” says Nath.

Furthermore, in the Indian context, services that have a strong consumer link, pertain to daily requirements like say courier services, pharmacies, food outlets etc see faster penetration through the franchise route, vis-a-vis businesses that pertain to only a limited segment of the population like say high-end jewellery or apparel brands.

“A food or courier company might need a presence in 600 cities, while a high-end brand might not need to be present in so many cities, and hence might require smaller number of franchisees,” says Marya.

The moral of the story is simple: when it comes to chains, just stay warned.