WHAT IS ‘ FRANCHISING ’
The term franchising essentially stands for “An arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested
products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products”. (as defined by www.businessdictionary.com ).
To put this far more simply, and in food and beverage terms, it’s a situation where a hotel or restaurant company, expands its business by allowing third parties to open up their brand outlets, usually by paying a fixed percentage or charging a fixed percentage for brand name.
HOW DOES FRANCHISING WORK
Franchising is easiest way for an investor to get into the Hospitality trade (Hotels or Restaurants). It ensures being a stakeholder in a recognized brand, and the thought of owning a well known restaurant or hotel is what drives most people to Franchising. It works by essentially following the same standards as other outlets of the brand across the region, for which training is imparted by the Franchiser. But, not all outlets you see multiplying are through Franchisee’s, a lot of companies prefer to run and operate their own stores, for this we must understand the system ‘Self-Operated’ and “Franchise-Operated” restaurants / hotels.
SELF / BRAND OPERATED FRANCHISING
In this situation the Franchiser allows investment from third party investors, like you or me, to put up money in acquiring the outlet location (rented/leased/owned), put up some more money in doing up the interiors, lighting, air-conditioning, plumbing, etc., which has to be followed completely as per the Franchiser’s instructions, and thereafter the Franchiser will pay the Franchisee a fixed percentage of the monthly revenue. An example of this is seen in KFC Restaurants, where the investor sets up the property for KFC, and they send in their own trained staff to run the show. In most cases like KFC, the investor gets a fixed percentage on ‘total sale’
(minus GST). Usually this percentage is between 6% – 15% across the board. In this kind of a situation, even the investor walks in and spends like a regular customer, and can have no say in food production areas like change of recipe etc.
For Hotels, an investor may setup a 3*/4*/5* Hotel on his own money and arrange for a larger well known Hotel company to run it for them, while the investor receives a fixed percentage of sale. For example, in the 5* category, all Hyatt and JW Marriott Hotels in India are run similarly. The employees are on the payrolls of the Hotel Company, but the property belongs to a third party owner. Another example of ITC Fortune and Taj Gateway Hotels can be offered in the 4* Hotels category. In this case however, the investor need not walk-in like any ordinary customer, he gets the same respect or more than that of the General Manager, with usually everything on the house.
FRANCHISE OPERATED OUTLETS
In this situation the Franchisee just uses the brand name and brand standards of a well known brand, however the staff are on the Franchisee’s payrolls not the brand’s. Like in the above case, The investor here has to find a suitable location, set it up with appropriate interiors etc. as per the guidelines of the Brand, recruit staff, and run the show himself, but within guidelines of the Brand. In this situation the investor or Franchisee pays the Brand a fixed percentage of sale, in return he gets Brand Standards, and Marketing. Most good brands also regularly hold trainings for all of the franchisee’s employees, assisting them to embrace the Brand’s standards An example of this in Hotels can be seen in OYO Rooms, who have recently started ‘self-operating’ some hotels under the banner OYO Townhouse, whilst the bulk of their hotels are under a ‘Franchise operated’ scheme, where they market the property via their App and e-portal, manage the reservations and charge a fixed percentage. Another ironical example is ITC Hotels, where in the case of Fortune Hotels, they become the Franchisor, for their Luxury 5* Deluxe Hotels like Sheratons and Luxury Collection, they actually pay Royalty to Starwood Hotels (now owned by Marriott) for the use of Brand Name and Brand Standards, whilst operating the Hotels themselves. For restaurants, there are numerous examples like this in small waffle chains, ice cream, donuts, frozen yoghurts, south Indian fast food, etc. brands. Even Baskin Robbins and Subway operate similarly, where the investment is made by the
investor and the owner has to run the show with support from them. The better the brand, the better the support an investor will get.
SHOULD YOU GO FOR IT ?
There is however one thing to note, when an investor goes to a big company to get a Franchisee for a ‘Self operated’ or ‘Brand operated’ outlet, where he will only have to pay money once and the Brand will run the show for him, it involves a lot of purchase from that
brand. For example, an investor cannot even buy an oven of his choice, he has to buy exactly what the Brand has told him, and more often than not, from the same vendor that the Brand has adopted in the past, even if the investor wants to buy a better oven or fridge or fryer, etc. Same for every single item purchased, right down to furniture. This adds up on the expenses, and some brands even manufacture their own machines / kitchen equipment, just for this purpose. To sum it up, Franchising works for anyone who has the investment to own a brand store. To give you an idea, in a metro city like Kolkata, a Baskin Robbins 15ft*20ft store costs between
Rs. 15-20 Lakhs, a Subway Franchise costs upwards of Rs. 60 Lakhs, KFC / Pizza Hut Rs. 1 – Rs. 1.25 cr. Hotels could cost between Rs. 10 cr to Rs. 1000 cr (yes one thousand) depending on size and location. The largest restaurant Franchise chain currently in the World is Subway with over 30,000 outlets worldwide, and KFC (Owned by Yumm Foods, which is further owned by Peps i Co) is not too far off, and the reason behind their phenomenal success is Franchising.