Franchise vs own business: The tandem Indian scenario and evolving trends

Franchising has really picked up pace globally. Today, it accounts for almost 50% of the retail trade in the US and 45% in Canada. However, in India the franchising sector is only a mere 2.5% of the total US $ 24 billion of retail sales. The future of franchising in India looks bright in the coming years. A report by KPMG India Pvt. Ltd. forecasts a four times growth of the retail sector by 2017 contributing 4% of India’s GDP, a healthy rate as compared to 10 to 25% in most developed countries.

At present, India’s retail market is the fastest growing in the world and is expected to grow from US$ 450 billion to US $ 1.3 trillion by 2020. However, figures point out that small businesses are going to be the major players in the Indian market as they (businesses in the small and mid range) have shown consistent annual growth of 11.5%, which is higher than India’s GDP growth rate of 8%. In this article, we take a moment to take a stock of the franchise vs own business situation in India.

Laws and regulations
In India, small businesses have to comply with five main legal requirements governing Corporate, Tax, Labour, Environment and General. The Indian Contract Act 1872 and the Specific Relief Act 1963 for enforcement and damages for breach of contracts. businesses also have to comply with several other general laws like the Consumer Protection Act 1986, Trademarks Act 1999, Foreign Exchange Management Act 1999, Competition Act 2002, Labour Laws, and Sales Tax.

While most countries have a single encompassing law to deal with ‘franchising’, in India franchising is treated ‘on par with small businesses’ as a contract and comes under the same rules and regulations.

There is no pre-contractual ‘disclosure requirements’ under law. The Franchisor is not required to divulge any information of his business, financial standing etc., and can easily abuse his position.

Often the franchisor imposes the law of his country to govern the franchising agreements. The liability of the parties is not clear.

Cost Factor
The high franchisee fees and the royalties to be paid to the franchisor, labour etc. can create a burden on the franchisee. Franchising usually demands location in a prime area and this cost is an additional burden to the franchisee. Logistic support from the franchisor helps minimise transport and storage costs.

Most businesses in India either have single-owners or are family owned and run, (local mom and pop stores) and the capital expenditure and outlay is lesser on all counts. They are also free to adapt and capture the local market requirements.

Financing of small businesses through self-financing, family and friends is easier as compared to the higher level of investment for franchising through loans from banks and financial institutions.

Market diversity
Uniformity of products and services, one of the cornerstones of franchising success, however cannot meet the vast and diverse Indian market with its varied needs. The local business is ideally suited and is more successful in meeting customers’ requirements.

Franchises are often well-established brand names and have the uniformity in products, price and quality.

However, one should not discount the fact that most small businesses grow and expand into franchising. In India the earliest franchise businesses were in computer education NIIT, Bata the famous shoe company and Apollo Hospitals pioneer in corporate hospital sector.

Franchising has also taken over in the beauty and personal care segment. The local beauty parlour has been replaced by franchisee spas. The ‘Naturals’ chain, which was started about ten years back now has a presence of over 450 outlets mostly as franchisees and is targeting a 3000 plus franchisees.

Increasing globalisation has led to the foray of well known brands in all sectors from food, clothing, automobiles etc., in to the Indian markets. Few brands like Pizza Hut, McDonalds, and KFC have established themselves all over the country and are expanding rapidly.

The Union Government is keen to encourage the retail trade (this includes small and medium businesses and franchising) in line with its ‘Make in India’ campaign and has allowed 100% FDI in single brand and 51% FDI in multi brand retail and GST (Goods Service Tax) will be effective April 2016.

Under the Government’s National e-Governance Plan, in association with the FICCI, it has launched ‘Business Portal of India’ as part of the ‘Mission Mode Project’. The portal is a single window providing complete guidance for start ups, development and maintaining a business. It has also promised an Rs 1000 crore corpus for facilitating start ups.

Government is also considering a franchise law for the speedy resolution of disputes. The trade would however, prefer a Comprehensive Franchise legislation governing franchising business.