Amritsar, April 30, 2010: Archies opened another store in Amritsar today at The Celebration Mall. The company has got some special collections which will be displayed in this mall.
The special gallery offers a wide range of Gifts, Toys, Cards, Disney Collection, Soft Toys, Helpage Products, Greeting Cards, Gift Packs, Calendars, Diaries, Business Organiser, Telephone Index, Perfumes, Perfumes and Deodorants, Exclusive Gifts, Showpieces, Pen Sets, Photo Frames, Toys & Huggables, Clocks and Watches, Kitchen Packs, Combo Gifts, Kids Stuff, Gifts For Her, Gifts For Him and all occassion Greeting Cards.
The Celebration Mall has a built up area of 2, 04,000 square feet with a total of nine levels including three levels of basement parking (approx 1, 28,000 square feet). A blend of international brands like the multiplex Cinepolis, UK retail giant Marks & Spencer, fashion brands like UCB, Levi's, Adidas, Reebok, Van Heusen, Allen Solly, Peter England, foodservice majors McDonald's and Cafe Coffe Day and a significant number of prominent local retailers like Bille Di hatti, Mohini Woolens, Xclusive Boutique, Kazo can be seen at the property. The other power brands of the mall are SRS Value Bazaar, 1469, Lilliput, and GKB Opticals
Tags: Amritsar Franchise, Franchising Amritsar, Archies Franchise, UCB, Levi's, cafe coffee day, Bille Di Hatti, Mohini Woolens, Kazo, Lilliput, GKB Opticals,SRS Value Bazaar,1469,celebration mall,
Showing posts with label Archies Franchise. Show all posts
Showing posts with label Archies Franchise. Show all posts
Tuesday, May 11, 2010
Monday, March 1, 2010
Franchise Industry Reforms Road Map : A Wish List to Govt Of India.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Cartridge World Franchise voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
With the union budget 2010-11, the franchise industry's budget expectations would facilitate the necessary reforms and enable the sector to take the next big leap. Franchising has been a significant organiser as well as facilitator of small and medium businesses across industry verticals, thus galvanising the evolution of organised markets. Replication of structured business practices through franchising has contributed significantly in bringing a large number of business units under the tax net. However, policy makers are yet to deliver a conducive eco-system for the growth of the franchise community, which incidentally includes a new breed of Indian entrepreneurs. An intricate framework of legal policies supported by transparent tax policies as well as robust funding institutions is sought by the industry.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start -ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun.Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Franchisee, Cartridge World voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Cartridge World Franchise voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
With the union budget 2010-11, the franchise industry's budget expectations would facilitate the necessary reforms and enable the sector to take the next big leap. Franchising has been a significant organiser as well as facilitator of small and medium businesses across industry verticals, thus galvanising the evolution of organised markets. Replication of structured business practices through franchising has contributed significantly in bringing a large number of business units under the tax net. However, policy makers are yet to deliver a conducive eco-system for the growth of the franchise community, which incidentally includes a new breed of Indian entrepreneurs. An intricate framework of legal policies supported by transparent tax policies as well as robust funding institutions is sought by the industry.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start -ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun.Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Franchisee, Cartridge World voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
Wednesday, December 9, 2009
Franchise Business In India:Pathway to Success & Wealth
Rajat Mathur, 36,
CookieMan Franchisee Mumbai
had always wanted to strike out on his own. So, when he left the i-flex Solutions office in Mumbai as its senior banking analyst for the last time, he did not regret it. An alumnus of the IIT-Mumbai and IIM-Lucknow, he had worked at Times Bank and ICICI Bank before i-flex.
You would walk into Orbit Mall on the Malad-Goregaon Road in Mumbai to the aroma of freshly baked cookies. The bouquet will lead you past the Good Earth store on your left, and round the corner to the Cookie Man shop. And there, presiding over chocolate and honey-almond cookies, you would meet Mathur again. Counting the cash, checking the cookies, and serving them straight out of the oven at the back to the crowds thronging the counter. “I always wanted to do something on my own as I think that’s where the real fun is. You can never get that in a nine-to-five job.” Mathur’s entrepreneurial spirit is alive and well.
Jaya Patodia 34
Lakme Beauty Salon, Delhi
She invested Rs 25 lakh initially and now has a monthly income of Rs 50,000-60,000. Her average monthly turnover is Rs 3.5 lakh
“I have a Swiss watch store in Khan Market, but that was not giving me good returns. The turnaround happened when a friend, who owned a Lakme franchise, told me about it.”Franchisee Checklist
While Mathur cut loose, a lot of others wanting to do so have not. With responsibilities and dependents, they don’t dare to leave the warmth of a regular income and plunge into the financial turbulence a new business could bring. But today, the ‘fresher’ can go in with the safety tube of franchising. That’s what Mathur did. T.K.S. Kumar, a franchisee of Whirlpool Service Centre in Chennai for a decade now, says: “I wanted to realise my long-cherished dream of becoming an employment giver from an employment seeker.” But P. Ramarao, president, Australian Foods, which owns Cookie Man, warns: “It’s not for people who aren’t passionate.”
WHAT IS A FRANCHISE?
During the Great Depression, Colonel Harland Sanders started selling fried chicken in the little town of Corbin, Kentucky, on the road to Florida. He is said to have used 11 herbs and spices in a secret recipe that gave the chicken its distinctive taste. Sanders’ fare gained fame and Corbin was a routine stop en route to Florida till a new highway bypassed it. That’s when the colonel shut shop and tried selling his chicken to restaurant owners. In 1952, Pete Harman of South Salt Lake, Utah, signed an agreement to sell Sanders’ chicken and pay him five cents for each piece sold. The eatery was called Kentucky Fried Chicken. It was the world’s first franchise. While Sanders was sharing proprietory knowledge and reputation with Harman for a fee, the latter was running the business on Sanders’ behalf. And that is the essence of a franchise even today.
WHY A FRANCHISE?
The simple answer is to mitigate risk. “The franchiser can expand its reach by investing almost no money and capital, while the franchisee is almost sure of success as he is working in a tested area,” says C.Y. Pal, president, Franchising Association of India, an industry body. A US Department of Commerce study conducted during 1971 to 1997 showed that less than five per cent of franchises closed down each year. In contrast, a study by the US Small Business Administration found that from 1978 to 1998, 62 per cent of non-franchised businesses could not make it past the sixth year. But remember that a franchise will never give the returns that a successful own business will. For example, Biocon CEO Kiran Mazumdar-Shaw, who started her business with Rs 10,000 in 1978, is now the richest woman in India with a net worth of about Rs 2,000 crore. Some franchises could give you annual returns of 70 per cent, but most will be in the 20-40 per cent range.
Good franchisers will help you get your business rolling and to keep it that way. Vivek Kaicker, 44, runs a US$ Dollar Store franchise in Delhi. “I had a retail business, but I liked this concept and thought it would increase footfall,” he says.
Retail giant Wal-Mart, with a turnover of $316 billion, announced that it would franchise its Indian operations to Sunil Mittal’s Bharti Enterprises. The latter would own and run Wal-Mart retail stores in India. Wal-Mart would also set up a joint venture with Bharti for the supply chain. Thus, systems honed over 46 years would be Bharti’s from Day One. Overnight, Bharti, whose retail plans had earlier been dwarfed by the Rs 3,200-crore investment announced by Mukesh Ambani’s Reliance Retail, was being billed as the company that would battle for supremacy in organised Indian retail. That’s the kind of fillip the right franchise can give. The model is versatile enough to work for Mittal, as well as Mathur. And it can work for you.
WHY IS THIS A GOOD TIME?
As a share of GDP, franchising accounts for 12 per cent in the US, but not even one per cent in India. The comparison gives an idea of where it could go. Industry estimates indicate franchising has grown to a Rs 8,000-crore sector now, from Rs 4,578 in 2004. Pal says there are over 750 franchisers in India today. Throw in the foreign franchisers, and the opportunity grows even bigger. It is attracting local talent in sectors such as food, lifestyle, retail, business services, healthcare, communication, education, entertainment and travel, among others. India is now the world’s largest franchise market after North America and is growing at about 30 per cent a year, says Tony White, managing director, White Connections, which advises franchise companies.
A big opportunity is in the Rs 40,000-crore organised retail sector, of which less than a fifth is franchised. It is expected to grow at 30 per cent a year for the next five years. But it may not be for everyone. “Retail often involves high costs as prime real estate, decoration and furnishing,” says Gaurav Marya, president, Franchise India Holdings, an integrated franchise solutions company. A cheaper option is a service franchise. Instead of the local guy, more people are getting specialists to, say, find a match, or clean a water tank. For a money-spinner education franchise, “in most cases all you need is a room and the course material”, Marya adds. “Eating out constitutes 11 per cent of the wallet of Indians; mom and pop stores are being replaced by organised F&B outlets,” says Ajay Bansal, director (business development), Yum International, which owns Kentucky Fried Chicken. But growth is concentrated more in the takeaways and value eateries than fine diners (see 26 Hot Franchises: An Invitation to Join the Fast-growing Fraternity, page 24).
WHICH FRANCHISE?
While buying a franchise, you have to consider several issues.
Abilities. This is the time for brutal self-assessment. Rule of thumb: stay off what does not interest you. If you are indifferent to food, stay off restaurants. If kids exasperate you, avoid play schools. But don’t lose heart. Your passion for travelling may make you one of the best equipped to plan holidays. Go for that. “I had already done a few beauty courses,” says Jaya Patodia, 34, who runs a Lakme Beauty Salon in Delhi.
More likely than not, a good franchiser will check out whether you fit the bill. Shahnaz Hussain, for instance, looks for people who are “passionate about beauty care”. Most franchisers will look for specific skills apart from “entrepreneurial attitude and open mind”. Institute of Computer & Finance Executives asks for no less then a chartered accountant, and Spykar Jeans wants a year’s experience in franchising.
Since this will be a new business, it will need a lot of hard work to get it running. “The initial one year is very important as this is when you build up a customer base,” says Hema Malini, 36, who, along with Ambika Viswanath, 24, run a Ferns ‘N’ Petals franchise in Chennai. Most franchisers want the franchisee to be involved personally. Ratan Jalan, CEO, The Apollo Clinic, says: “We need a person who is himself going to run the franchise.” But some may let you hire a manager and work at the franchise part-time. Remember, the monthly expense estimate franchisers give you assume that you will work full time.
Costs & finances. The big question is: how much can you invest in a franchise? Some service franchises could cost as little as Rs 2 lakh. You would need just a room, a table, a couple of chairs and a telephone connection. At the other end are beauty parlours, fine dining restaurants, or retail jewellery outlets. Here, investments could go to a crore or higher.
Now add on recurring costs—royalty (usually a percentage of sales to be paid every week or month). In some cases, Ferns 'N’ Petals and Angeos Academy, it is the higher of percentage of net sales or a lumpsum. There would also be working capital, which would include salary of staff, power bills, rent, and some fixed overheads like ad fees. When a franchiser talks about working capital needs, ask whether it includes rent. If not, this could be a chunky add-on. Check how much you can borrow from banks and at what rate and decide whether you want to do so (see Money Matters).
The amount of capital you can raise will partly determine how long you can wait for the business to pay back. Some franchisers will say that you can start making profits from the first month itself, but it is always wise to give yourself a cushion of at least a few months. Your reserves or savings will decide how critical immediate cash flow is. Also, ask yourself how much money you can afford to lose. It would be smart to have a contingency fund.
Goals. What do you want your franchise to do for you? Will it be the primary or a supplementary source of income? Are you looking to make any specific amount every year? What is the return you want on your investment? Develop a three-tier strategy for investing, a long-term strategy and an exit strategy. Ask where you see yourself five to 10 years down the line. Do you intend to make money and shut shop, or do you want to set up more outlets later? Remember, buying a very successful franchise for a high fee makes no sense until your outlet gives returns.
After you apply these filters, your list should get down to at most four or five franchises. But you still need to zero in on one.
Due diligence. Ultimately, you are investing in a franchise and need to know what you are buying. So, bring out the acid and do the test. The first thing to ask is whether the franchise is likely to be profitable. Check the record of the franchiser and the prospects of the industry it operates in. Find out how many franchisees it has, its growth plans and how many of its franchises have shut shop. Talk to the franchiser and at least five existing franchisees to get the low down. Often, even better known franchisers like Archies Gallery and Subway won’t give you their numbers. Others like Ferns ‘N’ Petals and Turtle will encourage you to meet franchisees. Cookie Man and Tech Kidz will even give you their profit and loss details. Says Pal: “In advanced countries, a franchiser is compelled by law to disclose information about its business, on other franchisees and expected earnings. In India, it’s not so.”
One proof of a franchiser is in the way it trains its franchisees, whether it provides initial training and upgrades your skills regularly. You may have to pay a small amount for that. It should also give steady help in marketing and managing the franchise. Cost of equipment and other inputs should also be lower than the market prices as the franchiser should buy them in bulk and supply them to you.
In most cases, the franchiser will help you find a spot, but check whether it has other franchises close by. The size of the area you serve could make the difference between profits and losses. Also remember all products and services are not in demand everywhere, or throughout the year. Stay with better brands as they could mean better business. “Brands can bring people into your store; the rest of the work you have to do yourself,” says Gagan Singh, managing director, Benetton India. Don’t buy a franchise just because someone will sell you one.
By now you should have enough information to home in on one. That would leave just one step—signing the agreement.
THE FINAL CHECKLIST
Understanding the franchise agreement is a must as it formalises your rights and obligations. Whether it is a two-pager or a whole booklet, once you sign it, you will have to abide by it. In the US, all the franchisers have to provide a uniform franchise offering circular (UFOC) to prospective franchisees at least 10 business days before any money is paid or agreement to purchase is signed.
There are strict guidelines about what the UFOC should include. There is no such rule in India. “The franchiser and the franchisee need to be on the same plane,” says Reebok India managing director Subhinder Singh. So, always get a lawyer to explain the agreement to you. He should also assist you with negotiations, if any. He may charge Rs 20,000-50,000, says Srijoy Das, an advocate at law firm Archer & Angels, but you should spend it as it might save you bigger losses later. And always look out for the following in the agreement you sign.
Term. The duration of the franchisee agreement and whether it is renewable should be clearly stated. Usually it would be for three years, and could be renewed for a fee.
Territorial rights. Most franchisers do not allow two outlets within 3 km of each other. But watch out for the ‘good business’ clause and make sure you know what it means in numbers. If you do not measure up, it will allow the franchiser to sell another franchise in your area. Also check out whether you can buy more franchises in neighbouring area if you want.
Exit and resale. But what if you want to shut shop before the term ends? Normally, there would be a notice period and you should get back any deposit you made. Deductions, if any, for a loss-making business should be included. Some franchisers let you sell the franchise. If the franchiser is part of the deal, you should know how much of your money you can recover. No franchiser actually likes to talk about selling options when you are buying a franchise. But it is good to be prepared for the worst.
Termination. In the whole franchisee game, the franchiser is bigger and stronger and, therefore, has the advantage over you. It might decide to terminate the franchise any time. Know by heart the reasons for which it can.
THE BOTTOM LINE
Franchising is an easier way to start your business, but certainly not an easy way to do it. It is a challenge, but one that may be worth taking. As the fraternity says: “When you are a franchisee, you are for yourself, but not by yourself.”
Source:Outlook Money.Com
CookieMan Franchisee Mumbai
had always wanted to strike out on his own. So, when he left the i-flex Solutions office in Mumbai as its senior banking analyst for the last time, he did not regret it. An alumnus of the IIT-Mumbai and IIM-Lucknow, he had worked at Times Bank and ICICI Bank before i-flex.
You would walk into Orbit Mall on the Malad-Goregaon Road in Mumbai to the aroma of freshly baked cookies. The bouquet will lead you past the Good Earth store on your left, and round the corner to the Cookie Man shop. And there, presiding over chocolate and honey-almond cookies, you would meet Mathur again. Counting the cash, checking the cookies, and serving them straight out of the oven at the back to the crowds thronging the counter. “I always wanted to do something on my own as I think that’s where the real fun is. You can never get that in a nine-to-five job.” Mathur’s entrepreneurial spirit is alive and well.
Jaya Patodia 34
Lakme Beauty Salon, Delhi
She invested Rs 25 lakh initially and now has a monthly income of Rs 50,000-60,000. Her average monthly turnover is Rs 3.5 lakh
“I have a Swiss watch store in Khan Market, but that was not giving me good returns. The turnaround happened when a friend, who owned a Lakme franchise, told me about it.”Franchisee Checklist
While Mathur cut loose, a lot of others wanting to do so have not. With responsibilities and dependents, they don’t dare to leave the warmth of a regular income and plunge into the financial turbulence a new business could bring. But today, the ‘fresher’ can go in with the safety tube of franchising. That’s what Mathur did. T.K.S. Kumar, a franchisee of Whirlpool Service Centre in Chennai for a decade now, says: “I wanted to realise my long-cherished dream of becoming an employment giver from an employment seeker.” But P. Ramarao, president, Australian Foods, which owns Cookie Man, warns: “It’s not for people who aren’t passionate.”
WHAT IS A FRANCHISE?
During the Great Depression, Colonel Harland Sanders started selling fried chicken in the little town of Corbin, Kentucky, on the road to Florida. He is said to have used 11 herbs and spices in a secret recipe that gave the chicken its distinctive taste. Sanders’ fare gained fame and Corbin was a routine stop en route to Florida till a new highway bypassed it. That’s when the colonel shut shop and tried selling his chicken to restaurant owners. In 1952, Pete Harman of South Salt Lake, Utah, signed an agreement to sell Sanders’ chicken and pay him five cents for each piece sold. The eatery was called Kentucky Fried Chicken. It was the world’s first franchise. While Sanders was sharing proprietory knowledge and reputation with Harman for a fee, the latter was running the business on Sanders’ behalf. And that is the essence of a franchise even today.
WHY A FRANCHISE?
The simple answer is to mitigate risk. “The franchiser can expand its reach by investing almost no money and capital, while the franchisee is almost sure of success as he is working in a tested area,” says C.Y. Pal, president, Franchising Association of India, an industry body. A US Department of Commerce study conducted during 1971 to 1997 showed that less than five per cent of franchises closed down each year. In contrast, a study by the US Small Business Administration found that from 1978 to 1998, 62 per cent of non-franchised businesses could not make it past the sixth year. But remember that a franchise will never give the returns that a successful own business will. For example, Biocon CEO Kiran Mazumdar-Shaw, who started her business with Rs 10,000 in 1978, is now the richest woman in India with a net worth of about Rs 2,000 crore. Some franchises could give you annual returns of 70 per cent, but most will be in the 20-40 per cent range.
Good franchisers will help you get your business rolling and to keep it that way. Vivek Kaicker, 44, runs a US$ Dollar Store franchise in Delhi. “I had a retail business, but I liked this concept and thought it would increase footfall,” he says.
Retail giant Wal-Mart, with a turnover of $316 billion, announced that it would franchise its Indian operations to Sunil Mittal’s Bharti Enterprises. The latter would own and run Wal-Mart retail stores in India. Wal-Mart would also set up a joint venture with Bharti for the supply chain. Thus, systems honed over 46 years would be Bharti’s from Day One. Overnight, Bharti, whose retail plans had earlier been dwarfed by the Rs 3,200-crore investment announced by Mukesh Ambani’s Reliance Retail, was being billed as the company that would battle for supremacy in organised Indian retail. That’s the kind of fillip the right franchise can give. The model is versatile enough to work for Mittal, as well as Mathur. And it can work for you.
WHY IS THIS A GOOD TIME?
As a share of GDP, franchising accounts for 12 per cent in the US, but not even one per cent in India. The comparison gives an idea of where it could go. Industry estimates indicate franchising has grown to a Rs 8,000-crore sector now, from Rs 4,578 in 2004. Pal says there are over 750 franchisers in India today. Throw in the foreign franchisers, and the opportunity grows even bigger. It is attracting local talent in sectors such as food, lifestyle, retail, business services, healthcare, communication, education, entertainment and travel, among others. India is now the world’s largest franchise market after North America and is growing at about 30 per cent a year, says Tony White, managing director, White Connections, which advises franchise companies.
A big opportunity is in the Rs 40,000-crore organised retail sector, of which less than a fifth is franchised. It is expected to grow at 30 per cent a year for the next five years. But it may not be for everyone. “Retail often involves high costs as prime real estate, decoration and furnishing,” says Gaurav Marya, president, Franchise India Holdings, an integrated franchise solutions company. A cheaper option is a service franchise. Instead of the local guy, more people are getting specialists to, say, find a match, or clean a water tank. For a money-spinner education franchise, “in most cases all you need is a room and the course material”, Marya adds. “Eating out constitutes 11 per cent of the wallet of Indians; mom and pop stores are being replaced by organised F&B outlets,” says Ajay Bansal, director (business development), Yum International, which owns Kentucky Fried Chicken. But growth is concentrated more in the takeaways and value eateries than fine diners (see 26 Hot Franchises: An Invitation to Join the Fast-growing Fraternity, page 24).
WHICH FRANCHISE?
While buying a franchise, you have to consider several issues.
Abilities. This is the time for brutal self-assessment. Rule of thumb: stay off what does not interest you. If you are indifferent to food, stay off restaurants. If kids exasperate you, avoid play schools. But don’t lose heart. Your passion for travelling may make you one of the best equipped to plan holidays. Go for that. “I had already done a few beauty courses,” says Jaya Patodia, 34, who runs a Lakme Beauty Salon in Delhi.
More likely than not, a good franchiser will check out whether you fit the bill. Shahnaz Hussain, for instance, looks for people who are “passionate about beauty care”. Most franchisers will look for specific skills apart from “entrepreneurial attitude and open mind”. Institute of Computer & Finance Executives asks for no less then a chartered accountant, and Spykar Jeans wants a year’s experience in franchising.
Since this will be a new business, it will need a lot of hard work to get it running. “The initial one year is very important as this is when you build up a customer base,” says Hema Malini, 36, who, along with Ambika Viswanath, 24, run a Ferns ‘N’ Petals franchise in Chennai. Most franchisers want the franchisee to be involved personally. Ratan Jalan, CEO, The Apollo Clinic, says: “We need a person who is himself going to run the franchise.” But some may let you hire a manager and work at the franchise part-time. Remember, the monthly expense estimate franchisers give you assume that you will work full time.
Costs & finances. The big question is: how much can you invest in a franchise? Some service franchises could cost as little as Rs 2 lakh. You would need just a room, a table, a couple of chairs and a telephone connection. At the other end are beauty parlours, fine dining restaurants, or retail jewellery outlets. Here, investments could go to a crore or higher.
Now add on recurring costs—royalty (usually a percentage of sales to be paid every week or month). In some cases, Ferns 'N’ Petals and Angeos Academy, it is the higher of percentage of net sales or a lumpsum. There would also be working capital, which would include salary of staff, power bills, rent, and some fixed overheads like ad fees. When a franchiser talks about working capital needs, ask whether it includes rent. If not, this could be a chunky add-on. Check how much you can borrow from banks and at what rate and decide whether you want to do so (see Money Matters).
The amount of capital you can raise will partly determine how long you can wait for the business to pay back. Some franchisers will say that you can start making profits from the first month itself, but it is always wise to give yourself a cushion of at least a few months. Your reserves or savings will decide how critical immediate cash flow is. Also, ask yourself how much money you can afford to lose. It would be smart to have a contingency fund.
Goals. What do you want your franchise to do for you? Will it be the primary or a supplementary source of income? Are you looking to make any specific amount every year? What is the return you want on your investment? Develop a three-tier strategy for investing, a long-term strategy and an exit strategy. Ask where you see yourself five to 10 years down the line. Do you intend to make money and shut shop, or do you want to set up more outlets later? Remember, buying a very successful franchise for a high fee makes no sense until your outlet gives returns.
After you apply these filters, your list should get down to at most four or five franchises. But you still need to zero in on one.
Due diligence. Ultimately, you are investing in a franchise and need to know what you are buying. So, bring out the acid and do the test. The first thing to ask is whether the franchise is likely to be profitable. Check the record of the franchiser and the prospects of the industry it operates in. Find out how many franchisees it has, its growth plans and how many of its franchises have shut shop. Talk to the franchiser and at least five existing franchisees to get the low down. Often, even better known franchisers like Archies Gallery and Subway won’t give you their numbers. Others like Ferns ‘N’ Petals and Turtle will encourage you to meet franchisees. Cookie Man and Tech Kidz will even give you their profit and loss details. Says Pal: “In advanced countries, a franchiser is compelled by law to disclose information about its business, on other franchisees and expected earnings. In India, it’s not so.”
One proof of a franchiser is in the way it trains its franchisees, whether it provides initial training and upgrades your skills regularly. You may have to pay a small amount for that. It should also give steady help in marketing and managing the franchise. Cost of equipment and other inputs should also be lower than the market prices as the franchiser should buy them in bulk and supply them to you.
In most cases, the franchiser will help you find a spot, but check whether it has other franchises close by. The size of the area you serve could make the difference between profits and losses. Also remember all products and services are not in demand everywhere, or throughout the year. Stay with better brands as they could mean better business. “Brands can bring people into your store; the rest of the work you have to do yourself,” says Gagan Singh, managing director, Benetton India. Don’t buy a franchise just because someone will sell you one.
By now you should have enough information to home in on one. That would leave just one step—signing the agreement.
THE FINAL CHECKLIST
Understanding the franchise agreement is a must as it formalises your rights and obligations. Whether it is a two-pager or a whole booklet, once you sign it, you will have to abide by it. In the US, all the franchisers have to provide a uniform franchise offering circular (UFOC) to prospective franchisees at least 10 business days before any money is paid or agreement to purchase is signed.
There are strict guidelines about what the UFOC should include. There is no such rule in India. “The franchiser and the franchisee need to be on the same plane,” says Reebok India managing director Subhinder Singh. So, always get a lawyer to explain the agreement to you. He should also assist you with negotiations, if any. He may charge Rs 20,000-50,000, says Srijoy Das, an advocate at law firm Archer & Angels, but you should spend it as it might save you bigger losses later. And always look out for the following in the agreement you sign.
Term. The duration of the franchisee agreement and whether it is renewable should be clearly stated. Usually it would be for three years, and could be renewed for a fee.
Territorial rights. Most franchisers do not allow two outlets within 3 km of each other. But watch out for the ‘good business’ clause and make sure you know what it means in numbers. If you do not measure up, it will allow the franchiser to sell another franchise in your area. Also check out whether you can buy more franchises in neighbouring area if you want.
Exit and resale. But what if you want to shut shop before the term ends? Normally, there would be a notice period and you should get back any deposit you made. Deductions, if any, for a loss-making business should be included. Some franchisers let you sell the franchise. If the franchiser is part of the deal, you should know how much of your money you can recover. No franchiser actually likes to talk about selling options when you are buying a franchise. But it is good to be prepared for the worst.
Termination. In the whole franchisee game, the franchiser is bigger and stronger and, therefore, has the advantage over you. It might decide to terminate the franchise any time. Know by heart the reasons for which it can.
THE BOTTOM LINE
Franchising is an easier way to start your business, but certainly not an easy way to do it. It is a challenge, but one that may be worth taking. As the fraternity says: “When you are a franchisee, you are for yourself, but not by yourself.”
Source:Outlook Money.Com
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