Franchising

Taking the franchise route

As tourism in India takes centrestage, international hospitality brands making a beeline for the hotel and restaurant circuit are looking to franchising as their main strategy. Express Hospitality dwells into the evolution of the concept

Hilton Towers, Mumbai

Franchising, as a concept, has been around for the past 50 years. But only in the past decade or so have companies in India been lending their names to other properties or bringing in foreign names through the franchise route. In India, franchising found takers initially in the food and beverage industry. In 1995, Domino's entered the Indian market with their plans of opening one outlet every month. The company tied up with Vam Organic Group that was authorised to franchise the brand.

On the accommodation front, in 1994, Sarovar Hotels signed a territorial development agreement with Northern California-based Park Plaza International Hotel & Resorts to set up 40 properties all over India. Carlson Hospitality later took over the brand in a worldwide deal and Sarovar Hotels was deemed master franchisee for India for a period of 50 years.

By 1998, franchising had begun to get a foothold in the food and beverage market, and developers were looking for franchises in fast food, theme and specialty restaurants. ITC's Bukhara restaurant led the trend. In 1998, Pizza Hut set up its first franchise outlet in Pune. Education institutes too got on to the trend, with Kohinoor franchising the Switzerland-based International Hotel Management Institute (IMI) brand name.

High on popularity charts

The turn of the century saw the franchise model getting increasing acceptance with more and more foreign companies entering the Indian market by franchising their brands to new developers. In January 2000, Cendant Corporation came scouting for a master franchisee for its seven brands including Days Inn. In the same year, Best Western International decided to increase its presence in India by adding 18 more properties taking the tally to 30.

In the second half of 2000, the foodservice industry caught the bug and chains such as Nirula's, Kamat's, Copper Chimney and Geoffrey's were planning on expanding their trade by searching for franchisees.

The economic downturn of 2001-02 threw a spanner in the works. The Regent, a brand of Carlson, had to rethink its franchise with the Lokhandwala group, leading to Carlson taking away the brand from the Mumbai property. Though the number of franchisees had reduced during this period, there were some happenings nevertheless. Choice Hospitality confirmed its plans to establish its Clarion brand, bringing the New Delhi-based Qutub Hotel within its fold. Actor Sanjay Khan's World Resorts, parent company of the Bangalore-based Golden Palms Spa & Resorts, also had plans of expanding the business nationally and internationally and was in discussions with property owners for management franchisees. Six Continents Hotels, on the other hand, discarded their policy of offering franchise agreements and decided only to stick to management tie-ups.

Franchising also made its mark in the hotel equipment market. Realising the importance of one-stop shops for hospitality equipment, New Delhi-based FCML projects also took the franchising route to enhance its presence in the segment.

Both five-star hotels and mid-market operators have realised that brand positioning is crucial and that it plays a major role in attracting business to one's property. Indian hospitality majors like the Oberoi and the Taj group who so far thrived on their own brand strength have entered into marketing tie-ups with international brands Hilton and Raffles respectively to compete on the international turf. Global brands like Four Seasons, Shangri-La and the Accor group (with its mid-market brand Ibis and Novotel) are all set to make a foray in the market, while the likes of Mandarin, Sol Melia and Ascot are waiting in the wings for the right opportunity.

If one carefully analyses the developments that have taken place in the Indian hospitality industry in the recent past, hotel brands like Quality Inn, Comfort Inn, Park Plaza, or Fortune Park have witnessed phenomenal growth, thus further instilling that required confidence in the concept in the minds of existing and aspiring hoteliers. According to K B Kachru, vice president of Carlson Hospitality India, "In India, franchisors and franchisees build strong personal relationships and thrive largely on mutual trust. First-time franchisees often take time to understand the benefits and the added value that the umbrella of franchising provides. They tend to evaluate only the real business transacted through the system and it takes time for them to understand the benefits of visibility and positioning of their product. Only few countries in Asia have laws that govern the franchisor-franchisee relationship. In India, these laws are mere safeguards for both parties involved. Although India is yet to enact these laws, some that already exist can be adequately applied to franchising also."

Sunil Mathur, head (Development hotels) at Cendant Corporation, feels that the situation in India is changing with rapidly increased competitiveness. "The concept is being better understood by hotel and restaurant owners for the major multiplier benefits that are gained by their hotels through good chain affiliation," he says.

On the proven track

Franchising in the hospitality industry is looked upon as a profitable business arrangement, which results in gaining recognition and awareness and achieving higher occupancies and revenues. Franchising in India vis-à-vis franchising abroad are two very different systems at work. In Western countries, the concept works successfully because of higher consistency in product. Also the government regulations on hygiene, safety and health being very stringent, compliance of the same becomes mandatory. Systems and processes are well defined and followed.

In the Indian hotel context, pure franchising has a low success rate. The franchise name alone is no guarantee for success. The reasons for this are product inconsistency, a lack of quality management and absence of rigid government regulations and policies.

A franchising arrangement coupled with management has been, and continues to be immensely successful in India. Apart from professionalism being infused, the benefits relate into a superior quality hotel and in generating additional revenues and profits.

A successful franchising and management company combines expertise, a performance-driven approach, flexibility and a sound foundation of values and integrity. The company continuously endeavours to achieve mutual respect with the owners.

A successful franchising and management arrangement provides various advantages, which a pure franchise would lack in. Some of these essentials are:

• Hotels in India require a very strong sales and marketing network in the country to drive business. This is due to the large volumes of business from local corporates, travel agents, tour companies, et al. The challenge is to provide business to the hotels and the Indian network must perform. If this is lacking, only a big name on the roof does not get business. GDS and international CRS systems cannot deliver significant business into non-metro B and C category, corporate hotels. Business prospects on the internet amount to less than one per cent.
• There should be continued and consistent investments in brand building and marketing. Brands have to be built globally and there cannot be any compromise.
• This arrangement also maintains high service standards and works aggressively towards quality compliance and improvements.
• A very strong corporate people infrastructure. A team personifying expertise, experience and excellence are highly essential.
• Another challenge is to maintain standardisation to the optimum at all levels.

Franchise v/s management

Both these revenue models have over time proven to be highly profitable. This is because each system in its own right is strong when applied correctly. In India's context, the management concept has got an excellent headstart over franchise. This has not been the case in other countries such as USA, where both concepts were developed alongside each other.

This is not to say that the franchise method of business will fall by the wayside. The benefits of franchising as a method of business expansion fall into two general categories:

• Benefits relating to the capital investment furnished by franchisees to expand the network
• The motivated management by franchisees of the businesses in which they have made substantial investments. These benefits are enhanced by the strong interdependence that exists in a franchise relationship.

Such strong bonding or interdependence is not commonly visible in a management relationship for the simple reason that the property owner takes on a manager as a replacement.

Expansion: From the capital investment and business point of view of a franchiser, the franchising system is excellent because it enables a company to establish a large number of business outlets in a relatively short time period. The capital and much of the work to locate and acquire sites and develop outlets is supplied by the franchisee.

Given that the management system's form of expansion is much slower than that of franchise, has not deterred companies such as the Marriott, Hilton, Hyatt, Taj, Oberoi, Sarovar Park Plaza, Park Hotels.

Longevity: In the area of longevity, the management model scores over franchise. This is because management contracts, while being based on the performance of property, are generally seven years and above - one complete business cycle in Indian hospitality. Such long spells at one location allow for greater adaptability to the location. This is highly desirable not only in the high-end categories of accommodation, but also amongst the middle levels in a tumultuous economy.

RoI: A franchising company can realise a higher return on its invested capital because the investment in the development of outlets is typically made with few fixed assets, other than the outlets that it owns. Therefore, though its revenue from franchised outlets (composed of fees and product sales to franchisees) is substantially lower than it would be from owned outlets, a higher percentage of the revenue is profit and that profit is generated with a much lower capital investment.

For the franchisee, the return on investment is generally at a quick pace (in direct relation to the investment and the revenue model of the franchise), because he has not had to spend on researching systems, independent marketing campaigns or incur expensive mistakes. One reason why management companies enter in to long-term contracts - other than long-term business - is that their own break-even is a long drawn process. Return on investment for a managed property is directly related to its revenue model and of course investment.

Taking Indian brands abroad

The market for franchising in the hospitality industry of this country is booming with many international concepts making inroads. Deriving support from the buzz, the strong potential of Indian franchise concepts is now being taken seriously. But for some, it is the international not the Indian market that holds greater lure.

An Indian brand's presence abroad is not new. However, it is restricted to a handful of accommodation and food and beverage players like the Taj and the Oberoi Group and the Gaylords restaurants which has set up properties abroad. But these properties are managed, not franchised. Till date, Indian companies have only just begun spreading their brand through the franchise route on foreign shores.

Increasing market awareness

Park Hyatt Goa

As far as Indian brands are concerned, unlike the accommodation segment, over the past few years a great potential has developed for franchising abroad in the restaurant segment, especially in UK and USA. Besides the presence of a large Indian or Indian origin population, the awareness and interest in everything 'Indian' from Bollywood to cuisine in the Western world has opened up a plethora of opportunities in the restaurant segment.

Param Kannampilly, director of Concept Hospitality, feels that there is a huge market abroad. According to him, they are in the process of locating cities with good base support or a strong Indian population for the expansion of 'Vital Kamat's', an Indian cuisine fast food restaurant chain, the brainchild of Vithal Kamat. After setting up two restaurants in San Fransisco, the project however has been put on the back burner for a while. Kamlesh Barot, managing director of Encore Hotels, has a more positive contribution. "We are looking at two to three options in USA and UK. We want to cash in on the Western craze for vegetarian fare by franchising for Rajdhani restaurant," he says.

Kannampilly states, "We are working to tie-up with like minded businessmen and entrepreneurs for a franchising-cum-management option. While we have been pure franchisers for the two restaurants in San Fransisco, we feel that skilled craftsmen are essential for the operations abroad. This is also one of the reasons why the project has been stalled as post 9/11 it has become difficult to send across the same."

There are a substantial number of investors for Indian restaurants today, but management is the key ingredient resulting in the increasing popularity of the franchising-cum-management module. Indian franchising abroad is likely to find more takers as it is quite profitable due to foreign exchange earnings. According to Barot, there is a strong demand for franchising abroad and it is mostly need-based, generally the need arising for a 'local' (Indian) chef. "An Indian restaurant in Vietnam approached us to be a franchisee of Revival. It was also a management deal, which was a result of managers and chefs quitting in succession. While the local population is not too fond of Indian cuisine, the restaurant is very popular with expats," he says. Goa Portuguesa is yet another popular Mumbai restaurant with overseas expansion plans in the pipeline.

While the Indian restaurant market in USA and UK is cluttered with resident Indian, Pakistani, Bangladeshi entrepreneurs (all restaurants owned and run by these groups is tagged as Indian) Indian franchisers can gain a foothold through NRI endorsement and 'authentic' and 'ethnic' Indian cuisine.

Given the nature of expansion by this business model, it looks like India is a fertile breeding ground for franchising. Analysts generally believe that existing businesses are willing to surrender some degree of independence and agree to pay fees in order to gain a stronger trade identity, regional and national marketing and the economic advantage of combined purchases of goods and services. On why franchising may succeed in India, Rajeev Chopra, managing director of The Residency Hotels, has a valid explanation. According to him, the hospitality market is cluttered with big international players and it is therefore easier for a sole proprietor to take the franchising route rather than creating and establishing a new brand which has a much longer gestation period. In his opinion, a franchisee to a well-known international brand offers international identity and value attachment. "The single most important factor as a franchisee is the market recognition and an assured market. For any new property half the battle is recognition, value attachment and marketing. As a franchisee to Marriott, all international values attached to the brand name are automatically affixed to my property, along with the bouquet of vast marketing resources and advertising spend. Marriott International spent about US $120 million on advertising last year," states Chopra.