Current Market Landscape for Franchising in India
Current Market Landscape for Franchising
Franchising is growing at an impressive pace in India. According to Franchise India, franchising has witnessed a growth of around 30-35% over the last four-five years and the overall turnover is estimated at around INR 938 billion. Currently, the sector contributes nearly 1.8% to the Indian GDP and is estimated to contribute to around 4% by 2022.
As the fastest-growing economy, India has tremendous potential for franchising business. With a high percentage of the young population, a franchise model will develop well through shared ownership. Till 2017, the Indian franchise market was about INR 938 billion. In India, franchising as a growth and expansion route has been prolific across sectors.
As per Franchise India, “There are about 600 national-level players that operate through 50,000 outlets and employ about half a million people.”
Franchising: A tried and tested formula
According to the report by GrantThornton, currently, several private companies are looking to diversify and expand at an optimal cost. The expansion of any company involves the risk associated with a significant investment of both capital and human resources to run the location. Thus, for higher reach and better service to every customer, a large number of companies adopt the franchise business model. Under this model, an authorisation is granted by the company to someone who can sell or distribute its goods or services under mutually agreed terms. When franchised, the franchisee provides the capital as well as the human resources required for expansion to the franchisor.
Under the franchise agreement, a franchisor is able to expand its services by optimising cost, keep a check at quality measures, and increase margins. International franchisors like McDonald’s and Kentucky Fried Chicken (KFC) and Indian players like VLCC and Crossword book stores are few who stand to benefit from this model. On the other hand, a franchisee not only gets to acquire the formula of a proven and efficient business but also gets benefits such as brand association, management assistance, training, and marketing assistance.
Key sector adopting a franchise model
Globally, India is the largest franchise market in the world after the United States, with about 4,600 operating franchisors and 0.15-0.17 million franchisees in 2017. Of these, around 26% of franchise buyers were women in an individual capacity or as a couple-led family business.
Today, India is home to more than 3,800 domestic franchisors that have adopted different models. Some of the pioneers of Indian franchising are Patanjali, Titan, Kidzee, Vakrangee, Raymond, and Amul. Several industry verticals such as food and beverage, education, retail, health and wellness, and consumer services have been leveraging their growth by franchising their products under several formats.
Franchise market size
The franchising business in India was worth INR 938 billion in 2012. In 2017, it reached INR 3,570 billion, growing at a compound annual growth rate (CAGR) of 31%. The market is projected to reach INR 10,500 billion by 2022, growing at a CAGR of 24%.
The key industries that possess immense prospects for the successful franchise opportunities are retail, food and beverages, health, beauty and wellness, consumer services, and education and training. The individual growth and potential of these key industries will drive the growth of the overall franchise sector in India.
Consumer services, health and wellness, and food and beverages are expected to drive the majority of the growth in the franchising industry. Over the years, the retail sector has dominated India’s franchise industry, with a major share of over 71% in 2017; however, its share has been estimated to have declined from 79% in 2012. Regional brands such as Jumbo King, Pind Balluchi, Giani’s, HiCare, and others have dominated the franchising market accounting for a share of approximately 50% in 2017.
Franchise penetration across various sectors
As per GrantThornton’s report, franchising as a percentage share of the revenues of its respective industry is estimated to have grown the fastest for the food and beverage sector, a CAGR of 36% from 2012 to 2017. Further, franchising as a percentage of revenues of the total industry within health, beauty and wellness, food and beverages, education, and retail sector, is estimated to have accounted for 27%, 10%, 4%, and 5% share, respectively in 2017.
Contribution to employment
Franchising encourages self-employment and is also a big employment generator. A single franchise store employs five to 30 people. The franchising industry was estimated to employ 14 million people in 2017, which is almost 10% of the total estimated workforce.
In addition to direct employment, franchising has also generated a push for indirect employment. The indirect employment is estimated to have created an additional 1.8 million jobs in 2017 across key franchising sectors. The service-oriented franchises, including food services sectors, are expected to generate maximum indirect employment.
Factors affecting the business
Franchised outlets in India have built such a massive consumer base mainly by focusing on Indianisation or customisation of products or services, thus connecting with the customer segment and catering to their specific needs. The demographic shift that India is experiencing with its middle class has led to an increase in their disposable income. Due to this shift, there has been a consistent growth in the number of consumers for branded products and franchised names. However, there are multiple other factors influencing the franchising model to become such a huge success such as:
Lower rate of failure
Franchises have a lower rate of failure as compared to the start-ups. According to a study by IBM and Oxford in 2016, 90% of the Indian start-ups fail within the first five years, against only 15% of franchises. Since the business concept has already been worked out with the existing loopholes been fixed, the model today is efficient, low risk, and low cost over any start-up. Thus, making it more appealing to the investor.
Increasing income and purchasing power
Indian disposable income was approximately INR 131 trillion in 2018 and is expected to double by 2025. The rising income levels in rural and urban India have resulted in increased spending on discretionary items as against necessities. This rise in income and spending capacity across India coupled with increased awareness, has created a substantial demand for domestic and international brands. A large number of companies are expanding beyond tier-I cities and increasing their presence by adopting the franchise model.
Privatisation in different sectors
With the rapid privatisation in India across various sectors such as education, healthcare, telecommunication, and others, there is a constant rise in the influx of international brands in the country. With this increase, the scope for franchising has also gone up. Today, companies across sectors such as EuroKids, Ferns N Petals, Vakrangee, Connect India, and DTDC are key examples of successful privatisation and franchising in India.
The newfound entrepreneurial spirit of young Indians has led many individuals to enter the franchise business. Presently, around 35% of all the franchise owners have been first-timers in business. These entrepreneurs choose franchising due to the range of benefits it offers such as reduced risk, association with an established brand, training, and support, etc.