A few days ago, I wrote about the possible “Dis-economy of Scale”, when we start to add up the hidden costs in industrial agriculture.

I’ve just found an interesting article from Fortune about Jason Clay, described as a “thinking environmentalist”.

He calls for intensification of agriculture, and “economies of scale”. However, the critical departure from usual proponents of industrial farming, his view is to make agriculture “both more productive and sustainable” (i.e. “generating more output from fewer inputs”).

I wonder if that means using truly fewer inputs through the entire chain. That is really the key, since the current intensive and industrial model of farming actually seems to use more input (fuel and production) calories to produce fewer output (food) calories. Unless that changes, the model of industrial agriculture is unsustainable over time.

(The earlier post is here: The Dis-Economy of Scale)

And while we are on the subject of sustainability, it’s always good to remember that human beings haven’t suddenly become rapacious in the industrial and post-industrial age. We’ve displayed similar behaviour of overdoing things over centuries – a good book to pick up is Jared M. Diamond’s “Collapse: How Societies Choose to Fail or Succeed”. (Here’s his profile on Wikipedia, and book on Amazon).

The Indian retailing industry is at an inflection point, and set to enter a new growth trajectory owing to rising household consumption and the entry of corporate entities. About 400 new malls, 1,500 supermarkets and 350 department stores are currently being built in various Indian cities. With more than US$ 30 billion in investments slated in the modern retail sector of India, it becomes imperative to develop a better understanding of the key challenges of talent management, supply chain / logistics and real estate and identify the next steps to facilitate this exponential growth and enable the policy makers to formulate appropriate strategies. With this objective, the Confederation of Indian Industry (CII) is organizing a Retail Conference on 13 May 2008 in New Delhi.

Devangshu Dutta, chief executive of Third Eyesight, will deliver a special address and chair the session on Supply Chain Management – the panel comprises of Vikram Bakshi (Managing Director – North and East – McDonald’s India), Rakhee Nagpal (Managing Director, Dynamic Vertical Software Pvt. Ltd.) and Puneet Kumar Bhatia (Director, Enterprise & ITS, Internet Business Solutions Group, Cisco Systems).

Other speakers at the conference include Vinod Sawhny (President & Chief Operating Officer, Bharti Retail Pvt. Ltd.), Mukul Rastogi (Vice President – Human Resources, Lifestyle Retailing Business Division, ITC Ltd.), Sanjay Verma (Executive Managing Director – South Asia, Cushman & Wakefield), Tim Eynon (Chief Executive Officer, Prozone-Liberty &, Director, Provogue (India) Ltd.) and several other senior executives from the Indian retail sector.

By Rajshree Kukreti

May 2, 2008

In Chennai, Vinay G Nagpal juggles cookies, hot dogs and steamed corn and comes up with a delicious profit. In Vadodara, Shamini Patel provides personalised matchmaking services at Shaadi Point, the real-world version of matrimonial website www.shaadi.com. In Delhi, Pragati Rao of BrainOBrain teaches kids mathematics using the abacus. In Mumbai, Shabbir Poonawala sells Monginis cakes to tired commuters. Not one of the people mentioned are entrepreneurs in the strict sense of the word. Nor are they really businessmen. Rather, they are members of the country’s growing tribe of franchisees.

“India has literally millions of individuals who would prefer to be their own boss and run a business, rather than being an employee. There are joint families, where resources may be available in the form of some real estate and family members who can be part of the business. Personal loans are available from family and friends, in the close social fabric of our communities. This is ideal ground for franchising“, says Devangshu Dutta, chief executive, Third Eyesight, a consulting firm focused on the retail and consumer products sector.

People like Nagpal, Rao and many other franchisees are proving Dutta right. As the case studies profiled through this story proves, people running franchises come from varied backgrounds – former employees, homemakers, shop or showroom owners and even retired professionals and employees. Nagpal was an executive with Rediffusion before he dabbled into franchising, Rao was a homemaker who liked mathematics, Shamini Patel of Vadodara was a graphic designer-turned-wedding card maker who found her calling in franchising for Shaadi Point.

An interesting feature of the franchising market in India is that while a large chunk of it is taken by franchises of foreign, mainly American, brands, small investors and small enterprises are happier to take franchises of home-grown companies. The McDonald’s, KFC, Nike and Pizza Hut franchisees are those who can afford to pay the huge franchisee fee and start-up costs that these companies demand. Smaller franchisees look at domestic companies or relatively unknown foreign brands in areas such as computer education, restaurants, health care, courier logistics, beauty parlours and apparel.

It doesn’t matter what your educational or professional background is; chances are that you’ll find a franchise to suit you. “Since I am no businessperson, I thought a franchise would help me do what I love best—teach in an ambience and system that was to my liking,” says Jamshedpur’s Nandita Sinha, once a franchisee of Erudite, a pre-MBA coaching institute.

A report released by Franchising Association of India (FAI) says that while franchising as a business model has been known in India for decades, there is clearly an unprecedented interest in adopting this model in recent times as is evident from the growth rate of 30-40% per year as witnessed in the last four to five years. There are already more than 600 franchising systems operating in the country. Adds Dutta: “The Indian market is at a stage where franchising is a great model that allows both franchiser and franchisee tremendous potential for growth.

According to the FAI, the global franchise industry grew by over 18% between 2001 and 2005. In a report, the president of the FAI, CY Pal, says: “In spite of the rapid growth of franchising in the recent years, it constitutes as of now about 2% of the total retail sale of about $405 billion, while in developed markets, such as the US, franchising accounts for more than 50% of total retail sales. This is indicative of the enormous potential that lies ahead for the growth of franchising in India.”

Why Franchising

Given that the survival rate of a franchised business is more than twice the survival rate of independent small businesses, it makes sense to start your own business riding on the back of an established and proven model. The franchise model is a great way for a franchiser to expand operations rapidly, with relatively low overheads and expenses, coupled with the local expertise that franchisees provide. Says marketing and brand consultant, Harish Bijoor: “The ship works primarily in three formats: where both players are small, when the franchiser is big and the franchisee is small, and when the franchisee is big and franchiser is small.”

For the franchisee, this business model makes sense, since he will have to spend less on infrastructure and processes than he would have in an independent business. The franchiser helps the franchisee establish and get over teething troubles and franchisees are free to grow their operation. Expanding business and revenues is what matters the most. Chennai’s Nagpal, for instance, started with one Cookie Man franchise. Today, in addition to Cookie Man he has added HogDog and sweet corn Hot & Juicy franchises to his kitty.A franchisee is in an ideal position to make profits, since the business he is entering has already been proven to be successful. The success or failure of the franchise will then largely depend upon the franchisee. Of course, if a franchisee takes on a franchise without conducting adequate due diligence, he might find himself a far sight poorer.

Investments Required

Says Dhawal Shah, executive officer, FAI: “This is one business opportunity that you can start with Rs 50,000 onwards.” However, a good franchise costs a bit more—at least Rs 3 lakh, going up to over Rs 25 lakh, and sometimes running into crores of rupees (see tables: Franchising Options for All).

The good news is that the seed capital is shared between the franchisee and franchiser. You will ideally bring in the premises and some working capital, but the intellectual property (in case of educational/software businesses) and stocks are provided by the brand owner on soft credit. Even better, franchisees can benefit from the cost savings associated with bulk purchasing power that the mother company has access to. They can also benefit from the pooling of resources into effective local, regional or national marketing programmes.

Depending on the franchise, stock and equipment is likely to be supplied to you, along with decor and help with accounting and any other training that you may need to get started. Says Pragati Rao, a BrainOBrain franchisee in Delhi: “The franchiser provided me with intensive training to set up the business. Initial investments included the franchise fee of Rs 65,000.” By doing this, the franchiser ensures that the franchisee has few commitments, leaving him free to run the business. Shabeer Poonawala, a Monginis franchisee in Mumbai, says: “Monginis assisted me in the entire set-up, right from identifying a location, buying a suitable property and arranging a contractor for interior designing. They made sure everything was as per their standards.”

Compared to starting your own business, this kind of financial burden is light. You are paying for a part of an established company’s brand—effectively ensuring a head start on someone starting from scratch. Says Pavan Gadia, vicepresident, Ferns ’n’ Petals: “We provide products worth Rs 2 lakh when a person opts for our franchisee model. We also help and facilitate loans for those who looking at borrowing money and not dipping into their reserves.”

Some companies use the initial sum to help the franchisee in building the business. Those taking up the franchise of Lakme Salons get the benefit of start-up fee being invested back into the business in the form of support.

The drawback is that the franchiser will demand a percentage of the profits you achieve, as well as fees to retain the franchise licence (see box: Who Gets What). Vivek Seigell, country head, retail, e-tail and consumer finance, HCL Infosystems, explains this: “The vision for the business is set by the promoter. It is like paying a royalty for using someone else’s intellectual property.” (see box: The Fundamentals) Surviving the gestation period is the biggest test.

Payment to the franchiser starts before one can record the first profit. Some companies defer fee till the turnover is substantial. This initial handholding makes certain franchising options quite attractive

Franchiser Support

When you set up shop, would you rather get on with running the business, or spend hours every day dealing with suppliers, accounts, inventory, sales and the like? The former, obviously. That’s why the franchise model succeeds. The franchiser gives the franchisee a proven and tested format, which can be customised to suit specific requirements.

Says Himanshu Jain, associate vice-president, Career Launcher: “We train the owner and the employees for about a week with our proprietary knowledge bank.” Says Meerut-based Shilpa Sarin, a Ferns ’n’ Petals franchisee: “The biggest question running through my mind was, what can the franchiser offer me as training, aid or support to run a flower shop? But, the kind of orientation, the flexibility to source flowers on my own, to be sure of certain quality checks, has helped me a lot. No wonder, even after other similar shops have opened in the vicinity, people are drawn to me for the quality and service that we offer.”

Sarin’s is not a one-off case. Says Surat-based Naresh J Patel, a Monginis franchisee: “A branded product definitely sells better.” Running a bakery shop of his own, Patel now sells under the Monginis brand and is also free to sell other products from his shop. Proven and successful franchise systems generally offer a greater chance of success compared to independent businesses. These systems have removed most of the trial-anderror inherent in start-up operations. This advantage only exists, however, where the system has a proven history of successful franchising.

New franchise systems, which guarantee returns and profits, and which claim to have opened 20 or so franchise outlets in a year or so, are neither proven nor successful. These systems are like the “penny stocks” of franchising. The people who promote them often share similar characteristics, and the people who buy them often share the same fate.

hat said, the growing popularity of franchising provides a golden opportunity for today’s successful start-ups to grow their business at a much faster pace and at much lower cost than was possible even 10 years ago. Mumbai-based Dheeraj Gupta started an eatery called Jumbo King in 2001. Thanks to franchising he has set up 45 outlets in seven years and his annual turnover has zoomed from Rs 40 lakh to Rs 12 crore during the same period. So successful has his franchising been that Gupta is looking at a 1,000-outlet chain in the next 3-4 year with a turnover of Rs 500 crore. Says Ashish Gupta, CEO of Delhi-based Invest Shoppe India: “When I looked at expanding, the biggest stumbling block was real estate cost, the additional responsibility of branches and running the show at each of the branches. The franchisee helps in growing the business— the front end is out sourced to him and the back-end headache is all ours. If today I have expanded from five outfits of my own to over 12 in all, it’s because of the franchising option.”

Most franchise companies often put newcomers in touch with more experienced franchisee owners for advice. Says, Career Launcher’s Jain: “We have refresher and reorientation courses for our franchisees, because ours is a dynamic business where trends and teaching modules keep changing and evolving.”

Help In Publicity

If you set up shop on your own, it’s part of your job to get your message to the right audience through carefully targeted newspaper, online or local cable advertising. There’s also the ongoing process of building and maintaining a reputation. Get this right and you will begin to thrive from positive recommendations from satisfied customers. But this can be a long, timeconsuming and expensive process—and it might not have the best impact anyway.

Here’s where the franchise model comes up trumps again. As a franchisee, you’ll have the clout of a large, often well-known, brand behind you. You’ll be given all the marketing tools you need and will benefit from advertising, sometimes on a national level.

A large franchise company will have dedicated marketing departments that will be able to provide you with all the advice and material required. Says Shaadi Point franchisee, Patel: “We pay a royalty for every customer to the franchiser and this reduces the profits considerably but the company takes care of the entire advertising, which I cannot afford.”

Rakshit Hargave, business head, Lakme Salon, says: “Our franchisees benefit most from Hindustan Unilever’s huge marketing scale. This is one of the biggest draws for them, apart from the brand pull.”

Your Job

Patel was a trained graphic designer, who decided to get into the business of designing and printing wedding cards in 1999. She banked on the contacts and experience she had built up in her career in advertising. Some research showed her that an alliance with shaadi.com could help her promote her cards. “I had approached them to place my cards on their site and expand my existing business,” she says. But the company was in the process of setting up Shaadi Point, and offered Patel a chance to get in early. “One trip to Mumbai to check on an existing similar format and I was ready,” she says. Over the past six years, Patel has added to her infrastructure and has now has eight computers and on an average gets 10 clients a week. Business has been so good that she no longer designs wedding invites.

Patel happened to be in the right place at the right time. She had also done her homework thoroughly. And that, say experts, is something not all franchisees do. Only a few conduct even the basic due diligence, and there are very few like Abhinav Garg. A Gwalior-based Career Launcher franchisee, Garg studied the market, gathered information from several sources, met innumerable franchisers, and only then decided upon Career Launcher. He hasn’t regretted this decision. In six years, he has grown from one centre to five centres.

It pays to do your homework before you meet a prospective franchiser (see What to Check Before you Sign). Sinha, who invested Rs 3 lakh in an Erudite franchise (a pre-MBA coaching institute) in Jamshedpur, did little research and had to shut shop in just about a year. “I found it very difficult to cope with the stress that I had not foreseen in the administration of a franchisee. There were hidden costs that no one talked about before the agreement. In retrospect, I feel I should have been more assertive while negotiating the deal,” she says. Your first step is to do some research on your own to see the demand for the product or service.

Take a close look at your competition and see how they are doing. Competition is good because it helps you to learn more about the market or industry. Moreover, franchising incorporates the features of both a start-up and an existing operation. Therefore, aspects of both will be evident in the running of your franchise company. If you are concerned about the risks involved in a new, independent business venture, then franchising may be the best business option for you. Remember, however, that hard work, dedication and sacrifice are key elements for success.

Getting a franchisee business of your liking is one thing and to keep it running successfully is another. Even though you are the boss, you will have to undertake tasks you may not be too keen on—book-keeping, managing staff and their rota, looking after local marketing, among others. Getting the company to renew your agreement when the term expires can be tough if the estimated targets have not been met. This puts a question mark on the future of your investment.

Finally, never forget that a franchise is not the same as your own business. Franchisers have their own set of criteria on how each of their outlets should look and operate. However much it feels like you’re the ultimate boss on a day-to-day basis, you will always be working to someone else’s vision, not your own.

“The amount of freedom afforded varies, but you have to check with the parent what a strict no-no is and where you can bring in your creative business pursuits,” says Sarin. For instance, you will almost certainly be briefed on how the company wants to be represented, from the uniforms of staff to what suppliers to use.

You will also need to check how you can expand the scope of your operations. For instance when Rao wanted to expand her BrainOBrain franchise from one outlet to another, the promoter was encouraging and helped her with her second outlet. It’s important that you are comfortable with these circumstances before you purchase the franchise, or you could become extremely frustrated.

Seek to understand, not negotiate

For the franchise model to succeed, certain rules must be followed. The franchise agreement signed by the franchiser and franchisee defines many of these rules.

But can the terms of the franchise agreement be negotiated? Yes and no. Seasoned franchisers generally do not as a rule negotiate. The only exception to this is the definition of protected territory offered to the franchisee and the franchise finance terms (if the franchiser has tie ups with banks for such assistance).

Franchisers do not negotiate the agreement because loopholes could not only damage the brand, but also harm other franchisees. Also, it’s a nightmare for a franchise system if every franchisee has a different contract form, terms and provisions. There’s a significant cost to doing business this way, because every question requires a contract review before an opinion can be given.

The key to a franchisee’s success is understanding why a provision is included in the agreement. Most franchisers are willing to spend time to explain any provision in their contracts, and many even issue letters of clarification. Be sure to ask for an explanation of any clause you don’t understand. And always seek legal counsel before accepting the franchise agreement.

We touched upon food price inflation last month and – no surprises – it is still hogging the headlines. It is, after all, an emotive topic. We are terribly concerned not just as food and grocery professionals, but also as consumers and general public. After all, food and grocery are typically half of our monthly spend, give or take a few percentage points.

Inflation often brings with it swift (sometimes knee-jerkingly quick) reactions – price controls, export controls, subsidies to farmers and food producers, and various others. Some of these measures work but only in the short term, while others may have no immediate visible impact on the market at all but may be truly insidious because of that.

However, a significant set of questions has not really been touched yet: how the food supply chain is structured, how it is driving consumption, what impact that might have on food prices and several broader cost implications.

Thousands of years ago, when hunter-gatherer human beings stumbled upon agriculture, it was a breakthrough similar to the discovery of controlled fire. Hunter-gatherers were dependent on the natural availability of food, while agriculture created the opportunity to have some control over food supplies and reduce the natural feast-famine cycle. Thereafter, farming, processing and storage techniques kept evolving incrementally to ensure that more food could be produced for each unit of land and effort, and stored for longer – all moving towards ensuring “food security”. This led to the age of empire-building, where monarchs grew their wealth (essentially food territory) with the help of military-imperial complexes, and the greater wealth in turn supported the military-imperial complex.

This remained the trend for a few thousand years, until the age of industrialisation and the age of petroleum. Through the industrialisation and the world wars, the military-imperial complex gave way to a military-industrial complex, which essentially became the military-industrial-petroleum-agricultural complex. Suddenly, there were not just machines to plant, reap, thresh, sort, clean and process, but also petroleum-based substances to dramatically increase output and to keep the produce fresher for longer.

As US farms and then European farms industrialised, the parameters that began to be applied were the same as in any factory – how to produce more while spending less – and every year the target was to grow more for less. Underlying this was the principle of “efficiency from larger scale”. The same philosophy played out further down in the supply chain – from processing to extend the shelf-life of the product as it was (such as chilling, cleaning, sorting) to processing and packing in order to change the nature of the product itself and gain additional value (such as tomatoes to paste or potatoes to chips).

Standardisation became a vital link in industrialisation – if you can standardise produce, you can cut down human handling – while you may lose product variety (including flavour and colour) you gain in terms of driving down the cost of production. By reducing unpredictability you can also concentrate on building the scale of business, because it becomes more repetitive.

The interesting side-effect of this is that, gradually, we are converting ourselves (and people in many industrialised economies already have) into petroleum-burning machines rather than those running on solar energy, because increasingly the agricultural supply chain is dependent on non-renewable petroleum and its products, rather than by the natural energy of the sun being converted into food by the plants.

And the important thing to keep in mind is that, in this switch-over, the energy efficiency is actually going down rather than up – we are using more calories of fuel source to produce each calorie of food energy.

The issue is more acute now than ever before, because now the growth markets of choice for industrial agriculture companies are China and India. If these two countries move through the exactly same path as have the western economies in terms of agriculture and food processing, given the population base itself, clearly the impact will be 5-7 times (or more) on the demand for petroleum as well as the fall-out on the ecosystem.

You may ask, why should retailers worry about this?

Firstly, pure cost considerations – clearly, the costs of petroleum are not coming down, and explosive demand through industrialised agriculture will only serve to push them up. How far can you push the food bill every month, before people start buying less? What impact would that have on large retail supply chains and farmers whose processes are increasingly built around products of industrial agriculture?

Secondly, what consumers are already beginning to express in western markets will possibly happen in India in the next few years as well: concern about where and how the product has been produced, what has been the fall-out on the environment and on the overall health of people involved with that supply chain as well as the health of consumers.

Carbon footprint, food miles & locavores (people who only consume food that is produced within 100 miles of where they live) are terms that retailers are increasingly hearing.

And an alternative set of questions is also being raised. Is it ok to burn non-sustainable fossil fuel if you get “carbon credits” by planting trees somewhere else – have all the carbon costs been accounted for from the start to the finish of the production process? Is it better to reduce the food miles and have food produced locally in a high-cost economy’s industrial agricultural model, or to have naturally grown foods from a more primitive farm in Africa or Asia where the environmental impact is only the “carbon debit” of the air-freight. And, even if the produce is carbon-friendly, what about the nitrogen footprint (from the fixation of nitrogen into fertilisers) and the methane footprint (from large scale animal farming)?

This one page is surely not enough to present any in-depth analysis, but I hope it will serve to kick-start the process of questioning how India (and China) should take the lead in creating an alternative and more sustainable model for food security for large populations. There is a lot of research being done, and much yet to be done, to quantify the true cost of blindly pushing for scale in the food chain. Truly “progressive grocers” need to take an active role in supporting this.