What Is ‘Franchising’
The term franchising essentially stands for “An arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building, design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products”. (as defined by www.businessdictionary.com)
To put this more simply, and in food and beverage terms, it’s a situation where a hotel or restaurant company, expands its business by allowing third parties to open up their brand outlets, usually by paying a fixed percentage or charging a fixed percentage for the brand name.
How does Franchising Work
Franchising is the easiest way for an investor to get into the Hospitality trade (Hotels or Restaurants). It ensures being a stakeholder in a recognized brand, and the thought of owning a well-known restaurant or hotel is what drives most people to Franchising. It works by essentially following the same standards as other outlets of the brand across the region, for which training is imparted by the Franchisor.But, not all outlets you see multiplying are through Franchisee’s, a lot of companies prefer to run and operate their stores, for this we must understand the system ‘Self-Operated’ and “Franchise-Operated” restaurants/hotels.
Self / Brand Operated Franchising
In this situation the Franchisor allows investment from third-party investors, like you or me, to put up money in acquiring the outlet location (rented/leased/owned), put up some more money in doing up the interiors, lighting, air-conditioning, plumbing, etc., which has to be followed completely as per the Franchisor’s instructions, and thereafter the Franchisor will pay the Franchisee a fixed percentage of the monthly revenue. An example of this is seen in KFC Restaurants, where the investor sets up the property for KFC, and they send in their own trained staff to run the show. In most cases like KFC, the investor gets a fixed percentage on ‘total sale’ (minus GST). Usually, this percentage is between 6% – 15% across the board. In this kind of a situation, even the investor walks in and spends like a regular customer, and can have no say in food production areas like a change of recipe, etc.
For Hotels, an investor may set up a 3*/4*/5* Hotel on his own money and arrange for a larger well-known Hotel company to run it for them, while the investor receives a fixed percentage of the sale. For example, in the 5* category, all Hyatt and JW Marriott Hotels in India are run similarly. The employees are on the payrolls of the Hotel Company, but the property belongs to a third party owner. Another example of ITC Fortune and Taj Gateway Hotels can be offered in the 4* Hotels category. In this case, however, the investor need not walk-in like any ordinary customer, he gets the same respect or more than that of the General Manager, with usually everything on the house.
Franchise Operated Outlets
In this situation the Franchisee just uses the brand name and brand standards of a well-known brand, however, the staff are on the Franchisee’s payrolls, not the brand’s. Like in the above case, the investor here has to find a suitable location, set it up with appropriate interiors, etc. as per the guidelines of the Brand, recruit staff, and run the show himself, but within the guidelines of the Brand. In this situation, the investor or Franchisee pays the Brand a fixed percentage of the sale, in return he gets Brand Standards, and Marketing. Most good brands also regularly hold training for all of the franchisee’s employees, assisting them to embrace the Brand’s standards
An example of this in Hotels can be seen in OYO Rooms, who have recently started ‘self-operating’ some hotels under the banner OYO Townhouse, whilst the bulk of their hotels are under a ‘Franchise operated’ scheme, where they market the property via their App and e-portal, manage the reservations and charge a fixed percentage. Another ironic example is ITC Hotels, wherein the case of Fortune Hotels, they become the Franchisor, for their Luxury 5* Deluxe Hotels like Sheratons and Luxury Collection, they actually pay Royalty to Starwood Hotels (now owned by Marriott) for the use of Brand Name and Brand Standards, whilst operating the Hotels themselves. For restaurants, there are numerous examples like this in small waffle chains, ice cream, donuts, frozen yogurts, South Indian fast food, etc. brands. Even Baskin Robbins and Subway operate similarly, where the investment is made by the investor and the owner has to run the show with support from them. The better the brand, the better the support an investor will get.
Should You Go for It?
There is however one thing to note when an investor goes to a big company to get a Franchisee for a ‘Self-operated’ or ‘Brand operated’ outlet, where he will only have to pay once and the Brand will run the show for him, it involves a lot of purchase from that brand. For example, an investor cannot even buy an oven of his choice, he has to buy exactly what the Brand has told him, and more often than not, from the same vendor that the Brand has adopted in the past, even if the investor wants to buy a better oven or fridge or fryer, etc. Same for every single item purchased, right down to the furniture. This adds up on the expenses, and some brands even manufacture their machines/kitchen equipment, just for this purpose.
To sum it up, Franchising works for anyone who has the investment to own a brand store. To give you an idea, in a metro city like Kolkata, a Baskin Robbins 15ft*20ft store costs between Rs. 15-20 Lakhs, a Subway Franchise costs upwards of Rs. 60 Lakhs, KFC / Pizza Hut Rs. 1 – Rs. 1.25 cr. Hotels could cost between Rs. 10 cr to Rs. 1000 cr (yes one thousand) depending on size and location. The largest restaurant Franchise chain currently in the World is Subway with over 30,000 outlets worldwide, and KFC (Owned by Yumm Foods, which is further owned by PepsiCo) is not too far off, and the reason behind their phenomenal success is Franchising.
About the Author
Amit Tejpal has worked at 12 five star deluxe hotels of ITC Hotels and Oberoi Hotels & Resorts in India, and now owns Tejpal Hospitality, which conceptualizes and executes Hotel & Restaurant projects for clients .
Hotel and Restaurant Franchising in India
