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 Prove Your Concept
10 Nov 2009
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DC Strategy executive director Rod Young is rated among the best five franchise experts in the world. He speaks to Alan D’Mello on the Indian food and beverage franchising sector.
Something seems to be amiss in the Indian F&B franchise sector. What do you think it is?
Franchise as a business is a strong model. I feel that Indian promoters are looking at their brands as 100% franchise, which is fundamentally flawed. Not all roads lead to franchise.
What is the point of a franchise brand?
Franchise is a means to an end, not the end in itself; the main aim of business is to build the empire for profit. Franchise is the best way to expand without the burden on heavy investment. We always recommend that some outlets be company owned and operated (Co-op). At the end of the day, the aim is not to maximise the franchise network but generate more profit (enterprise value), through the management of a franchise network.
Doesn’t that go against the basic principle of franchising being asset-light?
A good co-op store can generate five times more profit than a franchised one. All co-op profits belong to the company which strengthens the bottom-line. In franchise, you only get a royalty, which honestly is not much. Worldwide, McDonald’s owns or partners in 25% of its stores.
Co-op stores are very important for India where brands are still getting off the ground. A concept must not be franchised unless it is a proven success in multiple locations. It will be much easier to convince franchisees, and this can sustain the business when franchisees fail. Essentially, owners must understand why the business is profitable, as this is what franchisees buy into.
Can all formats be franchised?
It depends on the degree of difficulty. The lower the profitability per store, the greater the number of franchisees should be. It is a judgment of how much return you want on your capital. Low yield formats are better franchised because a franchisee can micro-manage these formats better on a day-to-day basis. The headache is too much for a company as it needs to focus on the macro picture. However, one should not be so blind as to say that every business can be franchised, and that to, a 100%.
What are your criteria for franchise?
This is very, very simple and just three criteria – the model must be proven and profitable; established and operating for a minimum of three years; and thirdly, must be operating in multiple locations as a co-op. This creates the proof of concept, an absolute compulsion in franchise. It is a system of turning product into cash, try and create a 100% premium over the cost of capital to justify the risk of investing in your format.
In your presentations, you often stress on the challenges of converting a business to franchise. Why?
An owner has three major barriers in this transition – creating a proven concept by moving from concept to reality; and the ability to reproduce that business, therefore demonstrating he has a business others can manage with some training. Finally, he must have the desire and the need to grow. People often say that F&B is one of the toughest businesses. In reality it is not more difficult than the others. The best companies are those which have hardened to competition, which is one of the essentials of franchise.
What is the normal gestation period for an F&B franchise?
There is no fixed rule. We have seen overnight success due to the latent demand, provide it is not a fad. This again calls back to the proof of concept.
There is a certain trend in India, that lends itself to large claims in short time frames. Does this have anything to do with the first mover advantage?
The first move advantage is important but not essential, especially in franchise. We have seen bigger brands create demand for smaller, niche players. The second rung can be profitable so long as it is not a ‘me-to’. Starbucks educated the US market on the espresso; now there are many niche coffee brands capitalizing on this.
Are multi-formats of the same concept viable?
We have found that the multi-format is not more profitable, because for all the work done, the returns are marginal or sometimes not better than the primary concept. The express format is essentially flawed because the fringe products needed for the star products to succeed are missing. Each format must be assessed for its own merits. The mall format is not too successful because it has lower footfalls than the food court. So do the math first.
What about multi-unit franchisees?
This is interesting, because multi-unit franchisees will soon emerge. When a brand has many multi-unit franchisees, the owner must ask himself why he does not have more co-op units. If a franchisee can see value in your business and reinvest many times, then a well managed co-op store should also succeed.
What about multiple brands by one company – we see that a lot here?
A large brand basket by an emerging company is not advisable because it drains precious resources. Many want to tap the entire spectrum, but all brands never get the same attention or have the same potential. The best ones ger the best resources – the laggards get the worst. It is an issue of husbanding management and assets. We do not recommend applying limited resources to an underperforming brand.
How can F&B companies attract venture capital (VC) funding?
To attract VC funding, you need to prove a growth rate of 40% on investment over a thee year period. Most VCs are out by the fifth year. You have to show a profitable business, which is scalable, and has good management. VC’s are not gamblers but investors who have a lot of options. You have to show yours is the best.
Can you name a one key challenge for Indian F&B?
It is IP protection – IP has a seminal value to success. India owners have not appreciated the value of the brand and have almost taken it for granted. You must be willing to protect it, which includes a show of force and putting in the contract.
What is your view of the future of Indian F&B?
In ten years, 80% of brands will be of Indian origin. Strong local concepts are the normal trend, just as in Brazil, which is fairly similar to India. The ratio of US to Brazilian brands is 1:9. KFC, Pizza Hut, and McDonald’s are normally the first signs of a maturing market, because these companies have perfected entering developing markets. India has to learn from the KFC’s of the world, that is, give the customers what they want.
Rod Young
Rod Young is Executive Director at DC Strategy.
DC Strategy is the region’s leading specialist consulting and legal firm. Our specialist teams in Strategy, Franchising, International and Legal have developed the networks and brands of many of the region’s most successful businesses. Contact Rod Young at rod.young@dcstrategy.com
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