Foreign Investment into India through Franchising
February 5, 2016; it was the date when Domino’s Pizza added its 1000th store in India, making India the only country outside of the U.S. with 1,000 Domino’s stores. Dunkin’ Donuts entered the Indian market with one store in April 2012; the company now operates 73 Dunkin’ Donuts restaurants through franchising across 23 cities in India. Last year, Anytime Fitness Gym unveiled plans to open 50 more outlets by the end of the year 2015. Each of these franchises is taking advantage of tremendous growth opportunities in India.
If we see the estimates, franchising is growing faster than any other sector of the Indian economy. The industry has grown from US$13.4 billion to approximately US$24 billion since 2012. In 2015, for the fifth year in a row, the Indian franchise industry saw more than 30 percent growth as compared to the previous year, with the addition of approximately 4,050 new brands. And franchises are expected to add 100,000 jobs in 2016.
As a business model, franchising is well suited to India’s business environment. India has no laws that specifically regulate business franchising. As a result, a franchise can be opened without concern for franchise regulations, registration, or accreditation. However, franchisors are governed by a number of different national and regional statutes and codes. To complicate matters, regulations often vary by region, and the lack of legal and regulatory recognition of franchises makes it difficult for them to obtain loans because most lenders do not treat franchisees as a separate customer segment.
In addition, India is not a one-size-fits-all market. Tremendous differences in culture, language, preferences, and tastes make it impossible to use just one business model for the entire country. Franchisors and their franchisees must therefore be highly innovative and flexible to succeed in the Indian market.
Despite all the potential challenges, numerous international franchisors have been extremely successful in India. The most successful have entered the Indian market prepared for difficulties and have adapted their products and services to local market preferences.
Dunkin’ Donuts, for instance, realized that its global model was not an option in India. The majority of U.S. sales happen between 6am to 8am when people stop for breakfast on their way to work. The concept of breakfast on the go does not exist in India. So instead, the company targeted the 50 percent of Indians who are under 35 years old with their slogan “Get your mojo back!”. Additionally, more than half of the Dunkin’ Donuts India menu has been altered to suit local tastes.
Industries with the best prospects for successful franchising in India include retail, food and beverages, education and training, health and beauty, and consumer services, but other industry sectors with potential also exist. Apparel franchises, travel and tourism, and business and financial services franchises have gained traction in recent years.
As is always the case with India, regulatory improvements would go far in improving both the ease of franchising and the economic gains from growth in the franchise sector. Some reforms, which are already underway, will affect franchising in positive ways. These include improvements to conflict resolution and bankruptcy proceedings and intellectual property protection. However, significant gains could be taken from specific federal franchising laws, pre-contract disclosure requirements, and controls on royalty payments and franchisee fees.
The Indian franchise industry offers excellent opportunities for new franchisors. Franchising is becoming a successful business model for foreign companies planning to enter the Indian market for the first time.