Leveraging a retail brand through franchise model

Squeezed Up Margins

Higher Real Estate Costs

In order to have better margins, a retailer can replace the inventory with the products of higher margins and try to earn a decent profit. This is just a short-term strategy and might not be helpful beyond a certain point. The other strategy would be to focus on generating more footfalls for his store and thus earn better margins on turnover. This again has its own limitation, as every store is serving the needs of a selected locality only. Hence, the long-term strategy for growth is to open multiple stores.

When we faced a similar situation we decided to start a new store in Vadodara. We were discouraged by the real estate costs and we had to shelve the idea of opening a branch of our store there.  But without implementing multiple store strategy, we knew that the survival of our business was bleak. It was during this time that a professor friend gave us an idea to look into the rural market and start a franchise. The idea looked really appealing and we seriously thought of pursuing it.

The rural market is a promising market as it comprises nearly 720 million people living in almost 627,000 villages, covering 128 million households (Source: National Council of Applied Economic Research (NCAER)). In other words, the rural population is thrice of its urban counterpart in India. Rural India accounts for 2/5th of the total consumption in India. Thus, the industry players have started looking towards the rural market and are devising strategies especially for the rural consumer.

However, entering into a rural market is not as easy as the urban market. We entered the rural market by tapping our social network of an enterprising community, mainly into Punjabi restaurant business in urban Gujarat, but having a rural base. They are better known as ‘Cheliya Muslims’ from the villages of North Gujarat. With the idea of starting our first franchise, we approached two aspiring rural entrepreneurs of this community at Ilol village, near Himmatnagar and eventually in 2007, our first franchise was launched.

This franchise model was innovative and it helped us in fighting the above-mentioned challenges. Some facts about the franchise model are shown here:

The franchise owner was a farmer himself and had enough space at his disposal. Thus the real estate cost was no more a deterrent here.

Secondly, since he was the native of the village where the franchise started, he got acceptance from the local people and he could create patrons for his store easily and a steady footfall was ensured.

Selling the merchandise on credit is a practice more prevalent in the rural market and this poses a big challenge to the retailer. In case of Hearty Mart model, this was curbed to an extent, as the franchise owner is a native of the village knew customers personally and he took the risk of credit on himself.

Rather than starting our own store, the franchise model worked much better at the rural level, as the villagers felt empowered to own and run a modern looking organised retail store in their own village set-up. And the consumers were happy to have found access to good quality products and brands at their village itself.

My experience of running the franchise network has given me valuable insights into its working. I am penning down the steps that go into franchisee network creation:

It is essential for an entrepreneur to be clear about his franchise model. Hearty Mart, since it is a multi-brand store, the franchise model isn’t only to supply products to the franchise store but to hand-hold the village franchisee and ensure its growth. Hence, we are a knowledge-driven ‘business process franchisee model’ unlike other fast-food/bakery franchisee model, which are purely on supplying raw materials and finished products to their store/restaurants to maintain standardisation. They are product based franchisee model.

Design a franchisee offer document which clearly defines the roles and responsibilities of the franchise and the franchisor. It should also give information on the offer and the value a franchise owner should expect if he enters into the business with the franchisor. It is essential to cover the dos and don’ts in this document, to avoid any kind of conflict, which might arise, if things aren’t mentioned clearly.

Inside a Hearty Mart supermarket in Gujarat.

A legal contract is again an essential document to safeguard Intellectual Property rights. The brand is owned by the franchisor, and he should ensure that it isn’t misused and its image isn’t hampered by the franchise. Hence, the legal contract, under the guidance of a legal consultant, needs to be drafted. It should include the financial implications – fees and royalty which a franchisor will charge to the franchise. In our case, we take a one-time fee and a recurring royalty on the annual sales of the franchise, till the contract lasts. Legal contract should mention the exit clause for both the parties – franchisor and franchise, in case either of them wants to exit the franchise contract amicably.

A robust support ecosystem is the backbone of any franchise business. In the case of the product based franchise network, the supply chain infrastructure helps the network grow. But in case of Hearty Mart, which is a knowledge-based business process franchise model, the supply chain wouldn’t have helped that much and hence we created a “Franchise Development Cell (FDC)’ – our franchisee knowledge partner, which helps our franchise network to grow and flourish. FDC works closely with our franchises and provides them with the insights, based on their sales, purchase and inventory data, about the product movements in the store and overall store performance. It guides them with effective strategies, to run their store in their villages successfully.

When we decided to enter into the franchise business, we kept our Juhapura store open for the prospective franchise owners to visit and have a feel. The prospective franchise owners get confidence if they see the store personally and this helps in closing the deal faster.

Once the documentation is properly done and the model franchise is ready, he can pitch the idea to his near and dear ones – family, friends, community people. They are the first market to approach and the best critic to get honest feedback. They can help refine the franchise model further. And if he gets early takers of his idea, he should make them work at his model franchisee store to have a real-world feel of the business and get trained, before they actually start their own store.  He should design an on-the-job training program for them so that they become well versed with various aspects of the organised retail trade practically.

A franchisor has the power of product or idea, while the franchise has the strength to market it. If they join hands and trust each other, a mutually beneficial long-term franchisor-franchisee relationship can be nurtured.