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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.
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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 judgement 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 too, 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.
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