India - Franchising India - Franchising
Demand for U.S. brands is strong in food & beverage, hospitality, retail, education, garments & apparel, healthcare, fitness and personal grooming clinics. India is also witnessing a consumption boom fueled by a huge demographic transformation. India’s middle class of 250 million has higher disposable incomes, changing lifestyles, mounting aspirations, appetite for Western goods, international exposure, and enhanced product choice and availability. The increased demand for goods in India is in turn generating a greater demand for U.S. franchises.
According to a KPMG and Franchise Association of India (FAI) report, the current estimated market size of the Indian franchise industry is $50.4 billion, an increase from $13.4 billion in 2012. Among the top prospects for U.S. franchisors are education, food, retail, and health, beauty & wellness services. Other industry sectors with potential include apparel, travel and tourism, and business/financial services.
The United States is a key player in India’s franchise boom. Indians demand products and services of good quality, which can be delivered by U.S. franchisees. Simultaneously, India is witnessing huge growth in entrepreneurial energy and talent. These new entrepreneurs are very receptive to American franchises. Several foreign companies with strong brands have established a presence in India through franchising. In the hospitality and food service industries, this has been the preferred method for starting operations in India.
Major U.S. restaurant brands that operate in India through franchisees include the following: Krispy Kreme, Dunkin’ Donuts, Wendy’s, Chili’s, Burger King, Johnny Rocket’s, Hard Rock Café, Cinnabon, Papa Johns, McDonalds, Kentucky Fried Chicken (KFC), Pizza Hut, Taco Bell, Domino’s Pizza, Subway, and Baskin Robbins. Hotels include Marriotts, Westin, Hyatt, and Radisson.
Challenges
Unlike the United States, India has no laws regulating franchising. When franchisors enter India, they are governed by many different national and regional statutes and codes rather than a single comprehensive set of regulations. Thus, each state or region needs to be evaluated. Key factors to consider in the Indian market include the following:
Regional Approach to Address Market Diversity
Companies prefer to appoint master licensees on a regional basis, as India is a large country with a diverse mix of populations and cultures.
Local Culture and Tastes
Understanding local culture and tastes and innovative strategies like “Indianization” of products is vital to a franchise success. For example, a large percentage of Indians is vegetarian. A classic example of successful “Indianization” is in the fast food sector. Several American companies such as McDonald’s, Pizza Hut and Domino’s have developed special India menus to cater to the Indian palate.
Expensive Real Estate
In the large Indian cities, retail space continues to be expensive and the quality is relatively poor. Antiquated rent control laws make finding a suitable and affordable location difficult.
Legal & Business Advice
U.S. Franchisors need a thorough understanding of the business laws related to franchising. In addition, hiring a good local tax consultant to provide guidance to avoid pitfalls is recommended. It is also vital to conduct thorough financial and legal due diligence on a prospective franchisee.
Negotiating Fees & Royalty Payments
U.S. franchisors should also be prepared to face stiff negotiations from prospective Indian franchisees toward the franchise fees/royalty payments, which they typically consider to be high.
Lack of Legal Framework
As previously stated India does not have any specific laws on franchising. Franchising is covered within the broad definition of transfer of technology. Thus, the legal framework for new franchisors interested in setting up master franchises in India exists in terms of brand protection and rules regarding payment of franchise fees.
Numerous U.S. franchisors have had success in India despite potential challenges such as high real estate prices, legal ambiguities, and regional differences in India. This is because most of them have adapted their products or services to local market preferences and have pursued effective market entry and expansion strategies.