Franchising Advantages and Disadvantages
The introduction of the Foreign Exchange Management Act, 1999 has made it easy for foreigners to invest in India and this has led to the rise of franchising in India. The concept of franchising was however first started in Germany and later spread to the United States of America, wherein it has become a part of the American culture. India is one of the top markets in the world today for goods and services and there is tremendous opportunities in franchising. In this article we look at the advantages and disadvantages of franchising in India.
Advantages of Franchising
Rapid expansion: Today scalability is important to quickly capture market share and establish market dominance. In traditional business models, the promoters would require large amounts of capital or bank loan to expand their business. However, in a franchise model, the franchisee provide the capital and the franchisor provide the brand and technical know-how to quickly expand with minimal capital requirement.
Local business knowledge: India is a diverse country having different cultures, languages and market. Therefore, most businesses do not have enough business, legal, or real estate knowledge and experience to invest across States and cities in India. However, in franchising, the franchisors have the ability to work with the franchisees to become aware of the knowledge about local market conditions.
Lower operating cost: In some franchising models, the franchisor would negotiate volume pricing and group buying on behalf of the franchisees. This will help lower the the operating cost of a franchisee business. Further, since the franchisee is aware of the local market conditions, the franchisor can save on doing expensive research on local markets, business procedures, etc.,
Branding: One of the primary responsibility of the franchisor is to use best efforts in advertising and promoting its brand name. Therefore, franchise business are typically better advertised and branded when compared to traditional business. Also, in the case of franchise business since advertising or branding cost is shared by all the franchisees, the overall cost of branding is lower in a franchise model.
Minimal risk for franchisee: Since the franchisor puts all the effort in promoting the brand, the franchisee is exposed to minimal risk. Further, in a franchise model since the business model is also proved, the business risk for a franchisee is minimized.
Easy access to capital: Since most franchise business models are well established and having a proven reputation, it is easer for the franchisee to obtain bank loan for starting a franchise business.
Training and technical know-how: In a franchising business, the franchisee is provided with training and technical know-how by the franchisor. Therefore, chances of costly mistakes due to lack of training on the part of the franchisee is prevented.
Disadvantages of Franchising
Independence of franchisee: In a franchise model, though the franchisee is a owner of a business, the franchisee cannot act independently. The franchisee’s are regulated by the franchisor and have to submit various reports to the franchisor.
Commitment or lock-in period: Typically franchisee’s are made to commit to the franchisor a lock-in period until which they would be mandatorily expected to operate the business irrespective of profits or loss. During the lock-in period, the franchisee will not be allowed to change the business model or change franchisor.
Negative publicity: In case the franchising business gets negative publicity due to the actions of the franchisor or another franchisee, the entire brand would suffer. This could lead to loss of sales or customers for a franchisee that was not involved in that act as well.
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