Franchising in India:
The Legal Framework for Foreign Franchises in India
© Sahil Gupta, 20 January 2002, All Rights Reserved.

I N T R O D U C T I O N

What is Franchising?

Franchising in general means granting of certain rights by one party (the franchisor) to another (the franchisee) in return for a sum of money. The franchisee then exercises those rights under the guidance of the franchisor.

The above definition is a very general in its nature and encompasses many different forms of licensing arrangements. The business format of franchising, being the important one, can be defined as the contractual license granted by one person (the franchisor) to another (the franchisee) which:

• Permits or requires the franchisee to carry on a particular business using the franchisor’s know-how under the franchisor’s brand as an independent business;

• Allows the franchisor to exercise continuing control over the manner in which the franchisee carries on the franchised business;

• Obliges the franchisor to provide the franchisee with ongoing support in carrying on the franchised business.

As a commercial matter, the agreement inevitably requires the franchisee periodically during the period of the franchise to pay to the franchisor sums of money in consideration for the franchise and / or goods and / or services provided by the franchisor to the franchisee.

The International Franchise Association (IFA) defines franchising as a “continuing relationship in which the franchisor provides licensed privilege to do business, plus assistance in organizing, training, merchandising and management in return for a consideration from the franchisee”.

Who is a Franchisor?

He is the owner of the franchised system.  It owns the know-how of the concept and the brand name. It grants franchises to third parties.

Who is the Franchisee?

He is the one who has been granted the right by the franchisor to carry on the business using the franchisor’s know-how and the brand name. Now, depending on the rights granted, franchisee’s can be classified into:

1.      Unit Franchisee – this is the simplest and most common form of franchising. This franchisee is granted the right to operate one unit or outlet of the franchised business.

2.      Master Franchisee – He is generally granted the right to a substantial territory. It will then grant unit franchises to unit franchisees throughout the territory. The Master Franchisee needs to have sufficient drive and resource to fully exploit the territory and control the unit franchisees territory.

3.      Regional Franchisee – Ina geographically large area a franchisor, or a Master Franchisee may decide that it is commercially appropriate to further divide the territory up with separate regions and grant a Master Franchise for each separate region. These franchises are known as regional franchises or sometimes area franchises.

4.      Multiple Franchises – Some unit franchisees operate not just one unit, but several. These are referred to as multiple franchises and usually have a large number of individual unit franchise arrangements – one for each unit.

5.      Developers – Large Corporations sometimes prefer to exploit their territory by opening outlets themselves. These are known as developers. They have a single developer agreement, which allows them to open many units. These are pilot operations so that they become fully familiar with the business at an operational level and can localize it so as to improve its chances of success.

What is Franchise fee?

A fee paid by franchisee to a franchiser. US standard accounting practice requires that franchise fee revenue should be recognized when all material service or conditions relating to the sale have been substantially performed or satisfied by the franchiser.

Basic Elements of Franchising –

Thus, we can sum up the basic elements of franchising as under:

1.      An entrepreneur (franchisor) has developed a system of doing business, which works and decides to grant to another entrepreneur (franchisee) the right to use the system.

2.      The two entrepreneurs are legally and financially independent enterprises.

3.      The granting of the right to use the franchise system involves the right of the franchisee to use the franchisor’s intellectual and industrial property, know-how, business and technical methods, procedural system and other intellectual property rights.

4.      The franchisee in exchange undertakes to follow the methods elaborated by the franchisor and to pay an entrance fee and / or royalties.

5.      The franchisor retains the right of control over the performance of the franchise.

6.      The franchisor undertakes to provide the franchisee with training and on-going assistance.

Some general Issues on franchising

Why is franchising growing?

Franchising is one of the world’s fastest growing and most lucrative industries. Franchise businesses will be turning over an estimated $ 1 trillion (which is roughly equal to ten times the size of India’s current GDP).

Franchising permits businesses to grow more rapidly than any other method. By increasing the efficiency by which goods and services are distributed, it brings impressive gains to any economy. On a cultural level, franchising is one of the few developments that generate employment, earnings and entrepreneurship at the same time. It disseminates ownership rights and decision-making power to thousands of small-unit operators. For developing countries, or countries shifting to a market economy, franchising has the effect of creating relationships between one economy and another. It promotes sharing of technologies, trademarks, marketing, intellectual property and even architectural designs.

Franchising is a particularly good developmental tool in any part of the world where financial resources are short and the need to simulate individual initiative is acute. There are no tariff barriers to be dealt with. It puts little strain on the receiving country’s balance of payments. Thus, not surprisingly, awareness of the benefits of this business formula is growing at an international level.

How is franchising relevant to India?

Franchising affords India an opportunity to build its commercial infrastructure and develop its domestically oriented businesses in an efficient, profitable and pan-national manner. It also offers India the opportunity to import and develop foreign concepts in a way, which ensures that the equity of the business remains in India, so avoiding the politically undesirable situation whereby successful domestic businesses are owned by foreign corporations.

The key attractions of franchising in India are as follows:

1.      Lower Capital Requirements – Franchising is an excellent way for both Indian and foreign corporations to expand their businesses and make their brand names known in India without having to risk large sums of money by way of direct investment. The franchisees finance the expansion of the business in India. In return they have the opportunity to make substantial income and capital profits.

2.      Geographical extent of the country – Franchising can enable a company to take advantage of the vast Indian market of over 1000 million people and growing at a rate of 1.9% p.a. There is an ever-growing demand of goods and services such as fast food and beverages, clothing, electronic goods, computer hardware and software and professional services. The infrastructure is poor, however, and operating a corporately owned distribution system that fully exploits the geographical expanse of the country is extremely difficult and inefficient. Empowering participants in the distribution system by granting them an equity interest in it (i.e. by granting a franchise) can substantially improve the efficiency in the distribution system.

3.      Cultural Empathy – Franchising well suits the entrepreneurial side of Indian culture. Indian business people are fiercely proprietary and feel a need to have ownership and control over their business operations which they can pass on to future generations. However, at the same time they are keen to benefit from the goodwill and technology that can be provided by the foreign franchisor. Franchising allows them to reconcile these conflicting ambitions.

4.      Harnessing local market knowledge – Indian master franchisees offer the foreign franchisors direct access to substantial market knowledge and a considered and sophisticated approach to its exploitation. A company needs a great deal of knowledge of the different regional markets in India. What holds good for Punjab may not be relevant for Kerela. Franchising provides a sure and easy way of accessing the right level of relevant local market knowledge.

The four ‘R’s of Franchising?

American corporate history is replete with instances of franchising’s outstanding success and also many failures. Learning from them, franchising can succeed if the franchisee has a right combination of the four R’s prescribed. These are:

1.      Realism – The franchisee should be very realistic in assessment of his business strengths and weaknesses. Certain key areas where realism is a must while deciding to go into franchising includes questions like are you prepared for the financial insecurity, are you capable of developing a frame of mind when you can smile and be cordial even when the customer is totally wrong.  More important is the need for realism in evaluating the products and services offered by the franchisor.

2.      Resources – Many franchisees, during the early periods of their business when resources constraints are common, tend to sometimes overlook sending in the royalty cheques to the franchisor. Franchisors keep feeling and rightly so that their royalty is as much a key business expenditure of the franchisee as payment for purchases or payroll is and any delay in handling this area would lead to unfortunate consequences of a long term nature. Therefore, while planning resources on a periodic basis, consider the payments that are to be made to franchisor. Another area where most franchisees have problems is to manage their resources while living within the franchising system. The franchising agreement, in most cases, clearly indicates systems, procedures and methods of managing the resources. The franchisee will do well to either be mentally prepared to accept the resource management terms of the franchisor or make it clear at the beginning that he needs the requisite leeway to manage his own resources.

3.      Research – Research on the franchisor is a must for the success. Various published sources also provide fairly detailed information on most of the franchises that are on offer but to what extent that will suffice for the Indian conditions needs serious examination. Whatever be the methodology, the prospective franchisee will do well to build a comprehensive information on the franchisor, the products or service of offer, competing and substitute products and services before he makes any move committing his financial resources on a long term basis.

4.      Resolve – Resolve to be part of the franchising system. The problem starts when a person gets into franchising only because he has an entrepreneurial instinct but the instant he becomes a franchisee, the true entrepreneur in him starts resenting the shackles that are imposed by the franchising system. The options are clear – either stay within the system and fully learn the nuances of the business and prosper or try one’s fledging entrepreneurial talent and get into trouble.

Franchising in India so far?

Franchising in India is at its early stage and neither business people nor the courts have had much exposure to it. Soft drinks and hotel franchises arrived in India in the 1960’s, but in the 1970’s and 1980’s, the government expelled foreign brands from India.

Some international franchises have recently come back to India and are doing well. Hotel business like Best Western Group and the Quality Inn Group have established themselves. Also, Walt Disney has been successful in having its label in all sorts of goods for children, whether they are clothing, toys, and school equipments. Fast food chains like McDonalds, Slice of Italy, Dominos, Taco Bell have also come in. Pepsi and Coke have re-captured the soft drinks market.

A lot of local franchises have also become established. Examples are:

Nilgiris – food retailing chain in the south and currently has 10 franchised stores.

Pizza Corner – Chain of dine-in restaurants and delivery outlets. Plans to open another 100 franchised outlets over the next 5 years.

Aptech – computer-training business which has some 950 franchised centers.

Blue Dart- a courier company with some 840 franchised outlets throughout India.

In India, we have an association set up which deals with the various issues emanating form the concept of Franchising. In the following page, we have an excerpt from the interview of the President of the association.

Advantages & Disadvantages of Franchising for Indian Businesses?

Advantages to the Franchisee: -

He is the proprietor of its own business and owns the tangible assets of the franchised outlet.

He gains from the franchisor the entire business concept with full training, assistance in every aspect of setting up and running the business, and access to necessary materials and supplies.

Franchisee’s have access to regional and national promotions / advertising campaigns.

He gets an access to global standards and international technology in products and services, without loss of control.

Disadvantages to the Franchisee: -

He is not an independent entrepreneur. He has to follow the franchisor’s instructions.

The lower risk is offset by the lower reward for the success.

Advantages to the Franchisor: -

Franchising allows him to increase its number of outlets with minimum capital outlay and so accelerate the network’s growth and probably it’s profitably.

Self-employed franchisees are generally more motivated than salaried managers and are more likely to give better results for less expenditure of capital on behalf of the franchisor.

Franchising provides him an opportunity to have access to international market.

Franchising gives him an assured earnings stream to fund continuous R & D investment.

Disadvantages to the Franchisor: -

It has to control and co-ordinate a network of semi-independent entrepreneurs to ensure favorable image of the franchise.

The franchisor-franchisee relationship is based on trust.

MODES OF FRANCHISING

The following are basically 5 types of international franchising mediums: -

Direct Franchising – Under this system, the franchisor grants franchises to individual franchisees in the foreign country through the execution of an international contract. The main problems associated with this type of franchising is the difficulty of franchisors to control the performance of the franchisees as these are located in another country, the assistance to be provided to the franchisee during the operation of the contract. The question of intellectual and industrial property rights in the foreign country also needs to be considered. Taxation is another issue which receives due consideration. Furthermore, how the franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on taxation. A very important question is clearly that of the choice of law and jurisdiction. There is a tendency for franchisors to want their own domestic law to apply to the agreement, even if the franchise is exploited in another country. Another vital point to be kept in mind is the law relating to transfer of technology that may be applicable.

Keeping the above problems in mind, it is observed that direct franchising is not used extensively internationally.

Subsidiary or Branch Office – Franchising through a subsidiary or a branch office are two methods which are often treated together, although there are differences which derive from the fact that a subsidiary, albeit controlled by the franchisor, is a separate legal entity whereas a branch office is not. Whatever be the difference, an advantage of this approach is that the franchisor is present in the foreign country as a corporate body. The contract will in this case be a domestic contract and thus subject to local legislation.

The problems associated with this type are similar to direct franchising. In addition, the franchisor will be required to send his personnel to the foreign country for the start up operations thus involving work permit and residence formalities.

Area Development Agreements – Such agreements traditionally involved an arrangement whereby the developer is given the right to open a multiple number of outlets to a predetermined schedule and within a given area. These arrangements in the past have been used mostly in domestic franchising, but are now being used increasingly in international franchising.

Items that are to be considered here include the number and density of the outlets to be opened, detailed development schedule and the consequence of non-complying of the schedule. In such arrangements, the developer will need to have substantial financial resources so as to be able to open the required number of outlets.

Master Franchise Agreements – In the international scenario, this is widely used. In respect to such agreements, the franchisor grants a person in another country, the sub-franchisor, the exclusive right within a certain territory to open franchise outlets itself and/or to grant franchises to sub-franchisees.

In this case, there are two agreements involved: an international agreement between the franchisor and the sub-franchisor (the master franchise agreement) and a national franchise agreement between the sub-franchisor and each of the sub-franchisees (the sub-franchise agreement). The franchisor transmits all its rights and duties to the sub-franchisor, who will be in charge of the enforcement of the sub-franchise agreement and of the general development and working of the network in that country. All the franchisor will be able to do is to sue the sub-franchisor in case of breach of obligation to enforce the sub-franchise agreement as laid down in the master franchise agreement.

The advantages of this system are that the sub-franchisor is familiar with the local habits, tastes, culture and laws of its country and that it will know ways about the local bureaucracy for necessary permits as and when necessary. The disadvantages include that the financial returns of the franchisor will be reduced by the amount due to the sub-franchisor and also that the franchisor will have to rely on the sub-franchisor for the performance of the franchise system.

Joint Ventures – In the case of joint ventures, the franchisor and a local partner create a joint venture. This venture then enters into a master franchise agreement with the franchisor, and proceeds to open franchise outlets and to grant sub-franchises just as a normal sub-franchisor would do.

An arrangement such as this will have to consider legislation on joint ventures in addition to all the other legalities that are involved. Problems may also arise with the fact that the double link may create conflicts of interest for the franchisor. The advantages accruing from this arrangement may include that it could be a way to solve the problem of financing franchise operations in countries where financial means are scarce.

Miscellaneous forms – There is no limit to the refinement that can be made to the above forms of franchising to accommodate the differing demands of potential franchisor and / or franchisee. New forms of franchising, or combinations of different forms of franchising, appear at regular intervals. Examples of these are stated as follows:

Multi-unit Franchising

Affiliation or conversion Franchising

Franchise within a Franchise

Subordinated Equity Arrangements

Management Agreement

Franchise Buy-ins

LEGAL ASPECTS INVOLVED IN FRANCHISING

Some Basic Legal Issues?

Franchising has been specifically regulated in only a very few countries. In part, this is due to the complexity of the relationship and due to the great number of areas of law that a franchising relationship involves. Some of these laws are dealt with hereunder: -

Competition Law or Anti-trust Themes

The resources in the market place would best be allocated by free competition; it is believed that goods and services are provided at the lowest possible price by the rule of open market forces. Any conduct, which unreasonably restricts those market forces, must therefore be eliminated. Terms such as ‘prevention, restriction or distortion of competition’, ‘hinder normal functioning of the market’, ‘distortion of normal play of competition’ are found in most competition regimes. When considering the expansion of their businesses through franchising, entrepreneurs should review their business practices and be mindful of their conduct in five main areas. These are-

Horizontal restrictive agreements

Excusive dealings

Tied sales

Territory or customer restrictions

Resale price maintenance

Indian Competition Law – In India laws to prevent monopolistic, restrictive and unfair trade practices that distort free competition in the market are found in Part A of MRTP Act, 1969. Also, the remedies available to the individual consumers for loss and injury suffered as a result of defective and sub-standard goods and deception are found in the Consumer Protection Act, 1986 and Part B of MRTP Act, 1969. The first part of MRTP Act, 1969 is mainly directed against the franchisors, whereas Consumer Protection Act and Part B of MRTP Act are directed mainly at those Master Franchisees and franchisees who produce the goods which the Indian Consumer Purchases.

Consumer Protection

It is anticipated that consumer protection laws could have a substantial impact on the development of franchising in India. As discussed earlier, one of the great strengths of franchising is that although the franchise network is comprised of independent entrepreneurs each having entered into a franchise agreement, they all present a common face to the public who should not be able to distinguish between corporate or franchised outlets. The franchisee uses the franchisor’s brand name or goodwill, in relation to the goods he sells or services he offers to the public, thereby representing that the goods or services are of the same quality or standard as that of the franchisor.          If the consumer finds that it has paid a high price and chosen the particular brand of goods or a particular agency due to its international reputation, but does not receive the same quality of goods and services, then it must have a remedy. Also when the product of the franchise causes injury to the persons who are the consumer of the products or causes damage to the property of the consumer, then who should be held responsible?

Consumer Protection Law in India

Consumer Protection Act 1986 is the most relevant to the common man who is the consumer of the franchised product. This Act covers a wide range of persons who may be liable including manufacturers, assemblers, distributors, wholesalers, retailers and packers. It may extend to installers, erectors and repairers of goods. Therefore, the franchisor or franchisee of goods can fall into this category quite easily. An action in tort may be also maintained if the relationship between the consumer and the franchisor / franchisee can be direct and proximate to create a duty of care towards the consumer.  At present there is no provision for disputes arising specifically out of franchising in relation to consumer protection, however the general law and statutes present can provide some relief to the consumer, until such time as specific legislation in relation to franchising are enacted. A draft model law framed by UNIDROIT has come into existence.

Intellectual Property Law

The protection of Intellectual Property Rights is of paramount importance to any international or domestic franchisor that is franchising into a new territory; since its goods can be copied and marketed by others or its brand name can be misused resulting in its goodwill being diluted. Further the know-how being transferred by the franchisor to the franchisee in relation to the product or services needs protection. In India, the Intellectual Property Laws have been in existence for long, but its implementation has been developing only in the recent years with considerable interaction with foreign businesses in relation to collaborations, technology transfers and trade.

Indian Law on Intellectual Property rights

There are various remedies available in India both under Statute and Common Law in relation to trademark, design and copyright, which are particularly effective against infringement and trafficking in trademarks. The Trademarks Act, 1999, which came into force subsequent to the amendment of Trademarks and Merchandise Act, 1958, was enacted to provide for the registration and better protection of trademarks and for the prevention of the use of fraudulent marks on merchandise. One of the ways for a franchisor to protect a trademark in India is by registration. The Designs Act 1911 is aimed at protecting the proprietors of novel or original designs and for enforcing those rights against infringers. It helps the franchisor to protect his exact design and maintenance of his goodwill, which is the whole basis of the existence of the franchise system. The issue of copyright arises in franchise when a franchisor wishes to protect his franchising manual, which contains the entire technique of running the franchise business from being used improperly by another. Furthermore, the franchisor may have videos on how to use the product and for advertisements that need to be protected from being pirated. Keeping such questions in mind, Copyrights Act, 1957 has been enacted and gives protection to the franchisor against the above apprehensions.

Labour Laws relating to Franchising

Labour laws are very important in International and domestic franchises especially in relation to the various outlet, shops and offices in which persons are employed. No franchising contract can derogate from the applicability of the labour laws. The labour laws govern the day-to-day conditions of employment and are particularly relevant in the franchising context when an outlet is shut down or the business is sold, in relation to the amount of compensation payable by the master franchisee, franchisor or franchisee.

Labour Laws in India

India has numerous labour laws which any foreign or domestic franchisor must be well aware of before doing business, and to mention a few: -

Apprentices Act, 1961

Contract Labour (Regulation & Abolition) Act, 1970

Employees Provident Funds and Miscellaneous Provisions Act, 1952

Employees State Insurance Act, 1948

Equal Remuneration Act, 1976

Factories Act, 1948

Industrial Disputes Act, 1947

Minimum Wages Act, 1948

Payment of Bonus Act, 1965

Workmen’s Compensation Act, 1923

Payment of Gratuity Act, 1972

Payment of Wages Act, 1936.

Insolvency Laws

Although the general picture of franchising is one of success, there have been cases of insolvency among the franchisees and franchisors. Insolvency becomes an issue if either the franchisor or one of the franchisees becomes unable to pay its debts as and when they fall due. Clearly, the risk of insolvency for both franchisor and franchisee in India will be greatly increased if the franchise concept is a foreign one and it has not been properly adopted for the Indian market.

Insolvency Law in India

The laws that are relevant in India in relation to insolvency are found in the Companies Act, 1956 and the Provincial Insolvency Act, 1920.

Documentation Involved?

Let us list hereunder some of the documents that are involved while franchising a business: -

The Manual – It is the embodiment of the know-how of the franchise. It is therefore of paramount operational importance. It is very dynamic in nature and continuously undergoes amendments as the business develops. Let us list here the various contents of a manual:

Shop layout

Staff schedules

Staff uniforms / appearances / etiquettes

Staffing requirements of outlets

Contracts of employment

Training requirements

Pricing policies

Accounting procedures

Advertising and Marketing practices

Technical information about equipments.

Uniform Franchising Offer Circular (UFOC) – The UFOC is based on the American system of disclosure and franchisee protection. UFOC, like a prospectus, is mandatorily to be given by every person offering to sell a franchise and should contain information on the following aspects:

Information about the franchisor, his affiliates and their related businesses

Complete professional experience of each of the officers, directors and other managerial personnel of the franchisor

Clear description, including the nature, extent of involvement, liability etc.

Full details of the up-front fee payable on the franchise and fee payable on the conclusion of the agreement together with on-going payment schedule.

Assistance provided – technically and financially

Restrictions to be imposed, if any in relation to sale of goods or services.

Details of the training to be provided

Quantitative data on the number of franchises in operation together with complete list of names and addresses of all franchisees.

Complete and unambiguous disclosure on restriction imposed in relation to protected territories, if any.

Terms of termination of the contract

Dispute settlement mechanism.

As India enters the era of franchising, first as a nation having large number of franchisees before it could perhaps graduate into being a nation of franchisors, the need for clear laws and implementable guidelines to regulate this form of business is essential.

Franchising Agreement – A draft agreement between a franchisor and a franchisee is given herein below: -

THIS AGREEMENT is made _____ day of _____ between _________ having its registered office at __________ (hereinafter called “the franchisor”)

of the first part and _________ having its office at ___________ (hereinafter called “the franchisee”)

of the second part.

WHEREAS:

The franchisor has spent time, money and effort in developing knowledge of and expertise (“the know-how”) in _________ (hereinafter called “the services”)

The franchisor wishes to expand the provisions of services and is willing to grant to the franchisee the rights set out herein.

The franchisee desires the right during the continuance of this agreement to provide the services from the premises specified in schedule 1 hereto as directed in the operation manual (“the manual”)

NOW IT IS AGREED AS FOLOWS:

Rights Granted –

The franchisor grants to the franchisee the right to carry on the business in accordance with this Agreement from the premises, to utilize the Know-How and to use the Marks.

Term –

Subject as herein appears this agreement shall be for a period of _____ years, commencing from the _________ day of ______.

Franchisor’s Obligations-

The franchisor shall:

Assist the franchisee to establish and efficiently operate the business.

Train the franchisee and his staff in the correct operation of the business

Give the franchisee such reasonable continuing assistance and advise as the franchisor considers necessary.

            4.         Franchisee’s Obligations-

The franchisor authorizes the franchisee to use the Mark solely for the purpose of promoting the business

The franchisee undertakes not to do anything to prejudice or damage the goodwill in the Marks or the reputation of the franchisor

The franchisee agrees in order to protect the franchisor’s intellectual property rights and maintain the common identity and reputation of the network to comply with the quality specifications laid down for the equipment.

The franchisee agrees to carry on the business under the Marks and no other name.

The franchisee undertakes to use his best endeavors and the highest standards in all matters connected with the business diligently and in a manner to the reasonable satisfaction of the franchisor.

The franchisee agrees to insure with a major reputable insurance company in an adequate sum against all normal and reasonably foreseeable risks relating to the conduct of the business including product liability.

The franchisee undertakes to indicate on all correspondence and notice board outside the premises the fact that it is an independent franchisee of the franchisor and is in no other way connected with it.

To indemnify and keep indemnified the franchisor from and against all damage or liability suffered by it as a result of the franchisee’s acts or omissions.

            5.         Financial Obligation -

The franchisee shall pay to the franchisor immediately upon signing this agreement a franchise fee to the tune of Rs. _______. Further, a monthly sum of service management fee equivalent to 5% of the previous month’s turnover will be paid.

            6.         Promotion and Advertising -

The franchisee shall upon receiving written notice from the franchisor pay on a monthly basis, a sum equivalent to 2 % of the previous months gross turnover into the franchisor’s Promotion and Advertising Fund. Such fund shall be used solely for the national and regional advertising of the services.

            7.         Franchisee’s Accounts and Audit-

The franchisee shall maintain proper books of accounts relating to the business and shall supply the same to the franchisor within 30 days after the end of each financial year with an audited certificate.

The franchisor or its auditor shall be entitled to inspect and audit the books of accounts and all supporting documentation of the franchisee relating to the franchised business.

8.         The Sale of the Business - 

                        The franchisee may not assign or delegate his franchise or any other right or obligation under this agreement, but may sell his business with the prior written consent of the franchisor.

            9.         Termination-

                        The franchisor may terminate this agreement by a notice in writing to the franchisee if it has committed any material breach of his obligations specified under this agreement or if any sum required to be paid under the terms has not been paid at the latest within 21 days following its due date.

            10.       Force Majeure -

This agreement shall be suspended during the period and to the extent of such period that the franchisor reasonably believes any party to this agreement is prevented or hindered from complying with its obligations under any part of it, by any cause beyond its reasonable control including but not restricted to strikes, war, civil disorder and natural disasters.

            11.       Arbitration -

In the event a dispute or deadlock arises in connection with the validity, interpretation, implementation or breach of this Agreement the Parties shall attempt, in the first instance to resolve such dispute through negotiations within thirty (30) days or within such longer period as may be agreed to between the Parties in writing. In the event that the dispute is not resolved through negotiations, or such negotiations do not begin within the reasonable time period set out in the notice calling for the same, either Party may refer the dispute to Arbitration, with each Party nominating one Arbitrator, and the two Arbitrators so appointed shall nominate a third Arbitrator to constitute a three (3) member arbitral tribunal. The Arbitration proceedings shall be conducted in accordance with the Rules on Arbitration framed by the International Chambers of Commerce.

                  12.     Miscellaneous -     

•Language: This contract, and all data and documentation, reports and other written materials, and all communications between the parties pursuant to performances of this contract, shall be in the English Language.

•Amendments: No modification, amendment or waiver of the terms and conditions of this Agreement, shall be valid or binding, unless made in writing and duly executed by both the Parties.

•Headings: The headings used in this Agreement are for convenience only and are not to be used in construction or interpretation.

                        Signed for and on behalf of

                        __________________________ Ltd. By

                        _______________________, Director.

                        ________________________, Director.

                        Witnessed by:

                        _________________________.

                        Place:   __________________

                        Date:    __________________.

Procedure for Approval of Foreign Franchises in India?

The approval procedure is complex and bureaucratic. The application has to be made to Secretariat for Industrial Assistance, Department of Industrial Development in form FC (SIA) along with 10 extra copies. No fees need to be paid with the application for technical collaborations.

On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration number. The application is then sent to the Foreign Collaboration section 1 in SIA, which sends the document to various departments such as the technical advisory section, department of economic affairs and the concerned administrative ministry for scrutinizing. Their comments along with the papers are then put before the Project Approval Board (PAB). The Board takes into account the need for foreign know-how, technology transfer and the terms of the franchising agreement.

Those proposals involving only financial collaboration or a combination of financial and technological collaboration are sent to the Foreign Investment Promotion Board (FIPB). If the investment in the project is up to 600 crore rupees, the application is sent for final decision to the Empowered Committee headed by the Finance Minister. In respect to projects requiring more than 600 crore rupees, the application is sent to the cabinet committee for final approval. The Section 2 of SIA issues the final approval within a period of approximately 45 days from the submission of the application form.

The approval by the government may vary the terms of franchise including the mode of payment of royalty / lump sum payment to the franchisor. If the terms are not favorable to the franchising business, representation against the same can be made to the administrative ministry concerned. A copy of the representation made by the applicant should also be sent for information to the Foreign Collaboration Section 2 of SIA.

We thus see the bureaucratic bottlenecks involved in obtaining the permission to set up foreign franchises in India. This deters investment.

Draft Model Law on Franchising made by UNIDROIT? 

The following is the text of the draft model franchising disclosure law as revised by the study group at its fourth session, 9-19 December 1999.

Article 1

This law applies to franchises granted for the operation of one or more franchised businesses (within the national territory of the state adopting this law)

Article 2

This article covers definitions relating to affiliate of the franchisor, development agreement, disclosure document, franchise, master franchise, and sub-franchise agreement.

Article 3

No disclosure is required:

In case of the grant of a franchise to a person who has been an officer or director of the franchisor for at least 6months immediately before signing the franchise agreement.

In case of the assignment or other transfer of a franchisee’s rights and obligations under an existing franchise agreement, where the assignee or transferee is bound by the same terms as the assignor or transferor.

In case of the renewal or extension of a franchise on the same conditions.

If the transaction is pursuant to an offer directed by the franchisor to only one person or entity for the entire jurisdiction.

Article 4

Disclosure must be in writing. The format of the disclosure document is as per the discretion of the franchisor, provided it contains all information imposed by this law.

Article 5

A franchisor must give every prospective franchisee a disclosure document, to which the proposed franchise agreement must be attached at least 14 days prior to either the signing of the agreement by the prospective franchisee or the payment by the prospective franchisee of any fees relating to the franchise.

Article 6

The franchisor shall provide the following information in the disclosure document:

The legal name and address of the franchisor

The address of the principal place of business of the franchisor

The description of the business experience of the franchisor

Complete professional experience of each of the officers, directors and other managerial personnel of the franchisor

Relevant details of any criminal or civil liability for the previous 5 years

The total number of franchisees in the network

Information regarding the franchisor’s intellectual property rights.

The following information shall also be included in the disclosure document. However, where it is contained in the agreement, the franchisor may make a reference of it.

A description of the franchise to be operated by the franchisee

Terms and conditions of renewal of the franchise

A description of the training facility

Conditions for termination.

Where the franchise is a master franchise, the sub franchisor must in addition to above items, disclose to the prospective sub-franchisee the information that it has received under the above points as well as the situation of the sub-franchise agreements in case of the termination of the master franchise agreement.

Article 7

The franchisor may require the prospective franchisee to sign a statement acknowledging the confidentiality of the information relating to the franchise.

Article 8

As a condition for it’s signing the franchise agreement, the franchisor may require the prospective franchisee to acknowledge in writing the receipt of the disclosure document.

Article 9

The disclosure document must be written in a clear and comprehensible manner in the official language of the principal place of business of the prospective franchisee or in the mother-tongue of the franchisee.

Article 10

If the disclosure document is not delivered at all or is not delivered within the period of time established in article 5, the franchisee is entitled to terminate the franchise agreement

If the disclosure document contains a misrepresentation or if there is an omission of a material fact required to be disclosed under article 6, the franchisee is entitled to terminate the franchise agreement.

The above is a model law yet to be passed. Countries, like India, which do not have any specific legislation, could take the above as its basis of franchising law governing their territory.

Financial And Taxation Aspect of Franchising

Valuation – what is the franchise worth?

A franchise is like any other asset. Ultimately, its value is what people are willing to pay for it. However, when considering the commercial viability of licensing as compared to some other form of exploitation, it is important to try and scientifically arrive at a reasonable valuation. It is only when the franchisor and the franchisee have taken a view as to the value of the franchise that negotiation can take place and ultimately a franchise granted. When entering into a master franchise / development agreement, the franchisor undertakes a number of commitments, which cost money and thus forms the basis of valuation. These include:

Training

Technical and / or marketing support.

Making improvements available

Use of trademarks

Supplying goods.

Service fees, royalties and other sums paid in return for the franchise represent a return on the valuable asset. Now the question arises as to ‘How do we calculate the return?’ Some of the possible ways to calculate the amount is discussed hereunder:

Net Cash Flow – It takes into account costs of doing business as well as additional capital investment needed to sustain the cash flow. The net cash flow represents the economic benefits derived from the ownership of the franchise. These are determined by management actions together with factors like:

Economic Climate – the value of a franchise is directly associated with the general trends in the economic situation.

Profitability – this aggregates the cost element, such as wages, procurement of raw materials, conversion of raw materials, sales and overheads.

Competition – The strategies of competitors can limit the amount and duration of future cash flows and must therefore be taken into account.

Capital Requirement – This can reduce the amount of future net cash flows that are derived from the franchise.

Actual and potential value – A franchise need not have immediate economic benefits for it to be valuable. Indeed, established brands may often need further developments before they have actual value in a foreign territory. This approach takes into account the following factors:

Discount Rate – Inflation can diminish a purchasing power of future economic benefits. Liquidity represents the difficulty with which an investment can quickly be converted into cash.

Real Interest – This represents the component of return from investment with sacrificing alternative use of the invested funds.

Risk Premium – This is the ended amount of return that investors demand for the assumption of risk.

Discounted Cash Flow Method – This method determines the present value of projected cash flows associated with the franchise. The present value is the value in today’s money of the expected cash flows generated by the asset being valued. Cash flows are adjusted for the time value of money and the risk of their eventual realization.

Cost Method – This approach focuses upon the cost of creating an economically equivalent substitute, i.e. replacement value. It is interesting to note that in determining the value of a franchise, the cost of the original development is rarely discussed. The reason for this seems to be that they do not fit into the equation suggested. They are seen as necessary but irrelevant as regards calculating the value. Millions of rupees might be spent upon R & D, but if the final franchise does not work, it will have no value.

Comparable Value Method – Market value can be transaction based or security price based. In order to make progress with this approach, it is important to identify a business, which is truly comparable in an economic sense, and secondly once such a comparable business has been identified, obtaining the relevant information – much of which will be confidential and therefore inaccessible- will be the task at hand.

Taxation Aspect?

Taxation is another issue which receives due consideration. It is important to know the local sales tax, property tax, and withholding tax applicable in a certain area. Furthermore, how the franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on taxation.

The situations and types of taxes that apply to franchising in India are described below: -

Where the franchisor receives royalties service or franchise fees, tax has to be paid under the Income Tax act, 1961 as income ‘arising’ and ‘accruing in India’, whether the franchisor is an Indian or foreign party.

If the franchise is wholly based in India, then the franchisor and franchisee as separate companies or partnerships will be subject to the taxes applicable to all Indian Companies incorporated under the Companies Act, 1956.

In a case where the franchisor is a foreign party and the franchisee is Indian, and the franchisor sends technicians and supervisors to India, the salaries payable to these persons would be subject to personal income tax, whether an arrangement is made to deduct the tax at source or they are taxed as self employed persons if they come as consultants.

If the franchise agreement provides that the franchisee shall export or sell to the franchisor some of the goods produced by it, then taxes will be levied on the deemed profits.

If the master franchisor is a foreign company, it will be taxed only on income that arises from operations carried out in India or in certain cases, on income that is deemed to have arisen in India. The latter includes royalties, fees for technical support, interest, gains from sale of capital assets situated in India and dividends from Indian companies.

Advance tax has to be paid by both, Indian and foreign corporate assesses, whose taxable income exceeds Rs. 5000/- p.a.

In calculating the amount of tax payable by the franchisor / franchisee company as assessee, the deductions available in Section 30 to 43D of the Income Tax Act, 1961 can be important for tax planning purposes. Some of these relate to:

Rent, rates, taxes, repairs and insurance in respect to premises used for business.

Depreciation

Expenditure on scientific research

Expenditure of a capital nature on acquisition of patent rights or copyrights

The availability of tax advantages would depend on the type of franchise, the product of the franchise and where the unit is to be physically located.

Collection of Tax – the income received by the foreign franchisor are taxable, and these have to be paid in India through an agent which could be the sub-franchisee himself.

Capital Gains Tax is relevant to a franchise business as any profits and gains arising from the transfer of a capital asset effected in the previous year is chargeable to income tax under the head “capital gains”.

Advance ruling on Taxation – if a foreign Master Franchisor has any apprehensions or uncertainties regarding the tax implications of any venture or transaction in India, a reference or application can be made to the Advance Ruling Authority under Section 245N of the Income Tax Act, 1961.

It must be noted that the above is subject to Double Taxation Avoidance Agreements entered into by India with any foreign country. The tax liability would accordingly be reduced. Section 90 of the income tax act gives recognition to this and this agreement takes precedence over the terms of the income tax act.

Termination of Franchises

Termination of an international franchise system is without doubt one of the most difficult issues for a franchisor to face. Not only must the franchisor face often complex legal provisions, sometimes providing for substantial compensation, it must face the daunting task of deciding exactly what should happen to the franchise in the territory following the termination.

Commercial Issues

The prospect of terminating a franchise agreement with a Master Franchisee, developer or franchisee raises a question of what is to happen to the franchise in the territory following the termination. The answer will inevitably depend on the value and potential value of the market. If the territory has a number of profitable outlets ‘up and running’, it will usually allow them to continue. One way of achieving this is to terminate the Master Franchisee’s right to open new outlets.

If full termination is the only possibility, the choices for the franchisor are:

Pulling out of the territory

Stepping into the master franchisee’s shoes

Appointing a new master franchisee for the whole territory.

            Legal Issues

The whole question of jurisdiction and conflict of laws is absolutely vital for the draftsman to consider when contemplating what may occur in the case of termination. Termination is generally resulted from breach of the franchising agreement. In such cases, the grounds are quite reasonable and, provided the obligation of notice being served is duly complied with, termination is set in action.

Some of the legal issues that are to be kept in mind are:

Intellectual Property rights – It is important that following termination, the franchisor takes steps to protect its trademarks and other intellectual property rights from the abuse by the master franchisee / developer / franchisee.

Arrears – non-payment of declared sums is a somewhat easier matter to deal with as the franchisor can weigh up the pros and cons of entering into litigation.

Real Estate - At least part of any real estate owned by the Master Franchisee / developer / franchisee used in the business may also have to be transferred. Valuation will create great difficulty.

Goodwill – A further issue which can arise is the Master Franchisee / developer / franchisee desiring to retain at least some of the goodwill established in the franchise and carry on the business in the territory under a different name.

            Conclusion - 

Termination is to be avoided if at all possible. However, if the situation is one to which there   is no other acceptable response, it must be effected quickly and efficiently. Careful planning of the legal procedures and subsequent commercial action is essential.

Franchising in other countries

Different countries have taken different approaches in regulating franchising within their territory. Those areas of franchising relationship that are usually regulated are recruitment, the relationship and termination rights. Regulation takes the form of mandatory forms of disclosure, registration of the franchise document and statutorily prescribed contractual provisions as regards, for example, termination.

Now, let us see how franchising has been regulated in other jurisdictions:

United States

Franchise legislation in United States is of 2 types:

The relationship between the parties after the franchise has been initiated

The offer and sale of the franchise – Disclosure Legislation. This again is of two forms. At federal level, in the form of the 1979 Federal Trade Commission (FTC) Rule on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures. Then at the state level in the form of state legislation.

Under the legislation, the franchisor has to go through a process of registration and examination by state administrators. The FTC Rule requires franchisors to provide prospective franchisees with a document with detailed information regarding:

The franchisor, his directors and officers

Litigation and bankruptcy histories

The franchise to be purchased

Initial and recurring payments

Obligations and duties

Termination, cancellation and renewal provisions

Training

Site selection

Australia

The Franchising Code of Practice (“Code”) came into operation on 1.2.1993 and was administered by the Franchising Code Administration Council Limited (FCAC).

The Code is intended to provide a best practice guide to regulate the relationship between franchisors and franchisees. Registration under the code was voluntary, but once registered, franchisors were required to comply with its terms. The introduction of the code was intended to provide, amongst other things, minimum prior disclosure standards, to facilitate improved dispute resolution between franchisors and franchisees and to improve franchise business practices generally.

The code regulates not only the direct parties involved, but also those providing ancillary services, such as financial institutions, advisers and publishers.

Europe  

The European Code of Ethics for Franchising adopted by the European Franchise Federation (EFF) provides that “in order to allow prospective individual Franchisees to enter into any binding document with full knowledge, they shall be given a copy of the present Code of Ethics as well as full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of these binding documents. The code further provides for a general obligation that “advertising for the recruitment of individual franchisees shall be free of ambiguity and misleading statements.

The European Code is applicable to the members of the national associations which are members of the EFF, i.e. Austria, Belgium, Denmark, France, Germany, Hungary, Italy, Netherlands, Portugal and the United Kingdom.

Franchising – Precedents

Let us evaluate some of the franchise outlets that have been successful in running their businesses.

McDonald’s Franchising

International Franchising

McDonald’s Is Seeking Qualified Individuals To Become Franchisees

We are particular about our Franchisees because they make McDonald’s successful by focusing on customer satisfaction. That’s why...

We are looking for individuals who have:

• Business experience in the market where they are seeking a franchise

• A strong desire to succeed, work hard, and contribute to a winning team

• Demonstrated personal integrity with emphasis on interpersonal skills

• A willingness to participate in a comprehensive training program

• A willingness to personally devote full-time efforts to the day to day operations of a McDonald’s restaurant business

• A history of success and the ability to work well within a franchising organization.

• Personal, non-borrowed resources to be invested in a McDonald’s restaurant business

McDonald’s Offers:

• A chance to run your own business without being alone. You will be supported by the world famous McDonald’s System.

• Support in the areas of operations, training, advertising, marketing, real estate, construction, purchasing and equipment.

• Personal satisfaction both as an owner/operator and as a member of McDonald’s worldwide organization.

• Personal growth and business knowledge from McDonald’s extensive training.

Franchising Frequently Asked Questions

Q: What business qualifications does McDonald’s seek in its potential franchisees?

A: The following qualifications, among others, are essential to be considered for a McDonald’s franchise:

1. High personal integrity

2. An entrepreneurial spirit and strong desire to succeed

3. A proven ability to motivate and train people

4. The ability to manage finances

5. A willingness to personally devote full time and best efforts to the day-to-day operation of the restaurant as an on-premise owner-operator

6. A willingness to complete a comprehensive training program and become proficient in all aspects of operating a McDonald’s restaurant business

7. Financial resources

Q: How much does a McDonald’s franchise cost?

A: Typically, new restaurant costs range from 432,800 to 715,150.USD. The size of the restaurant facility, area of the country, pre-opening expenses, inventory, kitchen equipment, signage, and style of decor and landscaping will affect new restaurant costs. These costs are paid to suppliers. In addition, at the time of opening, an initial fee of 45,000 USD is paid to McDonald’s Corporation for all new restaurants

Q: How much cash (or liquid assets) is required to acquire a franchise?

A: The initial cash investment is a minimum of $175,000 for a conventional purchase or $100,000 for a Business Facilities Lease.

Q: Will McDonald’s finance the remaining balance of the cost of the franchise?

A: No. McDonald’s does not provide any financing. The remaining cost may be financed through a bank

Q: May I obtain the funds to purchase a franchise from a relative, friend or associate?

A: No, because this would then involve you in a type of partnership. We do not franchise restaurants to partners or investors. An individual must personally meet the financial qualifications and be willing to devote his or her full time and best efforts to the day-to-day operation of the restaurant. A franchisee must divest himself or herself of all other active business interests.

Q: Is there any way I can be considered if I do not have all the required financial resources?

A: In a limited number of cases, McDonald’s grants a Business Facilities Lease (BFL) franchise to candidates who excel in all qualifications but are unable to meet the financial requirements of the conventional franchising program. An individual must have a minimum of 100,000USD of non-borrowed personal resources to be considered for a franchise under the BFL program.

Q: What is the availability of opportunities in my country?

A: The availability of franchises in specific geographic areas must be discussed with McDonald’s franchising personnel in the specific country for which you have interest. However, as you can appreciate, McDonald’s cannot predict which locations will be available when your training is complete. Therefore geographic flexibility is a characteristic we seek in candidates.

Q: Will McDonald’s buy a piece of property that I own and then sell me the franchise for that location?

A: Our franchisee selection process does not play a part in our site selection. In other words, we develop a location because we think it will be successful and without regard to whom the franchisee may be. McDonald’s does all of the site evaluation and selects the location. We acquire the property, improve the site and construct the building. The franchisee is responsible for equipping the facility with all necessary items of kitchen equipment, seating and decor, signs and landscaping, etc. As sites are developed, we offer them to candidates who have already completed training and are approved to become owner-operators. .

Notable Franchising Facts

First Restaurant in DesPlaines, IL

Salient Features of ‘Wimpy’s Franchise’ in India

One time non-refundable upfront franchise fee for a 10-year contract.

All investments for establishing the restaurant to be provided by the franchisee, Investments would depend upon the size of the restaurant, seating capacity, etc. etc.

Licenses, Power load, etc. to be arranged by franchisee / investor.

The restaurant shall be run, managed and controlled by the franchisee. All costs for day to day running of the outlet shall be incurred by the franchisee. The raw material shall be supplied by the franchiser, Wimpy International Limited at ex-factory cost.

The franchisee shall pay a sum equivalent to 7% of the net sales as Royalty.

OR

No working capital deployment by the franchisee. Restaurant shall be run, managed and controlled by WIMPY Management at their cost. All costs for day to day running of the outlet shall be incurred by WIMPY.

An attractive return is assured to the franchisee / in terms of fixed percentage of net sales starting from 1st day of operations.

Wimpy International Ltd. shall provide advice and consultation concerning the site feasibility assessments through its officials/professional specialists. All expenses and charges for whom will be paid for by the FRANCHISEE.

Strategic outlook for the soft drinks industry in 2010

Publication date : Feb 1, 2001

Author : Canadean Ltd

The ‘revolution’ is already under way

Over the next decade the global soft drinks industry is likely to undergo probably the most fundamental change in its entire history, according to a new report from Canadean, the international beverage research specialists. With its traditional focus mainly on carbonates, and notably colas, often involving complicated franchise systems, the soft drinks business is already in the throes of a major revolution which encompasses the very concept of a ‘soft drink’ as well as questioning the relevance of the franchise system that has served the industry so well for so long.

At the same time the competitive landscape is shifting dramatically, says the Canadean report. Once mainly the preserve of Coca-Cola and Pepsi-Cola, the carbonates market alone is seeing successful local players emerge to challenge the pre-eminence of the US multinationals, from Europe to South America. In the context of the wider definition of soft drinks, the competitive line-up now includes international majors such as Nestle, Danone, Unilever and Procter & Gamble.

Who will set strategy now?

Against this background the Canadean report spells out the sort of conflicts that could arise within the existing franchise system for soft drinks, consisting as it does of brand owners and brand bottlers, especially the more recently consolidated ‘anchor bottlers’ - now very large businesses in their own right. The whole ethos of the anchor bottler is based on achieving ever more efficient production built around fewer and fewer high speed filling lines. That implies constant product and brand rationalisation. On the other hand, a strategy which embraces the new wider definition of soft drinks implies product proliferation. So who will set the strategy agenda in the future? How are these two seemingly opposing strategies to be reconciled?

Pressures for lower concentrate prices

Moreover, the growing importance of anchor bottlers within the franchise system raises even more fundamental questions for the brand owners. In recent years both Coke and Pepsi have learned to their cost the need to stay close to local consumers, and are now reversing earlier strategies aimed at centralising their global operations, especially marketing. As they decentralise that role, and the ‘added value’ function of global marketing becomes increasingly superfluous, there will be growing pressure from anchor bottlers for the brand owners to pass on corporate savings in lower concentrate prices. That pressure is likely to become even more intense wherever it becomes apparent that brand owners’ field operations are duplicating those functions already performed by anchor bottlers’ local subsidiaries. The franchise system can no longer afford a multiplicity of brand managers ‘responsible’ for a single brand, for example.

Franchise/Bottler Profit Split

Is There Enough To Share?

Significantly reduced market growth (3-4% in the 1990s against 6%-8% in the 1980s), coupled with low inflation, hugely increased retailer customer buying power, as well as markedly lower entry costs for local soft drinks manufacturers have brought about an intensification of price competition. This has thrown into sharp relief the franchise system’s dependence on sharing the total profit available - at a time when overall profitability is being eroded. So, sharing this smaller pie is bound to create even more pressures within the franchise system.

The relative performance of share prices - brand owners vs bottlers - has also underlined the significant differences that exist between the low capital intensity of the brand owners’ balance sheets (reflected in a high return on capital employed) and the high capital intensity of the anchor bottlers which typically achieve half the rate of return of brand owners. Furthermore, the fact that Coke and Pepsi are still very substantial owners of anchor bottlers’ shares may also mean they could be faced with a delicate fiduciary balancing act when it comes to decisions which directly affect bottler profitability.

Changing competitive landscape

Finally, the report explains how local companies have emerged to compete successfully with the US multinationals. Key factors working in favor of local players include the sharply reduced costs of market entry ranging from packaging to media; the widespread availability of technical know-how provided by flavor houses, filling equipment makers, packaging suppliers; the role of leading food chains in demanding higher quality and lower prices in return for extended supply contracts - an imperative which does much to explain the continuing focus on pruning overheads within such companies. Moreover, there is growing evidence that soft drinks manufacturers, which operate within a single integrated system, may be attaining a level of profitability, which is greater than half the total profit pot, which has traditionally been available to the whole of the two-tier franchise system.

Source : www.just-drinks.com

Archies Gifts & Greetings 

   It was set up in 1979 as a partnership firm to carry out the business of manufacturing and marketing of posters and greeting cards. The company pioneered the concept of branded retailing in India. The first exclusive store of the company was opened in 1987. In 1990, the business of the partnership firm was taken over by Archies Greetings & Gifts Pvt Ltd and the company was incorporated as a public limited company in 1995. Today Archies Gifts & Greetings is the market leader in the Gifts & Greetings business.

How did you start the business of Gifts and Greetings?

This business was started as a hobby. We were all doing our family business of sarees. From there we started the business of songbooks -- the lyric books of English songs. So we sold all this stuff through mail orders at that time. Then we started making posters which were also distributed through mail order. Subsequently, we started getting queries from retailers that they wanted to resell them so the wholesale network was started. We then got feedback about the demand for cards, so we went on to greeting cards also. After that, we started opening exclusive stores because cards had limited appeal at the time. The business was started in 1979 and the first store set up in 1987. We then made our own model suitable for Indian conditions. We created a branded franchise. Now the scenario has changed in India and everybody talks about franchising.

But we were the first to do that kind of stuff. We then went in for tie-ups so as to get a greater range to support these stores because these were exclusive stores. Earlier the cards were sold in shoeboxes in bookstores or stationary stores. So we have provided a comfort level and an ambience to the customer who shops for greeting cards. Generally a customer goes to a store to buy, say, `X’ card, and he starts picking up many other things.

You have several JVs for sourcing designs.

We have an exclusive arrangement with the world’s largest publicly owned company - American Greetings. We reproduce their designs in India keeping in mind the Indian environment. Then we have couple of other tie-ups -- just to increase the range. We pay 5% royalty on the designs we choose from our principals. In certain JVs, we buy at one fixed price and then reproduce it.

When was the Gifts business started?

Once we started franchising we realized that 50% of sales come from these gift items. Earlier, these franchisee outlets used to source these gift items themselves, because we were not producing them. Four years back, we launched a gift division to source and make exclusive gifts. We see the gift line as having great potential for the future.

Is there a conscious focus to increase sales from gifts and stationery products because of the danger of low growth in cards?

Gift is one thing that you have to update everyday. And once you are sourcing and creating gifts exclusively with different raw materials, it is not that easy to enhance its revenues from the day one, like in greeting cards. So, setting up a gifts business takes time. We definitely see it as a fast moving thing and in terms of value also it is much higher than greeting cards.

Do you perceive a threat from the e-greetings business?

The penetration of computers is very low. Five years down the line we definitely see it growing and we have to be there in that media also. E-greetings will be a support for our industry. But it will not replace the physical choosing and sending of cards. E-greetings have a different feel altogether. Also, if someone receives 100 e-cards, he will not be able to open each greeting and enjoy it. E-greetings can only be a `last minute’ activity on people’s minds. The physical sending of cards will remain. Even if you look at the European and American greeting card market, you will realize that e-greetings are not a major threat to the paper greetings market. The year 1995 was a full Internet year for the US market and greeting card sales were $6.5bn, which grew to $7.2bn in 1997. With these figures, one can easily estimate the growth of paper cards versus e-greetings.

What are your plans for the online business?

We have launched our dot-com company. It is not going to be yet another website, but an interactive e-gifting vertical portal, with the primary focus on third party gifting. This will serve as a complete one-stop shop for the browser, to fulfill and satisfy his emotional needs of “meet, greet and gift”. The site will have three main functional areas -- meet, greet and gift, which will have .various e-centric services and intelligent storefront along with a shopping engine. Our e-shopping model will be different from the current set-up of various e-enabled dot-com companies. We will focus on single point sourcing and single point fulfillment in the first phase and multi-point sourcing and multi-point fulfillment in the second phase. Our forte lies in the fact that we are not dependent for warehousing and sourcing on other vendors.

How will the physical distribution be enabled?

As you are aware, we have a strong network of over 400 franchise stores and apart from this we have six branch offices and 55 distributors located at 120 locations across the country. Initial fulfillment will be taken care of from Delhi and this will subsequently, in a phased manner, be extended to our branches, distributors and franchise outlets. This whole network will come in place anywhere between one and three years based on the market response to our vertical gifting portal.

Do you see your product mix changing in future?

The market is changing drastically every year and we have to move with the times. We have been doing that and wherever we see the thrust we will move in that direction, of course, keeping our consumer base the same. We will not move to any other trade because we already have a marketing set-up. Any other product that we sell will be within that customer profile.

How many Vision 2000 stores are being planned? What is the investment in real estate for these Vision 2000 stores?

At the moment we have 17 stores. They are mainly located in Delhi, Bombay, Bangalore and Nagpur. We have a plan to set up six such stores every year. They are huge in size; they display and justify all our products -- whatever we have created. We are taking all these stores on lease or on rent. Also, we are converting existing franchisees into Vision 2000 stores. About 50% of these are going to be company owned. Under the franchise arrangement, Vision 2000 stores get some kind of support from us because they stock everything that produced by us. Support will be in terms of changing the dead products, replacement facilities, new schemes, new merchandise, new packaging. Everything about the Vision 200 stores is unique. Even the neon signs are different than the existing franchisee.

How would you see your business growing in terms of top line growth?

We are expecting around 15–20% growth. We have three main categories -- greeting cards, stationery and gifts. We are trying to put more efforts in the gifting area. The gift business is growing by 30% and the card business is growing by 15%. Music and perfumes are included in gifting. Stationery is growing at around 10-15%.

What kind of advantage do you hope to gain from the conversion of distributors to C&F agents?

One advantage is that C&Fs display and stock everything that we produce, while distributors pick and choose. So the retailers will get a range to choose from. Also, the percentage of sales C&Fs are paid is less. So the company gets a better margin.

Are all distributors being converted to C&F agents?

Not all. We are going step by step. Today, we have converted four states to this system. We are learning from experience and gradually all will be converted to C&Fs. Seeing the volumes, everybody wants to become a C&F, but it is not an easy task. We have to be practical and we have to be geared up by creating that kind of inventory for C&F. So it has to be done step by step. The entire conversion will be completed two years down the line.

What is your vision for the company?

We would like to be what we are -- the leader for years to come. We will be responsible for creating new `days’ so that people will find a reason to greet each other and keep in touch. It is very essential that everything we create becomes an example for others to follow. We created Valentines 14 years ago. Nobody knew what it was then. With the satellite boom, everybody has participated in that occasion and have made it a big event. This year, Valentine’s day contributed 7% to total sales. It was only 1% of sales four years ago. Similarly we created a Friendship Day four years ago and in the years to come it will become very big.

Where do you see the company five years from now?

Five years from now I think we will have 100 Vision 2000 stores, which will contribute at least 40% to sales. C&Fs will contribute 40% to sales and the balance 20% will come from distributors. And, if the dot-com takes off, then you never know.

What has been the key factor behind Archies’s success?

There is no one particular reason. There are many. The first is that you have to create a product which is innovative, which is price sensitive and of a good quality and then this has to be supported by retail branding. That’s the success. You create an excellent product but you don’t have a retail, it will not be noticed.

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© Sahil Gupta, 20 January 2002, All Rights Reserved.