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Understanding franchising as a model for foreign investment into India

indiainvestment

By Dezan Shira and associates

On Feb. 5, 2016, Domino’s Pizza opened its 1,000th store in India, making India the only country outside of the U.S. with 1,000 Domino’s stores. Dunkin’ Donuts opened with one store in India in April 2012; the company now has 67 Dunkin’ Donuts restaurants in the country. Last year, Anytime Fitness Gym unveiled plans to open 50 more outlets by the end of 2015. Each of these franchises is taking advantage of tremendous growth opportunities in India.

By some estimates, franchising is growing faster than any other sector of the Indian economy. The industry has grown from U.S. $13.4 billion to approximately U.S. $24 billion since 2012. In 2015, for the fifth year in a row, the Indian franchise industry saw more than 30 percent growth over the previous year, with the addition of approximately 4,050 new brands. And franchises are expected to add 100,000 jobs in 2016.

As a business model, franchising is well suited to India’s business environment, as India has no laws that specifically regulate it. As a result, a franchise can be opened without concern for franchise regulations, registration, or accreditation. However, franchisors are governed by a number of national and regional statutes and codes. To complicate matters, regulations often vary by region, and the lack of legal and regulatory recognition of franchises makes it difficult for them to obtain loans because most lenders do not treat franchisees as a separate customer segment.

Perhaps the greatest obstacles, however, involve the stringent foreign direct investment rules. The Indian government considers retail to be either multibrand (retailers such as supermarkets that offer multiple brands) or single-brand (retailers that sell only their own brands). Most franchisors fall into the single brand category. As of September 2012, the government allows up to 100 percent foreign investment in single-brand retail. However, single-brand ventures with more than 51 percent foreign investment must be locally sourced, with at least 30 percent of the value of goods purchased from Indian firms. For many companies, this threshold will be extremely difficult to meet.

In addition, India is not a one-size-fits-all market. Tremendous differences in culture, language, preferences, and tastes make it impossible to use just one business model for the entire country. Franchisors and their franchisees must therefore be highly innovative and flexible to succeed in the Indian market.

Despite potential challenges, numerous international franchisors have been extremely successful in India. The most successful have entered the Indian market prepared for difficulties and have adapted their products and services to local market preferences. Dunkin’ Donuts, for example, realized early that its global model was not an option in India. The majority of U.S. sales happen between 6 to 8 a.m., when people stop for breakfast on their way to work. The concept of breakfast on the go does not exist in India. So instead, the company targeted the 50 percent of Indians who are younger than 35 with its slogan, “Get your mojo back!” Additionally, more than half of the Dunkin’ Donuts India menu has been altered to suit local tastes.

Industries with the best prospects for successful franchising in India include retail, food and beverages, education and training, health and beauty, and consumer services, but other industry sectors also have potential. Apparel franchises, travel and tourism, and business and financial services franchises have gained traction in recent years.

As is always the case with India, regulatory improvements would go a long way to improve both the ease of franchising and the economic gains from growth in the franchise sector. Some reforms, which are already under way, will affect franchising in positive ways. These include improvements to conflict resolution and bankruptcy proceedings and intellectual property protection. However, significant gains could come from specific federal franchising laws, pre-contract disclosure requirements and controls on royalty payments and franchisee fees.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at info@dezshira.com. For more information about our firm, visit www.dezshira.com.