Market entry strategy- Franchising World-Nov 2009
(Interview with Seth Associates)
Many foreign companies have taken recourse to the joint venture to enter the emerging Indian market. TFW explores various facets of the most viable business route for entering into the new market.
Research before you decide
When any company plans to unveil its brand in the new market, it has to undertake a lot of meticulous research and scrutiny in finding out how receptive the market is towards international brands? Are people ready to pay for branded possessions? How competitive the market is? Which business route is most feasible? When you decide to launch your brand name in the market, it is advisable to do a thorough study of the market. It will help you to decide whether to go for a master franchise or form a joint venture. On the basis of overall market research conducted in assistance with trade commissions or consultants, the companies analyse and thereafter, consider the next move of negotiating on their terms and conditions.
Franchise v/s JV
Master franchising is a lucrative option for international franchisors. In a franchise agreement, the franchisor grants the rights to the franchisee to operate, sell and develop the franchise business in the given geographical area under the franchisor’s brand name and trademark. To expand the brand position in a new country, franchisors primarily use this form of franchising. For example, Domino’s entered India through the master franchise agreement.
On the other side, joint venture is a strategic alliance, where two or more parties form a joint venture by contributing a share of an equity, which allows them to share the revenues, expenses and the control of the venture. Such a partnership can only happen between goliaths in the business world. For example, McDonald’s in India is a Joint-Venture (JV) partnership run by two Indians. McDonald’s International through its wholly-owned subsidiary, McDonald’s India, entered into two JVs, one with Connaught Plaza Restaurants Pvt. Ltd, which is managed by Vikram Bakshi in the Northern and Eastern region, and another with Hard Castle Restaurants Pvt. Ltd, which is managed by Amit Jatia in the Western and Southern Region.
Commenting on both the business routes, Karnika Seth, Attorney at Law and Partner, Seth Associates, Advocates and Legal Consultants, clarifies, “We suggest JV or franchise route, depending on the level of involvement the foreign party chooses to have in its Indian business. Franchising can be easier but JV is more effective as foreign party has better input in terms of running the business.”
Being recognised as the world’s largest and India’s first golf interactive bar, lounge and retail destination, Golfworx, is planning to launch its lounge in Ambience Mall, Gurgaon, in December. Commenting on the route it is looking to penetrate India, Darrell Stapleton, CEO and Founder, Golfworx, says, “Golfworx is currently looking at various joint venture options around the country with SMEs and larger organisations. The joint venture option at this stage seems to be a more viable option than franchising for the simple fact that we can control brand integrity and destiny a lot better.”
Commenting on the reason behind entering into a JV with Bharti Enterprises, Bharti-Walmart Spokesperson, elucidates, “In every country that we are present, we operate strictly under the guidelines of that country. In places such as India, Mexico, Central America and China, we recognise the importance of having a local partner based on our excellent experiences working with partners around the world.”
On differentiating between the role of a franchise or a JV partner, Seth states, “A master franchisor licences its trademark and trade dress of a business and assumes a quality control through operation manuals and inspections. However, a JV partner is equally responsible for profits and losses by a JV partner and participates in running the business on a day to day basis.”
The master franchise (partner) is entitled to receive a percentage of the franchise fees from the franchisee on the sale of a franchise unit. They also receive a share of royalty income and some additional fees, which are generated by each franchise unit in the given geographic area. While on the other side, in JV’s, the partners equally share risks and profits, can access specialised staff, technology and resources, and it provides the opportunity to gain expertise, contribution and a benefit of distribution network of Indian partner and the companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company.
Strategy behind decision
To test the waters in the Indian market, few brands in their initial stages clinched deals with the Indian companies simply to popularise their brand in the new market. And after capturing some market share through the franchising route, they broke their deals with Indian partners and formed JV’s. On this, Seth adds, “Commitment is equally important in JV or franchise agreements. Exit clause decides the level of commitment shared by the parties. A foreign party is more aggressive in terms of moving out of JV agreement and therefore, exit clauses need careful drafting.”
Call it as their strategy for capturing the interest of the target consumers or positioning the brand in the market to take greater control over operations in order to expand in the country, these days, the market trend is changing.
International brands like Gucci and Mothercare have now started following the footsteps of UK’s Retailer Marks and Spencer. Initially, the company entered India through the franchise route with Planet Retail Holdings Limited as its master franchisee and later on, after a few years it terminated its agreement and entered into a joint venture with Reliance Retail Limited. Most of the international brands are interested in setting up 100 per cent-owned stores so as to ensure that they stay in complete control. However, Indian rules allow only 51 per cent foreign investment in single-brand retail and none in multi-brand retail.
The success of master franchise or a joint venture route lies in various factors:
Either going in for franchise or JV route, it is essential for both the parties to understand the ins and outs of
the system. When planning a market entry, it is important for the foreign company to understand the laws of the country.
- Before partnering with any foreign brand, it is important that the Indian investor considers how recognised the brand is in international markets, in which countries it is present, how many of its stores are running successfully in its home base and other countries.
- Prior to making the entry, do a lot of homework on the type of business you’re dealing with. Never forget to take the useful advice from experts in international trade, and also get in touch with the existing franchise and venture partners and ask them on which all terms and conditions you negotiated. Do conduct research about the brand’s positioning in other markets, find out how competitive the market is and never forget to take assistance from legal experts.
- To instantly raise the credibility of your business, it is important that you select the right business partner, who has a good understanding of the local market.
- Ensure that the business partner knows the consumer tastes and preference well. In addition to it, make sure that the business partner puts in essential value in bringing financial and managerial resources to deal with the local environment.
- Before signing the letter of intent, ensure that each and every term or condition in an agreement is clearly understood and amend any clauses that one may not find favourable.
- To be successful in a new country, it is important for the foreign brand to customise its product offering as per the consumer tastes and preferences.