Inventory Management Maturity Model

Level 1 : Manual Inventory Management

• Manage incoming and outgoing inventory Excel or manual register
• No central system to see inventory across the enterprise
• Huge delay in processing of sales and inventory updates 
• No ERP system available, even billing might be done manually

Level 2: ERP Enables Inventory Management

• Near Real Time Data flow architecture across the ERP systems
• Single source of truth for inventory
• Day -1 update of inventory and updates

Level 3: Auto Replenishment Enables Inventory Management

• Automated replenishment of repeated orders
• Reduced Inventory holding cost without impacting forward cover
• Central and regional ARS enabled distribution system

Level 4: Planning and Forecast Driven Inventory Management

• Demand Forecasting system enabled Merchandising Planning
• Open to Buy enabled purchase order management
• Replenishment Optimisation based on product lifecycle
• Business Analytics driven by Day-1 data warehouse setup

Level 5: Actionable Insights Driven Inventory Management

• Contextual BI and actionable Insights driven operational decisions
• Near Real time perspective analytics to end user
• Track Inventory ageing and forward cover
• Optimised Push & Pull Strategy for profit centers driven inventory control
• Near real time to real time business analytics supported by OLTP systems

SALES TAX & VAT/GST - Their applications in Retail

Taxes have become mandatory around the world. There is no clear evidence when actual taxation system began and how it spread around the world. More formal tax systems were created by British Colonial Rules in their empire which was also used as a means to suppress the indigenous people by exploiting their earnings via stringent tax systems.
There are currently 2 types of taxes applied on goods majorly across the globe.
1. Taxes on Sale of Goods to end customer
2. Values Added Tax (VAT) or Good and Services Tax (GST)

1. Taxes on Sales of Goods to End Customer or Sales Tax:
This is the tax applied on the final retail price of the goods i.e when the final finished good is sold to the customer or the consumer. In this case the goods at source, manufacturer, wholesaler, distributor are not taxed. Such taxes are collected as a percentage on the final value of goods sold and there could be multiple taxes applied such as state, central, luxury,  sin taxes, etc. This leads to inflation of price at point of sale.
But this process also simplifies tax collection as there is only one point where tax is collected in the entire supply chain but to control tax evasions the retail industry should be an organised sector like in case of developed countries like USA, UK, etc. Such taxes are difficult to be applied in a country where unorganized retail in more prevalent like in case of India, Bangladesh, etc.,

Let us see a simple example of sales tax applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $25 each. The retailer buys them from manufacturer directly. He then sells them for $38.5 each after applying 35% margin. If there is a discount then the taxes are applied on the discounted values of the goods sold.

Manufacturer to Retailer : 25 x 2 = $50
Sale of Goods    : 38.5 x 2      = $76.9
State Tax 5%     : 76.9 x 0.05 = $3.85
Central Tax 3% : 76.9 x 0.03 = $2.31
Sin Tax 4%       : 76.9 x 0.04 = $3.08
TOTAL VALUE PAID BY CUSTOMER : $86.13
TOTAL TAX COLLECTED : $9.23
This tax amount collected is paid to the government as part of tax returns quarterly or more frequently based on respective country's finance policy.

2. VAT or GST:
This is the tax that the seller collects on the incremental value of good from the buyer. The major difference between sales tax and VAT is that Sales tax is applied only on the final price of the product that the consumer pays to the retailer and VAT is a stage wise application of tax on the value add all the way from manufacturer up till the consumer. In both the cases consumer is the one that bears the burden.
VAT and GST's definition is similar and the difference can only be made based on the application defined by the government. Some institutions apply VAT on tangible products and apply service tax on intangible services rendered to customers. GST is usually a blanket tax applied across tangible and intangible goods and services on the value added amount. In case of VAT or GST it is always included in the selling price unlike sales tax which are applied on the selling price.
Let us see a simple example of how VAT can be applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $28 each. VAT applied is 12% i.e. $3. The retailer buys them from manufacturer directly, he buys them for $25 + $3 VAT. He then sells them for $43 each after applying 35% margin and 12% VAT on net retail. If there is a discount then the VAT/GST is applied on the discounted values of the goods sold minus the landed cost.
Total cost of manufacturing : $40
Manufacturer to Retailer      : (20/(1-0.2)) x 2 bottles = $50
VAT Amount (12%)             : 50 x 0.12 = $6 (paid to manufacturer by retailer)
Now 25$ becomes the cost of goods purchased by retailer and $3 is the VAT paid by retailer to manufacturer.
Retail to Consumer               : {((25/(1-0.35)) x (1+0.12))} x 2 bottles = $86.15
VAT Amount collected from customer = 86.15-{(86.15/(1+0.12))}= $9.23
VAT already paid to manufacturer = $6
Balance VAT to be paid to government =$3.23 i.e ($38.46 - $25) x 0.12
There by the VAT is applied only for the difference of the value in every movement of goods from manufacturer up till the consumer where in the total burden of VAT is born by the end consumer who bears the total VAT of $6 and $3.23 i.e total of $9.23

Formula for calculating net retail i.e. retail excluding VAT = ( Selling Price / (1+Vat%))
                                                                                              = (43.08 /(1+0.12))
                                                                                              = $38.46

Formula for calculating Selling retail from Cost = (Unit Cost / (1-Margin)) x (1+vat%)
                                                                              = 25 / (1-0.35)} x (1+0.12)
                                                                              = $43.08

In both cases the tax paid to the government is the same but in case of VAT the partial tax is already collected and paid to government even before the goods are sold. In the case of Sales Tax, the tax is paid only upon the sale of goods there by increasing the wait time for tax collection.
Also the unit retail paid by customer also remains pretty much the same in both the cases.

FOOTFALL ANALYSIS

Footfall is also known as 'Walk-in' in the number of people walking into a retail store for the respective period be it a day, week or month. With the advent of technology and IOT, it has become easier for retailers to track footfall attributes accurately. It lets a retailer understand the success of the retailer's marketing strategy and brand power. There are huge benefits in analysing the footfall and its attributes. The below are few of the analysis that can be done by collecting footfall information (in brief) :
- Direction Analysis
- Gender Analysis
- Age Group Analysis
- Time Analysis
- Conversion Rate
- Location Analysis
- Loyal Customer Walk-ins

1.Direction Analysis: 
Customer tend to move towards a direction, either right, left or straight when they walk into a store. Display of mannequins, gondola display, store layout can force customers to move it a specific direction which will cause drop in sales to the areas of the stores which get minimal footfalls.

2.Gender Analysis: 
Brick and mortar stores have limitations with respect to space, which cannot be expanded. So analysing the percentage of male and female walking into your store will help you plan your assortment such as few stores may require better assortment and range of products suiting female customers compared to male customers. This is more important in fashion retailing.

3.Age Group Analysis: 
This analysis helps retailer under the age group it is catering to by understanding what percentage of walk-in is kids, millennials, baby-boomers/senior citizens, etc. Classification of age group can be coupled with gender to give better meaning to your analysis so that assortment and display can be planned accordingly. For example if a store has more of senior citizen walk-in then display has to be structured in such a way that their respective products are kept at reachable heights and easily accessibly aisles of the store to give a comfortable shopping experience. Also retailer can provide facilities like wheelchairs, electric carts with shopping basket attached, etc.,

4.Time Analysis: 
This analysis helps retailer understand the peak hours, peak days and peak seasons. Based on the analysis outcomes in-store promotions can be planned to liquidate inventory and make the best use of peak walk-in. Shifts for staffs can be planned according to the peak hours during the day, weekend or sale season so that customer service is not compromised due to staff shortage. Retailers also higher contract staffs for bagging and for visual merchandising during off-sale to maintain the shopping environment and visual merchandising standards. For example if the walk-in is more in the evening then the retailer can plan for clearance price in fruits and vegetables after 6 PM to clear the unsold ones from the morning so that fresh stock can be stocked the following day there by reducing wastage and retaining freshness in Fruits and Vegetable section.

5.Conversion Rate:
This analysis will let the retailer know what percentage of customers who walk in to the store actually buy from them. Conversion rates are usually low in Mall Store formats and high in Stand alone stores. But by understanding what is the actual reason for drop or increase in conversion rate during various time frame will help retailer to take necessary action to sustain higher conversion rate.

6.Location Analysis:
This analysis will let the retailers understand which stores in their chain has highest walk-in. This coupled with conversion rate will give insights into which store has high walk-in compared to which stores are actually converting this walk-in into sales. ATL and BTL marketing activities can be conducted to increase walk-in.

7.Loyal Customer Walk-In:
With advance in technology and IOT, retailers can differentiate between Loyal customers and new customers who can be converted into a loyal customer. In-store routers and mobile app can assist retailers achieve this. If there is high percentage of loyal customers coming into a store and the store is also a top performer in location analysis then the store team is hitting the right cord with the customers there by maintaining high level of customer satisfaction.

Indian Telecommunication Market is in for a shake up ! AIRTEL-VODAFONE-AIRCEL-IDEA : JIO

With Reliance Jio entering the Mobile network market in India many believe it has started a war of sorts and the whole market is panicking. 13,500 crore Rs. was lost in market capital in a single day and tariff cuts are being announced by Airtel, the largest mobile network service provider in India.

But if we have to analyse this brick by brick, we can dismantle the new wall built by Jio and Airtel or any other mobile network for the matter of fact can be peaceful at mind and concentrate on retaining their customers in a more friendly manner. I have split this blog into 3 parts for better understanding :

- Prequel
- Present
- Sequel

Market share by service providers as on 1-Mar-14

Credit:www.telecomlead.com

PREQUEL 

Before any new entrant hits the market with a big plan and capital in hand, we can be rest assured that the industry leaders will be well informed about the new entrant's move if not for the full picture atleast partially. This partial information should be enough for the experienced market leaders to take decisions that should keep the new entrant in check. Airtel's move to give away 5GB free data for every broadband user was a preparatory move but was it successful, I would say it did not really impress its existing customers nor did it create enough excitement in the market to get new customers for Airtel.

Both Vodafone and Airtel came up with flexible post paid plans that were quite user friendly unlike their earlier either rigid plans or plans with hidden terms that gives you bonkers every month. Airtel even came up with an open network promotion where they advertised about their existing tower locations and they claimed to be transparent to their customers. But where both Vodafone and Airtel lost is in gaining customers' trust and that is what has left them to panic right now, for customers will be more than willing to port their numbers to Jio and currently it seems the effort needed to port one's number to Jio is worth it.

PRESENT

Porter's 5 forces is the best tool to explain the current situation

- Threat from New Entrant

- Threat from Substitutes

- Competitor Rivalry

- Bargaining Power of Customers

- Bargaining Power of Supplier

Threat from New Entrant

This is the first or the real threat that has caused ripples and activation of the other 4 forces. Reliance Jio is the new player in the telecommunication space but Reliance is not taking things for granted and they are playing their cards carefully unlike the original Reliance Communication's (RCOM), currently owned by Anil Ambani, entry into the CDMA mobile network which was and is not so successful venture.

Reliance Jio unlike RCOM which gave away handsets for free with no proper recovery mechanism leading to huge losses, is betting on cheap tariff charges alone to attract customers. This has directly hit the customer base of the existing large players who have huge customer base with less or very little loyal customers.

The cost of entering the mobile network market is very high but with Jio's capital investment power of 1,50,000 Crore this is very much achievable and it can be done with sheer style and strength.

Threat from Substitutes

The entry of Jio has created a new substitute for the existing networks and in fact it has also created new substitutes within the existing players due to drop in tariffs among the latter. This time substitute is not in the form of products but it is in the form of service providers. Now customers have a new service provider who says he will listen to their requests, give them free call services, low data tariffs and please them with offers.

The worse thing that existing players can do right now is to match the plans that the new substitute is offering and sadly that is what is happening right now.

Competitor Rivalry

Competitor rivalry was always there in the India mobile network market but it was not that aggressive all this while because one way or the other we paid the same amount as tariff to all the service providers, so customer's preferred to pay a bit more and stay with a good mobile network provider rather than being pulled by offers with hidden terms and conditions.

But with Jio's entry it has all changed and there is a new rivalry again in the market and this time experts call it a war due to the aggressive stance Reliance has taken. The rivalry will only worsen now, at least for the next few months until the dust settles.

Bargaining Power of Customers

With the above 3 forces acting in conjunction with another on each one of the service providers, the bargaining power of the customer has increased. In fact customers can now call up the customer service and ask for discounts on their post paid bill to stay in the network, if you are taking this for a joke try it for yourself and you will be successful if you pitch it right.

The bargaining power of customers will only increase if the existing players and the new entrant keep fighting to expand and retain their customer base.

Bargaining Power of Supplier

In mobile network market, the only supplier for telecommunication network is the Indian Government. So there is not going to be much change except for players betting higher to get more spectrum. If the betting is more aggressive then it can lead to huge capital expenditure but since these are amortised and paid to government over the period of 10 to 20 years it can be kept under check.

Bargaining Power of Employees

This is one force that we look down or shy off and it is not part of the Porter's 5 forces but this is a serious force that can come to devour into the efficiency of the existing players. With an entry of a new and big player in the market, it is sure to attract existing talents. The new player can bring in new hardware, new offices, new network, new ERP but he will require experienced talents from the existing market and if the big players were not treating their resources well then they are going to be in for a bigger surprise. Attrition can impact the overall efficiency and it can worsen the panic situation for a new employee will not understand the core strength of the company and will play the wrong cards at the wrong time, only to worsen the situation further.

HOW TO HANDLE THE SITUATION

Now that we have seen an overview of the existing market situation, the existing players should come up with quick and actionable business plan to tackle the threat and rivalry created by the new entrant. We can come up with a few DOs and DON'T and plan of action

Don't create a panic Situation

Do not panic and create one in the market as it will lead to a worser stock market situation which has already happened in this case.

Understand the strengths and weakness of the new entrant and your competitors, if you have already done a SWOT for your competitors do one again because your competitor's strategy has been altered by the new entrant just like yours.

This will give you the insight to hit the right cord with your customers and retain them. This will also create new opportunities to pull the confused customers, from the existing rivals, who are not sure whether to change their network to Jio or not

Avoid Hidden Charges

It's high time you stop charging customers heartlessly for their ignorance, like draining the entire airtime for no reason within a few minute once the data pack is 100% consumed or charging randomly a few customers with no reason at all and then giving them lame excuses to justify that through untrained call centre employees.

Instead be transparent to your customers, charge them for what they use. Do not give them nightmares and train your call centre employees to handle customer's properly. Put decision makers behind the telephone and not parakeets who are worse than your automated answering services.

Avoid Price Cuts

Do not go for price cuts to match the new entrant all of a sudden. This will be the worst thing to do. Customers are now more cautious and educated, they can very well understand that if you cut the price now that means you have been looting them all this while or you are temporarily doing this to lure them to stay. This will only encourage them to switch if not to Jio may be to any other network.

Instead give them freebies and loyalty bonuses such as free talk times and excess data on recharges. When a customer applies for number portability through message, give them a call and tell them that they have been qualified for free talk time and free data pack and credit it instantly to their account. Then if your call centre contacts them for portability, for sure most of them will cancel the application for portability. This will retain them until the excitement created by Jio settles and they will stay with you after that for you have created a connection with them. And DON'T TRY to recover this freebie from them later through hidden charges.

Use Analytics

Perform competitor analysis and see what strategy they are adopting to tackle the situation. You got to have ears and your ears got to have ears in this situation to gain as much information as possible about the market situation. Only data analytics will not help you in this area, inputs from industry experts and information from your ground staffs will help you do the right thing.

Perform customer insights to see what segment of your customers are dropping out of your network and why. Try to gain deeper insights with the help of your data analysts, they are the most valuable resource to your right now. Mining your data to get patterns and to understand where you can concentrate to retain your customers, by looking at their usage trends. Start customer centric promotions and give loyalty bonuses based on the respective customer's usage trend. It will save you money and help you do just the needful to retain your customers by putting a big smile on their face.

Check for high usage and loyal customers who have stayed with your for long and give them bonuses as talk time or data without them asking for it. Do not ignore them assuming they will continue to stay with you.

Treat your employees well

You need your employees now to your rescue more than ever before. Get your ground staffs and operations team motivated. See for opportunities to do it with little operational expense. Let the CEO do the talking and address the employees through conference. Explaining the current situation and guiding them how to pull it off. Do not let them move to your competitors. It also depends on how well you have treated them so far, if you haven't treated them well then please get yourself prepared for the stormy days to come.

The worst thing you can currently do is to cut cost by reducing usage of paper, by stopping or reducing the quality of services, beverages and snacks provided to employees. This will be a 'Penny wise pound foolish decision to do' and if you are going to cut your employees increments during appraisal it will take a toll on your best performers. Ask your HRD to do a more performance based appraisal and not the regular bell curve. Give spot awards and introduce Gamification in your organisation, this is the best time to implement it to keep your employees' moral high.

Advertise and Connect

Connect to your customers and indirectly you have to highlight the faults of your competitors with humour by projecting your strengths just like what coke and pepsi does to each other. The best thing for Vodafone to do will be to reinstate their ZOO ZOOs for they will bring back the glory days of Vodafone and gain customers, they can be put to the right use to mock at the competition.

Do not spare your competitors in the commercials and do hit the sweet spots with your customers, put your marketing team to work to come up with a creative marketing campaign. This will be the joker card that will bring you fortunes by winning this game of rummy that Reliance has pulled you all to play, willingly or unwillingly you will have to play it, spectators have no room.

SEQUEL 

Now for the Sequel, if you can get the solutions mentioned above put in place and analysed, you will build resilience and survive the storm. There are so many lessons to learn from this market disruption attempt by Jio. Your business strategy is being put to real test and if you find it faulty, have the heart and mind to accept it and change it for the better, being rigid and stuck to your point will only throw you to the backseat for you to never raise again.

Reliance Jio has adopted a 'Red Ocean Strategy' and it has not only disrupted the market for the existing players but also for itself. It has created a price competitive market rather than a customer centric market. Being a new player this will give a lot of hick ups to their own operation because it will not be profitable and even after amortisation of the capital invested their balance sheets will be out of balance for the first few years. This means pressure from investors and capital crunch. It may lead to poor network coverage and customer service and when the excitement dust settles it will settle only to bury them in their own ditch.

This is one of the main reasons why not only did the share value of Airtel, Vodafone and Idea fall but so did the share value of Reliance Industries.

But if they have the financial band width to accommodate all this loss as a investment cost to enter the new business area and either write it off as loss or amortise it and show profits with higher customer happiness index and network quality then the competitors will have to run for their money. But this is hard to come by in the ruthless corporate world where investors spare none and if the investors lose faith then Jio will end up being one of those second tier players in the market with lot of hidden chargers to recover the losses incurred and with cost cutting down the line leading to resource attrition and unhappy customers. But only time and customers can decide this, all that the network providers can do right now is to truly impress their forgotten customers.

If you see mergers of relatively smaller service providers then don't be in for a shock. It is still a good option to tackle a giant as big as Reliance. What an 'idea' sirji ! 

AN INTRODUCTION TO INCOME STATEMENT

We shall discuss on how we can arrive at our organisation's profit and loss without getting into the core financial side of the business, this is also known as Income statement. I have kept it as simple as possible for retail business users to understand the calculation mechanism and the various factors that impact our profits. I have not included capital expense, re-investment of funds, expansion expenses, paid-up stock value, creditors, debtors, dividends, etc. I have only considered a few simple expense and revenue components to give an understanding of how we can arrive at our Income Statement
Before we begin with the workings, let us understand the below terms that will be used in the calculations that follow :

TURNOVER
In simple business terms turnover is nothing but our front line sales i.e. the sales value realized after deduction of VAT, sales and service/miscellaneous taxes that are collected from customers.

COGS
This is the cost of goods that are sold i.e. (Weighted average cost of the goods sold X quantity sold). This helps us understand the purchase cost incurred for the sale of a good and this amount does not include VAT in it. This is the weighted average of the unit cost at which the goods are purchased. Refer "RETAIL FORMULAE - THEIR USAGE AND BENEFITS TO BUSINESS OPERATIONS" post to know how it is calculated

EBITDA
This is the Earnings that an organisation makes after its operational expenses and before applying Interests, Taxes on earnings, Depreciation of assets and amortisation cost. This is a simple base figure or percentage what a business makes from the turnover after incurring variable/ fixed operational costs. It gives us a picture on how efficient we operate our business and how much room we have for applying the other financial expenses as mentioned above.

PBT 
Profit Before tax or gross profit that an organisation achieves before paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value

PAT 
Profit after tax or net profit that an organisation achieves after paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value

OVERHEADS/ OPERATION EXPENSES
Every Business will have over head costs that are differentiated as fixed and variable cost for the given financial period. Examples for fixed expenses are Rent paid, Annual Maintenance Charges, etc.,
and for variable expenses are Marketing, Wages, Electricity & Water, Repair and Maintenance, etc.,
For further details check out the post "OPEX and CAPEX - Fixed and Variable Costs"

DEPRECIATION
Not all assets acquired by an organization will appreciate in value. Most of the assets depreciate in value over a period of time and it has to be eventually disposed for purchase of a new one. We cannot write off the total value of the asset after a few years in a single fiscal year in one go as it may lead pull down profits for the financial year drastically and more over it is not the right thing to do too for we have used the asset in business over a period of time. In order to manage this, the business will write off a percentage of the asset value as depreciation every year throughout the asset's life time.

AMORTISATION
Every Business will have to invest in technology, licenses and hardware but this should not be totally consumed as a expense for a single financial quarter or year because we will use them over a period of time though they are paid up front. So the lifespan of the technology, hardware and license investment is projected and the investment is split equally throughout the period. This is known as amortisation.

TAX
This is no the VAT or Service tax collected on behalf of the government. This is the actual tax on revenue that the organisation has to pay to the government. The revenue that will be considered here is the net revenue after deduction of all expenses, amortisation expense and depreciation.

I will summarise the workings at 4 levels i.e. Turnover, EBITDA, PBT and PAT with an illustration.

Retailer ABC has taken a franchise for Apple products in 4 States in India. He has 20 stores that are operational and sells all the latest apple gadgets. Lets see his sales for a quarter from April 2016 till June 2016 for both of his stores as given below

Based on the above sales figures we shall arrive at our EBITDA and PAT
Incomes
Total Gross Sales for the period  (A)                                             :  67,35,00,000
Total VAT Collected                                                                          :  8,27,10,526 (-)
Total Net Sales  (Turnover)(B)=(A/(1+VAT%))  or (A-V)           :  59,07,89,474
Cost of Goods Sold   (G)                                                                  :  49,00,00,000 (-)
Total Revenue  (C) = (A-B)                                                            :  10,07,89,474
Turnover Net Margin %  (A-G)/A X 100                                     :  17%
Expenses & Loss
Rental expense                                                                                  : 1,10,00,000
Salaries and Wages                                                                           : 1,20,00,000
Repair and Maintenance                                                                   :      3,50,000
Marketing Expense                                                                           :      6,00,000
Electricity and Water                                                                        :     12,00,000
Staff Welfare                                                                                     :     13,00,000
IT and Administrative Expense                                                        :     45,00,000
Insurance Expense                                                                            :     10,00,000
Logistics                                                                                           :     10,00,000

Shrinkage (Variance due to loss of stock)                                        :     10,00,000
Total Expense (D)                                                                            :  2,94,50,000 (-)
EBITDA   (E) = (C-D)                                                                    :   7,13,39,474
EBITDA %  (E/B X 100)                                                                :  12.1%

Interest Paid                                                                                      :     30,00,000 (-)

Amortisation value                                                                           :      55,00,000 (-)

Depreciation value                                                                            :     20,00,000 (-)

Total Income before Tax                                                                 :   6,08,39,474  

Tax Payable                                                                                       :   1,05,28,000 (-)

Profit After Tax      (P)                                                                    :   5,03,11,474

Profit Percentage to Turnover     (P/B X 100)                               :   8.5%                

The above shows how we can work a simple income statement by which we can get to know how our business operations is performing, which are the areas we need to work on and where we need to concentrate to reduce our expenses. All expenses can be expressed as a percentage of turnover to see which one of them actually eat into our profits more. I have shown the same in the below pictorial representation for all expenses as a percentage of turnover. I hope this helps to get an overview of an income statement.

OPEX and CAPEX - Fixed and Variable Costs

Will be published shortly, please come back.

Franchise Business Models

Franchising can be defined as Business Operations owned or operated or both by a third party under the licensing from the parent brand which entitles the licensee to use the brand name, operational procedures and the products of the licensor.
Franchise model is used by well established brands to expand their business presence and market share in a fast paced manner.
Benefits of Franchising to the Brand
- Rapid expansion of business
- Penetrating new markets by engaging partnership with local business men
- Reduced Capital and Operational expenditure
- Higher return on investment
- Lower risk of business exit
- Increase brand value and presence
Usually a company begins operations with Company Owned and Company Operated Model of business (COCO) but when the brand is well established, the company get into a franchise model to reduce operational cost, capital cost and to increase the return on investment through the brand value that the company has created for itself.

1. Franchise Owned Franchisee Operated (FOFO)
This model is adopted by companies for faster expansion of business/brand presence and to penetrate completely new markets with the help of local business men. In this model the training of staffs, initial store setup is done by the Company and handed over to the Franchise to over see the operations and maintain standards based on SOPs set by the Company. Then on the operations is independently managed by the franchisee. The Franchisee pays a licensing fee as per the agreed terms to the Company. Surprise and scheduled SOP audits are done by the Company to ensure high standards are maintained. When Franchise fails repeatedly in audits, the Company either levies fines or pulls out from the contract eventually closing the franchisee business.
But when well operated, the local market knowledge of the franchisee coupled with the business expertise of the Company are put to the right use there by fetching good profits for both the Company and the Franchisee.
A good example for this model are Fast Food Chains where in the business is owned and operated by the franchise but regular audits are done by the Company to ensure standards are maintained as agreed.

2. Franchise Owned Company Operated (FOCO)
This model is adopted by Companies when they want to reduce their capital expenditure and expand faster in an already established market or in a known market. In this model the franchise owns the business but the brand and the operations is handled by the company with regular reporting done to the franchisee on performance of the business. The franchisee can oversee the business and question the Company in case of poor performance. This model is usually signed under profit sharing basis where in the company gets a bigger share of the profit compared to the franchisee as it is company operated.
A good example for this model are Exclusive Brand Outlets in fashion and lifestyle retail segment where the brand operates the business with its staffs as per its standards and the business is owned by a local or national franchise.

3. Company Owned Franchise Operated (COFO)
This model is adopted by Companies when they want to reduce their operational expenditure. In this model the Company leases the operations of the business to an interested franchise to take over the operations of the business with the former holding trainings and SOP audits to ensure standards are adhered to. The business ownership still lies solely with the Company, the franchise can be changed when the Company identifies a more profitable and efficient franchisee. This model is adopted by the Company only in well established markets where the company has operated and got high return on investment.
A good example for this model is Cafeterias within Hospitals and Corporates that are owned by the company but operated by a franchise for a lease period and then new bidding happens at the end of the lease term or when the company find out that the franchise is not maintaining the expected standards.

4. Franchise Invested Company Operated (FICO)
This model is similar to FOCO but the difference here is unlike FOCO the franchise does not involve themselves in business operations at all. Only an agreed fixed amount is paid to the Franchisee by the company for the investment done by franchisee in the business. In this model there can be multiple franchise investors for a single business unit and the Company runs the business operations with end to end control of the supply chain.