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.

RETAIL STORE FORMATS

Retail stores fall under multiple formats. We will discuss the major classifications in retail store formats based on their line of business and product assortment.

- Chain Stores
- Department Stores
- Category Killers
- Store on Wheels
- Dark Store
- Mom and Pop store / Kirana stores

CHAIN STORES:

These are a set of retail outlets managed centrally, working for the set of goals which the organisation has put forward. They share the same business standards, management policies and operation procedures. This retail approach has wide reach across various geographic locations or even worldwide. Chain stores share the same brand and franchise retail model is also common among chain stores. A few good examples of chain stores in food retail are Subway, McDonalds, etc.

DEPARTMENT STORES: 
These stores are multi brand retail outlets catering to wide range of products at multiple price points for customers to choose from. The products range will include general merchandises, toys, jewellery, grocery, electronics, electrical, food, bakery products, home needs, baby care, etc. Good examples of department stores are Wal-Mart stores, Landmark's Centre Point and More Hypermarkets.
Department stores are further classified into supermarkets and hypermarkets based on their size and product assortments.

CATERGORY KILLERS:

These are speciality stores offering multiple brands and multiple range of products under one category of merchandise such as electronics (Croma) or Baby Products (Baby Shop Concept) or Sporting Goods (Decathlon). Offering very wide assortment in a single category at lower price points will make them "Killers" in their retail category by taking away sales from other retailers. Category Killer stores also set the industry standards and bring about changes in trends in their category.

STORE ON WHEEL:
These are moveable stores set on vans or buses catering to a special occasion or an event. For example during a Rally championship the viewers would like to purchase eatables and drinks, to cater to their needs a supermarket retailer can set up a small moveable retail store on wheels with limited set of products. Such temporary stores are low is operational cost and ensure high returns for the retailer.

DARK STORES:

Also known as dotcom centre, these are retail outlets or distribution centres that caters exclusively for online shoppers of that particular retailer. Its a large warehouse that can either be used to facilitate a "click-and-collect" service whereby a customer collects an item they have ordered online, or as an order fulfilment platform for online sales. It is not open to the public and it resembles a cash and carry supermarket where is products are arranged in slotted angles under different aisles. Usually information of orders placed online along with customer details are sent to these stores. Here picking is done for the ordered products and home delivered to the customers.
Tesco opened a "fourth generation dotcom store" in Erith in October 2013, with a much larger product range – 30,000 lines – and higher degree of mechanisation that brings items to pickers rather than requiring them to collect individual products manually (CREDIT : Wikipedia)
A good example will be Flipkart's distribution centres in India.

MOM and POP STORES / KIRANA STORES :

These are small, family run stores and the product range can be varied as per the requirement from the locality the store caters to. These are individual stores run by family members or individuals and they try to make the best business out of the individual store. These stores are usually smaller is selling area.

POP UP STORES:

There is also an emerging trend where in facility management institutions are leasing mall store space for a short period to brands for selling their merchandise. The fixtures, space and at times employees are all provided by the facility management company. Systems and merchandise are brought by the retailer. This ensures rotation of retail space and also provide fresh collection to the customers every time they step in.

Pop up stores can also be used as experimental stores to understand the catchment’s response to a retailer’s assortment or a product brand.  Or they can be setup for a holiday season or a fare. 

OMNICHANNEL RETAILING / CROSS CHANNEL RETAILING

What is Omnichannel retailing , to understand this we need to first understand the various channels in retail industry :
1. Brick and Mortar stores (BNM)
2. E-Commerce
3. Catalogue Stores


1. BRICK and MORTAR STORES

These are the regular retail stores where we walk in, pick our products, bill them and leave. Though they are customer friendly, it is becoming more and more expensive for retailers to maintain physical stores in today's retail environment. With retailers working on wafer thin margins in grocery and FMCG, it is getting difficult to maintain profits by running a physical store. Moreover brick and mortar stores have high overheads such as Monthly Bills, Repair and maintenance, store sales staffs, management staffs, housekeeping and security expenses, rentals, CAM charges, etc. To dilute the expenses, retailers have moved on to open bigger Hypermarkets and reduce the number of departmental and supermarkets in their chains. Exclusive brand outlets are fading off and multi-brand outlets are gaining popularity in value retailing. In this growing trend small retailers and entrepreneurs find it difficult to penetrate the market and fight alongside with big time retailers. This is also one of the main reasons FDI in Multi Brand Retailing is opposed in India. Types of Brick and Mortar stores are :
- Chain Stores
- Department Stores
- Category Killers
- Store on Wheels
- Dark Store


2. E-COMMERCE

The latest mantra of every retailer. Reduced operating expense, better offers for customers, more number of products to offer, etc, are the benefits of E-commerce retailing. The best example is FLIPKART, which started of an online book store with a total face value of just 4,00,000 and has grown into a muti billion dollar company over a short time span of less than 10 years
(60.8 billion in revenue for FY 2013-14)
Flipkart is an e-commerce company founded in 2007, by Sachin and Binny Bansal. It is registered in Singapore, and owned by a Singapore-based holding company;. It operates in India, where it is headquartered in Bangalore, Karnataka (Credits : Wikipedia)
Online stores also offers customers a wide range of products, one stop shopping and home delivery options. Competition in Online retailing has further pushed the online retailers to offer various modes of payment from online payments to cash of Delivery. E-commerce is also helping the customers to save time in today's fast paced life. A few online retailers have taken the technology to new levels, one such retailer is RAYBAN who offers customer to try their sunglasses in a virtual environment.
You can try it if you haven't through the below link :


RAYBAN VIRTUAL MIRROR : http://www.ray-ban.com/usa/virtual-mirror

3. CATALOG STORES

Catalog stores , also known as catalog merchant. In this case the merchant sells his product to his customer through catalogues. Once the customer fianlises his/her selection then the merchant picks the product from the back warehouse and bills it for the customer. This is cost effective but with Online stores gaining market, catalog stores are fading off.


OMNICHANNEL RETAILING

Now that we have understood the above channels of retailing, we can proceed to Omnichannel Retailing. Omnichannel was preceded by multichannel retailing where in the retailer had presence in both Brick and Mortar and in E-commerce channel of retailing. Slowly multichannel retailing gave way for Omnichannel retailing where in retailers have one database serving all their products to both the customers online and offline. Customers can surf online and buy from a BNM store or see the physical product in a BNM store and buy online. This has also taken shopping experience to a all new level where in when a particular product is out of stock in a BNM store, sales staff can assist customer purchasing the product online and pay for the same at the BNM store or take a cash of delivery. Omnichannel retailing has picked pace and will be the future of retail industry. In near future, retailers will have fewer stores, either exclusive or cash and carry format stores and the rest will be Hubs spread across geographic locations for distribution of products purchased online. Customer loyalty programs will play a big part is retaining customers, we will discuss the same in my future blog. BNM and E-Commerce are closely interlinked in this format and with mobile technology revolutionising the way we browse, retailers are releasing apps in various platforms of mobile OS.
Thus making their presence in Mobile, social media and PCs through E-commerce and through BNM stores in tangible format for customers to choose from. Pricing strategy and category mix is usually maintained the same across all platforms thereby ensuring hassle free shopping for customers.
Dark Stores also known as dotcom centre, these are retail outlets or distribution centres that caters exclusively for online shoppers of that particular retailer. Its a large warehouse that can either be used to facilitate a "click-and-collect" service whereby a customer collects an item they have ordered online, or as an order fulfilment platform for online sales.
There is a new format of retailing which is also gaining popularity which is CLICK and COLLECT stores. Click and Collect model enables the patrons to avail a personalised, one-to-one service and experience the brand first hand. Unlike the conventional retail shops, these stores are also equipped with iPads that give access to the online portal as well aid the customers to place an order instantly in case of non-availability of a product. These facilities are transforming the whole process of purchasing products into a gen-next experience.
LENSKART , an Indian Eye-wear retailer has introduced this format of retailing in India recently


Happy Shopping :)