A survey by global consultancy firm Ernst & Young (E&Y) sees India as the world’s most attractive investment destination. With the opening up of foreign direct investment (FDI) in several sectors, India is today an eye-catching destination for overseas investors. 2014–15 GDP growth is expected to be 5.4%.

Franchise Glance

“Franchising in India has witnessed impressive growth of around 30-35% year after year over the last 4-5 years with an estimated turnover of US$4 billion,” Mr Gaurav Marya:President, Franchise India.

As we know, India is a huge market of untapped consumers. Having showed consistent growth with an ever increasing affluent consumer base it presents very favourable conditions for a franchisor in a broad range of product and service sectors.

Consumer expenditure is estimated to be US$6 trillion by 2025 (indiaretailing). GDP growth is forecast at a minimum of 5% for 2015, corresponding to a value of US$2.4 trillion (EY’s Attractiveness Survey: India 2014).

The service sector contributed 57% to GDP in 2014 and is second fastest growing service sector in the world with a CAGR of 9%, (Finance Government of India Economic Survey 2013-14); the 2014 retail market is estimated at US$490 billion and expected to grow (CAGR) 13% and reach around US$950 billion by 2018 (EY).

India is already the 3rd largest retail market in the world and forecast to grow (CAGR) 15% in 2016-17 (Yes Bank-Assocham). Within the retail sector, food and grocery provides 69% of the total market and is one of the main drivers of this sector. Although this is a large percentage of the market, the general view is that India offers a diverse range of retail investment opportunities across all formats and sectors.

By 2016, Credit Suisse Research Institute’s Global Wealth Databook expects wealth in India to more than double to US$8.9 trillion. Not only will incomes increase but we are seeing a related increase spend on non-essential products. India’s population as well as becoming wealthier and moving themselves up the consumption curve are also relatively young, with a median age of 25 which will rise to only 37 by 2050.

30% of the population is urban and is predicted to rise to 40% by 2030 but as the wealth is spreading, Tier 2 and 3 cities: Jaipur, Nagpur, Ludhiana; Vadodara, Aurangabad, Kochi are showing rapid development and modernization and should not be undervalued as markets. Outside the main cities, analysts are describing rural India as a new goldmine with an estimated worth of US$425 billion. In some of these areas we are already seeing spending power increasing by 20-30%. With highly motivated consumers discovering a new range of products and services, reduced competition and eager mall operators offering preferential rates (amongst a number of other factors), these cities are highly appealing to franchisors-a pattern similar to China.

Forecasts:

  • India’s consumer class is estimated to grow nearly twelve-fold to 583 million by 2025.
  • The total number of middle and upper-income earners will grow over the next two decades by almost 170m-twice the current population of the Philippines (HSBC 2050 Consumer).
  • Analysts predict the middle-class will account for 41% of the population by 2025.
  • Consumer spending is predicted  to increase about 2.5 times by 2025.
  • More than 23 million people are likely to be listed among the world’s wealthiest citizens by 2025 (McKinsey).

The fattening middle-class group with their developing, sophisticated tastes and growing appetite for consuming a wider range of new exciting products, will be the target of international and domestic franchisors.

As demand growth rises by 11% by 2016 (PwC) new products and services will be in high demand. We can expect a growing influx of companies to fill these desires and needs. At present there are over 4,000 franchising opportunities in India and the franchise industry was estimated at US$13.4 billion in 2012 and is expected to grow by 6 to 7 times by 2017, both in value and volume terms. KPMG estimates that over 43,000 franchisee establishments (valued at US$36 billion) may be required by 2017 to meet this demand. With only 2.5% of total retail sales through franchises, opposed to 50% in the US, the existing lack of franchise development is also a key point for franchisors.

The Indian retail sector is fragmented with unorganized formats providing over 90% of total retail but bulk purchasing and shopping in modern retail formats is a growing trend and as consumers need for global brands is shifting, footfall towards these more modern formats is increasing. The wider choice and a more exciting, inclusive shopper experience matches their developing aspirations and busier lifestyles. Modern retail is considered to be an essential driver and is expected to account for 20% of the market by 2020 (ibef.org).

Franchising is not a new idea to India but it is now in a sweet spot. Over recent years, franchising has become accepted as one of the most feasible and quickest ways to grow a business. With shifting consumer tastes, there are many new foreign entrants introducing global products, services and even sectors to the franchise market. There has always been innate entrepreneurial motivation in Indians but now more of them can put this into practice as franchising has become more feasible and franchise knowledge and know-how spreads.

There is also more stability in franchising due to the government tightening or loosening regulations (where appropriate) to encourage growth and ease of business, international franchisors bringing more refined business models and solid processes to their respective markets, and the credit sector being more open to lending to franchisees.

While all sectors have considerable potential, franchising opportunities of particular interest:

  • Consumer Services.
  • Food and Beverages.
  • Education and training.
  • Health, beauty, and wellness.

It is assessed that cumulatively these sectors have a potential to add 100,000 franchisees in the next 5 years (KPMG). Therefore India is one of the main target countries for franchisors seeking quick growth.

Present companies include:

  • EuroKids.
  • The Coffee Bean.
  • Fitness First.
  • Crestcom.
  • Cartridge World.
  • YogurBerry.
  • Pinkberry.
  • Sbarro.
  • Gold’s Gym.
  • US Dollar Store.
  • Yum Brands.

Indian Consumers

“India will take over where China is leaving off, becoming the driver of middle-class creation over the next decade. Its contribution to growth in the middle-class will increase sharply and is unlikely to peak even after 2020,” Goldman Sachs global chief economist Jim O’ Neill.

Reports suggest that Indian consumers are some of the most confident in the world. The increase in discretionary spending and availability of credit has put them higher on the consumption curve and enabled them to purchase products that they could not before, or regarded as one off luxury items.

Due to media and the increased availability of global brands the Indian consumer has become well exposed to these products. With this exposure has come experimentation and learning. Now the consumer is more open-minded while being a lot more knowledgeable and au fait with brands. However, because of increased brand awareness and choice, Indian consumers are more selective about their purchases. They are not primarily buying a product because of its functional benefit but they are also considering the image, status and lifestyle it portrays or is associated with the brand. Consequently a franchisor will have to differentiate themselves in ways over a lifestyle or emotional connection.

The change in behavior has been agreeable to global products. For example, eating out is now accepted as a common practice across demographics, supported by convenience and time factor drivers. With the arrival of a greater variety of food options so consumer tastes have changed and they now enjoy trying new foods from across the world. Foreign franchisors also have an in-built competitive advantage as foreign services and products are perceived as higher quality and more reliable. This perception, although most prevalent in the education and luxury sectors, rings true across all sectors.

| FRANCHISE Key Point | The adoption of non-Indian brands is most noticeable among the younger generation. As the average age of the population is 25 and it is these people who are building the new middle-class, becoming brand conscious and becoming consumers in their own right, this group is an obvious target for franchisors.

3 main consumer demographics picked up by a very informative Spencer Stuart roundtable discussion:

  • Kids.
  • Youth.
  • Urban Indian women.

Factors shaping consumer behaviour

  • Most Indian consumers are value conscious.
  • While tastes and behavior are changing there are still deep cultural and regional influences. The brand which identifies and supports family values and tradition are more popular and easily accepted by the Indian market.
  • Brands that connect with the consumer emotionally have a higher chance of success.
  • The middle-class consumer see overseas brands as superior to Indian brands.
  • As lives become busier, convenience grows as a driver.
  • 55% of the modern trade shoppers actively seek promotional deals, 35% of them make bulk purchases, of which 30% are male customers (Food Bazaar).
  • Indian consumers feel price indicates product quality but are also led by well-known retail brand outlets in the belief that they will have sourced the quality products/services they seek.
  • “In urban markets, aspiration is key-it is all about brands, lifestyles and show-off value. This is followed by quality and finally price” (D Shivakumar: Nokia India). This is contrary to rural India where price is the main influencer.
  • Indian consumers are strongly influenced by promotions and freebies.
  • After-sales service is an important factor when Indians make a purchasing decision.
  • A large number of Indians are vegetarian.

Possible areas of differentiation (accounting for factors shaping consumer behaviour)

  • Offer cross-functional products: deliver a product that is delicious, represents good value and has health benefits.
  • The brand image should be modern and have a pleasing ambience that consumers will be able to easily associate with your brand.
  • Run promotions and limited time customer loyalty schemes to tie in the consumer and increase frequency and volume of purchases.
  • If a product or service is luxury or premium-make it luxury or premium and don’t worry about the potential price barrier.
  • Price point products/services and accessories to target your demographic and adapt to match regional/cultural tastes and preferences.
  • Provide exceptional customer service and after-care service. Willingly offer refunds and coupons as an apology to complaints.
  • In the food retail sector be sure to offer at least a couple of vegetarian choices.

The bottom line

With all growth factors in place and the rise of Tier 2 and 3 cities, vast opportunities exist not only across industries but also across demographics and across the country as a whole.

To conclude: Difficult not to be optimistic about the potential of this market.

Franchise Meets reckons: 8/10.

written by Franchise Meets. see more