FRANCHISING

Master of Commerce

(M.Com-I)

Semester II

(2012-13)

Submitted by

VARSHA CHAWLA

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)

MUMBAI-50

1

FRANCHISING

Master of Commerce

(M.Com-I)

Semester II

(2012-13)

Submitted

In Partial Fulfillment of the requirements

For the Award of Degree of Master of

Commerce (Part-I)

By

VARSHA CHAWLA

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)

MUMBAI-50

2

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)

MUMBAI-50

CERTIFICATE

(2012 – 2013)

This is to certify that VARSHA CHAWLA of M.com (I) Semester I (2012-13) has successfully completed the project on FRANCHISING under the guidance of Mr. VISHAL TOMAR.

Date:-

Place:-

(Prof. Mrs. Megha Somani) (Dr. Ashok Vanjani)

Course Co-ordinator Principal

(Prof. Mr. Vishal R Tomar)

Project Guide External Examiner

3

DECLARATION

Date:-

I, Miss. VARSHA CHAWLA, the student of M.Com (I) Semester II (2012-13) hereby declare that I have completed the project on FRANCHISING successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

VARSHA CHAWLA

4 ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of blessing. The desire of completing this dissertation was given a way by my guide Mr. Vishal R Tomar. I am very much thankful to him for the guidance, support and for sparing his precious time from a busy and hectic schedule.

I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College. My sincere thanks to Prof. MEGHA SOMANI who always motivated and provided a helping hand for conceiving higher education.

I would fail in my duty if I don’t thank my parents who are pillars of my life. Finally, I would express my gratitude to all those persons who directly and indirectly helped me in completing dissertation.

5 VARSHA CHAWLA

DECLARATION

Date:-

I the undersigned Mr. Vishal R Tomar, have guided VARSHA CHAWLA for her project, she has completed the project FRANCHISING successfully.

I hereby, declared that information provided in this project is true as per the best of my knowledge.

Thank you,

6 Yours faithfully,

Mr. Vishal R Tomar.

What is a Franchise?

Franchise

A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee. Some of the most popular franchises in the United States include , McDonalds, and 7-Eleven.

Franchisee:

Definition: A franchisee is an individual who purchases the rights to use a company’s trademarked name and business model to do business. The franchisee purchases a franchise from the franchisor. The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.

7 Franchisee is the one who purchases a franchise. The franchisee then runs that location of the purchased business. He or she is responsible for certain decisions, but many other decisions (such as the look, name, and products) are already determined by the franchisor and must be kept the same by the franchisee. The franchisee will pay the franchisor under the terms of the agreement, usually either a flat fee or a percentage of the revenues or profits, from the sales transacted at that location.

Franchisor:

Definition: The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.

The company that allows an individual (known as the franchisee) to run a location of their business.

The franchisor owns the overarching company, trademarks, and products, but gives the right to the franchisee to run the franchise location, in return for an agreed-upon fee. Fast-food companies are often franchised.

Franchisors are available in every industry / sector to work with entrepreneurs (the Franchisee) to help them develop successful business opportunities (franchises). The franchisor typically provides marketing, sales assistance and lends corporate credibility.

Franchising:

Introduction:

8 Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

Franchising is a faster, cheaper form of expansion than adding company-owned stores, because it costs the parent company much less when new stores are owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the parent company will only earn a percentage of the earnings from each new store. 70 different industries use the franchising business model, and according to the International Franchising Association the sector earns more than $1.5 trillion in revenues each year.

Franchising is the practice of using another firm's successful business model. The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

Essentially, and in terms of distribution, the franchisor is a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the operator pays the supplier a fee.

Thirty three countries, including the United States, and , have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising.

9 What is Franchising?

A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).

Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) on going help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earnings at minimum capital outlay.

An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace. In most states you cannot drive three blocks without seeing a nationally recognized franchise company.

History of franchising

Earliest Franchising:

10 Many believe that Albert Singer, founder of the Singer sewing machine, was the initiator of franchising. He was actually the earliest person recognized by most as being associated with franchising. However, the concept of franchising really began long before.

The term 'franchising' derived from ancient French, is defined as holding a particular privilege or right.

Back in the middles ages, local leaders would designate privileges to citizens. Some of these rights included conducting fairs, running markets, and operating ferries. The franchising idea then carried forward to the practice of Kings yielding rights to conduct activities such as beer brewing and road building. In addition, the expansion of the church is known as a form of franchising.

The Evolution of Franchising

During the 1840's, several German ale brewers granted rights to particular taverns to market their ale. This was the beginning of the type of franchising that became familiar to most of us in the twentieth century.

Franchising then travelled from European brewers into the United States. Before franchising there was not much in the way of chain operations, which would eventually form the basis of franchising in the U.S.

Peddlers in early American history, selling items from town to town, were also considered a form of franchising. Licenses were provided to general stores at military outposts as well. These exclusive territorial rights are described in written literature, however specific names are not.

11 Albert Singer came on the scene in 1851 with the Singer Sewing Machine Company. Singer made use of franchising to distribute his machines over a widespread geographic area. He is the first actual name recognized as an early franchisor. Additionally, Singer was the first to prepare franchise contracts. These documents then became the basis for the modern version of franchise agreements. Franchising has had a long history, but the concept is widely believed to have started from sewing manufacturer, Albert Singer. The idea came about to address one common problem in business: funding.

In the 1850s, the Singer Company produced sewing machines, but could not pay its salesmen their salaries. As an alternative, the company created a network of dealers who paid Singer a fee to sell the machines. These first franchise owners made money for each sewing machine they bought from Singer and eventually resold within their particular territories.

In 1851, Isaac Singer accepted fees from independent salesmen to acquire territorial rights to sell his recently invented sewing Machine. The Singer Company began granting distribution franchises and was the first Company to write franchise contracts. In the late 1880′s Cities began giving franchises to newly established electricity companies. Around the turn of the Century oil companies and automobile manufacturer began to grant rights to sell their new inventions. White Castle was the first hamburger franchise chain in America, opening 1921 and sold since then over 12 billion hamburgers. A&W started franchising their root beer stands in 1921.

In the late 1800's and early 1900's many other forms of franchising took place. Some examples included monopolized franchises for several utilities as well as street car companies. Then as oil refineries and auto manufacturers found that they could sell their products over a larger geographical area, they began to franchise.

12 Transportation and increasingly mobile Americans were the basis for the establishment of retail and restaurant chains/franchises. As time went on a large number of establishments began to franchise. Some of the well-known franchises include Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950, in 1954, and McDonald's in 1955.

Other prominent examples abound in history. Coca-Cola, for example, was originally created as a fountain drink until Benjamin Thomas and Joseph Whitehead obtained permission in 1899 to bottle the soda. Upon realizing that they alone could not afford to create a bottling company, the two created a franchise company that sold the right to bottle the cola to individual plants.

In the , franchising also traces its roots to the Singer Sewing Machine. In that period franchising was limited only to foreign businesses and public utilities services until the Philippine Franchising Association was created in 1995. During that time, there were only 111 franchise concepts which eventually grew to 967 concepts in 2007.

Over the years, franchising has become a lucrative enterprise.

In the Philippines, the number of franchise concepts has grown by 19.8% in a span of 12 years to 2007.

In the same year, of the total number of franchise concepts, 43% are in the food sector, 28% and 21% involve retail and services, respectively, and 3% are engaged in specialized services such as hotel services and memorial services.

According to Philippine Chamber of Commerce and Industry President Samie Lim, franchising is a promising venture given the country’s growing consumer market and rising per capita incomes and rate of urbanization.

13 The emergence of the business-process outsourcing industry also gives opportunities for establishments to extend their operating hours to cater to different workers throughout the day, especially to those working in graveyard shifts.

According to Philippine Franchise Association (PFA) President Robert F. Trota, franchising remains a good business option amid the economic slowdown.

The continued inflow of OFW remittances also provides adequate support from both the supply and demand side. Remittances enable some households or persons to venture into franchising; at the same time, remittances also boost the consumption of goods and the patronage of various services that franchised establishments offer.

The overall effects on the economy have been substantial. In the latest PFA study presented by the chairman emeritus Samie Lim, income from franchising represents some five percent of the country’s gross domestic product from 2005 to 2007, which translates to approximately P106.75 billion for the economy. It is also an important means to create enterprise and generate employment, creating an estimated 200,000 franchise outlets and employing almost a million of Filipinos nationwide.

Department of Trade and Industry Undersecretary Zenaida Maglaya has noted that franchising is a sure and secure way to a successful business due to the availability of technology, formula, and the process, giving the entrepreneur an advantage since he or she will not necessarily start from scratch

Modern Franchising

The modern leading form of franchising, known as business format franchising, became popular post World War II. At that time, those serving in the war returned home and had huge desires for many products and services. Subsequently, the baby

14 boomers became the leaders of the economy and are expected to continue as the driving force for quite some time.

As franchising expanded rapidly in the 1960's and 1970's, also came a large amount of oppressive activity to contend with. There were several companies that were under-funded and poorly managed, therefore going bankrupt leaving many franchisees in a lurch. More upsetting were the fraudulent companies who literally took peoples' money for nothing.

These unfortunate events led to the formation of the International Franchise Association (IFA) in order to regulate the franchising industry. The IFA continuously works in conjunction with the US Congress and Federal Trade Commission (FTC) on improving the industry's relations with franchisees. In 1978, the FTC created the Uniform Offering Circular (UFOC) requiring franchise companies to provide detailed information to potential franchisees. This document was updated in 2007 and renamed the Franchise Disclosure Document (FDD).

Franchising continues to be a highly regulated industry in an effort to promote the healthy growth of the economy. Franchising has become an easy and convenient way to deliver goods and services to consumers. Aside from usual food and beverage establishments, other services such as salons, hotels, and many others are now also open for franchising.

Clearly, consumers are not the only ones benefiting from the welcome convenience offered by quick services or from the wider range of products and services made available to them.

Franchisers, in turn, also reap the benefits through profit.

How Franchising Works:

15 The franchising business model consists of two operating partners: the franchisor, or parent company, and the franchisee, the proprietor that operates one or multiple store locations. Franchising agreements usually require the franchisee to pay an initial fee plus royalties equal to a certain percentage of the store's monthly or yearly sales. Initial fees vary significantly across each industry, ranging from $35,000 for an Applebee's restaurant to over $85,000 to open a Hilton hotel. Royalty fees are also variable - for example, Intercontinental Hotels Group (IHG) franchisees are required to pay the company 5% of their yearly sales, while Applebee's franchisees pay 4% of monthly sales and IHOP franchisees pay a 4.5% royalty fee of weekly sales. The franchisee also covers the costs of actually starting and operating the store, including legal fees, occupancy or construction costs, inventory costs, and labour. Franchise agreements usually have a term of between 10 and 20 years, depending on the company.

The parent company authorizes the franchisee's use of the company's trademarks (for example, selling Big Mac's at McDonald's) as part of the franchising agreement. Additionally, the franchisor provides training and support as well as regional and/or national advertising.

Types of Franchising:

The main distinguishing feature of a franchise is its structure--in other words, the rights that the franchisor allows a franchisee to have regarding the franchisor's products or services. However, a secondary classification of franchise types does exist; it's based on the type of franchise ownership. The following is an overview of the types of franchise structures and ownership classifications.

Manufacturer Franchise Structure

16 One of the lesser-known franchise structures is called a manufacturer franchise. The focus of this type of franchise, as the name suggests, is on the manufacturing phase of a product's lifecycle. Owners of a manufacturer franchise have the right to manufacture a franchisor's product. In some cases, he also may have the right to sell and distribute the products as well.

Product Franchise Structure

Those who buy into a business structured as a product franchise are purchasing the right to sell and/or distribute a particular product from a manufacturer. For example, an auto repair shop owner may decide that he wants to sell tires in order to add a revenue stream for the business. In order to have inventory on hand, selected tire manufacturers may require that the auto shop become a product franchisee before it allows the shop to carry its tires.

Business Format Franchise Structure

The most common type of franchise structure is the business format franchise. In this type of franchise, the franchisee is buying the right to more than just producing and distributing a franchisor's product as in the manufacturer type of franchise, and more than simply selling a franchisor's product as in the product type of franchise. Instead, entrepreneurs who choose the franchise business format are really purchasing the franchisor's strategic business operation model, which has proven to be effective; and the right to produce, distribute and/or sell the franchisor's goods and/or services comes along with that purchase.

Single-Unit Franchise Ownership

As stated earlier, types of franchises are categorized not only by the structure but also by ownership. The most common type of franchise ownership is one that is offered as a single-unit franchise. This type of franchisee purchases the right to own

17 and operate one franchise location. Most entrepreneurs who invest in a franchise--- whether as a business format franchisee, a product franchisee or a manufacturer franchisee---buy into the franchise as this type of franchise owner. • A single-unit franchise is the most common type of franchise available. It is a franchise that the franchisee purchases directly from the franchiser or an appointed agent of the franchiser, and is for a single business unit in one physical location. The franchisee is sometimes assigned a territory by the franchiser, or the franchisee may already have a location in mind that will require approval from the franchiser. In many cases, the franchiser will protect a territory for a franchisee within a certain radius to avoid inter-company competition.

To become a single-unit franchisee, it is recommended that you have a basic understanding of how business works or that you have strong team in place to advise you. A franchisee is expected to be very hands-on with running his or her business unit.

Multi-Unit & Area Development Franchise Ownership

Aggressive or experienced franchisees may opt for a more involved type of franchise ownership such as multi-unit franchise ownership or area development franchise ownership. The two types of franchise ownership types are similar in that the franchise owner has more to manage than a single-unit franchise owner and they differ only in how and what is managed. The multi-unit franchise owner manages multiple franchise locations while the area development franchise owner typically owns a single franchise that has the right to do business across a vast area---multiple cities or states, for instance.

A multi-unit franchise occurs when the same franchisee is granted multiple units by the same franchiser. These units can be within a specific geographic region negotiated between the two parties, or it can be multiple units with random

18 geographic locations. In many cases, a franchiser will offer multiple units to a successful single-unit franchisee, and then offer discounts in licensing fees to start more locations. In some cases, franchisers may award multi-unit franchises to new franchisees who have displayed a competence for running multiple business units with other franchise opportunities.

• An area development franchise agreement is typically offered to companies or individuals that have already set up successful franchises for other franchisers. A franchisee is given a geographic territory and must begin to develop units within that territory. Normally there is a established schedule between the franchiser and franchisee as to how many units must be set up within a predetermined time period. The geographic area can vary depending on the business and the agreement. It can be a region the size of a county, or it could be an entire state. If the franchisee does not live up to the unit development schedule, his or her license could be revoked and he or she may be subject to fines. Normally the franchiser offers special licensing pricing and ongoing royalty pricing to area development franchisees.

Master Agreement

The master franchise agreement is rare, but it is something that many franchisees look to have. A master franchise owner is similar to an area development franchiser in that he or she is given a geographic region and cost breaks for the agreement, but the master franchisee can also sell franchises on behalf of the franchiser and collect part of the regular royalty for the franchise as well. The master franchise owner speaks as the appointed representative of the franchisee for their region, and the region is normally larger than one given to an area development franchisee.

Absentee Franchisee

19 • There is one other kind of franchise agreement, which allows someone to start a franchise but not have to be the hands-on manager. In this case of the absentee franchisee, the agreement is made in advance that the franchisee will not be the day-to-day operator of the franchise, but that he or she will be responsible for reporting royalties and income to the franchiser. This allows people to have a franchise without leaving their regular employment.

Companies Involved:

The franchising business model is used across many industries, but it is most popular in the fast food restaurants, hotel, and casual & upscale restaurants industries. According to an International Franchise Association study, franchisee- owned locations accounted for 56.3%, 18.2%, and 13.1% of each respective industry's total locations in 2001.

Fast Food Restaurants

McDonald's (MCD) operates the world's largest fast food chain, and earns 37% of its revenue from franchising across its approximate 31,400 restaurant locations. Franchisees operate 65% of McDonald's restaurants worldwide.

Yum! Brands (YUM) runs over 35,000 locations of its A&W, KFC, , , and Long John Silvers restaurant chains worldwide. The company franchises 72% of its restaurants which accounted for 12.6% of the company's revenue in 2007.

Burger King Holdings (BKC) operates 11,000 restaurants of its fast food Burger King chain worldwide and earned $2.3 billion in revenue in 2007. Franchisees operate 88.5% of Burger King locations, which account for 22% of the company's revenue.

20 Hotel

Intercontinental Hotels Group (IHG) operates hotels and resorts under the InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express, Candlewood Suites, and Staybridge Suites brand names. The company franchises 76% of its hotels, which accounted for 33% of the company's revenue in 2007.

Starwood Hotels & Resorts Worldwide (HOT) operates luxury hotels under the St. Regis, Luxury Collection, W, Westin, Le Meridien, Sheraton, Four Points, Aloft, and Element brand names. Approximately 44% of the company's hotels are operated by franchisees. Approximately 44% of the company's 2007 revenue was earned through franchising operations.

Casual & Upscale Restaurants

Denny's (DENN) operates 1,546 restaurants nationwide, 75% of which are franchisee-owned. The company's franchise operations accounted for 10.1% of Denny's revenue in 2007.

DineEquity, Inc. (DIN) runs 1,344 IHOP restaurants and 1,976 Applebee's restaurants, two casual dining chains. Franchisees operate about 84% of DIN's restaurants, which together accounted for 42.5% of the company's revenue in 2007.

Retail

Blockbuster (BBI) is a leading provider of in-home movie and game entertainment that focuses on movie and video game rentals. Franchisees operate 22.4% of the company's stores, which account for 12.3% of Blockbuster's revenue in 2007.

Rental & Leasing Services

Avis Budget Group (CAR) operates two car rental companies, Avis, and Budget and is the largest publicly-traded car rental company in the United States. The company

21 franchised 39% of its Avis locations and 57% of its Budget locations nationwide, which together contributed to 9% of company's 2007 revenue.

Dollar Thrifty Automotive Group (DTG) operates in the rental car industry, specializing in airport car rentals. Franchisees operate 44% of the company's locations, but only account for 3.8% of DTG's 2007 revenue.

Beverage Bottling Groups

Coca-Cola Enterprises (CCE) serves as the largest bottler of beverages for the Coca- Cola Company (KO), producing 20% of KO's beverages worldwide. As a separate company, CCE operates as a franchisee- CCE agrees to buy all its concentrates from KO, while KO grants CCE the rights to produce, market, and sell its products.

Pepsi Bottling Group (PBG) operates under the same terms as CCE and KO in relation with Pepsico (PEP). PBG earned almost $14 billion in revenue in 2007.

Franchisee Groups

Carrols Restaurant Group (TAST) is a franchisee conglomerate that operates over 560 restaurants under the Burger King, Pollo Tropical, and Taco Cabana brand names. In 2007, the company earned $645 million in revenue.

Lodgian (LGN) operates 46 hotels nationwide as a franchisee, operating hotels like Hilton and Holiday Inn. The company earned approximately $278 million in revenues in 2007.

22 Prospects

In addition to the emergence of the business process outsourcing units, the franchising industry also sees tourism as a road to market expansion for local businesses.

According to Franchising in the Philippines in 2008: Country Report, tourist inflows afford franchisers an opportunity to acquire concepts from the country where these foreigners come from to cater their needs and preferences.

In addition, the franchising industry can capture more investment in the forward and backward linkages in the tourism industry; in this case, they can venture into travel and transport services, hotel and other accommodation services, food and beverage, and others.

The franchising industry also boasts a competitive stance in franchising operations abroad. In fact, the Philippines ranked 4th in the world when it comes to franchising concepts (and 1st among ASEAN nations). With its success in the local market, some brands such as Jolibee, Bench, Max’s Restaurant, etc. have penetrated and established their grounds in the foreign market.

Indeed, the franchising industry has proven to be a successful business in the country, surviving even in tough economic times. Further, this business has indeed

23 provided starting entrepreneurs a good head start in the world of business, given the readily available technology and process of running the franchise. With its growth in the local market and penetration in the international market, this venture is indeed a good business prospect.

20 years of franchising in the Philippines

(Source: The Philippine Star News Online - 07/29/12)

Manila, Philippines - Some 20 years back, the then infant franchising industry in the Philippines only had less than 50 players, with 80 percent of them foreign brands.

Now, under the stewardship of the founders of the Philippine Franchise Association (PFA), franchising in the country exploded into an $11 billion industry that consists of over 1,300 franchise concepts, more than 124,000 franchisees and employee base of 1.1 million.

“In the past 20 years, the Philippine franchising industry is likened to an hourglass, wherein entrepreneurs and retail concepts squeeze through the small ‘ring of purification’ to become a franchise, which can now go forth and multiply and create thousands of SMEs and millions of jobs,” Samie Lim, the acknowledged father of Philippine franchising, emphasized.

The success story of the industry dates back to the early ’90s when Lim toured the United States and Europe as head of the Federation of Asian retailers. In the conferences that he attended, Lim learned that franchising is the fastest growing industry.

24

So in 1993, realizing the potential of franchising as a major economic growth catalyst for the Philippines, Lim and industry pioneers such as Jose T. Pardo and Vicente T. Paterno joined hands and held the country’s first franchise expo. The event grew bigger the following year, giving the then industry bigwigs the reason to create an industry association.

That time, the Top 10 franchisers in the country were only meeting among themselves regularly where they talk about best practices. This small group was convinced by Lim, Pardo and Paterno to spearhead the establishment of the Philippine Franchise Association in 1995. Lim, although he was not a franchiser then, served as the founding father, which is a testament to the efforts he put in to bring together the industry players.

PFA then approached the USAID, through the Private Investment and Trade Opportunities headed by Sergio Ortiz-Luis, and obtained a $10,000-funding support for the creation of an industry master plan using the American example.

“The gist of that study is we identified the 10 different sectors that are best suited for franchising, and we focused on them. With that came the development of local and foreign franchises like Jolibee,” Lim explained.

With homegrown business concepts sprouting, PFA included an incubation pavilion at the annual franchise expo to support the high potential business ideas. Those who

25 got the nod of the PFA screening committee got free booths, thus, giving them free exposure to prospective buyers, investors and partners.

The PFA also talked to the colleges and universities like the University of Asia & the Pacific and Ateneo School Management to dedicate areas for food stalls that were conceptualized by students. And through the Philippine Chamber of Commerce and Industry (PCCI), PFA also launched the Business Ideas Development Award (BIDA). It awarded the best business ideas that were sent by students and gave them free space again at the expo.

Then came the next big thing – financing. “Out of 100 who come forward to say they want to franchise, only five are really qualified because the rest do not have enough money. So we brought in the banks and now we have BPI Family Savings Bank, Banco de Oro, Philippine National, Planters Bank, SB Corp., Development Bank of the Philippines, and PS Bank as the top lenders to the industry,” Lim said. With funding no longer a problem, Lim said franchisers and franchisees are now also able to acquire multi-brands.

And now, the Philippines is being used as staging point of foreign franchises that are establishing presence in Asia. And more importantly, Filipino brands such as Max’s, Jolibee and Potato Corner are now doing good in the international arena.

The strong growth of the industry was mainly private sector-led as in contrast to the other countries that provide numerous support schemes to their franchisers, the PFA toiled on its own, and even turned it into an advantage. “Since we are basically

26 private sector-led, we are more consistent, unlike the others where policies change when there is a change of government,” Lim further explained.

The Philippines also benefited a lot from PFA’s membership in the World Franchise Congress as the country is able to get experts that give valuable pointers to the industry players during the annual Franchise conference.

“As of this year, we have the largest franchise exhibit in the world — the Franchise Asia Philippines (FAP) 2012. We are able to do this because we are consistently growing. With last year’s World Franchise Conference hosted by the Philippines, the word is now out that if you want to go to Asia, you should go to the Philippines.

We are building from last year and I hope we can sustain that,” Lim stressed. This year’s International Franchise Expo, which is one of the four major components of FAP 2012, will have about 500 firms exhibiting at the 10,000- square meter SMX Convention Center exhibition halls, with over 50,000 visitors expected. Visitors and exhibitors are expected from US, Canada, Guam, Africa, Pakistan, Bangladesh, Middle East, , , Taiwan, , Japan and Korea.

Lim said he is now seeking to harness the programs of Tesda director general Joel Villanueva to further boost the potential of Philippine franchising.

Lim noted he agrees with Villanueva that Filipinos should change their notion that college diploma is important to be able to land a good job. Lim hopes to partner

27 with Villanueva in launching nationwide several short courses that will serve the employment requirements of the franchising industry. These include short courses for baristas, waitering, and even basic housekeeping.

“With Tesda’s help, we can improve the competitiveness of Philippine franchise concepts because we will have workers that have standardized knowledge and skills. That is what franchising is all about, having professionalized and standardized operations,” Lim added.

Franchise Agreement:

A Franchise Agreement is a legal, binding contract between a franchisor and franchisee, enforced in the United States at the State level. Prior to a franchisee signing a contract, the US Federal Trade Commission regulates information disclosures under the authority of The Franchise Rule.

Once the Federal ten day waiting period has passed, the Franchise Agreement becomes a State level jurisdiction document. Each state has unique laws regarding franchise agreements. A franchise agreement contents can vary in content depending upon the franchise system, the state jurisdiction of the franchisor, franchisee, and arbitrator.

A typical franchise agreement contains:

 Uniform Franchise Offering Circular (UFOC)or FDD Franchise Disclosure Document (FDD)

 Disclosures required by state laws

 Parties defined in the agreement

28  Recitals, such as Ownership of System, and Objectives of Parties

 Definitions, such as:

. Agreement, Territory Area, Area Licensee, Authorized deductions, Gross Receipts, License Network, The System Manual, Trademarks, Start Date, Trade name, Termination, Transfer of license.

 Licensed Rights, such as

 Territory, Rights Reserved, Term and Renewal, Minimum Performance Standard

 Franchisors Services, such as:

 Administration, Collections and Billing, Consultation, Marketing, Manual, Training

 Franchisee Payments, such as

 Initial License Fee, Training Fees, Marketing Fund, Royalties, Renewal fee, and Transfer fee

 Franchisee Obligations, such as:

 Use of Trademarks, Financial Information, Insurance, Financial and Legal responsibility

 Relationship of Parties, such as:

 Confidentiality, Indemnification, Non-Compete

 Transfer of License, such as

29  Consent of franchisor, Termination of license, Termination by licensee

 Other provisions

 Governing law

 Amendments

 Waivers

 Arbitration

 Severability

Franchise Disclosure Document:

A franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process in the United States. It was originally known as the Uniform Franchise Offering Circular (UFOC) (or uniform franchise disclosure document), prior to revisions made by the Federal Trade Commission in July 2007. Franchisors were given until July 1, 2008 to comply with the changes.

The Federal Trade Commission Rule of 1979 which governs disclosure of essential information in the sale of franchises to the public underlies the state FDD's and prohibits any private right of action for the violation of the mandated disclosure provisions of the FDDs. Therefore, the FDD implies that only the federal government or the state governments have the right to sue and negotiate consent decrees and rescissions with those franchisors who violate the provisions of the FTC Franchise Rule and the Franchise Disclosure Document (FDD).

30 The Franchise Rule specifies FDD disclosure compliance obligations as to who must be the one to prepare the disclosures, who must furnish them to prospective franchisees, how franchisees receive the disclosures, and how long franchisees must have to review the disclosures and any revisions to the standard franchise agreement.

The FDD underlies the franchise agreement (the formal sales contract) between the parties at the time the contract is formally signed. This franchise sales contract governs the long-term relationship and contains the ONLY promises and obligations of the parties to each other that will remain in effect over the stated time term of the contracts – the terms of which generally range from five to twenty years. The contracts cannot be changed unless there is agreement of both parties.

Under the Franchise Rule, which is enforced by the Federal Trade Commission (FTC), a prospective franchisee must receive the franchisor’s FDD franchise disclosure document at least 14 days before they are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. The prospective franchisee has the right to ask for (and get) a copy of the sample franchise disclosure document once the franchisor has received the prospective franchisee’s application and agreed to consider it. The franchisor may provide a copy of its franchise disclosure documents on paper, via email, through a web page, or on a disc.

Franchise disclosure document requirements:

According to the Federal Trade Commission, there are 15 states that require franchisors to give a FDD to franchisees before any franchise agreement is signed. Thirteen of those states require that they be filed by a state agency for public record.

The document discloses extensive information about the franchisor and the franchise organization which is intended to give the potential franchisee enough

31 information to make educated decisions about their investments. The information is divided into a cover page, table of contents and 23 categories called "Items":

Twenty one of the items contain information primarily pertaining to the franchisor but, unfortunately, only two of the items contain information pertaining to the performance of the franchise, itself, that is being offered for sale. One of these items, Item 19, "Earnings Claims" is an optional disclosure under the FTC Rule and State FDDs even though the performance of the franchise in terms of unit "earnings" are material facts that should be disclosed to new buyers by the seller of the franchise, who profits from the sale.

The other, Item 20, provides a current accounting of the number of units that comprise the systems and reports the terminations and sale-transfers which have been applied to report the total number of units that comprise the system. Item 20 also provides the names and contact information of franchisees, current and ex- franchisees, who may be contacted for information in the due diligence process to be conducted by prospective buyers of the franchises offered for sale. Unfortunately, due diligence conducted with Item 20 references is not always reliable because, of course, these references have no legal duty to disclose the performance statistics of their independent businesses to new buyers of franchises.

The Franchisor and Any Parents, Predecessors, and Affiliates:

This section tells how long the franchisor has been in business, likely competition, and any special laws that pertain to the industry, like any license or permit requirements. This will help the prospective franchisee understand the costs and risks they are likely to take on if they purchase and operate the franchise.

Identity and Business Experience of Key Persons:

32 This section identifies the executives of the franchise system and describes their experience.

Litigation History:

This section discusses prior litigation, whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for—or settled civil actions involving—the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance.

This section also should say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy:

This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy, information that can help potential franchisees assess the franchisor’s financial stability and whether the company is capable of delivering the support services it promises.

Initial Franchise Fee:

This section describes the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial

33 inventory, signs, equipment, leases, or rentals. It also explains on-going costs, like royalties and advertising fees.

Other Fees and Expenses:

Training:

This section explains the franchisor’s training and assistance program.

Advertising:

This section has information on advertising costs. Franchisees often are required to contribute a percentage of their income to an advertising fund.

Franchisee's Estimated Initial Investment:

 Restrictions on Sources of Products and Services:

This section tells whether the franchisor limits:

 Suppliers from whom a franchisee may purchase goods

 Obligations of the Franchisee:

. Financing Arrangements.

. Obligations of the Franchisor.

. Territory.

. Trademarks.

. Patents, Copyrights, and Proprietary Information.

34 . Obligation of the Franchisee to Participate in the Actual Operation of the Franchise Business.

. Restrictions on Goods and Services Offered by the Franchisee.

 Renewal, Termination, Repurchase, Modification and/or Transfer of the Franchise Agreement, and Dispute Resolution.

This section spells out the conditions under which the franchisor may end a franchisee’s franchise and a franchisee’s obligations to the franchisor after termination. It also defines the conditions under which a franchisee can renew, sell, or assign the franchise to others.

 Public Figures

 Financial Performance Representations.

 Earnings information can be misleading:

Franchisors are not required to disclose information about potential income or sales, but if they do, the law requires that they have a reasonable basis for their claims and that they make the substantiation for their claims.

Franchisors practicing Franchise fraud may have a high number of former franchisees under a Gag order, preventing a potential new franchisee from obtaining a clear picture of financial performance.

 Sample Size

The disclosure document should tell the sample size and the number and percentage of franchisees who reported earnings at the level claimed.

 Average Incomes

35 Average figures tell very little about how individual franchisees perform. An average figure may make the overall franchise system look more successful than it is because just a few very successful franchisees can inflate the average.

 Gross Sales

These figures don’t really tell about the franchisees’ actual costs or profits. An outlet with high gross sales revenue on paper may be losing money because of high overhead, rent, and other expenses.

 Net Profits

Franchisors often do not have data on net profits of their franchisees.

 Geographic Relevance

Earnings may vary with geography. The disclosure document should note geographic or other differences among the group of franchisees whose earnings are reported and a franchisee’s likely location.

 Franchisees’ Backgrounds

Franchisees have different skill sets and educational backgrounds. The success of some franchisees doesn’t guarantee success for all.

 Reliance on Earnings Claims

Franchisors may ask a franchisee to sign a statement— sometimes presented as a written interview or questionnaire—that asks whether a franchisee received any earnings or financial performance representations during the course of buying a franchise.

 List of Franchise Outlets

36 This section has very important information about current and former franchisees. Many franchisees in an area may mean more competition for customers. The number of terminated, cancelled, or non-renewed franchises may indicate problems. The sale-transfer columns can obscure churning of units through fire sales to third parties by failed or failing franchisees. Some companies may repurchase failed outlets and list them as company-owned outlets.

Some of the former franchisees may have signed confidentiality agreements that prevent them from speaking. Franchisors practicing Franchise fraud may have a high number of former franchisees under a Gag order.

If a franchisee buys an existing outlet that was reacquired by the franchisor, the franchisor must tell the franchisee who owned and operated the outlet for the last five years. Several owners in a short time may indicate that the location isn’t profitable or that the franchisor hasn’t supported that outlet as promised.

 Financial Statements:

The disclosure document gives important information about the company’s financial status, including audited financial statements.

A franchisee can find explanatory information about the franchisor’s financial status in notes to the financial statements.

Investing in a financially unstable franchisor is a significant risk; the company may go out of business or into bankruptcy after a franchisee has invested their money.

A lawyer or an accountant can review the franchisor’s financial statements, audit report, and notes. They can help a franchisee understand whether the franchisor:

 has steady growth

37  has a growth plan

 makes most of its income from the sale of franchises (Franchise fraud), or from continuing royalties.

 devotes sufficient funds to support its franchise system

 Contracts

 Acknowledgment of Receipt.

STARBUCKS

38 The Story:

Starbucks Corporation is an American global coffee company and chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 20,366 stores in 61 countries, including 13,123 in the United States, 1,299 in Canada, 977 in Japan, 793 in the , 732 in China, 473 in South Korea, 363 in Mexico, 282 in Taiwan, 204 in the Philippines, and 164 in Thailand.

Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell packaged food items, hot and cold sandwiches, and items such as mugs and tumblers. Starbucks Evenings locations also offer a variety of beers, wines, and small bites after 4pm. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores.

From Starbucks' founding in 1971 in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-1990s, and overseas stores now constitute almost one third of Starbucks' stores. The company planned to open a net of 900 new stores outside of the United States in 2009, but has announced 300 store closures in the United States since 2008.

39 Founding

The first Starbucks opened in Seattle, Washington, on March 30, 1971 by three partners: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker. The three were inspired by coffee roasting entrepreneur Alfred Peet, whom they knew personally, to sell high-quality coffee beans and equipment. Originally the company was to be called Pequod, after a whaling ship from Moby- Dick, but this name was rejected by some of the co-founders. The company was instead named after the chief mate on the Pequod, Starbuck.

From 1971–1976, the first Starbucks was at 1912 Pike Place Market; it then was never relocated. The company only sold roasted coffee and did not yet brew coffee to sell. During their first year of operation, they purchased green coffee beans from Peet's, and then began buying directly from growers.

The Starbucks Centre, Seattle. The company HQ, in the old Sears, Roebuck and Co. catalogue distribution centre building

Sale and expansion

In 1984, the original owners of Starbucks, led by Jerry Baldwin, took the opportunity to purchase Peet's. During the 1980s total sales of coffee in the USA were falling, but sales of specialty coffee increased, forming 10% of the market in 1989, compared to 3% in 1983. By 1986 the company had 6 stores in Seattle and had only just begun to sell espresso coffee. In 1987, the original owners sold the Starbucks chain to former employee Howard Schultz, who rebranded his Il Giornale coffee outlets as Starbucks and quickly began to expand. In the same year, Starbucks opened its first locations outside Seattle at Waterfront Station in Vancouver, British Columbia, and Chicago, Illinois. By 1989 there were 46 stores across the Northwest and Midwest in 1989 and Starbucks was roasting over 2,000,000 pounds (910,000 kg) of coffee a year. At the time of its initial public

40 offering on the stock market in June 1992, Starbucks had grown to 140 outlets and had a revenue of $73.5m, up from $1.3m in 1987. Its market value was $271m. The 12% portion of the company sold raised the company around $25m which would help it double the number of stores over the next two years. By September 1992, the share price had risen 70% to over 100 times the earnings per share of the previous year.

Expansion to new markets and products

The first Starbucks location outside North America opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of the then 60-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks. In September 2002, Starbucks opened its first store in Latin America, at Mexico City.

In 1999, Starbucks experimented with eateries in the San Francisco Bay area through a restaurant chain called Circadia. These restaurants were soon "outed" as Starbucks establishments and converted to Starbucks cafes.

In October 2002, Starbucks established a coffee trading company in Lausanne, Switzerland to handle purchases of green coffee. All other coffee-related business continued to be managed from Seattle.

In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises for $72m. The deal only gained 150 stores for Starbucks, but according to the Seattle Post-Intelligencer the wholesale business was more significant. In September 2006, rival Diedrich Coffee announced that it would sell most of its company-owned retail stores to Starbucks. This sale includes the company-owned locations of the Oregon-based Coffee People chain. Starbucks converted the Diedrich Coffee and Coffee People locations to Starbucks, although the Portland airport Coffee People locations were excluded from the sale.

41 In August 2003, Starbucks opened its first store in South America in Lima, Peru.

In 2007, the company opened its first store in Russia, ten years after first registering a trademark there.

In March 2008 they purchased the manufacturer of the Clover Brewing System. They began testing the "fresh-pressed" coffee system at several Starbucks locations in Seattle, California, New York and Boston.

In early 2008, Starbucks started a community website, My Starbucks Idea, designed to collect suggestions and feedback from customers. Other users comment and vote on suggestions. Journalist Jack Schofield noted that "My Starbucks seems to be all sweetness and light at the moment, which I don't think is possible without quite a lot of censorship". The website is powered by the Salesforce software.

In May 2008, a loyalty program was introduced for registered users of the Starbucks Card (previously simply a gift card) offering perks such as free Wi-Fi Internet access, no charge for soy milk & flavoured syrups, and free refills on brewed drip coffee or tea. A store in Seattle known for its use of the corporation's new ideas reopened in the fall 2010 with a modified interior design in which the espresso machines were placed in the middle of the store.

On November 14, 2012, Starbucks announced it will purchase Teavana for $620 million dollars in cash.

On January 3, 2013, Starbucks announced it will open a store in Ho Chi Minh City, in February 2013.

42 Locations:

Transcontinental Africa South Oceania Asia Europe North Europe and Asia America America Turkey Argentina Australia Austria Aruba Russia Brazil New China Belgium Canada

Chile Zealand Curaçao

Peru El Salvador

Indonesia Czech Guatemala

India Republic Costa Rica

Japan Denmark Mexico

Jordan Finland Puerto Rico

Kuwait The Bahamas

Lebanon United States

Macau Greece

Malaysia

Oman Ireland

43 Philippines Netherlands

Qatar Norway

Saudi

Arabia

Singapore Romania

South

Korea Sweden

Sri Lanka Switzerland

Taiwan United

Thailand Kingdom

Vietnam

UnitedArab Emirates

As of November 16, 2012, Starbucks is present in 61 countries.

44 Facilities

Free Wi-Fi Internet access varies in different regions. In Germany customers can get 2-hours of free Wi-Fi through BT Openzone, and in Switzerland and Austria customers can get 30 minutes with a voucher card (through T-Mobile).

In September 2009, Starbucks in the UK rolled out free Wi-Fi at most of its outlets. Customers with a Starbucks Card are able to log-on to the Wi-Fi in-store for free with their card details, thereby bringing the benefits of the loyalty program in-line with the United States. Beginning in July 2010, Starbucks offers free Wi-Fi in all of its US stores via AT&T and information through a partnership with Yahoo!. This is an effort to be more competitive against local chains, which have long offered free Wi-Fi, and against McDonald's, which began offering free wireless internet access in 2010. On June 30, 2010, Starbucks announced it would begin to offer unlimited and free Internet access via Wi-Fi to customers in all company-owned locations across Canada starting on July 1, 2010.

In October, 2012, Starbucks and Duracell Powermat announced a pilot program to install Powermat charging surfaces in the tabletops in selected Starbucks stores in the Boston area. Furthermore, Starbucks announced its support in the PMA (Power Matters Alliance) and its membership in the PMA board, along with Google and AT&T, in order to create a real-world ecosystem of wireless power, by creating a universal standard for wireless charging, and to help the customers to recharge their phones.

Recycling

45 Starbucks began using 10% recycled paper in their cups in 2004, which they claimed was the first time that recycled material had been used in a product that came into direct contact with a food or beverage. In 2005 Starbucks received the National Recycling Coalition Recycling Works Award. Allen Hershkowitz of the Natural Resources Defense Council called the 10% content 'miniscule' but Starbucks claimed they only used 10% recycled material because it is more expensive.

Starbucks bought 2.5 billion cups for stores in North America in 2007. The 10% recycled paper cups used by Starbucks are not recyclable, because the plastic coating that prevents the cup from leaking also prevents it from being recycled. The plastic cups used for cold drinks are also non-recyclable in most regions. Starbucks cups were originally made using plastic No.1 (polyethylene terephthalate, PETE) but were changed to plastic No.5 (polypropylene, PP). The former type of plastic can be recycled in most regions of the U.S. whereas the latter cannot. Starbucks is considering using biodegradable material instead of plastic to line the cups, and is testing composting of the existing cups. The exception to this is stores in Winnipeg, Manitoba, Canada, where paper cups are recycled to a local company called "Wriggler's Wranch", where they are composted. The majority of Starbucks stores do not have recycling bins; only 1/3 of company-owned stores recycled any materials in 2007; however, improvements have since been made and recycling bins are popping up in more stores (the only thing hindering Starbucks' ability to have bins in every store is the lack of facilities for storage and collection of recycling in certain areas.)

Starbucks gives customers a 10-cent discount when they bring their own reusable cup, and it now uses corrugated cup sleeves made from 85 percent post-consumer recycled fibre, which is 34 percent less paper than the original.

46 Type: Public Traded as: NASDAQ: SBUX NASDAQ-100 Component S&P 500 Component Industry: Restaurants Genre : Coffee house Founded: Pike Place Market in Seattle, Washington (March 30, 1971) Founder(s): Jerry Baldwin Gordon Bowker Zev Siegl Headquarters: Seattle, Washington, U.S. Number of locations: 20,366 in 61 countries (November 16, 2012)[1] Area served Worldwide: Key people: Howard Schultz (Chairman, President and CEO) Products: Whole bean coffee Boxed tea Made-to-order beverages Bottled beverages Baked goods Merchandise Frappuccino beverages Smoothies Services: Coffee Revenue: US$ 13.29 billion (2012) Operating income US$ 1.99 billion (2012) Net income US$ 1.38 billion (2012) Total assets US$ 8.21 billion (2012)

47 Total equity US$ 5.10 billion (2012) Employees 149,000 (2011) Subsidiaries: Starbucks Coffee Company Ethos Water Evolution Fresh Hear Music La Boulange Bakery Seattle's Best Coffee Tazo Tea Company Teavana Torrefazione Italia Website: www.starbucks.com

STARBUCKS INDIA:

48 In January 2011, Starbucks and Tata Coffee, Asia's largest coffee plantation company, announced plans for a strategic alliance to bring Starbucks to India and also to source and roast coffee beans at Tata Coffee's Kodagu facility. Despite a false start in 2007, in January 2012, Starbucks announced a 50:50 joint venture with Tata Global Beverages called Tata Starbucks. Tata Starbucks will own and operate Starbucks outlets in India as Starbucks Coffee "A Tata Alliance". Starbucks had previously attempted to enter the Indian market, in 2007, with a joint venture involving its Indonesian franchise and Kishore Biyani of the Future Group. However, the joint venture withdrew its foreign investment proposal with the Indian government. Starbucks did not cite any reason for the withdrawal. Starbucks opened its first store in India in Mumbai on 19 October 2012. As of February 2013, Starbucks operates 7 outlets in 2 cities of India. (Mumbai- 4, Delhi- 3).

Agreement includes opening cafes, bean sourcing and roasting.

Starbucks is finally coming to India. The world's largest premium coffee retail chain today announced that it has entered into an agreement with Tata Coffee for a strategic alliance.

Under a non-binding memorandum of understanding (MoU), Starbucks will explore setting up stores in the Tata group's retail outlets and hotels, besides sourcing and roasting coffee beans at Tata Coffee's Kodagu facility.

Tata Coffee, one of the biggest suppliers of Arabica coffee beans, has shipped coffee beans to Starbucks in the past and is now building a structure for a long-term relationship, a joint release from the Tata group and Starbucks.

Starbucks, which runs over 16,000 stores worldwide, has been in talks with the Future Group, Reliance and Jubilant for an entry into India, but none of those discussions fructified.

49 Retail growth outside the US is now central to the company's strategy. In an investor presentation, Starbucks International President John Culver said the company hopes to operate at least 1,500 stores in mainland China by 2015. He also said that the company sees exciting growth prospects in other emerging countries such as India and Brazil.

According to the MoU, the two companies will collaborate on providing training to local farmers, technicians and agronomists to improve coffee-growing and milling skills. The two companies will also explore social projects in the coffee-growing regions Tata Coffee operates.

R K Krishna Kumar, Chairman of Tata Coffee, told Business Standard that the first Starbucks outlet could open in the next six to seven months. He said there is no exclusive arrangement with Starbucks at the moment.

One of the hurdles that the two companies have to sort out is Starbucks’ franchisee- led business model — something Tata is uncomfortable with. “It’s up to Starbucks to decide what kind of a sustainable partner they are looking at and what will be the shared values,” Krishna Kumar said.

“This MoU is the first step in our entry to India. We are focused on exploring local sourcing and roasting opportunities with the thousands of coffee farmers within the Tata ecosystem. We believe India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations,’’ said Howard Schultz, chairman, president & CEO, Starbucks Coffee Company.

In the areas of sourcing and roasting, Starbucks will explore procuring green coffee from Tata Coffee estates and roasting at the Indian company’s existing facilities. At a later phase, Tata Coffee and Starbucks will consider jointly investing in additional facilities and roasting green coffee for export, the release said.

50 Headquartered in Seattle, Washington, Starbucks operates in more than 50 countries. It has been sourcing coffee beans from India for the last seven years.

Tata Coffee is Asia’s largest coffee plantation company and the third-largest exporter of instant coffee in the country. It produces more than 10,000 million tonne of shade grown Arabica and Robusta coffees at its 19 estates in south India. Its two instant coffee manufacturing facilities have a combined installed capacity of 6,000 tonne.

Devangshu Dutta, chief executive at retail consultant Third Eyesight, said Tata offers a good platform for Starbucks. The Indian group has deep experience in running food supplies, so it can handle that part of the outlets. But in terms of running cafes, Tata has no specific advantage.

He said Starbucks need to address pricing issues for India, since demand is highly elastic. It is a challenge the US Company has faced in its home market, with other chains competing on price. Though there are several competitors in the segment — Barista (200 outlets), Cafe Coffee Day (1,040 outlets) and Costa Coffee and others (100) – analysts said the market is far from saturated.

Harish Bijoor, chief executive officer, Harish Bijoor Consults, says the agreement provides a win-win situation for both partners. Tata can leverage the Starbucks name, and vice versa. The entry of more players means the market will grow. India can absorb up to an estimated 5,400 outlets; at the moment, the number is over 1,300.

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52

Conclusion:

Franchising today has become a fast growing global business technique and is preferable amongst investors due to the freedom of carrying out the business on their own. The experience, training, skills that these franchisees learn from the franchisors help them understand the business and how to successfully run it. Not only have the global brands proven to be successful in India, but Indian franchises too are expanding globally.

Bibliography:

Franchising- How to Franchise by Gregory Smith

Starbucks in India- Business Standard

Wikipedia

53 Franchising Agreements- The franchise agreement book by Samuel Worchester

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