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Retailing in India Presented by the U.S.-India Business Council

Sponsored by the International Franchise Association, DLA Piper,

Inventure, J. Sagar Associates, the Franchising Association of India and

Re/Max

August 5, 2014

About USIBC

• Premier business association and

principal interlocutor for U.S. and Indian

industry with an aim to strengthen trade

and deepen commercial ties.

• 37 years old. Founded in 1975 at request

of both governments.

• Over 300 U.S. and Indian member

companies.

• Offices in New Delhi, Washington, New

York, Silicon Valley with growing presence

in Mumbai and across the U.S.

Ajay Banga, Chairman

President and CEO, MasterCard Worldwide

Harold “Terry” McGraw III, Past-Chair

Chairman, President, and CEO

The McGraw-Hill Companies

2

Today’s Presenters

Eric Wulff Partner

DLA Piper

Josh Merin Director of International Affairs

International Franchise Association

Rajeev Manchanda Vice President

Franchising Association of India

Sajai Singh Partner

J. Sagar Associates

Larry Oberly Vice President, Global

Franchise and Business Solutions

RE/MAX, LLC 3

• Founded in 1960, IFA is the world's oldest and largest organization representing franchising worldwide.

• IFA’s Mission: to protect, enhance and promote franchising.

• IFA members include franchise companies in over 300 different business sectors, individual franchisees, and suppliers that provide products and services to the industry.

www.franchise.org/India2014

Josh Merin Director of International Affairs

[email protected]

http://www.franchise.org/India2014/

mailto:[email protected]

inventure Fuelling Entrepreneurship

Collaborating for Growth

Franchising in India

6

India

Franchising Know-How

Essentials Challenges Case Study

Introduction

inventure

Spread over 3 million square kilometres

Seventh largest country in world

Population of 1.27 billion

16 official Languages spoken in the country advocates all Religions

1 million schools

300 universities of National Importance

India is sovereign

socialist

secular

World’s largest democratic republic

29 states and 6 union territories

Central Government State Governments

The Legislature

The Executive Branch

The Judiciary system

Supreme Court

7

India



Introduction

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India is set to become the third largest economy in the world by 2030. The rapid rise of the Indian economy with its young workforce would push it up from being the 10th largest economy in 2013 to the third largest by 2030. PricewaterhouseCoopers (PwC)

India has become world's third biggest economy in terms of purchasing power parity (PPP) World Bank report (April 2014)

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16 official languages, 114 languages, 216 mother tongues and 900 dialects

With different languages comes different preferences and lifestyles that are unique to each part of India, which gives it the world renowned colorful character

India



Introduction Diversity

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450

314

63 80 65 22

Indian MiddleClass

USA UK Germany France Australia

Population (in Million)

Total Populations

Below 25 yrs 51%

Other Age

Groups 49%

Below 35 yrs 65%

Other Age Groups

35%

India 17%

Rest of the World

83%

The Demographics of Opportunity

India



Introduction Diversity Demographics

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Business

Models Area Development

Franchise

Unit Franchise

Multi Unit Franchise

Franchising

Know-How

Essentials Challenges Case Study India

Master Franchise

Regional Franchise

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45,000

168, 000

Estimated franchising industry market potential (2012-17)

$13.40

$50.4

India Franchising

Sector

Retail USD 10.6 billion

Food and Beverages USD 1.2 billion

Health, Beauty & Wellness

USD 0.49 billion

Consumer Services

USD 0.83 billion

Education & Training USD 0.71 billion

Franchising

Know-How


Industry

Report

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Franchising

Know-How


Industry

Report

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$445.0

$926.0

$24.0 $79.0

$10.6 $36.0

2012 2017

Total Retail

Organized

Franchise Retail

Focus

Sectors

Franchising

Know-How


Industry

Report

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Franchise Retail

USD 10.6 billion

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Food and Beverages USD 1.2 billion

Focus

Sectors

Franchising

Know-How


Industry

Report

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1,368

6,168

741

3,441 2,964

13,964

171 771 456

2,656

2012 2017

No. of Outlets

QSR

Fine Dine

Café/Bars

Confectionary

Kiosks/Street Stalls

15

89%

71%

9%

26%

2% 3%

2012 2017

IT Training

Pre-School

Others

Focus

Sectors

Franchising

Know-How


Industry

Report

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Education & Training USD 0.71 billion

16

2 34 25 185

55 140 365

1572

387

1991

2012 2017

All figures in USD Million

Dry Cleaning

Matrimony

Travel

Courier

Financial Services

Focus

Sectors

Franchising

Know-How


Industry

Report

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Consumer Services

USD 0.83 billion

17

Focus

Sectors

Franchising

Know-How


Industry

Report

Health & Wellness USD 0.49 billion

0.30

1.92

0.12

0.80

0.08

0.51

2012 2017

in USD Billion

Salons

Fitness & Slimming

Spa

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Focus

Sectors

Franchising

Know-How


Industry

Report

Success

Stories

• Started in 2001 • ~ 400+ Stores at present • Menu to suit Indian palate

Plans to reach 650 by 2015

• Started in 1996 • 300+ Stores at present • Introduced Chicken Maharaja Mac

Plans to reach 500 by 2015

• Started in 1996 • 700+ Stores at present • India remains the fastest growing market for Domino's Pizza: Richard Allison, EVP at Domino's International

Will overtake Domino’s UK soon

• Started in 2012 • 40+ Stores at present • India is the fastest growing market in Starbucks’ history Avani Saglani Davda CEO Tata-Starbucks

Plans to open “Thousands of stores”

in India soon

Maj

or

US

Fran

chis

ing

Bra

nd

s

19

Other US Franchise Brands

Focus

Sectors

Franchising

Know-How


Industry

Report

Success

Stories

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• India – USA Double Taxation Avoidance Agreements (DTAA)

• Permanent Account Number (PAN)

• Franchise Disclosure Document (FDD)

• Franchise Laws in India

• Foreign Exchange Management Act (FEMA)

• Foreign Direct Investment (FDI)

• IP / Trademark Protection

Regulations

Franchising Challenges Case Study India

Industry

Report

Know-How

Essentials

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JV 5%

FOCO 11%

COFO 28%

FOFO 56%

JV : Joint Venture FOFO : Franchise Owned Franchise Operated FOCO : Franchise Owned Company Operated COFO : Company Owned Franchise Operated

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Operating Models in Franchising Industry in India

Regulations


Industry

Report

Know-How

Essentials Strategy

22

Adaptation Adaptation Adaptation

$1.54

$4.62

India

US

66.8% Undervalued

The Big Mac Index

Regulations


Industry

Report

Know-How

Essentials Strategy

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vs

Regulations


Industry

Report

Know-How

Essentials Strategy


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Regulations


Industry

Report

Know-How

Essentials Strategy


inventure 25

NORTH

SOUTH

EAST WEST

Regulations


Industry

Report

Know-How

Essentials Strategy

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Customs

Freight

Inventory

Cost of Operations

Import Model

Franchising Case Study India

Challenges

Know-How

Essentials

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Vegetarian

Non - Vegetarian

Mumbai:

• India’s Business Hub

• Most expensive real estate in

India

• Industries: All (BFSI)

• Regional Language - Multilingual

New Delhi:

• Capital of India

• Political Power Center

• Industries: Government

• Regional Language - Hindi

Chennai:

• Industries: Auto Mfg

• Regional Language - Tamil

Bangalore:

• India’s IT & Software Hub

• Industries : Hi-tech

• Regional Language : Kannada

Hyderabad:

• Industries: Pharma & Tech

R&D centers

• Regional Language - Telugu

Import Model

Franchising Case Study India

Challenges

Know-How

Essentials

Single

Market Myth

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Entry of Foreign Brands

Supply Chain Management

Backward Integration

Acceptance of Foreign Brands

Experimentation with Cuisine Innovation

Evolution

Franchising India Know-How

Essentials Case Study

Challenges

1 7 34

50 79

167 200

300

1 24

49

1 11

61

100

357

500

749

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

McDonalds

Starbucks

Dominos

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Evolution

Franchising India Know-How

Essentials Case Study

Challenges

Business

Models

McDonald's

Joint Venture (North & West)

Joint Venture (East and South)

Recently changed to

Master Franchise

Dominos

Master Franchise (India, Sri lanka, Nepal and Bhutan)

Chili's

Area Franchise (North & West)

Area Franchise (East and South)

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inventure

Inventure India Pvt. Ltd.

A 13, Kailash Colony

New Delhi 110048 India

Tel +91 11 40560000

Fax +91 11 40560099

www.inventureindia.com

Property of Inventure India Private Limited, Not to be distributed or shared without permission

Rajeev Manchanda

M +91 98110 55240

E [email protected]

31

What is Franchising?

Franchising is a method of distributing products or services.

At least two levels of people are involved in a franchise

system:

Franchisor, who lends his trademark name or trade

name and a business system; and

Franchisee, who pays royalty and often an initial fee

for the right to business under the franchisor’s name

and system

Franchising is the practice of using another firm’s successful

business model.

A Franchisee gets to use a tried and tested business

model of the Franchisor and avoid risking capital.

For the Franchisor, the franchise is an alternative to

building chain stores to distribute goods and avoid

investment and liability over a chain

33 [email protected]

Regulating Franchising

Regulated in Countries like the U.S, China, Australia,

France and Brazil

India does not have a single ‘franchising law’, but

several laws read together

Franchising, as a business model works within the

framework of contract law and the Indian Contract Act,

1872


Types of Franchising

The Product Franchise

Franchise Agreement determines how product is

distributed by Franchisee

Franchisee utilizes Franchisors brand name and trademark

to distribute or sell the product

Franchisee may pay the Franchisor a franchising fee or

agree to purchase a minimum product inventory for onward

sale

Franchisor earns income from product purchase of the

Franchisee and/or the franchise fee

Franchisee gets benefit of the brand and experience of the

Franchisor

Typical manufacturer-retailer model of doing business (e.g.

Coca Cola)



The Manufacturing Franchise

Franchisee licensed by Franchisor to manufacture

products, and sell them using the originator’s trademark

and name

Franchisee benefits from Franchisors national advertising

and PR campaigns

Franchisor earns the franchise fee and sometimes a fee /

royalty for every unit sold

Used extensively in the food and beverage industry



Business Format Franchise

Involves providing the Franchisee with a proven business

model using a recognized product and brand

Supplies (raw materials / ancillaries / products) are

purchased from the Franchisor and the Franchisee pays a

royalty / fee

Common in the branded apparel industry, restaurants,

hotel, all types of services


Indian Regulatory Framework

FDI in Franchising

A foreign Franchisor granting a master franchise to an Indian

subsidiary / JV / other company may do so on an automatic

basis under the Governments Foreign Direct Investment (FDI)

guidelines

Law of Contract

Franchise Agreement governed and enforced under Indian

Contract Law

Advisable that a comprehensive written contract be drawn up


Contractual Framework

Every Franchising Agreement, should meet certain criteria in

order to be enforceable, including:

An offer and acceptance of the offer

Lawful consideration

Lawful object / purpose

Free consent of the parties

Capacity of the parties

Section 27 of the Contract Act provides that contracts in

restraint of trade are void. Franchise Agreement

restraining the Franchisee from carrying out competing

business or limiting it to a given territory may be drafted

with care


IPR Framework

Franchisor is generally the proprietor of intellectual property rights (IPR), know-how etc. IPR Protection is of utmost importance to any Franchisor Trademarks Protection accorded to trademarks under the Trademarks Act, 1999 Registration of a trademark allows the owner to sue for infringement who otherwise would have had to seek remedy for the common law tort of ‘passing off’ Patents Although patents may feature in cases where manufacturing enterprises are structured as Franchises they are not likely to be an important type of IPR in most franchise operations


Regulatory Framework for Franchising

Copyright

Copyright Act, 1957

Protection of Manuals containing technique, process and

operation of business, use of product and delivery of

service

Copyright protection also available for graphical

representation of products, designs used and other works

like slogans, publicity material, menus and specially

designed packaging

Remedies for infringement of copyright include

injunction, damages and accounts of profits made by

infringer

Indian Courts pro-active in according IPR protection


Anti-Trust Framework

The enforcement/regulatory provisions of Indian Anti-trust law:

Anti-competitive Agreements

Abuse of dominance

Regulation of Combinations

Vertical Agreements : When producers or suppliers enter into an

agreement with a supplier of inputs or with a distributor of their

products. Restrictive covenants in vertical agreements are vertical

restraints

Franchise Agreements are vertical agreements

Competition Act details vertical restraints in Section 3(4). This is

an inclusive definition which lists out five specific restraints

(tie-in, exclusive supply & distribution, refusal to deal and price

maintenance)

Section 3(4) applies the rule of reason and treats vertical

agreements to be anti-competitive only if they cause an

appreciable adverse effect on competition in India


Employment & Foreign Exchange Regulations

Labour Law Application where the Franchisor has a significant

control over the Franchisee’s day to day operations and employees

Foreign Exchange Foreign Exchange Management Act (FEMA) and the

Reserve Bank of India (RBI) regulate the inflow and outflow of foreign exchange from India


Taxes

Customs Import of goods is subject to customs duty. In case of imports from related parties, the value declared for customs purposes

subject to review by a Special Valuation Branch of the Customs Department. In the event of import of goods from unrelated parties, transaction value forms

basis for customs duty Importer required to obtain an EXIM code from DGFT VAT Franchisee, upon making a sale of the goods, will have to charge value added

tax on the goods at prescribed rates Franchisor required to seek registration with the VAT authorities in the state in

which the unit is operated

Royalty Royalty obligation of the Franchisee, may be subject to 12.36% service tax Permanent Establishment Service PE is attracted by the foreign enterprise in India if the employees of

foreign enterprise furnish or perform services in India, other than services covered under royalties or fees for technical services, for a specific period of time

Tax Permanent Account Number (PAN) required to be obtained in India to reduce tax

exposure


Dispute Resolution Framework

Arbitration vs Litigation

Arbitration under the Arbitration and Conciliation Act,

1996

Provisions for seeking interim relief

Though approaching Indian Courts is a relatively slower

process, in IPR infringements matters, Indian Courts tend

to provide quick and effective relief

Under the provisions of the Specific Relief Act Courts can

order specific performance of contracts and grant

injunctive relief

Indeed, even in case where arbitration is provided for,

recourse to courts is preferred to seek interim injunctive

relief


Terms of a Franchise Agreement

Duties and obligations both of the Franchisor and of the

Franchisee

Expressly contemplate and regulate the use of IPR

Fee payment, its timing and consequences of non

payment

Grounds for Termination

Consequences of Termination


THANK YOU

[email protected]

mailto:[email protected]

www.usibc.com

Thank You!

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