Franchising in India: Learning the Hard Way

Full Transcript

Vijay Kapoor: In India, at least, people think when you’re investing in franchise, “I’ve invested the monies like a bank deposit. I get 6 percent, 7 percent return investment.” Franchise doesn’t work that way. You need to invest your energy into it.

Darius Teter: Franchising: it’s a strategy we recognize from huge corporations the world over. But are franchises a model that you can harness for your emerging business?

Vijay Kapoor: So, we ensure we have enough training for the franchise partners for them to understand, because most of them come as first-generation entrepreneurs who have never been into franchise or never run a business before. So, we need to train them in terms of understanding how to look at business and how to become true entrepreneurs.

Darius Teter: Welcome to the second season of Grit & Growth from Stanford Seed, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs, with insights from Stanford faculty, on how to tackle challenges and grow your business.

You’ve certainly been in a franchise before: fast-food restaurants, clothing stores, furniture outlets. Franchises are ubiquitous across the world, and they’re becoming more popular in India, even for local brands. It’s not hard to see why. They are an asset-light way to grow your business with other people’s money. And for franchisees, it’s access to an established brand. But it’s not as simple as it sounds, and it’s not always the right fit for your business. How do you decide if you should franchise? And once you do, how do you pull it off? Today, we’re talking to someone who’s learned hard lessons about franchising, who’s been knocked down and gotten back up again, and who’s on a mission to bring more people into the fold.

Vijay Kapoor: Hi, my name is Vijay Kapoor. I’m the founder and CEO of Derby Responsible Menswear.

Darius Teter: Vijay is a fast talker, a natural salesman, but one with principles. Speak to him for 10 minutes and he can convince you to do almost anything, and that thing will be healthy and good for you. I first met him at a Stanford Seed training program where he convinced all the other CEOs at his table to take a meditation break.

Yeah, Vijay, I mean, one of my most treasured memories of you was coming in after the lunch break during that immersion week, and you had your whole table meditating.

Vijay Kapoor: I always believe in the power of silence. I always like to take a break, probably a minute’s break, just silence myself. Just do nothing.

Darius Teter: Well, if you want to do that now, we can, or we can just get right into it.

Vijay Kapoor: That’d be great, if you can take just a one-minute silence, and then we’ll start off. And this one minute is basically for world peace and brotherhood and love.

Darius Teter: If Vijay can make a table of CEOs shut up for a whole minute, he could do anything. But his actual business is in retail, menswear to be exact.

Vijay Kapoor: We are headquartered from Chennai, India. So Derby is a men’s fashion brand, and we are in the men’s clothing category. The predominant products that we sell are shirts, trousers, jeans, and T-shirts. And we run a chain of retail, exclusive retail stores, across southern India.

Darius Teter: I’m not sure if you caught it, but the full name of Vijay’s company is actually Derby Responsible Menswear. So, what makes your menswear responsible?

Vijay Kapoor: I think the word responsibility itself means responding with ability. So, I’ve asked myself, what is the ability that we have to respond to the fact that garment-making is the second-most-polluting industry in the world? We happen to be a third world, so-called third world, country, where education and employment is a major challenge. And what is it that we could do as a brand to probably bring better meaning to whatever we’ve done? I’ve been a part of the problem since I started off in 1994 with the two-machine tailoring unit. I’ve been a part of the problem for more than about 25 years. I think responsibility itself means it’s inside out. It’s not outside in. It comes from deep within. So, the responsibility that we took is, can we get a little more sustainable? Can we use a little more, better ways of production in terms of using sustainable means of producing? Can we have gender neutrality? Can we ensure that we are… as a brand, can we help empower people and also spread the success that we have had through franchising? So, that’s what responsibility is, and that’s what makes us responsible.

Darius Teter: Can you tell me a little bit about how you got started? What sparked your interest in the clothing and fashion industry?

Vijay Kapoor: Okay. For my first job, I didn’t know how to dress coming fresh out of college, and I was wearing one of those flip flops and just casual clothes. And the security man outside the building stopped me and said, “Hey, brother, where are you going?” I told him, “I have an appointment. I need to get inside there.” And he looked at me up and down, looked at my unkempt clothes, and he said, “Please go and read the board.” And the board read, “Dogs and salesmen not allowed.” And that was my first inkling how important dressing is. But short story is, I decided I’d get into clothing and probably help people dress well, because if you’re dressed well, the confidence is there. And if you’re confident, your inner strength and your talent comes out, and you can go out and succeed.

Darius Teter: So Derby Responsible Menswear started small. How did it evolve into the company it is today?

Vijay Kapoor: Initially, when I started off, I started with a two-machine tailoring unit. The vision was nothing much. All I wanted to do was fill my stomach. In fact, when I wanted to start my business, I didn’t have any money. So, [needing a]lakh of rupees, I went to my father and asked him, “Dad, would you lend me a lakh of rupees? I want to start this business with a partner of mine.”

Darius Teter: One lakh of rupees, by the way, is 100,000 rupees. That would be about US $3,200 at that time. Not insignificant, but not a fortune by any stretch of the imagination.

Vijay Kapoor: And coming from a middle-class background, the only response was, “No. You’re doing very well. Don’t experiment or try anything rash.” But by then, I had become a seasoned and a hardened salesman. So until my dad said, yes, I kept repeating, going back to him until he eventually said yes, after a month. So, he broke his prominent fund account and gave me a lakh of rupees. And this is my one lakh of rupees. I went and gave it to my partner to start the business.

Darius Teter: Vijay and his partner’s original concept was for a restaurant, but they ran into trouble almost as soon as they leased the space.

Vijay Kapoor: So, what’s most important for a restaurant is a kitchen, and kitchen, the most important component is chimney. And the cost of making the chimney was over two lakhs. So, I went and asked my partner, “What do we do under these circumstances?” The partner said, “Wait for a week, which I will decide.” After a week, when I went and met my partner, he said that, “Vijay, I’ve already withdrawn whatever money is out of the bank. I’m out of the business partnership. Here is a key to the premises. You take over from now onwards,” and exited out of the place. So, before my business started, the business had flopped. And I was absolutely devastated because I didn’t know what to do. I could not go back to my father and tell him that I’ve lost all the money. I had already resigned my work. The security that I had was lost, and I was totally devastated.

Darius Teter: In the face of this setback. Vijay decided to pivot. The restaurant space became the headquarters of his first tailoring shop.

Vijay Kapoor: Initially, when I started off, I started with a two-machine tailoring unit. The vision was nothing much. All I wanted to do was fill my stomach, ensure I’m able to earn enough to take care of my family. And the customers loved the fit and comfort. And it was a customer who came back and said, “Vijay, you are doing such a great job. You’re tailoring such great clothes, but it’s taking a long time. So, why don’t you make your clothes into ready-mades? Why don’t you put in your own label?” So, that’s how I got into branding Derby and keeping it within the store. And when I did that, the turnover doubled and it really improved. And we were eventually able to grow from a two-machine to a 10-machine, from 200 square feet to 500,000.

Darius Teter: To continue growing Derby, Vijay eventually turned to franchising, but that wasn’t his only option. I am curious. The other option you could have pursued, of course, is to have a Derby Responsible Menswear section in somebody else’s department store, right? Did you consider that model, or is it an option now? Is it interesting?

Vijay Kapoor: We did consider, and we did have it. Pre-2008, we were available through large format stores, but the realization that we had is that you don’t get the type of respect that you get. The payments don’t come on time. There is a lot of delays, and you are always kept as a fallback, as a substitute option, because it’s still not among the top brands. You’re not an international brand. You’re not a national brand. You’re still a local player, so you don’t get the type of respect that you deserve.

Darius Teter: Another alternative is to keep everything under your control by running your own company’s stores. That model also has drawbacks.

Vijay Kapoor: We decided very early that the route that we will take is go through exclusive stores. And it’s actually very difficult to run your own exclusive stores because the footfall is purely dependent upon the strength of your brand. So, building the brand strength to ensure the footfalls happen is the most difficult aspect that has to be considered

Darius Teter: Of all your stores now, how many are owned by the company, and how many are franchises?

Vijay Kapoor: Ninety-five percent of them are franchise, and only 5 percent are company-owned. So, we venture that we are only franchise-focused right now. Multiple reasons. One is it makes us asset-light. Second is we are able to ensure all our concentration, and all our money, is used to us developing R&D in terms of better products, innovation in terms of… And marketing the brand well. And we are able to focus on what we are best at.

Darius Teter: What also appealed to Vijay about franchising was that it felt relatively low-risk.

Vijay Kapoor: The whole idea of franchising is: Can you expand your business using somebody else’s capital? That was the whole thought process when we did it the initial round. Can we get successful using other people’s money? And can we do it?

Darius Teter: So, after 14 years of organic growth, Derby began franchising in 2008. Tell me about your thought process in deciding to switch to a franchising model.

Vijay Kapoor: We were having extremely good success in the southern part of India, the southern four states. We had close to more than about 30, 35… close to about 30 stores. They were all company-owned stores operated by us. So, that’s when in 2008 we decided that let’s start expanding, and let’s start franchising these stores out. And we wanted to take it national.

Darius Teter: To attract franchisees Vijay settled on a financial model that was designed to benefit everyone. But how did you sell the idea of this franchise to all those people who decided to bet on you?

Vijay Kapoor: Our franchising model is very simple. There was a threefold investment that the franchise partner had to make in terms of the rental deposit that goes to the landlord. In terms of interior costs, that is non-refundable. That goes through as investment of this location. And third is the stock deposit, the money that is paid to the company, to the brand, for these stocks that we provide. The stocks are provided on a consignment basis. So, in case the franchise needs to shut after five years, 10 years, 15 years, eventually whenever it shuts, the entire refundable deposit comes back to them. So, [of] the three investments, two investments are safe. One is your rented deposit, which is refundable, and the stock deposit, which is refundable. The way we had designed it, even in initial days, well, the clothing was all given to them on consignment — that is, sale or return basis.

So, we would take a fixed fee against which we would give them two and a half times value of stocks. So, as they will sell it on a weekly basis, they would retain the commission or the profit margin. And the balance amount would get transferred back to the brand. The profit margin was their margin on which they would use it for the entire operational expense, the operational expense that would comprise of the mall rentals, the air conditioning, your EB charges. And all your operational costs, like your salaries and all of the expenses, will be taken care of by the margins that they had.

Darius Teter: Do they pay an annual royalty or percentage of their profit royalty?

Vijay Kapoor: The way we structure the entire thing is that we share profits. So, we supply goods to them on consignment basis. So, in case the product is worth hundreds, they retain 30 percent of it, and 70 percent is given back to the company. So, the 30 percent is their profit margin. And 70 percent includes the cost of product, as well as our royalty, that comes back to the brand. So, we started the whole footprint of opening up nationally. We opened up in north, south, and east and west India. Simultaneously, we opened up close to about 24 stores at the same time. And they were all located in the top malls and the best mall developers. That’s the whole expansion that took place between 2008 to 2012, but the expansion didn’t go so well.

Darius Teter: As Vijay discovered, franchises were far from a sure bet.

Vijay Kapoor: By 2012, we were already falling apart because we were extremely strong in the south, but when we opened up nationally, we realized that we had done a blunder and the basic strategy was wrong, the way we expanded. We thought that the strength of the brand was already there in the south, so people [would] recognize it in the different parts of the country. But India is a country where people go more by word of mouth. Word of mouth is nothing but reference. “I like the product, so I’m going to refer it to a friend.” So, we opened up nationally. Just because it started advertising on newspapers, hoardings, it did not bring us a type of traction that we expected, and the franchise partners started losing money

Darius Teter: In the year since Derby’s initial franchise rollout, Vijay has had a lot of time to think about what went wrong.

Vijay Kapoor: There were multiple strategy issues. First was that the brand strength was not there nationally. We had to create it. You need very deep pockets. I did not have any external funding. Whatever funding I had was completely internal money that had earned over a period of time, so there was no venture capital. There was no money to burn. Second was that when we opened up all these malls, all these malls were themselves just being launched. Generally, the gestation period for any new venture, any new mall, for them to get the ideal amount of footfall is a couple of years. It takes minimum two years for the mall to gain traction. And the two years is enough to kill any brand. Unless you have deep pockets, it is very difficult for you to sustain until the mall develops the footfalls coming in.

Darius Teter: What’s fascinating to me is that you went national, pan-India, all at once, right? There was no test. You were all in. This whole question of footfalls in the mall and footfalls in the store could have been tested, right? So, was this the triumph of optimism and ambition over finances? And related to that is, who did you go to for help as you thought through the strategy?

Vijay Kapoor: On the hindsight, you’re absolutely right. The best option being to probably design, think, and probably launch those, one each in north, east, and west, and see how it goes for a couple of years and then take it forward— we did not do that. Secondly, I did not have any franchise advisers. At that point of time, franchising itself was the very new concept. There were not many brands doing franchising in the country. The country was just opening up and the economy was just opening up at that point of time. But 2011, we realized that the franchise partners were losing money.

The stores were still not getting profitable, and we could see that the bleed was happening. Had we had deeper pockets, probably we could have sustained, but since everything was internally funded, it made no sense. So, I started calling up my franchise partners and telling them, “I think we have done a mistake. It is not working out. It’s better for us to shut.” But I also took a very conscious call, which most people do not take. I also told them that I will be refunding them the entire losses that they made. That included the cost of interiors and whatever operational loss they lost operating the business.

Darius Teter: I think you’d be hard-pressed to find a story like this in the United States, where the franchiser reimbursed the franchisees for their losses.

Vijay Kapoor: But this was not a loss. Today, we do shut down stores, but today, when we shut down stores, it’s more to do with the market reasons, more to do with the failure of probably a franchise partner of not operating the way they had to operate, so then we pull the plug. But at that point of time, it was very clear to me. In my mind, it was a strategy mistake, so I took the responsibility for it, did the whole calculation and told my partners, “Say, I will not be able to pay you at one shot, but I’m going to do it over a period of a couple of years.”

So, they were getting the money back. And for me, it was a big hit because I had to sell away most of the properties and most of my investment that I made until then, to the extent that I also had to sell away the home I was living in. I did not even ask my wife and I sold away our home. And it went to the extent where I had to start borrowing from loan sharks to ensure I’m able to honor my payments.

Darius Teter: I think I understand your motivation here, which is that you talked these people into signing up for these franchises, but then you felt that you had sold them something that wasn’t real, or that wasn’t smart. And so it felt personal. I mean, it seems to me that you felt personally responsible for selling them something that just wasn’t going to work. Vijay clearly has a strong moral compass, and strategic mistakes aside, he felt like there were some underlying problems in how he approached franchising

Vijay Kapoor: When we had these losses, and when I had to sell away everything and bring everything back to the drawing board, is when I realized the fundamental mistake or flaw in my whole thought process, because you’ve been given an opportunity. Not that the business model did not work. The business model was a successful business model in south India. Just that the way it was operated and expanded was absolutely flawed, trying to look at how I could gain. And business is not about me, mine, myself, but entrepreneurship is more than that. Entrepreneurship is about sharing and growing together. Only when everybody wins in your value chain will you succeed. How do we share the success? How do we make a business model that works?

Darius Teter: So, I love this point, and I want to just make sure I understand it correctly. In the first model, you weren’t thinking that much about what would happen to the franchisees. Their success was not necessarily top of mind in your vision. When you pulled it all back in and you rethought the model, you restated the model as, “We’re successful together. Like-minded people together can do something huge. And my success depends on your success,” that whatever the strategy is, the franchisees have to win. They have to be part of the success story from the very… They have to be built in. Their success as entrepreneurs has to be built into the strategy from the very beginning. It has to be part of the vision. Is that correct, the correct way to state it?

Vijay Kapoor: Absolutely, it does. We wanted to reverse the whole process. We asked ourself… The business model is strong. I think we know how to do business. We have what it takes to succeed. So, can we actually put this whole thing in terms of putting the franchise in the center of it and ensure we start looking at his being … Can we ensure that he’s able to make enough money? So, the whole thought process, when we brought the whole thing back to the drawing board in 2014–15, is when we do the entire vision for the organization, which led to create a thousand commercially successful entrepreneurs, and that’s how we grew the business.

Darius Teter: Creating a thousand successful entrepreneurs is a huge strategic shift. To fulfill their vision, Derby had to understand what makes a good franchise. It all starts with a strong brand.

Vijay Kapoor: There are a lot of opportunities for customers to go and shop with different brands. Why should they come and choose yours? They come to you because they believe in you, they trust in you. So, building the trust is the responsibility of the franchise and the franchise partner. So, how do you build that trust is something that you need to look at.

Darius Teter: Let’s translate that into the services that you provide as the franchiser. When somebody signs up to open a franchise of Derby Responsible Menswear, what do they get from you? Do they get a manual? Do they get a style guideline for the interior of the shop?

Vijay Kapoor: Over the years, you realize that the only way you can make people successful is when you structure the whole business and make it very easy for people to operate. We ensure that we give them a complete brand manual, a guidance, so right from how the store should look, what’s with the type of interiors, to the extent that who will come and do the interiors. We have about four to five good contractors who could construct it to the brand standards at the shortest possible time with negotiated prices, so that they’re able to get the best leverage out of the whole process, to the look and feel of the store, the entire sales staff. We help them hire the sales staff, train them, get them trained within our own store. We conduct a training program for the franchise partners and ensure that we are able to scout the place along with them and ensure we locate the space. We help negotiate with the landlords so that we are able to get a good deal. So, all the aspects of franchisee is internal, and we support the partners in that way.

Darius Teter: But brand isn’t just about decor, or even the product itself.

Vijay Kapoor: A brand is in emotion. So, what’s the type of emotion that you want people to connect with your brand? Is it that of love? Is that of happiness? Is that of joy? Is that of success? And the feeling and the emotion is generated right from the point of realization, the point of truth. When a customer walks into your store, it starts from a thing of the air conditioning hitting him, the right amount of music coming in, someone greeting him and say, “Hi, how do you do today?” Or someone investing that type of time and the customer not getting a feeling that he’s being sold, but he’s being served. I always tell my team, “Do not sell. Stop selling. We are not here to sell. We are here to serve.” So, can you invest a few moments in terms of understanding what the customer is here for? What’s his profession? What’s his background? And what does he have in his wardrobe? So, that is about 20 percent of it; 80 percent of it is the experience that he has after he buys a product.

Does the product deliver the brand promise? Is it fashionable? Is it innovative? Is the fit and comfort what he expects? If you’re able to deliver the brand promise, the 80 percent of it is taken care of.

Darius Teter: One of the things that really strikes me about what you said is that consumers, when they walk into a franchise, they don’t know who owns that store, right? They’re only interested in the brand. So, your franchisees are your brand ambassadors, and picking a bad one is really bad for the brand, right? So, I keep thinking about that. The brand is everything. And without the brand, there’s no franchise. And if the franchisee doesn’t represent the brand well, the consumer doesn’t blame the franchisee. They blame the brand. Since they’ll be carrying the banner for your brand, identifying the right entrepreneur to run your franchise is another key piece of the puzzle.

Vijay Kapoor: But the way we vet it is we call them, we send them entire details or profile of the organization, and people are able to invest money. Then we have a meeting with them in terms of understanding what is the process that they need to follow, and we find that, yes, it is going to work. Having done that, we also do a complete competitive analysis in terms of who are the competitors out there? What type of revenue are they doing? What are the types of profits they’re doing? We also understand that. And having shortlisted, we go ahead and sign up with the franchise partner. We take a sign-up fee, initial sign-up fee of about two lakhs. This two lakh of rupees are basically used towards marketing the franchise when the store opens up.

Darius Teter: Are you sometimes taking risks on people, that just because you think, “This person has the drive and the personality. They just don’t have the experience. I’m going to take a bet on them”?

Vijay Kapoor: Lots of our existing franchise partners are partners who have worked with us, who have been store managers, and who want to grow and become franchisees. And that’s the moment of pride for me, when I see people who have worked in the store, who come from absolutely low-income group, who are able to go and take up a franchise. So, we do support them at that point of time, in terms of lowering, possibly, the deposit amount or the stock deposit amount, or we give them the leverage at that point of time.

Darius Teter: And while capital is an important consideration for a franchise partner, it’s far from the only thing.

Vijay Kapoor: Always get in entrepreneurs who are passionate about what they do. Don’t get in people just because they have the money, is what I feel. Because if you have people who are equally passionate and also have the resources, then you’ll find that the business becomes more fun. It’s more entertaining, and it’s more… Business should not be a stress. There should be a happiness. There should be a flow. There should be a sense of achievement. There should be a sense of fulfillment that comes out of work. And that fulfillment will never happen when money is the only focus. Money is an amazing byproduct, but a very poor part of focus. So, when money comes out of the fact that you’re doing service, when you are helping other people, when you’re helping, and when you see the smile on your customer’s face, who swear by you saying that, “I love your brand,” I think that’s the most sweetest thing that you can ever have.

Darius Teter: In Derby’s first try at franchising, they realized their stores weren’t in the right place to get sufficient consistent footfalls, so now geography is a central component of their model and they analyzed tons of data to set up their franchisees for success.

Vijay Kapoor: First, in retail, what’s most important is location. Number one to five is all about location: location, location, location, location, location. After that, everything else follows. So, before we sign a franchisee, we are very careful about: What location are we going to open up? What’s going to be the type of footfall that’s going to happen? What’s going to be the break-even point? What’s going to be the study of that? So, we do the complete analysis. We invest enough time in scouting the location, finding our competitor activity, finding out what is the type of revenue that we can generate. And we get into various models of scenario one, scenario two, scenario three, so that even the worst case scenarios, they’re able to make money.

Darius Teter: Do franchisees ever find themselves competing with each other based on location?

Vijay Kapoor: As a matter of policy, we said that we will not have any franchise partner within three kilometer radius of what we have. We’ve given it in writing. So, we ensure that we will never put two franchise partners closer. In fact, this week, we are opening a second location within the same city. And I had to meet the franchise partner who is already operating a store for our last 10 years. And I tell him, “Hey, we are opening the second location. We are opening up over the weekend. We are going to be opening up the store, and this is the reason we are doing it.” And though the location’s completely… — it’s about 15 kilometers away — but still he needed that reassurance coming in from the big boss saying that, “I think this is why we are doing it, and it’s okay. Your business is only going to improve because we are going to have more money to do better marketing out here.”

So, that little bit of reassurance, that little bit of… People get jittery when you have other stores opening up in your location, but we try to manage it by doing this PR work with them.

Darius Teter: Location is just one way that Derby can use their data to give their franchisees a leg up.

Vijay Kapoor: Different stores have different merchandise that is more tuned towards the customer footfall that’s happening in that place. There’s a whole basket of merchandise that Derby makes, but depending upon the price point that sells in a certain market, depending upon the color that sells in a certain market, style that sells in a certain market … So, we have the back-end team that’s continuously analyzing the complete… We have CCTV [closed-circuit television] cameras monitoring every store, and we are continuously monitoring it from the back end to understand what are the customers expecting in every store in terms of, what is selling through better? How should the next replenishment go? What should be the type of colors out there? And everything is tuned towards the local requirement, because India may be one country, but India is actually — probably every 200 kilometers in India, the entire look and feel in what sells… Even the language changes, your culture changes, and the attitude of people changes. The buy pattern changes. So, everything is more localized, more attuned.

Darius Teter: A lot of this work happens even before a new store opens, but that doesn’t mean you can just set it and forget it. To be truly franchise first and achieve the goal of more successful entrepreneurs, you’ve got to spend significant time training them.

Vijay Kapoor: In India at least, people think when you’re investing in franchise, it’s all about, you know, “I’ve invested monies like a bank deposit. I get 6 percent, 7 percent return on investment.” Franchise doesn’t work that way. You need to invest your energy into it. You need to ensure that you are able to question your team members, you’re able to look at your P&L [profit and loss] on a regular basis, you’re able to have an interaction with the company on a regular basis. So, we ensure we have enough training for the franchise partners for them to understand, because most of them come as first-generation entrepreneurs who have never been into franchise or never run a business before, so we are trying to pull them and get them into business. So, we need to train them in terms of understanding how to look at business and how to become true entrepreneurs.

So, the responsibility we have taken on ourselves is: How do we teach people how to become entrepreneurs? What is it that they need to do? How do they look at the business? What will be the type of strategy they need to follow and guide them through the whole process and hand-hold them until they eventually are able to fly on their own?

Darius Teter: What you’re saying is that in India, it was still relatively new concepts, so the people who were signing up didn’t actually necessarily have experience running a fashion shop. And so part of your mission was actually to teach them how to be business people.

Vijay Kapoor: In fact, research shows that over 90 percent of businesses that open up in India shut within the first five years, 90 percent failure rate. That’s how risky it is to open a business, but the same similar research shows that close to about 70 percent of franchise businesses succeed within the first five years in the country. So, we’re able to reverse a whole process when you take a franchise. And the vision is also: How do we convert people into first-generation entrepreneurs? Can we get in people and make them entrepreneurs?

Darius Teter: In Vijay’s model, franchising is an ongoing relationship. And like any good relationship, it requires open channels of communication.

Vijay Kapoor: What’s most important is: communication should be a two-way communication. Feedback is extremely important from the franchise partner. So, there are multiple ways how we keep in touch with the franchise partner. One is the sales head, as well as the cluster managers or the retail managers who are there. Be in touch with the franchise partners on a daily and weekly basis in terms of understanding what’s happening within the business. So, during my travel, I ensure that I invest time in terms of a lunch or a dinner meeting with my franchise partner, going through the entire records, taking… Whenever I go for a meeting, I take back the entire history with a P&L with all the working about what is happening, the plus and minuses, and have a one-to-one discussion with the franchise partner over lunch or dinner and discuss it out and tell, “Hey, I think this is working.

I think this is why we need to strengthen. These are the issues that we have, and this is what we need to sort. This is what the organization brand is willing to do, and this is what we expect from you.” So, this would be the meeting point. So, we do a threefold methodology of keeping in touch with the franchise, with the franchise partners.

Darius Teter: So, at least once a year, either you or one of your senior leaders meets with them, or more often?

Vijay Kapoor: The senior leader meets with them probably every 15 days. I meet with them once in three months, minimum. Once in three months is when I have a meeting with them. One thing I’ve realized, out of touch, out of mind. You need to be in touch with your… He’s your biggest… Let’s be very honest. He’s your investor. He’s your biggest customer. And if you do not have the personal touch, people drift away, and you give an opportunity for competitors to sneak in. So, we do not want to do that. We do not want to lose a franchise partner, so we are very cautious about that. And we build systems and processes to ensure that they’re constantly in touch.

Darius Teter: These open channels of communication come in handy, because like in any business, franchisees will clash with corporate.

Vijay Kapoor: Conflict is a part of business. There will always be… When you have multiple people working together, ego conflict is bound to be there, and that’s human nature. And without conflict, it’s impossible to have. But the whole thing is about: How do we look at the entire situation? One is that we look at it from the perspective about… As I told you, we are more franchise first. Over the years, this is the learning that we had, is how do we be more franchise first and understand why the conflict is coming, and what is it that they want out of it? If we feel that, yes, what they’re demanding or what they’re expecting is something very realistic and something that’s doable, we definitely do. If you feel no, it’s against the brand and it’s going to be against their own interest because it’s probably short term, but long term is not going to help them, then we are confident enough to go back and tell them, “Hey, I think we will not be able to do this.”

In fact, a lot of time, being at a clothing line, a lot of time, they want us to introduce products or services which may not actually align with the brand. So at that point of time, we are very clear that, “Hey, I don’t think it’s possible with the brand. This is the boundaries within which we work.”

Darius Teter: Being franchise first also means that you stand by your partners even when they’re going through a rough patch. When franchises are underperforming, Derby works hard to figure out the underlying causes and to help fix them.

Vijay Kapoor: We do this on a monthly basis. Part of the BSE itself is franchise profitability. Are they getting 20 percent ROI, return on investment? Close to about 95 percent of our franchise partners currently are profitable. So, we can monitor this extremely closely. And wherever we find that is, few months there, maybe a dip probably. Some people slip into the red, because we have to look at the entire year. But a few months which are downward, they do dip into the red. So, that gives us to think, okay, they’re going to red. What do we do to ensure they, again, are able to slip back and get back into their performance? What is it? Is it the attention of the brand that has not been there? Has it been a supply chain issue? Is there any marketing that needs to be done there, or is all of the franchise partner’s attention diverted to some other activity? Is he getting married? Or, probably he’s invested in some other business. He’s not investing in the type of time that he used to invest, or probably there has been a change in the retail team out there.

What is the root cost? So, we do a complete root cost analysis and look into the issue and try to fix it before it blows out of proportion. It’s easier to plug the boat when it starts leaking rather than the entire water draining out, so we take care of that.

Darius Teter: Vijay’s journey has been a roller coaster, but he’s sharing what he’s learned with as many people as he can, and he’s setting a standard for the way that franchises operate across India. There’s a common phrase in the franchising industry: “At first, it’s about we, but it quickly becomes about me.” And I think that refers to the fact that at the beginning of the franchising journey, the relationship starts off as collaborative. It’s win-win, we’re in this together. But as time goes on, the relationship could become more combative as each party tries to maximize their own interest. Do you experience this?

Vijay Kapoor: I think that is my first experience of franchising. I totally agree with them. That’s how the tendency, the general mind tends to go. But I tried to build this culture post-2015. I always tell my team, “Ask yourself your question every time. What is the right thing to do? And not what is the easy thing to do, or what is good for you. What is the right thing to do? That will give you the answer.” Not that the franchise model was wrong. It was something that was outside in. I was trying to ensure I’m using my franchise partner to grow my business and become profitable. There’s nothing wrong about it, but it was done with a very selfish intent. When I was able to sit back and realize that, hey, I think I need to reverse the whole process and look at, “How do I internally connect myself and how do I take responsibility for it?” is when things started to change. I think, yes, it was far more easier to shut down, far more easier to lift your hands up, far more easier to protect whatever was left.

But I said, that is not going to… I will never be able to look up to myself ever in the mirror after that, because the biggest setback is to fall in your own eyes, and the greatest joy is to grow in your own eyes.

Darius Teter: Vijay initially saw franchising as risk-free growth, but that growth didn’t happen until he fully invested in his franchises. You don’t need to have Vijay’s ambitious goal of training 1,000 entrepreneurs, but if you approach franchising as easy money, you may be disappointed in the results. Before you can even start a franchise, you need a compelling and consistent brand. You need to identify locations that will generate strong footfall and have a strategy to localize products to that market. You need to source great talent for the franchisees and be committed to training them, because entrepreneurs with the most passion may be better than those with the most money. And simplify things for your franchisees before they even open their doors so that they can focus on what’s important. Even once they’re up and running, the best franchises aren’t left to their own devices. They’re empowered by the franchiser. Provide them with research in real-time back-end data. Create channels of communication so you can build on what’s working and fix what isn’t.

Franchises aren’t magic money-printing machines. Entrepreneurs can’t just draft off a successful brand, and corporate can’t get free growth. What franchises do offer is a model that combines the resources of big business with the tenacity of entrepreneurship. So, if you can set up your franchises for success, you will all reap the benefits together. I want to give a big thank you to Vijay Kapoor for empowering thousands of entrepreneurs, both with his story and with his work.

This has been Grit & Growth with the Stanford Graduate School of Business. And I’m your host, Darius Teter. If you liked this episode, leave us a review on your podcast app. It really helps us to share the stories of these incredible entrepreneurs with as many people as possible. To learn how Stanford Graduate School of Business is partnering with entrepreneurs in Africa and Asia, head over to the Stanford Seed website at seed.stanford.edu/podcast. Grit & Growth is a podcast by Stanford Seed. Laurie Fuller and Erika Amoako-Agyei researched and developed content for this episode. Kendra Gladych is our production coordinator, and our executive producer is Tiffany Steves, with writing and production from Andrew Ganem, and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.