Dubai: Wannabe entrepreneurs hoping to get into the F&B industry but do not have the necessary capital to do so on their own can still whet their appetites. Just serve them with a sub-franchising option. Many of them have taken quite a liking to it.
It's not that the sub-franchising concept is a new phenomenon that has the local marketplace in thrall. Far from it.
The concept has been around for some time, but it's only over the last two years that it has built up enough steam to be a sub-sector to the thriving franchising industry.
Nowhere is this more apparent than in the local sub-sandwiches business. Both majors, Subway and Charley's Grilled Subs, are not only finding favour with consumers, but they have also created a rapidly emergent market for sub-franchising opportunities. Clearly it is a case of "sub-sub" creating a win-win situation.
"It works to the advantage of the master-franchisee as there will be far-flung locations where on his own he may not get the economies of scale to justify setting up there," said George Kunnappally, general manager of the F&B division at Al Madani Group. His company is the regional rights holder to Charley's Grilled Subs and late last year acquired them to do the sub-franchising as well.
Critical mass
"This is where a sub-franchisee who knows his market — even if it's a narrowly defined one — can thrive. That's good enough to create the critical mass for the sub-franchisee and, by extension, for the brand and us as master-franchisee."
Taking this process to the logical conclusion, the sub-franchised outlets can be found in university campuses as well as strategic locations in Ras Al Khaimah and Saudi Arabia.
A Charley's Grilled Subs sub-franchisee prospect would have to pay $20,000 for a 10-year licence and pump in an additional Dh750,000-Dh800,000 for the equipment. On top of that, they would need to pay the master-franchisee 8 per cent royalty on daily sales calculated monthly.
"Even with all these commitments, both upfront and down the line, our sub-franchisees are finding a return on investments in 20 to 24 months," said Kunnappally. "Also, it's not that sub-franchises are left with secondary locations and we take on all the main ones.
"There is an ethics in the sub-franchising industry that requires all location prospects should be offered to sub-franchises as well."
But can sub-franchising work well in other F&B categories? On available evidence, it has not as regional rights holders have by and large preferred to do the investments — and the cooking — on their own. It could also be that unlike the sub-sandwich concept sub-franchising does not lend as easily to other F&B opportunities. But banking industry sources suggest sub-franchising is still in the marinating mode and should be good to be served to a wider user base soon.
"Most leading local banks have dedicated financing programmes for small businesses; with the lower capital base sub-franchising requires they will be more willing to look at it," said a banking source.
The impression is that it would provide fertile ground for more UAE nationals to get into business for themselves. And they would have access to funding from resources other than banks and probably on more advantageous terms.
"The services industry is reaching a level of maturity in the UAE and that's the point when sub-franchising opportunities take off," said the banker. "It will make for an interesting marketplace going forward."
A few pitfalls
While there are many plusses going the sub-franchise way, are there any disadvantages that may be less obvious?
"Those looking at sub-franchises by definition are likely to be small businessmen and first-time entrepreneurs," said Vikram Venkataraman, director of Salvus Strategic Advisors based in Dubai.
"Both are likely to be swayed by the power and popularity of global brands. Being small, they can only go for non-prime locations as rentals will be lower.
"These areas are likely to have demographic profiles that may or not be the target market.
"He must be aware the franchise financing does not exist in the UAE ."
