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Franchising in healthcare offers biz opportunities

Mar 14 2013, 14:00   |   By Entrepreneur

By Avanish Tiwary

Healthcare in India has always suffered due to the lack of adequate hospitals and testing centers in remote areas.

Three decades ago, with the aim of increasing the network in small towns to correct that, diagnostics chains in India decided to adopt the franchise model.

Back in 1981, the 60-year-old diagnostics chain, Dr Lal Pathlabs, began the diagnostics franchise model in India. It now boasts of more than 135 labs across the country. "In the healthcare and diagnostics industry, it is we who brought in the trend of franchising. Like any other franchise model, ours is also based on a hub and spoke model," says Dr. Arvind Lal, Chairman and Managing Director, Dr Lal Pathlabs.

In the hub and spoke model, there is one main laboratory at the central location (hub) around which small collection points (spokes) are located. At the end of the day, these collection points take all the testing samples to the main laboratory, where the actual testing is done.

Sanjeev Vashishta, Chief Executive Officer of SRL Diagnostics, says the reason they took the franchise path was when they realized that it was difficult for people to travel long distances for their diagnostics needs. SRL Diagnostics, which is the diagnostics arm of Fortis Hospitals, started operations in 1996, but did not adopt the franchise model until 2003. "Right from the beginning we knew that we had to reach out to people, instead of expecting them to come to us. In 2003, we thought of having a franchise model which would reinforce our existing network in the remote areas," Vashishta says.

The franchise model has also helped SRL Diagnostics get local support. "As we are always moving ahead aggressively and want to have a pan-India presence, we realized that franchising is the way to go," he adds.

All-India reach

The firm, Vashishta says, is now present in nearly every nook and corner of India. Speaking on the growth trajectory, he says that till 2006, they had only about 20 laboratories. Post 2006, the company spread much faster and now has 242 laboratories and more than 1,300 collection centers across India. "We have labs in far-flung places like Imphal now," he says.

The unique quality of the franchise model is that it can make the company's presence felt in more places. Birla Kerala Vaidyashala (BKV), a part of Birla Wellness Private Ltd., which offers ayurveda treatment, was able to reach remote areas in the country with the help of their franchisees.

"The model allowed us to expand beyond Mumbai to Bengaluru, Chennai, Puducherry, Kerala, and smaller towns of Maharashtra like Shirdi, Wada, etc. It has also helped us increase our presence in Mumbai and Thane. Our revenues almost doubled in a very short period of 18 months," informs Tanjai Kapoor, Vice President, Marketing and Sales, BKV.

The franchise journey, which BKV started 10 years ago, did not meet with success initially. The model started showing results only from 2009 after the management brought in a few strategic changes.

"It is only in the last three years that the numbers are up as we have minimized the investment from the company's side and have been choosy in terms of access to good retail locations. We also started targeting niche segment such as clubs, residential societies and hotels," says Kapoor. Over 30 percent of the overall revenues of the Kerala-based BKV comes from South India and they are also looking to expand in Andhra Pradesh and Karnataka.

The latecomers
Gradually, the growth of diagnostics chains with franchise models started affecting business of other diagnostics and healthcare companies. They too decided to adopt this model.

Dr. Reddy's Path Labs, which has been in the diagnostics market since 2009, decided to take up the franchise model a couple of months ago. "When we were doing direct operations, we faced a lot of logistical problems. Our services were getting affected due to the time taken for a sample to reach us," says Dr. Madhusudan Reddy, Director, Dr Reddy's Path Labs. He adds, "It also increased our costs, after which we decided to adopt the franchise model."

Reddy is quick to add that in these two-three months, they have already begun feeling a marginal decrease in logistics costs.

Currently, Dr. Reddy's Path Labs offers three types of franchisee models for individual entrepreneurs-district centers, collection centers and pickup centers. Under district franchise, there are collection centers, and within them, there are pickup centers. Early numbers reveal that the franchise model of Dr. Reddy's has got them a few buyers. In a short span of three months, the diagnostics chain has ratcheted up 62 laboratories under its name, spread across eight states.

"It's been a good journey till now and the response is also quite positive. We have been promoting the franchise model in these existing states and in another three months, we will be entering other states too," Reddy says of the expansion plans.

A question of quality

Hospitals, the main arm of the healthcare ecosystem, are not too enthusiastic about the franchise model citing lack of quality as one of the main issues. Apollo Hospitals has stopped promoting their franchisee business and is planning to cut down on the existing franchisee centers. "There are a lot of quality issues that we have to take care of. That's the reason why we are not very enthusiastic about the whole franchise model for hospitals. Soon we will be closing down the existing franchisee centers too," says Dr. Harinder Singh Sidhu, Senior General Manager, Apollo Hospitals. Currently, the Apollo Hospitals are run by the management team, except a few. The exact numbers could not be verified.

Dr. Batra's, which specialises in homeopathy treatment, has decided to adopt the franchise model for strategic growth.

The homeopathy clinic giant aims to have more than 110 clinics in tier I and tier II cities and they say franchising is the best model to achieve that target efficiently. "We believe that this model will help us achieve our target of having 750 clinics by 2020. Apart from helping us reach out smaller cities in India, this exercise will also help us to spread the umbrella brand of Dr Batra's to individual practicing homeopaths," says Dr. Akshay Batra, Managing Director, Dr. Batra's.

Grooming entrepreneurs
The by-product of the franchise model in any sector is that it helps an individual find his or her entrepreneurial feet and with the backing of a good brand name.

Hospitals and diagnostic chains are looking for partners who are starting out business in this sector. However, they are willing to tie up only with those who have a basic knowledge or at least some inclination towards healthcare.

"We are not promoting people who are in the market for long. To push new entrepreneurs ahead, we have kept the qualification bar and franchise rate at a minimum," points out Reddy. These steps have been put in place chiefly to attract young and new entrepreneurs, he adds. Almost all healthcare chains using the franchise model offer technical support and help, such as training to the franchisees.

Dr Lal PathLabs, which is strictly against franchising its laboratories and offers franchise only for its collection centers, trains people who have spent some time in the healthcare industry in some capacity. "We help individual entrepreneurs who want to do something in healthcare but don't have the expertise. If someone wants to run a chemist shop but cannot, then he or she can come to us. One need not be a doctor; we train the interested to run a collection center," Lal says.

Around 50 percent of the total revenue (he refuses to divulge figures) comes from franchise centers, Lal tells us.

Unlike diagnostic chains, a hospital or a clinic cannot train someone to treat patients since that requires knowledge and expertise. Finding experts for the franchise is not the main concern of Dr. Batra's, as according to their in-house survey, 48 percent of homeopaths would like to join
the brand.

"We are looking forward to amalgamating all practicing homeopaths and providing them with our platform, expertise and sharing the learnings from the seven lakh plus cases treated over 30 years," says Batra.

Franchise partnership
A franchise is not someone who just carries your brand name, but also a business partner. Hence, it requires a great deal of screening before handing over the franchise.

"We don't let any Tom, Dick and Harry come on board. The franchise has to share our value system as we are dealing with life," SRL Diagnostics' Vashishta says. He agrees that it's a mutual relationship with the franchisee and one has to give something to expect something in return.

Apart from technical training, SRL also provides a professional back-end laboratory, marketing and logistics support, vendors and a full team. "Basically, we are providing a key to a franchise to start his own show. We virtually give everything to them for them to start off," Vashishta says.

The business model with the franchisee can be negotiable and depends from person to person. It can either be based on a revenue-share framework or a fixed monthly payment to the company. Kapoor says BKV works on two different business models- franchisee-owned and franchisee-operated (FOFO) and franchisee-owned and company operated (FOCO).

In the FOFO model, BKV only gets a share of revenue as royalty which could range from about 10-20 percent depending on the territory
and investments.

However, in the FOCO model they usually assure the franchisee of a minimum revenue guarantee per month and then a percentage share of the revenue after a certain point. Kapoor says the minimum guarantee varies from center to center as it is linked to real estate prices and revenue potential in the territory. Even though franchising is a two-way business model and both the parties benefit from it, the large fish-hospitals and diagnostics chains-have more of a say because of their brand names.

The deal depends on what the small and individual entrepreneur brings to the table. "There is a franchise agreement, which he [the franchisee] has to adhere to and work in the same spirit, because he is carrying our name," Lal says. Almost all healthcare companies interested in franchising want you to adhere to certain parameters.

"First, we see if he or she has got a place of his own, because it is not easy in India to find suitable premises on rent. The second requirement is whether he or she has spent time in the healthcare industry or has worked as a medical representative, chemist or a lab technician," Lal informs.

Even if a person desirous of getting a franchise does not have any technical know-how or place to start one, he can still probably be a franchisee, says Lal, but adds that this could mean a lower revenue share or monthly income for him, depending on the final franchising model adopted .

The road ahead
The diagnostics franchise market, people from the sector say, is highly fragmented and has not been tapped into much; which means there is a distinct possibility of more players coming here in the future.

"There is place for everybody as the market is very nascent in terms of getting organized. Only 10 percent of the market is currently tapped by diagnostics companies," says Vashishta.

According to Lal, there are four to five big healthcare labs operating in India and collectively they have more than 2,000 centers. Around 95 percent work on the franchise model. "Whoever is not in the franchising market will have to splurge on it in the future," he adds.

© Entrepreneur India February 2013
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