We were on the edge when we started our franchise network in 2007 with a supermarket at Ilol in Gujarat. The franchise was dependent on us for procurements of products at an economical cost.
With just two stores (Ahmedabad and Ilol) in our network then, product procurement in this manner was out of the question. This was a serious matter on our hands, which needed immediate action from our side. Franchisee businesses flourish on mutual trust — if the trust is breached by either party, the relationship goes for a toss.
We started our franchise model, by tapping the rural community base of
‘Cheliya Community’, as they are popularly known in Gujarat. This is an enterprising community which has farming and cattle rearing as its occupation at a village level. Some of them have also ventured into restaurants businesses in cities and urban centres. Their Punjabi food joints are quite famous.
In order to tap their restaurant business, we devised a backward integration strategy of creating a separate business of bulk supplies of food, grocery and spices to the restaurants. Most of their restaurants are located on highways and remote places. We knew that in such remote places they would be in need of a reliable HoReCa (Hotel/Restaurant/Caterer) supplier, who can provide them with these items regularly. We approached them with the idea of filling this gap.
This strategy of backward integration would help us in two ways:
We would have the strength to negotiate bulk deals for many restaurants, rather than negotiating only for two retail stores. The bulk deal benefits can be passed on to our village franchisees, and thus we can procure products for them at an economical cost and fulfil their immediate need.
In order to have a more focused approach for the execution of this strategy, we launched a separate vertical with different sets of entrepreneurs – Hearty Mart Enterprise Pvt Ltd in 2008. The sole aim of the people working in this company was to crack more bulk deals with vendors and sell the same to the hotels & restaurants.
Gradually, this idea clicked and it became robust support of procuring products at economical cost, for our franchise network. We created our private brand – GoodTime — in this company. GoodTime is a range of spices for retail customers and sold through our network of supermarkets.
We later invested in a production facility at Dholka and started manufacturing spices for hotels, under the brand name –
Chef ki Pasand. Today, we supply bulk food-groceries, spices, rice, ketchup and other food items to nearly 1000+ restaurants in the states of Gujarat, Maharashtra and Rajasthan.
The success of Hearty Mart Enterprise helped in the evolution of a hybrid franchise business model. We call it a ‘Co-operative–Investment Model’. When we realised that our HoReCa customers wanted us to add more diverse products like bakery items, tea and non-food products like paper napkins, aluminium foils etc. in our product line, we started creating Strategic Business Units (SBUs) for these products.
SBUs, in our case, are run by entrepreneurs and are not wholly owned by us unlike SBUs of other companies. In this model, HM Enterprises holds about 15 -25 percent stake, and the rest (75-85 percent) is distributed among those who run it. Thus, it is a co-operative model with multiple partners investing in the firm.
We take 5 percent as a brand fee from their profits and brand their company as Hearty Mart venture and introduce them to our captive customer base of 1,000+ restaurants. The managing director of HM Enterprise works as a Group CEO for our SBU companies and the rest of the entrepreneurs report to him for operational guidance. Most of them hail from a small village named
Saathal near Dholka town in Gujarat.
This co-operative investment model helped us scale our business. We entered into bakery and café (Bakers Point), tea (Day Break), HoReCa, food-grocery retail, flour trading, paper products, packaging, hospitality products business and marketing and logistics business.
Today, Hearty Mart is a network of nine companies in different food segments. In food-grocery retail, it is a chain of 14 supermarket franchisees at the rural level; it runs two HoReCa depots (Surat and Vasai, Mumbai) and 21 young entrepreneurs work with the brand.
In the growth stage in order to scale up, a well-thought-out plan needs to be implemented. I suggest the following five steps for effectively implementing an integration growth strategy:
Step 1: Target Existing Market First
The current market of operations is the best place to look for growth ideas. Penetrating the current market is easier to execute than expanding into a newer and unexplored market. At Hearty Mart, when we wanted to grow we focused mainly on the food-grocery market and added bulk supplies to hotels and entered the HoReCa segment, along with the retail of these products. We had the same sets of vendors in both the cases and hence things became much easier for us to carry out HoReCa operations.
Step 2: Integrate Ideas
Once the market is finalised, the next step is to devise an effective strategy to tap the market. An entrepreneur who manufactures bread can easily make sandwiches and sell them to his current customers and grow. This is a forward integration strategy.
But before taking the plunge, he is expected to deliberate on the pros and cons of the strategy implementation. Hearty Mart Enterprise was a spice trading company in the HoReCa segment. We implemented a horizontal integration strategy by foraying into products like bakery, tea, flour etc along with spices and rice for our same sets of customers.
Step 3: Get The Funding Right
Once the integration idea (vertical or horizontal) is mulled over, the next step is to fund the idea. The cash-rich ventures in the growth stage can easily fund the idea and float wholly-owned SBUs. But other companies with a paucity of funds need to think of an alternative strategy.
At Hearty Mart, we came up with the innovative idea — ‘Co-operative–Investment’ business model to fulfil our needs for funds and manpower. Here, the separate sets of partners come together to fund and run the vertical under the guidance of Hearty Mart.
Step 4: Define Roles And Control
It is essential to put in place a proper control system that monitors the working and behaviour of these SBUs. They are brand representatives in the eyes of the customers and hence it is essential that their conduct and behaviour with customers are in sync with that of the parent company.
At Hearty Mart, we periodically visit our customers and take the general feedback of their experience in dealing with our other companies. We have formed a ‘Corporate Group’ within our company and the entrepreneurs running these SBUs report to this group. Their role is to implement the ideas and strategies devised by the Corporate Group and achieve the growth target.
Step 5: Create A Suitable Legal Contract
In any kind of business relationship, a legal contract is essential to safeguard business operations and IPR. Under the guidance of a legal consultant, draft a contract that clearly mentions the roles and responsibilities of both the parties and financial implications involved. A legal contract can be similar to franchise contracts but with slight modifications, depending upon the agreed terms and conditions.
Growth is achieved only when everyone in the system works in tandem to reach a common goal. James Cash Penney has wonderfully conveyed this thought: "Growth is never by mere chance; it is the result of forces working together."
Nadeem Jafri is the founder and chief mentor of Hearty Mart. He tweets as @nadeemjafri.
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