Just Cuts in India: Running with scissors

Australia’s biggest franchised hairdressing chain is expanding to India. Founder Denis McFadden tells Jacqui Walker how 250 salons will open within four years.

Denis McFadden has just signed a master franchising deal for India that will see 250 Just Cuts salons open in four years. Just Cuts, which started franchising in 1990, is Australia’s biggest franchised hairdressing chain with 160 salons in Australia and New Zealand.

McFadden, who founded Just Cuts, tells Jacqui Walker how he found his Indian partner, why they think it will be a great success and what they have learned so far.

Jacqui Walker: How did you find your master franchisee in India? Why India?

Denis McFadden: We went with Austrade on a trade tour in late 2006 and the ball started rolling from there. India is the world’s second most populous country and Australia’s fourth-largest export market. There are a million salons operating in India, of which only 500 are high-end salons.

There is a huge opportunity to tap into the expanding middle-class market and fill the niche between barber and high-end salon.

Austrade set up some meetings with local businesses interested in Just Cuts. Then we went back early this year and interviewed a shortlist of three candidates, and selected one.

It’s critical to get the right business partner in a foreign market. Who did you choose and why?

We chose a billion dollar company with lots of experience in retailing and franchising. Gitanjali Lifestyle has a large franchised chain of jewellery stores with four brands, high-end to cheap, so they understand how retail works in India.

There are 500–700 shopping centres under construction in India now. You would only want stores in shopping centres. We want to be part of the groundswell. They want the brands. The middle class have the money.

Gitanjali Lifestyle know about shopping centres. We wanted someone with contacts in shopping centres because it will increase their rollout potential. They understand that market. The first salon will open in New Delhi.

Our master franchisees’ knowledge of the franchise industry and their contacts gives them access to database of potential franchisees. The franchise owners don’t have to be hairdressers. Only 25% of our owners in Australia are hairdressers. They are more likely to be investors who will employ hairdressers.

Was it difficult to choose them? How much due diligence did you do?

We met with the principals. We walked round their operation got the vibe of it. We met people who do business with them. Prior to doing the deal they came out and looked at Just Cuts in Australia.

The directors of the company are setting up a new division to run Just Cuts India. They have a dedicated management team to make sure it is a success.

Why did you choose the master franchising model?

They get real ownership. It worked well for us in New Zealand. We can see Just Cuts in many countries. They have the knowhow in leasing in India, the legal side and retailing. We have the brand and the business model.

It suits us being here in Australia. We can’t always be there.

We will look after the brand. We will oversee their rollout, salon design, promotional material. What you see here is what we would like to see in India – the same chairs and signage and corporate identity.

What modifications making for a different culture?

They will have larger salons. In Australia, salons are 40–50 square metres. Over there they will be much bigger, purely because there is a bigger market. There are office buildings in India with 64,000 people in them. The numbers are staggering. You don’t have to worry about the numbers.

There are two other hairdressing chains in India with about 100 salons each. They think they are big. But we aim to be bigger and the leading brand.

What are the challenges for you in this expansion?

One of main issues is compliance with Just Cuts policies and procedures. We’re believing we might have to watch that. We don’t want to dilute it. In six months we may make modifications to make better for this market. But initially we won’t muck around with the model.

Also expanding can be a strain on local operations. We only have 10 staff in our head office. That’s why we chose master franchising.

How will you manage compliance?

Our compliance manager will go over there. They are looking at 50 salons very quickly. We will have one of our managers there for four to five weeks to run owners training and franchisee training.

When they need help they can pull people from Australia. We have done that with new Zealand and it has worked well. Once they get bigger they will hire their own support staff. In the beginning we will be directly importing retail products from Australia to India. From there we will be sourcing local suppliers that meet our standards and formulations, depending on the quality.

Will the master franchisor recruit franchisees straight away?

The first three salons, the master franchisor will operate themselves. That way they will get an understanding of what is required.

Why will your model, which runs on a flat fee paid by franchisee to franchisor, work in India?

Wage costs represent about 55% of costs for franchisees in Australia. In India, wage costs are low, approximately 20% of revenue. Rents are on par to Australia at about 20% of revenue. Other outgoings about 10%. So the return on franchise in India is even better than in Australia.

What’s the fee structure?

In Australia, franchisees pay a flat fee to us, which is the equivalent of 12 haircuts per week, the advertising fee is five haircuts per week. So whether turnover is $2 million or $200,000, the royalty to the franchisor is the same.

It enables a better relationship between the franchisee and franchisor. There’s no need for a point of sale system, of audits of turnover.

But the Indian master will be charging his franchisees a percentage of turnover and a proportion of this, equivalent to about nine haircuts a week per salon will be paid to us as master franchisor and for international marketing.

They have also paid us an up-front fee, six figures, but it’s minimal. We will make money as they go forward and grow.

What are the top three considerations in deciding to expand overseas?

For Just Cuts, the three most important considerations have been finding a niche in the market, locating an experienced master franchisee – be it an individual or group – and ensuring we have adequate head office resources required to ensure compliance in the other country.