Franchising in Russia
Franchising – from the French for ‘Free’, is a method of doing business
wherein a franchisor licenses trademarks and methods of doing business
to a franchisee in exchange for a recurring royalty fee.
The term is commonly used to describe a wide variety of business
relationships which may or may not fall into the legal definition
provided above. For example, a vending machine operator may receive a
franchise for a particular kind of vending machine, including a
trademark and a royalty but no method of doing business.
In the US franchising falls under the jurisdiction of a number of state
and federal laws. Contrary to what might be expected, there is no
federal registry of franchising or any federal filing requirements for
information. Instead, states primarily collect data on franchising
companies and enforce laws and regulations regarding their spread.
Franchising is at least 150 years old. One early example resulted in the
characteristic look of historic hotels (bars) in New South Wales, with
franchising agreements between hotels and breweries. An American example
was the telegraph system operated by various railroad companies but
controlled by Western Union, or selling a certain make of automobiles in
a car dealership.
Some people would argue that franchising (in a non-profit sense) goes
back even further; science-fiction author Neal Stephenson pointed out a
resemblance between franchising systems and churches (specifically the
ones that proselytize) in his breakthrough novel, Snow Crash.
Modern franchising came to prominence in the 1950s with the plethora of
franchise-based fast food restaurants, of which McDonalds is the first
and most globally successful. Many retail sectors, particularly in the
United States, are now dominated by franchising to the point where
independently-run operations are the exception rather than the rule. As
an example, the Sport Clips Franchise organization only opens company
owned stores to test new marketing concepts or ideas. As a result, Sport
Clips owns very few of the over 200 franchisee owned stores. There is
much information on franchising online.
As practiced in retailing, franchising offers franchisees the advantage
of starting up a new business quickly based on a proven trademark and
formula of doing business, as opposed to having to build a new business
and brand from scratch (often in the face of aggressive competition from
franchise operators).
As long as their brand and formula are carefully designed and properly
executed, franchisors are able to expand their brand very rapidly across
countries and continents, and can reap enormous profits in the process,
while the franchisees do all the hard work of dealing with customers
face-to-face. See customer service.
In response to the soaring popularity of franchising, an increasing
number of communities are taking steps to limit these chain businesses
and reduce displacement of independent businesses through limits on
“formula businesses.”
Franchising is both an old and a new concept. The term from the French
originally meant to be free from servitude. Its meaning in the context
of present-day promotions is the opportunity for an individual to own
his or her own business, even if he or she is inexperienced and/or lacks
adequate capital. During recent years, franchising, as a type of
business operations, has been expanding rapidly and entering into new
areas of application. The most recent industry study estimates that
franchised businesses accounted for $803 billion in annual sales in
1992. Retail (business format) franchising is estimated to account for
35% of total U.S. retail sales. More than 8 million people are employed
by franchise establishments.
Franchising is a form of licensing by which the owner (the franchisor)
of a product, service or method obtains distribution through affiliated
dealers (the franchisees). The holder of the right is often given
exclusive access to a defined geographical area.
The product, method or service being marketed is identified by a brand
name, and the franchisor maintains control over the marketing methods
employed, or assists the franchisee in the operation of the business.
In many cases, the operation resembles that of a large chain with
trademarks, uniform symbols, equipment, storefronts and standardized
services or products. The franchisor maintains uniform practices as
outlined in the franchise agreement.
The International Franchise Association, the major trade association in
the field, defines franchising as “a continuing relationship in which
the franchisor provides a licensed privilege to do business, plus
assistance in organizing, training, merchandising and management, in
return for a consideration from the franchisee.”
Franchising has been described as “a convenient and economic means for
the filling of a drive or desire (for independence) with a minimum of
risk and investment and maximum opportunities for success through the
utilization of a proven product or service and marketing method.” The
owner of a franchised business, however, must give up some options and
freedom of action in business decisions that would otherwise be open to
the owner of a non-franchised business.
In a way, the franchisee is not his own boss, because in order to
maintain the distinctiveness and uniformity of the service and to insure
that the operations of each outlet will reflect favorably on the
organization as a whole and protect and build its goodwill, the
franchisor usually exercises some degree of continuing control over the
operations of its franchisees and requires them to meet stipulated
standards of quality. The extent of such control varies. In some cases,
franchisees are required to conduct every step of their operation in
strict conformity with a manual furnished by the franchisor. In other
cases, the franchisor may allow considerable latitude on the part of the
franchisee.
In return for following the franchisor’s guidelines, the individual
franchisee can share in the goodwill built up by all of the other
franchised outlets bearing the same name.
A company that depends upon the successful operation of franchised
outlets needs individual franchisees who are willing to learn the
business and who have the energy for a considerable amount of effort.
The franchisor can supply the other essentials for the successful
operation of the outlet. Among the services the franchisors may provide
to the franchise operators are: (1) location analysis and counsel; (2)
store development aid, including lease negotiation; (3) store design and
equipment purchasing; (4) initial employee and management training and
continuing management counseling; (5) advertising and merchandising
counsel and assistance; (6) standardized procedures and operations; (7)
centralized purchasing with consequent savings; and (8) financial
assistance in the establishment of the business.
The U.S. Commercial Service in Russia has identified the franchising
sector as one possessing a significant potential for development and
offering vast opportunities for U.S. franchisers. Growing domestic
consumption and demand for high quality services in the country has led
to an increase of interest in franchising. The popularity of American
franchise brands and improved trade relations between the two countries
in combination with positive macroeconomic trends and an improving
investment environment in Russia have created the necessary conditions
for successful market entry by U.S. franchisers.
While an interest in franchising has existed in Russia since the fall of
the Soviet Union and the opening of a market economy, the real start of
development of this sector did not occur until the mid 1990’s.
Initially, the unstable economic situation hampered market growth in
franchising. Despite the adverse economic conditions, the sector
continued to expand. The recent macroeconomic stabilization of the last
two years has created conditions for more rapid growth in this sector.
Furthermore, the state of entrepreneurial activities is increasing
support and actively endorsing the development of this sector.
Both foreign and local franchisers successfully operate in the Russian
market and are quite optimistic about opportunities for expansion.
Although there are currently, fewer foreign than domestic franchisers
present in the market, it is far from saturated. The number of local
franchisers (and potential franchisers) however is not sufficient to
meet the growing demand and with new market entries by foreign
franchisers the competitive situation may quickly change.
In Russia, franchising is utilized in the restaurant business, printing
and copying services, photo-shops, repair and maintenance services,
body/health care and leisure services, retail sale (clothing and
footwear shops, furniture shops, sport wear shops, supermarkets,
gasoline stations), business management and other services.
Because of the specific time, when franchising emerged in Russia, it has
not had an opportunity to develop and spread as widely as it potentially
could in a more stable environment. The main impediments that have
constrained market development could be summarized as follows:
– Legal environment was lacking clarity that would boost the development
of the sector.
– Local businesses had very limited knowledge of the mechanisms and
advantages of franchising.
– Until recently, the state did not undertake any significant efforts to
support SME development.
– Cultural and psychological particularities of local business ethics
made the idea of purchasing intellectual capital unattractive.
– The high degree of mistrust among businesses, and inadequate
protection of ownership rights.
Unfortunately, insufficiency in the local legislation governing
franchising created a situation of the complete absence of market
statistics. The franchisers and franchisees preferred to register
franchise agreements under various legal forms, such as a licensing
agreement, or a sales contract. Consequentially such deals were not
reflected in the books of the State Registration Chamber – a main source
of statistical data on the Russian market. Thus no justifiable data
reflecting the size of the market is currently available.
According to recent research reports, during its very short history,
franchising has generated more than 17 thousand jobs and attracted more
than US$ 350 million in foreign investments to Russia. Even more
significant grow of this sector is foreseen by many analysts. The
following factors are expected to create better conditions for new
market entries.
The Russian economy has seen an upturn over the past three years
(1999-2001). After a decade of political and economical instability, the
main trend now emerging in Russia is stabilization. The State is
consolidating its control functions, the economy is expanding, and
political and macroeconomic risk factors have been significantly
reduced. Consumer spending and investment expenditure have grown at
dizzying rates which has led to an increase in consumer demand. This has
led to growth in economic sectors that are primarily focused on the
domestic market.
Substantial progress was achieved in improving legislation governing
economic, business and investment activity. The Government is
successfully implementing structural reforms, aimed at lifting the tax
burden, a more liberal currency regulation system, and a further
reduction of administrative barriers such as: simplified procedures for
registering legal entities, streamlined inspection procedures, and fewer
licensing requirements.
Increasing economic globalization is forcing Russia to make effective
use of resources and increase the competitiveness of its domestic
market. Russia is making efforts to actively foster global economic
links and to create conditions conducive towards generating revenue and
increasing in-bound investment.
The top rating agencies agree that Russia has become an increasingly
attractive place to invest. Fitch, S&P and Moody’s have raised their
ratings and upgraded the outlook on Russia from stable to positive, with
Fitch citing “exceptional macroeconomic performance and acceleration in
structural reform,” that makes Russia “well placed to weather even a
severe global downturn.”
The macroeconomic situation in Russia creates favorable conditions for
boosting small- and medium-sized enterprises (SME) and new business
development. Moreover, SMEs are likely to receive strong political
backing from the Russian Government given the ongoing restructuring in
the majority of industry sectors, and their role as a source of
political support for market reforms.
A simplified tax structure, streamlined regulation, and increased access
to bank financing creates conditions for the development of small
enterprises and is likely to stimulate the development of franchising in
Russia. One of the latest examples of reform is the simplification of
small business taxation. Beginning in January 2003, small businesses
(enterprises with fewer than 100 employees and an annual turnover of
less than RUR 15 million, which is approximately US$ 470,000) will be
given a choice of paying either a unified tax rate of either 6% of
turnover or 15% of income.
Franchising is an ideal tool to be utilized in the development of a
favorable environment for SMEs. It is widely utilized by existing
businesses, as well as by first time businessman and individual
entrepreneurs. For the first group franchising represents a very
attractive tool for diversification of business activities and
leveraging of risks for the latter group it serves as an unfailing means
for starting their own private businesses.
The improving business environment (including good governance,
intellectual property rights and investors’ rights protection)in the
mid-term is expected to improve the image of Russia in the eyes of
foreign investors. Which may attract more foreign franchisers to the
local market.
Russia’s efforts to join the WTO in the near future positively affects
the business and economic environment for U.S. products and services.
The Russian Government is successfully building an efficient market and
is making efforts to raise the country’s long-term standard of living.
WTO accession would foster greater competition among enterprises,
increased transparency, attract foreign investment, reduce corruption,
and open Russian markets for exporters. Russia is already gradually
lowering tariffs and quotas.
Since 2001, the U.S.-Russian relations have become very close, which
also very positively affected the trade and investment climate and
created conditions for U.S. exports in Russia. The current
Administrations of the two countries are capitalizing on this momentum.
The U.S. Department of Commerce Secretary, Donald Evans has visited
Russia three times since mid-2001 and created excellent working
relationships with his Russian counterpart Minister of Economic
Development and Trade, German Gref.
The private sector Russian-American Business Dialogue (RABD), a
business-driven mechanism aimed at strengthening the trade and
investment ties between Russia and the U.S, has further enhanced the
level of economic cooperation between our two nations. In May 2002,
Russia was formally recognized by the U.S. as a market economy.
With the growth of domestic consumer capacity, demand for various
services is growing and practically all services where franchising can
be used represent considerable business opportunities in Russia.
According to experts, franchising is quite attractive for the businesses
that are interested in sales of technically complicated equipment,
business support services (business consulting – audit and accounting
services, advertising, HR related services, technical consulting),
housing construction and repair services, education services (tutoring,
foreign language courses), leisure and entertainment, fast food, medical
and cosmetic services, retail sale, and other personal services
(laundry, footwear and clothing repair, delivery services etc).
Currently, the mainstream of local potential franchisees is seeking
agreements with franchisers operating in the following sectors:
– Fast-food
– Printing and copying services, photo-shops, etc.
– Auto repair and maintenance services
– Body/health care services (beauty saloons, gyms, etc.)
– Retail sale (clothing, footwear, furniture, sporting goods,
supermarkets, gasoline stations)
In 2002, a marketing agency MAGRAM Market Research conducted an analysis
of the fast food industry. The main result of the study was that the
market is expansively growing. However, the research did not define a
precise size of the market. Experts estimate the annual volume of
transactions on the market as US $15 – 40 billion. In Moscow alone,
approximately 30-40 restaurants and cafes open each month. And still
many experts comment that the demand is significantly undersatisfied,
especially in suburban areas where most Moscovites live in multi-flat
apartments. According to the Department of Consumer Markets of the
Moscow City Government, in March 2002 there were 5,717 catering
facilities (2000 restaurants, 130 nightclubs, 40 locations with around
the clock service facilities, 45 pubs, 500 fast food facilities, and
2000 cafes and bars).
The concept of fast food remained largely unknown to Russians until the
late 1980s and early 1990s when Pizza Hut – then operated by PepsiCo and
McDonald’s – opened its first stores in downtown Moscow. At that time
fast-food restaurants were viewed as exotic Western attractions rather
than regular eateries.
The first fast-food restaurants were too expensive for ordinary people
and mostly catered to the very limited. Gradually, salaries rose in
dollar terms, making imports more affordable, and fast-food restaurants
began to serve a wider clientele, which brought about a decline in the
quality of services. Insiders say that the quality of service is a
common problem for the entire sector and while some firms have made
better progress, there is still a long way to go before Russian
fast-food restaurants can offer customers proper levels of service. A
more significant presence of international food franchising giants in
the market could improve the industry’s overall quality standards.
With salaries on the rise and more discretionary spending, fast food
chains are prospering in Moscow. The market is divided between
international fast-food giants and their domestic competitors, and both
are looking at expansion. The market is far from saturated however, with
unsatisfied demand for high quality fast-food chains.
The Russian automotive sector has been growing rapidly since the
beginning of the 1990s and during the last ten years the average growth
rate is approximately 7-10% per year. Import of foreign automotive
industry products is also growing. Analysts predict that this growth
will continue in the near future. According to various industry sources,
the annual per car maintenance expenditure in Russia exceeds $ 1,000. In
Moscow alone, there are over 2 million private cars, thus the Moscow
market exceeds $ 2 billion. In Moscow there is only one network of
independent car service outlets – Bosh Service. It has approximately 54
car service shops in Russia (including 11 in Moscow). A Pennsylvania
based ChipsAway Inc. is successfully using franchising to increase its
presence on the Russian market of car paint restoration services and has
already opened six car body maintenance centers in Moscow and one in
Vologda.
Literature
1. Oganes Sarkisov, U.S. Commercial Service Moscow, Russia. Franchising
in Russia. 09/30/2002
2. http://en.wikipedia.org/wiki/Franchising
3. http://www.offshore-services.biz/article-what-is-franchising
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