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Franchising As a Key To Success. The Russian Way.
December 14, 2012 13:22


Franchising is considered to be one of the possible solutions to many economic problems of modern Russia. In fact, it has already enhanced the growth of the small businesses here. The article gives an overview of the Russian franchising market, depicting its peculiarities in comparison with the global experience.

Franchising as it is

There are many definitions that characterize this type of activity, but in the first place, franchising is the transfer of knowledge: the transfer of successful business experience from a franchisor to its franchisees, the transfer of the franchise experience from working partners to their potential investors. The member of the Board of Directors of the Russian Franchising Association, the president of the Russian Franchising Association Alexander Mailer calls franchising a business partnership in which one partner is a company with successful and safe business (franchisor) and the other partner is an entrepreneur starting a new business (franchisee).

For the franchisor franchising is an effective way to develop his business. This method is based on the ideas of building a large network of franchisees and on the well-established technologies of territorial business development. The franchisor transfers a ready market niche and his brand to the franchisees, provides them with comprehensive help. The above-mentioned method is very efficient due to two key franchise technologies: practical business processes training and sub-franchising system allowing to build network business across large territories.

In nowadays Russia there are about 595 franchisers in more than 75 areas of business - from retailing to truck transportation. Some companies have just started their franchising activities - about half of them decided to use a ready-made business system already in 2010. However, there is a great number of large networks that have long and successful experience of work at the franchising market.

Is it easy to be a franchisor in Russia?

The establishment of franchising doesn`t happen overnight, it takes years. And from year to year the market of franchising in Russia becomes more transparent and attractive. But despite such consistent growth, unfortunately, we can ascertain that the number of franchise systems in Russia is relatively low compared with many developed countries. In the U.S. there are over 2,500 franchise brands, they make up about 850 in Germany and more than 800 in the UK, with only 450 such brands in Russia. What hinders the development of the Russian franchising or at least a large-scale entry of foreign franchise companies to the Russian market? There are some negative aspects of real business practices that are specific for our country; they hinder the effective formation of the Russian franchising market:

• imperfection of the legislation;
• lack of serious knowledge of franchising in the entrepreneurial circles;
• tax evasion practice and commonness of "shadow" operations;
• practice of non-compliance between business partners;
• excessive bureaucracy in business regulations; bribery.

As far as small and medium businesses in Russia have their own specific Russian features in comparison with the European and American businesses, franchising in Russia also has its peculiarities, because all franchise companies are small and medium enterprises. Almost everyone needs working space and loans, everyone reports to regulatory authorities, however in the West all the processes basically adhere to clear rules, while in Russia they adhere to well-known entrepreneur practices. All in all franchising is a great opportunity to give business a try. Even an absolute beginner in this field having an ardent desire to start a business can implement his plans with minimum risk. By purchasing a franchise an entrepreneur starts to work under a well-known and respected brand, and therefore receives all the benefits of cooperative advertising program - not only locally, but also nationally and sometimes internationally.

Russian market overview and the stories of success

Franchising came to Russia in the late 80's of the last century – these were the Western concepts of food service raising capital from the West. Already in the early 90's such companies of foreign brands were opened using financial resources of the first Russian entrepreneurs. First foreign franchises in Moscow were of such kind as "Baskin Robbins." The majority of domestic franchises are concentrated in Moscow (70%) and St. Petersburg (15%). However there are developing regional franchises in smaller cities (Samara, Rostov-on-Don, Kursk, Ekaterinburg, Novosibirsk, Vladivostok).

Russian franchising market is dynamic enough. From year to year dozens of international companies enter the market, for example, Burger King, Dunkin` Donuts, H & M, Gap, New Look, River Island, Kika. More and more domestic projects are launched, such as “Kroshka Roo” ("Baby Roo"), “Schyotka” ("Brush”), Moncassa, Mr. Stillini, ORMATEK, “Lechu”, "Nearmedic", "Hemotest", "Center of Molecular Diagnostics." Due to the absence of the opportunities to get loans and other financing many companies have turned their attention to franchising as a strategy for their own business development.

The leadership in the area of food services belongs to fast food franchises. As for the Russian franchising model in the area of food services, it is necessary to emphasize "Rostiks Group" corporation that has developed the network of fast food services under its own brand "ROSTIKS" since 1993. In different cities of Russia and CIS over 100 corporate and franchising enterprises under the brand "ROSTIKS" work nowadays. Although "McDonald's" first entered the Russian market, classical fast food franchising was brought to us by another U.S. fast food operator - Subway. The first Subway opened in the U.S. in 1965. Today the network has more than 28,799 restaurants in 86 countries. Subway network is developing with astonishing speed - more than 1,000 new restaurants are opened every year in the world, taking the advantage of franchising schemes which allowed the company to win the title "Best World franchising system” already for the 14th time. It is noteworthy that the company Subway only works using the system of franchising. This means that in order to avoid conflict of interests, the parent company itself or the franchisor do not own any of the restaurants. They all belong to the franchisees.

There exists a so-called supermarkets franchising. This franchising is a field of the Russian franchising where the sale of franchises as a business development strategy is used for its capitalization. Franchisor sells franchises, thus probing the territory. And if the franchisee`s store gains a certain volume of sales, the franchisor may repurchase the franchisee`s business and add a strong outlet to his network, increasing business value respectively. One of striking examples of supermarket franchising is the network “Kopeyka” (“Kopeck”) which has 591 supermarkets, 33 of which belong to the franchisees.

Another type of franchising in the service sector is the realtor franchise. It is actively developing in Europe where franchise agencies take 30% of real estate transactions. In Russia, on the contrary, franchising can not yet be named the most popular destination of the development at the real estate services market. In Russia only 3-5% of real estate agencies are operating under the franchising scheme.

Contagious examples for potential participants of franchising are the success stories of the current players. Let`s take for example, "Invitro" company - its franchise has become a pioneer at the Russian market of laboratory diagnostics services. The project was launched in 2005, and already in 12 months the company won the national award "Golden Brand". In 2008 the independent laboratory joined the Russian Franchising Association, and in July of that year it took a place among the top five franchises in Russia according to Forbes magazine. Franchising proved to be the best way for the company to spread its branches in more than 300 cities of Russia and Ukraine – CEO of the company Alexander Ostrovsky noted: "Franchising helps "Invitro" to gain regional markets rapidly".

It is important that new areas covered by franchising appear. Russia has already seen such specific proposals as the franchising of a bookmaker's office, franchises of the company creating and promoting websites, ski schools, the company making the musical arrangement of the places of leisure, bakeries and so on. Probably, franchises market has recently been fed up with "normal" proposals, and the future belongs to creatively different projects that will surprise the consumer.

The solution to many economic problems of modern Russia needs new economic mechanisms. One of such mechanisms is franchising. We can state that franchising nowadays is one of the most important tools enhancing the effectiveness of small business.



Author: Anna Dorozhkina

Tags: franchising Russian business business law   

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