Franchising in Russia

General overview

In Russia, franchising started in the early 90’s, primarily due to foreign companies. Straight after the collapse of the Soviet Union came such brands as” Kodak”,” Xerox”,” Baskin Robbins ” and others.
The first foreign franchise was the Baskin Robbins Corporation, which continues to actively work and develop today.

Foreign franchisors in their activities in Russia use two schemes. In the first case, the parent company is located abroad, and its special representative works in our country. According to this principle, the American company Subway Russia, which is headquartered in Nevada, sells its franchise. All decisions on granting a franchise are made by the American office, and royalties are transferred to the same checking account on a monthly basis. Russian subway franchisees also receive trade equipment and necessary materials from America.

In the second case, the foreign company sells to the Mastrer franchise of a Russian company. The owner of the Master franchise receives broad powers and responsibilities: he implements the franchise on the territory of Russia, conducts training for the staff of partner companies, controls their work and receives royalties from them. The owner of the Masrter franchise transfers a certain amount of payments to the franchisor. Such a scheme, for example, was chosen by Kodak, entrusting its network to the Russian LLC “Kodak“.

Currently, the Russian Federation occupies a leading position in the world
rating on the growth of the number of franchising companies. Many of them have become not just recognizable brands in the world, but has familiar attributes of reality: “”, “Pyaterochka“, “MegaFon“, “Pharmacy 36,6“, “FixPrice“, etc. If we talk about the structure of Russian franchising by industry, the most franchises account for trade in consumer goods and services.

It is noteworthy that franchises in Russia occupy 62% of the domestic franchise market, the average of about 45% are young companies working in this field for less than 5 years, which indicates a growing interest in this method of organizing business relations. The reason for this interest, oddly enough, was the crisis of 2014: business owners are looking for new ways to generate income. There is another reason: big players who have created their own networks over 10 to 20 years are tired of operating management, are ready to share their experience and build their own business model.

Today in Russia there are about 1450 franchise brands and more than 50,000 franchisees. Estimated market volume at $350-500 million – a big amount, but the United States, the birthplace of franchising, is still far away.

During the first four years of using the franchise business model (from 1995 to 1999), 42 franchising company appeared in Russia, that is, approximately 10 new franchises per year. By 2018 their number has increased more than 50 times.

Experts attribute the slowdown in market growth to a drop in the activity of foreign franchisors in Russia. The trend is that companies that entered the Russian market before 2015 are actively developing now, while new companies almost do not appear. Moreover, many franchisors began to make decisions about geographical expansion more carefully, they carefully choose partners and work exclusively on incoming calls.

Nevertheless, due to its availability in the context of the changing Russian economy, franchising continues to be one of the most promising business formats in Russia. The turnover of the franchise market in Russia occupies a significant share in the country’s GDP, for 2017 it amounted to more than 3.5%.

Russia is among the world leaders in terms of the pace of franchising development. In terms of the number of franchising points last year, Russia was ahead of Germany, showing a result of 74.6 thousand points.

The experience of 2008-2009 showed that the crisis only contributes to the development of franchising.
The study of ratings of popular and profitable franchises allows you to identify several trends in the franchise market:

– Increasing the importance of social networks and online communication. Traditional marketing is becoming less relevant, and consumers are increasingly using websites and social networks to interact with the company and its brand. Online communication is a tool for providing better customer service and a source of feedback.

– Growth in the number of multi-brand franchisees. Many franchisees have started buying several franchises at once, citing the fact that such actions help to improve cash flow in the long term.

– Increasing the number of franchises in the Health and Education categories. The results of sociological research show an increase in people’s attention to their well-being and achieving a high level of health and education.

– Increasing attention to customer focus. The goal of the entrepreneur is not only to create a popular product, but also a flexible solution adapted to a specific request. For example, there are business models in the market that allow a customer to create their own hamburger by adding ingredients and choosing the order in which they are served.

– Growing popularity of on-demand products and services. Consumer preferences change very quickly and are influenced by new market trends. An entrepreneur who effectively organizes his activities, analyzes the market dynamics, monitors current changes and offers clients the solutions they need.

According to the rating of Forbes, it has formed a list of the most profitable franchises for 2018.

As a rule, from the rating, one of the most expensive franchises-catering points. They have become much more in recent years, they occupy 35 -37% of franchising in Russia. This trend is clearly visible in the first group of the rating, where 5 out of 10 participants — restaurants, pizza’s, cafes. Opening a food franchise costs an entrepreneur an average of 10-15 million rubles.* And it does not matter whether it is a Russian brand like “IL Patio“, or an international one like Papa John’s. Revenue from one point-from 30 million rubles, but the payback period is about three years, and the profit is at the level of 10-12% per year.

The main franchises that are in this rating are also franchises for the provision of medical services. This is a direction that has managed to take about 3% of the market in a few years. The total number of points of the main players is about 2200, and most of them are franchised.

Another segment — retail franchises-includes clothing, furniture, FMCG and DIY stores.

Education and leisure for schoolchildren and preschoolers is another important area.

There are five such projects in the rating. And each of the groups has its own leaders. Thus, the opening of a bilingual kindergarten “Sun School” will require 7.5-10 million rubles. Among the franchises with average investments-the school of speed reading and intelligence development “IQ007“, the investment in the opening of the point is 1.4 million rubles. During the year, the company has almost doubled (to 418 points on the franchise), the average profit of one school — 11 million rubles. The payback period is six months, the profitability of the business at the level of 50%.

The profitability of children’s sports sections is even higher. The rating included two football schools for boys — “champion” and “Junior”. You can open a school with 500,000 rubles in your pocket. The franchisor promises a payback for
the same six months. The profitability of such a business is 80-90%, hence the furious dynamics of development. Their peculiarity is that they are growing within the regions, so they do not compete at the Federal level with each other.

Thus, more than 40% of world trade is carried out through franchising networks. A well-developed trading network is increasingly becoming an advantage in the competitive struggle in the market. The franchise business model has proved its effectiveness in Russia and continues to develop rapidly due to a significant degree of survival of franchise enterprises. According to forecasts of the Russian franchising Association, by 2025 in Russia will operate about 400 thousand points of sale of goods and services managed by franchisees. Today, experts count only about 40 thousand franchising points in the country.

Problems of franchising development in Russia

Recently, foreign companies have shown increasing interest in the Russian market, in terms of launching franchising enterprises in our country. At the same time, the development of franchising in Russia is not as fast as it is potentially possible, because there are a number of obstacles that cause this process to be delayed.

The main problems that hinder the development of franchising in our country can be classified as follows:

Economic problem

– Lack of economic prerequisites for development. Franchising is an economic tool. For its implementation, appropriate economic prerequisites are necessary, which in Russia have not been formed either at all or partially.
– Instability of the Russian economy. The last decade, in which the accelerated development of Russian franchising began, is characterized by a lack of stability in the economy, constant jumps in the development of the country’s economy, which leads to the same sharp fluctuations in demand for all types of goods, regular redistribution of property, which can not but hurt the franchisee.

– Lack of the majority of potential franchisees-the necessary start-up capital to enter the franchise system. Given that many of them are forced due to lack of their own funds to open their businesses in rented premises, the change of ownership has a negative impact on the work of both the franchisee and the franchise system as a whole.

– Difficulties in obtaining loans to create start-up capital. Franchising, as has been repeatedly noted, is based on the interaction of two types of independent entrepreneurs-the franchisor and the franchisee, each of which is an independent legal entity. Therefore, not only the franchisor, but also the franchisee should invest their starting capital in the development of the system.
If you consider that the franchisee must pay a one-time franchise fee (lump sum payment), the starting capital of the franchisee must be large enough.

Unfortunately, not all domestic entrepreneurs have such capital. Attempt to obtain start-up capital in the form of Bank credit also faces a number of challenges: the level of profitability of franchisees, taking into account all regular payments (royalty payments to the centralized advertising Fund and other fees), can lead to the fact that the repayment period is large enough, and given current rates of the loan, not impossible; the existing legal system further complicates lending to franchisees.

– Lack of legal support for franchising in Russia. The most important problem, which is recognized by most experts, is the lack of an appropriate legal framework in the field of commercial concession, the rules of which are set out in Chapter No 54 of the Civil Code of the Russian Federation. There are several main weaknesses of the document, which reflects the main principles of the commercial concession.

The possibility of one of the parties to terminate the agreement by simply notifying the counterparty six months before the termination of the contract.
The need to register a franchise agreement by the body that registered the right holder, which is the franchisor.
The preservation of the contract of commercial concession in effect in that case if one of the parties changes.

Experts note that the development and implementation of the legislative act “on franchising” will help to resolve these contradictions and outline real prospects for development. Without certain laws, the franchise will not work in full force. In addition, there is a need for strong state support for projects related to the inflow of foreign investment

Social and psychological problems

– Lack of domestic experience and fear of failure in the subjects of the franchise system-the franchisor and franchisee.
– Fear of franchisees losing their independence and their own “face” of the entrepreneur and manager.
– Lack of due respect for intellectual property.

Educational problems

A special place among the problems of franchising is occupied by education as a mechanism for resolving social and psychological problems. This problem is caused by poor training of small businesses in the field of franchising. It is important to say that this problem is already being studied and the state is opening programs to inform and familiarize potential franchisees with this business model.
These problems need to be considered and analyzed in a complex, because they are all interconnected and strongly affect each other. For example, the economic problems of franchising are caused not only by the state of the economy, but also by the influence of other problems, primarily organizational and legal.

The absence of a legal framework significantly narrows the possibility of franchising development and, first of all, significantly complicates the possibility of lending to franchisees. The development of legal support for franchising requires again solving economic problems and additional costs for improving the legal framework. Socio-psychological problems are related to both economic and legal problems. Entering the franchise system, the franchisee has a number of concerns caused by both economic and legal aspects. First of all, he is afraid of bankruptcy, which may be caused by the actions of the franchisor. But it is the legal component that should reassure the franchisee: he is the owner of his company, a legal entity, which should be confirmed by the necessary legal procedures.

Summing up the analysis of the problems of franchising, we should once again say that there is a fairly wide opportunity for the development of franchising in Russia, but it is necessary to create certain conditions for its implementation.

  • First, it is necessary to create a regulatory system of acts to fully regulate franchising.
  • Second, to include a franchising development program in the government’s small business support program.
  • Third, create a system of tax incentives for franchisees, especially at the initial stage of development of the franchise network.

In addition, it is advisable to provide the possibility of applying a simplified accounting system to franchisees. It is also necessary to create and implement a network of training and consulting centers for franchising throughout Russia.

At the moment on the territory of Russia carry out the activity following a franchise centers:

-The Russian franchising Association;

-Russian Association for the development of small and medium-sized businesses;

-Federal Fund for support of small and medium-sized businesses;

-Moscow small business support Fund;

-Foundation for the development of science, technology and franchising.

– Franchise World Link

This shows that in our country, special attention is paid to the development of franchising.
Despite such difficulties, the franchising system is spreading steadily on the territory of Russia, and the pace of development of franchising in Russia is among the world leaders.

The growth of franchising models that work in the field of production franchising is noticeable. Legal norms regarding franchising activities are also slowly but surely brought into line with international standards.

Also, this model is the best fit for the Russian market, where competition and brand promotion play an important role. With the help of franchising, you can open obviously successful stores, restaurants, service centers, as well as many other things that are in demand not only in Russia, but also around the world. At the same time, not only a single point is developing, but the entire network as a whole, which allows you to leave only successful and competitive companies on the market

Franchising opportunities in Russia

Speaking about the prospects for the development of franchising, we can highlight the following features:

Development of franchising in the regions of the country

Although the Russian franchise market is characterized by an uneven distribution of business, as usually only after the introduction of their projects in the Moscow or St. Petersburg markets, businessmen begin to promote it in the regions. Nevertheless, the direction of development towards regional franchising has already been set. Experts recommend paying attention to the development of franchising in Nizhny Novgorod, Samara, Rostov-on-Don, Perm, Omsk, Vladivostok and other cities.

But first you need to conduct a “literacy campaign” to engage in training programs. Realizing the prospects for the development of franchising, the authorities intend to engage in active training of businessmen in the basics of this business. We intend to spend considerable sums of money for these purposes.

Expanding the boundaries of franchising

Franchising becomes a real tool for bringing the economy to the world market, but at the same time the condition that created the package offer. Franchise should mean not only permission to use the brand, but also a certain set of services that accompany the business. As an example, can serve a franchise for the production of aircraft “Bombardier”. The French sell not only service, but also airports and destinations.

Development of existing companies in a new direction on the terms of franchising

In this situation, it is not surprising that in the near future it will be possible to open branches of “Russian Post” by private companies on the terms of franchising. Innovations are provided by the draft law “on postal communication” will allow “Russian Post” automate delivery terminal networks, the franchising scheme of post offices is successfully used in European countries. The operator itself manages 10% – 20% of all branches, while the rest are open under contracts with chain stores and individual entrepreneurs.

Women’s participation in the franchise business

As you know, women are excellent leaders, and are able to maintain self-control even in the most stressful situations. Thanks to the emergence of such a business model as franchising, the number of women in the business sector has increased several times.
The appeal of franchising for women lies in its basic principles, which allow a polished entrepreneur to start his own business under the care and close supervision of an experienced partner who has a huge interest in the financial success of his precious franchisee (franchise owner).

The international Franchise Association has been conducting research and monitoring of the franchise market for more than a decade. According to statistics, over the past five years, the number of women who own a franchise has increased by 43%. Unfortunately, the main part of the growth is accounted for by foreign countries.

In Russia, the situation is somewhat different, since the process of emancipation of women is just beginning. However, positive changes are already visible to the naked eye.

For many women working in business, franchising is not only a great business model, but also an information platform that allows you to get the necessary data and support. This fact largely explains the popularity of franchising among women.

The discovery and isolation of new market niches for the development of franchising

According to a special study, the services sector will continue to specialize and identify new market niches. Services such as home renovation, interior design and implementation of design projects, lawn care, housing services, child care, parenting and education services, along with some types of business services will be the most preferred for the application of franchising. There are active processes of mergers and acquisitions, in which small networks are combined with each other, but eventually absorbed by the business giants.

Franchising as an incentive for innovation

Considering the requirements that are imposed on franchisees, we can say that they increase the personal capabilities of entrepreneurs, their professional knowledge, which in General contributes to the spread of innovation both within a particular franchise system and in it. On the other hand, the expansion of almost every major franchisor and, as a result, increased competition entail the need to develop and implement innovative business standards by local businessmen, who are forced to adapt to a new level of quality.

Many entrepreneurs, when there is competition in their region, are faced with the need to use innovative methods of work in order to further be able to develop their business projects.
In conclusion, it should be noted that, of course, there are a number of reasons that hinder the development of franchising in our country, but, despite all the identified problems, it remains the most reliable option for business organization in the market system. New trends that are emerging in the franchise market will help bring this form of business organization to a new level.

Franchising as a new way of organizing business in Russia

Currently, much attention is paid to helping small businesses to find new areas of development, as well as those who are still thinking about opening their own business. Many entrepreneurs claim that their business is not only a dream of independence from their superiors and the transition from salary to profit, but also the pleasure and pride of creating something unique. Sometimes, one idea is not enough to start a business, because, as you know, not all budding entrepreneurs, trying to start a business without any platform, were successful. In this regard, we can safely say that the choice of form for the development of your future business plays a very important role.

Today, one of the most popular forms of business organization are startups and franchises.

*Note current exchange rate on 13/01/2019 is 1USD=61,26RUB

Should you be interested to open a business in Russia we are here to serve your needs.

Vitaly Sorokin
Area Director Russian Federation
Franchise World Link
Moscow, Leninsky pr.85
Tel: +7(926)537-72-51
Skype: rainbowtrout7