Топик: Fanchising in Russia
Топик: Fanchising in Russia
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
|