The Russian Franchising Sector

A Hot Tip about Sales in Russia

Posted on: 4 Jan 2010

Overview

The Russian business community has developed a better understanding of franchising as a way to do business and has a growing interest in it, as well. This has come about as a result of three main factors. First, both the business community and consumers are better educated about established brands, resulting in brand value and recognition. Second, many Russian entrepreneurs have discovered that working with established brands requires the utilization of modern business practices and technology, giving them more efficiency and, therefore, an advantage over their competitors. Finally, being associated with an established brand may offset certain risks characteristic of the Russian economy. In order to take advantage of these favorable factors, many entrepreneurs have turned their attention to franchising, and more and more private Russian enterprises and entrepreneurs seek partnerships with recognized Western companies.

 

Statistics on franchising in Russia are somewhat unreliable and figures vary widely, but in general they tend to support several observations. Since 2000, the number of franchising systems in Russia has grown from 54 to approximately 300, with some sources estimating as many as 600. There are over 160 domestic franchising businesses in Russia, with a total of 2,900 franchisees. On average, each franchisor has six franchisees in Russia. The fast food and retail sectors represent the largest shares, 22% and 46% respectively. Development of the service sector is slower, but growing. About 43% of all franchisors are in the Moscow region (Central Federal District), 15% in St. Petersburg and northwest Russia (North-Western Federal District), and about 12% in the Urals (Urals Federal District).

 

Several well-known U.S. franchises have successfully entered the Russian market. Among the most visible brands are: AlphaGraphics, Baskin Robbins, Candy Bouquet, Carl’s Jr., ChemDry, Chips Away, Crestcom, Domino’s Pizza, Fastrackids, Gold’s Gym, Jani King, KFC, LMI Consulting, Mail Boxes Etc., Kwik Kopy, Century 21, Office 1 Superstore, Papa John’s, Pizza Hut, Pizza di Roma, Sbarro, Subway and Starbucks. Restaurants, including fast food, are in great demand for U.S. franchise models. U.S. market presence is also highly visible in business education and training services, business services, children’s services/preschools, cleaning services, and automotive services. The majority of non-U.S. foreign franchises in Russia are from western Europe, mainly the U.K., France and Germany.

 

Many franchises operating in Russia share certain distinctive characteristics. Most franchisors select Moscow and/or St. Petersburg as their entry point for Russia, where consumer markets are strongest. Fast food franchisors, in particular, have multiple storefronts in Moscow. However, there is also a steady growth in the next tier of consumer markets - cities such as Yekaterinburg, Nizhny Novgorod, Krasnodar, Kazan, etc. Many local storefronts are larger than similar locations abroad and many are owned and managed by the same company that owns the master license.

 

Some factors limit the growth rate of franchising in Russia. The same factors that impede development of Russian franchises may also operate to prevent foreign brands from entering the Russian market. Cumbersome licensing regulations often stand in the way of expansion through the sale of sublicenses. Lack of knowledge and information about existing business opportunities in franchising also prevent potential investors from becoming franchisees, especially in the regions. Lack of transparency, still plaguing the Russian business environment, often seriously complicates the process of choosing the right business partner and compromises royalty payments, further contributing to many companies’ preference to manage their own stores. Loose contractual discipline and weak legal enforcement often jeopardize observation of contractual obligations between partners. And finally, franchises face excessive bureaucracy and corruption, still prevalent in the Russian economy.

 

Despite these negative factors slowing the development of franchising in Russia, the market continues to show signs of sustained growth. The Russian Franchising Association has been active since 1997 and currently has 40 members. Its main goal is to popularize franchising in Russia by providing information and support to franchisors and franchisees. Another reflection of the dynamic growth of the franchise market is the steady growth of participation by both domestic and international brands in the BuyBrand International Franchise Exhibition, which has been held annually in Moscow since 2003.

 

Best Prospects/Services

During its more than ten-year history, the Russian franchising sector has developed mainly in customer-oriented segments, such as restaurants, retail, education and training, fitness and health care, recreation and entertainment, travel and lodging, and automotive. Franchising in business-oriented services is also picking up. Successful examples of the business-to-business segments where franchise models are already used include: cleaning services and maintenance, transportation, logistics, express mail services, management training and consulting.

 

Franchising is most visible in the fast food sector. Many local and international fast food franchise concepts successfully operate on the market, although it is far from saturated. Expansion of casual dining is expected over the next few years, as emerging local and global players enter the market. Also, there is growing demand for cafes (coffee shops, tea rooms) as the culture of drinking coffee and tea in cafes penetrates the Russian lifestyle. That demand was partially met by the arrival of Starbucks in the Russian market in 2007, along with the emergence of smaller franchising concepts (Travelers Coffee), and add-ons to traditional fast food services to cater to coffee drinkers (McDonalds’ Café Mac).

 

Another large segment where franchise opportunities exist is retail trade. According to recent statistics, Russian retail trade turnover in 2008 grew by 13% to approximately $543 billion. Assuming that franchising development in retail segments will have some correlation with the development of the total retail market, it is possible to predict a very bright future for retail franchises.

 

Opportunities

Currently, franchising, along with other sectors of the Russian economy, is starting to feel the negative effect of the global economic crisis, but significant opportunities for development still exist in hotels, entertainment, education, training, healthcare, fitness, real estate, business services, and other services. The U.S. Commercial Service receives numerous inquiries from local entrepreneurs, investors and companies seeking franchise opportunities with U.S. businesses in various sectors. The most frequently requested include the following:

• Automotive Products/Car Wash

• Business Services

• Children's Services/Preschool Education

• Clothing and Shoes

• Educational Services/Training

• Fast Food/Restaurant/Catering

• Health/Beauty/Fitness

• Lodging/Hotels/Motels

• Laundry/Dry Cleaning/ Commercial Cleaning Services

• Marketing/Public Relations

• Postal Services

• Printing/Signage

• Recreation Facilities/Equipment & Services

• Retail Stores/Specialty Stores

 

Read the full market research report


Posted: 04 January 2010

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