By Michael Amies
Although Russia has experienced serious economic upheaval since August 1998, it is nevertheless a market of 146 million people that has become increasingly aware of, and hungry for, the range of products and services to which the West has long been accustomed. As an alternative to heavy local investment and commitment of resources in Russia, or to the random and relatively uncontrolled distribution of products through informal distribution agreements and licenses, franchising offers unique advantages. Typically, the franchisor will make necessary local investment, take on the role of distributor, and undertake to maintain the quality of goods or services, or will permit a master franchisee to do so.
Franchising Gains Ground in Russia
Five years ago, only a handful of foreign franchises, with one or two units, were open in Russia, and it was hard to find a genuinely Russian franchisor. Today, more than 30 U.S. franchises are operating some hundreds of units, mainly in western Russia, including two Starlite Diners in Moscow. Moreover, many hundreds of franchises have sprouted up in a variety of market sectors. Although, as usual, fast food is the most prominent and widespread of these sectors.
McDonald’s has dominated the fast-food sector here as elsewhere, but in Russia and the NIS, these are corporate-owned restaurants rather than franchises. However, Western franchises and homegrown concepts are rising up to challenge the omnipresent golden arches. For example, Subway licensed its first Russian-owned restaurant franchise in Moscow at the end of 1998. Russian competitors, such as Russkoe Bistro, which serves Russian food in several fast-food style outlets, Patio Pizza, and Rostik Chicken are beginning to franchise units away from their home bases in Moscow.
Nonfast-food Successes
Xerox has successfully franchised its copy centers in several major Russian cities. AlphaGraphics, whose first store in Moscow (opened in 1989) has consistently been one of its highest volume stores in the world, now has three stores in Moscow, one in St. Petersburg, and one in Novgorod Velikiy. Express Personnel Services has been successful in building a network of units serving this market with offices in nine Russian cities across the country. Also, modern, Western-style gas stations with small convenience stores are replacing the roadside tankers that used to be the main sources of fuel.
Russian View of Franchising
Since 1997, franchising has been formally recognized by Russian lawmakers as a legitimate way of doing business (an important step in a country where people are mistrustful of any activity that is not officially recognized), and the activity has its own chapter in the revised Civil Code. Although franchisors would like to see some clauses of this law changed, it is generally a supportive measure. In addition, officially, protection of trademarks, logos, and intellectual property is available—all vital features if a franchisor is to establish a unique and recognizable brand in Russia.
Support for Franchisors
As further evidence of the gathering strength of the franchise community, the Russian Franchise Association (RFA) has been established (assisted in its early days by technical assistance funded by the U.S. Agency for International Development (USAID) and, more recently, by the European Union’s Tacis program). This organization has a formally constituted board, a code of ethics for member franchisors, and a well-equipped resource center in Moscow.
The RFA organized an international franchise conference in Moscow in April 1999. It also held three educational workshops in March 1999 in Moscow, Novgorod, and Tula. Each was attended by more than 40 government officials and entrepreneurs, all eager to learn more about the concept and, in many cases, ready and able to acquire franchise businesses.
Obstacles to Franchising
Major difficulties faced by would-be franchisors include the fact that good retail space is hard to find and leases can be difficult to acquire because of uncertainty about property ownership and a labyrinthine bureaucratic process. Also, regular insurance is hard to come by and very expensive.
Another major problem is establishing dependable sources of high-quality inputs. One of the effects of the economic downturn and the resulting currency crisis was to make the import of supplies and equipment a costly affair for franchisors. The foresight of two well-known brands—McDonald’s and Baskin Robbins—in establishing their own supply sources in Russia has been well rewarded in recent months. Both have been able to adjust to the recent difficulties and to carry on with development plans.
The message for franchisors looking at this market is that dependence on imported supplies and equipment can make them vulnerable. Franchises that are service oriented, depending on technology transfer to their franchisees for success rather than the sale of goods, can more readily ride out the crises.
As in all developing markets, the risks are high for the pioneers. However, those who can establish themselves now will gain a head start that will make it difficult for them to be overtaken. There is an emerging middle class in Russia and more than 50 cities with a population of over one million. Each of these cities can support at least one unit of practically any franchise business one can name.
Franchising Potential in the NIS
Franchising has been slower to develop elsewhere in the NIS than in Russia, but it is beginning to take hold in Ukraine and interest is growing in Central Asia.
The Ukrainian market offers many opportunities for international franchising and no specific regulatory constraints hinder the activity. However, the investment climate in Ukraine has proved a major obstacle for franchisees. Western investments in Ukraine with franchising potential (e.g., McDonald’s, Coca-Cola) are currently corporately owned, and very few Ukrainian businesses recognize the potential for franchising. Although successful examples of franchising projects can be found—such as Baskin Robbins and Dunkin Donuts in Kharkiv and Express Personnel Services in Kyiv, in general, franchising projects in fast food, photocopying, gas stations, and so forth are still rare.
Currently, U.S. franchisors have an extremely limited presence in Central Asia. Central Asia watchers, however, believe that the potential for such activity is there. The Central Asian-American Enterprise Fund (CAAEF), which provides both direct equity investments and loans to enterprises in the region, including start-up ventures, is seeking to assist the development of franchising in the area. According to CAAEF President Don Nicholson, “The opportunities for franchising in Central Asia are still unknown given the lack or absence of any real experience. However, we see it as having considerable potential and would welcome inquiries from potential franchisers. Given the state of the market and low wage levels, the potential will be greatest for those franchisees that provide very affordable goods and services, and where the initial costs are not that high.”
For a lengthy report on Franchising in Russia, visit BISNIS Online at www.mac.doc.gov/bisnis/isa/9707fran.htm.
For more information on the Russian Franchise Association, contact Alexander Mailer, President, tel: +7 (095) 305-5877, fax: 305-5850, or e-mail: franch@matrix.ru.
Michael Amies is Executive Vice President of Sibley International, an economic development consulting firm in Washington, D.C.
Franchising Terms
Franchisor—an entity that has developed a business concept and brand image. It licenses a third party (the “franchisee”) to operate the business under that brand within a predetermined territory, in return for a fee, or fees. The franchisor will normally continue to support the franchisee with training, product development, and marketing in return for an ongoing fee, usually termed a “royalty,” or “management service fee.”
Master Franchisee—effectively the same as a franchisee, except that the territory granted is usually much larger (can be a whole country or a group of countries), and the master franchisee would have the right to open multiple units or to sub-franchise within the territory.