# FRANCHISING IN RUSSIA ’99

 

By Michael Amies

 

AlthoughRussia has experienced serious economic upheaval since August 1998, it isnevertheless a market of 146 million people that has become increasingly awareof, and hungry for, the range of products and services to which the West haslong been accustomed. As an alternative to heavy local investment andcommitment of resources in Russia, or to the random and relatively uncontrolleddistribution of products through informal distribution agreements and licenses,franchising offers unique advantages. Typically, the franchisor will makenecessary local investment, take on the role of distributor, and undertake tomaintain the quality of goods or services, or will permit a master franchiseeto do so. 

 

Franchising Gains Ground in Russia

Five years ago, only a handfulof foreign franchises, with one or two units, were open in Russia, and it washard 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** inMoscow. Moreover, many hundreds of franchises have sprouted up in a variety ofmarket sectors. Although, as usual, fast food is the most prominent andwidespread of these sectors. 

 

**McDonald’s** has dominated the fast-foodsector here as elsewhere, but in Russia and the NIS, these are corporate-ownedrestaurants rather than franchises. However, Western franchises and homegrownconcepts are rising up to challenge the omnipresent golden arches. For example,**Subway**licensed its firstRussian-owned restaurant franchise in Moscow at the end of 1998. Russiancompetitors, such as Russkoe Bistro, which serves Russian food in severalfast-food style outlets, Patio Pizza, and Rostik Chicken are beginning tofranchise units away from their home bases in Moscow. 

 

Nonfast-food Successes

**Xerox**hassuccessfully franchised its copy centers in several major Russian cities. **AlphaGraphics**, whose first store inMoscow (opened in 1989) has consistently been one of its highest volume storesin the world, now has three stores in Moscow, one in St. Petersburg, and one inNovgorod Velikiy. **Express PersonnelServices** has been successful in building a network of units serving thismarket with offices in nine Russian cities across the country. Also, modern,Western-style gas stations with small convenience stores are replacing theroadside tankers that used to be the main sources of fuel. 

 

Russian View of Franchising

Since 1997, franchising has been formally recognized byRussian lawmakers as a legitimate way of doing business (an important step in acountry where people are mistrustful of any activity that is not officiallyrecognized), 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 isgenerally a supportive measure. In addition, officially, protection oftrademarks, logos, and intellectual property is available—all vital features ifa franchisor is to establish a unique and recognizable brand in Russia. 

 

Support for Franchisors

As further evidence of the gathering strength of thefranchise community, the **RussianFranchise Association** (RFA) has been established (assisted in its earlydays by technical assistance funded by the **U.S.Agency for International Development** (USAID) and, more recently, by theEuropean Union’s **Tacis**program). This organization has a formallyconstituted board, a code of ethics for member franchisors, and a well-equippedresource center in Moscow. 

 

The RFA organized an international franchise conference inMoscow in April 1999. It also held three educational workshops in March 1999 inMoscow, Novgorod, and Tula. Each was attended by more than 40 governmentofficials and entrepreneurs, all eager to learn more about the concept and, inmany cases, ready and able to acquire franchise businesses. 

 

Obstacles to Franchising

Major difficulties faced by would-be franchisors include thefact that good retail space is hard to find and leases can be difficult toacquire because of uncertainty about property ownership and a labyrinthinebureaucratic process. Also, regular insurance is hard to come by and veryexpensive. 

 

Another major problem is establishingdependable sources of high-quality inputs. One of the effects of the economicdownturn and the resulting currency crisis was to make the import of suppliesand equipment a costly affair for franchisors. The foresight of two well-knownbrands—McDonald’s and **Baskin Robbins**—inestablishing their own supply sources in Russia has been well  rewarded  in  recentmonths. Both have been able to adjust to the recent difficulties and to carryon with development plans. 

 

The message for franchisors looking at this market is thatdependence on imported supplies and equipment can make them vulnerable.Franchises that are service oriented, depending on technology transfer to theirfranchisees for success rather than the sale of goods, can more readily rideout the crises. 

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As in all developing markets, the risks are high for thepioneers. However, those who can establish themselves now will gain a headstart that will make it difficult for them to be overtaken. There is anemerging middle class in Russia and more than 50 cities with a population ofover one million. Each of these cities can support at least one unit ofpractically any franchise business one can name.  

 

Franchising Potential in theNIS

Franchising has been slower to develop elsewhere in the NISthan in Russia, but it is beginning to take hold in Ukraine and interest isgrowing in Central Asia. 

 

The Ukrainian market offers many opportunities forinternational franchising and no specific regulatory constraints hinder theactivity. However, the investment climate in Ukraine has proved a majorobstacle for franchisees. Western investments in Ukraine with franchisingpotential (e.g., McDonald’s, Coca-Cola) are currently corporately owned, andvery few Ukrainian businesses recognize the potential for franchising. Althoughsuccessful examples of franchising projects can be found—such as Baskin Robbinsand **Dunkin Donuts** in Kharkiv andExpress Personnel Services in Kyiv, in general, franchising projects in fastfood, photocopying, gas stations, and so forth are still rare.

 

Currently, U.S. franchisors have an extremely limitedpresence in Central Asia. Central Asia watchers, however, believe that thepotential for such activity is there. The **CentralAsian-American Enterprise Fund** (CAAEF), which provides both direct equityinvestments and loans to enterprises in the region, including start-up ventures,is seeking to assist the development of franchising in the area. According toCAAEF President Don Nicholson, “The opportunities for franchising in CentralAsia are still unknown given the lack or absence of any real experience.However, we see it as having considerable potential and would welcome inquiriesfrom potential franchisers. Given the state of the market and low wage levels,the potential will be greatest for those franchisees that provide veryaffordable goods and services, and where the initial costs are not that high.”

 

*Fora lengthy report on Franchising in Russia, visit **BISNIS Online** at www.mac.doc.gov/bisnis/isa/9707fran.htm.*

 

*Formore information on the Russian Franchise Association, contact AlexanderMailer, President, tel: +7 (095) 305-5877, fax: 305-5850, or e-mail:[email protected].*

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*Michael Amies isExecutive Vice President of **SibleyInternational**, an economic development consulting firm in Washington, D*.C.

 

FranchisingTerms

Franchisor**—****an entity that has developed a business concept and brand image. Itlicenses a third party (the “franchisee”) to operate the business under thatbrand within a predetermined territory, in return for a fee, or fees. Thefranchisor will normally continue to support the franchisee with training, productdevelopment, and marketing in return for an ongoing fee, usually termed a“royalty,” or “management service fee.”**

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Master Franchisee**—effectively the same as afranchisee, except that the territory granted is usually much larger (can be awhole country or a group of countries), and the master franchisee would havethe right to open multiple units or to sub-franchise within the territory.**