Analysis of trends and prospects of development of Russian franchising

FRANCHISING MARKET, GLOBAL TRENDS.

There is no doubt that franchising is one of the most attractive types of activity for small and medium-sized businesses. This business model has been actively developing for more than 20 years and it has excellent prospects for development in Russia. Today franchising is one of the best ways to raise the efficiency of business in any sphere of activities, so in future those entrepreneurs who want to improve their competitiveness will definitely choose franchising.

Over the past 2 years dynamics of economic growth in Russia has dramatically shifted into low gear. According to Russian Federal State Statistics Service in 2014 and 2013 GDP growth accounted for 0.6 % and 1.3%, respectively as against 3.4 % in 2012 [1]. On the part of manufacturing this slowdown was connected with dynamics of industrial production, wholesale and retail trade, construction, real estate transaction and net tax on products. On the part of GDP the slowdown was provoked by consumption dynamics and dynamics of capital formation. However, despite such volatile economic environment franchising has clear prospects for further development and gives entrepreneurs new opportunities.

It should be noted that official statistics stays quiet about any market data on franchising. Up to the present moment Russian Federal State Statistics Service hasn’t provided any statistical data concerning franchising. For example, it is not known how many available franchises are there in the country. There is no a unified register because franchising is not singled out into a certain business type. However, the total volume of Russian franchising market is estimated at $5 billion. The predominance of franchise units over company-owned units allows the franchisor to spare funds on distribution and increase market coverage without much additional expenditure. The number of company-owned units is gradually decreasing. Nowadays their percentage accounts for 75-79% depending on the branch of industry.

■ Franchise Units

■ Company-owned units

Image 1 – The structure of franchise and company-owned units by the type of economic activity in Russia, 2014 [2]

It is worth noting that boom time for new franchises in Russia is over. Decline in the Russian economy, sharp increase in exchange rate, erosion of purchasing power, and as a consequence of that, sales slowdown make Russian franchising change its business strategy. According to the data from Russian franchise association there were 750 franchise companies in 2011 (98% growth over a 3-year period) and by 2014 their number has fallen to 720. But those companies that managed to consolidate their positions in the market try to develop their networks. 40% of franchisors are originally Russian and there is a potential for growth in this particular sector (for example, 90% of franchisors in China are presented by Chinese brands). [3]

Global development trends of franchising are typical for Russia. It is connected with common franchising benefits and conditioned necessity for the unification of potential and resources in the age of globalization. However, every country has its own peculiarities related to socioeconomic, cultural and psychological, legislative and other factors. For instance, public demand for certain goods and services and development trends of one or another branch of industry influence overall franchising structure. Russia has its own peculiarities of franchising, for example, in our country retail and catering establishments and establishments for public service have become more popular than other branches while in the USA leading positions have been held by fast food companies.

• ■    Non-food retail sector

• ■    Consumer service sector

• ■    Catering sector

• ■    Business service sector

• ■    Food retail sector

• ■    Other

• ■    Manufacturing Sector

• ■    Mass Media, Internet

Image 2 – Structure of Russian franchising [4]

Worldwide tendency of last years shows that franchise companies can be divided into three main types: trading companies (they accounts for about 80% of the total number of franchisors), service companies (providing services) and manufacturing companies. Russia is not the exception and has the same types of franchise companies.

It is obvious that distributional franchising predominates over manufacturing franchising. Consequently, it is important to pay special attention to the development of manufacturing franchising and business format franchising in Russia. They are the most promising sectors.

Such indicator as payback period is rather substantial argument when buying a franchise. According to the research data from Retail Idea company the average payback period typical of Russian franchising market does not surpass 24 months (2 years). Sometimes this period is even less than 12 months (no more than 10% of all franchisees had such experience).

The payback period depends on a number of different factors such as the branch of industry, location, geographic footprint and demographic factors. For example, retailing and catering are repaid much faster than manufacturing.

Apart from this, when buying franchise potential franchisees are guided not only by payback period, brand awareness, franchise cost but they also focus on various ratings. After analyzing these ratings the following general tendencies of franchise market in Russia can be revealed:

• •      franchise growth in retail sector;

• •      the decrease of total amount of franchise offers with simultaneous

network growth;

• •      high level of Russian franchises;

• •      increasing popularity of fashion jewelry franchises in clothes and

footwear industry which do not require a lot of investment from potential franchisees.

Various government and regional franchise support programmes favour the development of this business model. Such programmes suggest:

• •      judicial and tax reform introduction;

• •     economic debureaucratization ;

• •     small and medium-sized business support;

• •      elaboration of bespoke solution for franchising development;

• •      start-up subsidies;

• •     assistance in development and promotion of national brands;

• •      training of skilled personnel;

In the near future all that will allow enterprises to become more confident in the market and open up new horizons for themselves and their customers. Besides, franchising prospects in Russia will remain favourable for a long time, so entrepreneurs who will decide to try themselves in this sphere of business will never lose. Moreover, they will be able to develop their business and extend the geographic reach conquering new cities and primary audience.