Franchising in Russia and the main problems of development of franchising in Russia

Russia has many economic challenges, which require new methods and new economic mechanisms. Franchising is one such mechanism. This economic tool increases the efficiency of small business. This is what our small businesses need at this time. It joins together small and large businesses very correctly and subtly.Over the last decade, franchising has become a very attractive commercial and contractual model in Russia. Many domestic and foreign companies use the franchise model to expand into various regions and territories in Russia .

In nowadays Russia there are about 595 franchisers in more than 75 areas of business - from retailing to truck transportation. Some companies have just started their franchising activities - about half of them decided to use a ready-made business system already in 2010. However, there is a great number of large networks that have long and successful experience of work at the franchising market.

Franchising came to Russia in the late 80's of the last century – these were the Western concepts of food service raising capital from the West. Already in the early 90's such companies of foreign brands were opened using financial resources of the first Russian entrepreneurs. First foreign franchises in Moscow were of such kind as "Baskin Robbins" .The majority of domestic franchises are concentrated in Moscow (70%) and St. Petersburg (15%). However there are developing regional franchises in smaller cities (Samara, Rostov-on-Don, Kursk, Novosibirsk, Vladivostok).

The leadership in the area of food services belongs to fast food franchises. As for the Russian franchising model in the area of food services, it is necessary to emphasize "Rostiks Group" corporation that has developed the network of fast food services under its own brand "ROSTIKS" since 1993. In different cities of Russia and CIS over 100 corporate and franchising enterprises under the brand "ROSTIKS" work nowadays. Although "McDonald's" first entered the Russian market, classical fast food franchising was brought to us by another U.S. fast food operator - Subway. Subway network is developing with astonishing speed - more than 1,000 new restaurants are opened every year in the world, taking the advantage of franchising schemes which allowed the company to win the title "Best World franchising system” already for the 14th time. It is noteworthy that the company Subway only works using the system of franchising. This means that in order to avoid conflict of interests, the parent company itself or the franchisor do not own any of the restaurants. It took only five years for "Subway Russia" to bring the Russian market to the fourth place in Europe in the number of operating restaurants. In terms of sales growth, profitability and efficiency of individual restaurants, SUBWAY market in Russia is the second largest national market of the network in the world, while SUBWAY restaurant on 20 Nevskiy Prospect, St. Petersburg, is one of the world’s leaders in terms of sales.

Let`s take for example, "Invitro" company - its franchise has become a pioneer at the Russian market of laboratory diagnostics services. The project was launched in 2005, and already in 12 months the company won the national award "Golden Brand".

It is important that new areas covered by franchising appear. Russia has already seen such specific proposals as the franchising of a bookmaker's office, franchises of the company creating and promoting websites, ski schools, the company making the musical arrangement of the places of leisure, bakeries and so on. Probably, franchises market has recently been fed up with "normal" proposals, and the future belongs to creatively different projects that will surprise the consumer.

From year to year the market of franchising in Russia becomes more transparent and attractive. But despite such consistent growth, unfortunately, we can ascertain that the number of franchise systems in Russia is relatively low compared with many developed countries. There are some negative aspects of real business practices that are specific for our country; they hinder the effective formation of the Russian franchising market:

The most important economic problem of franchising in Russia is absence of stability. Last decade, in which the rapid development of franchising in Russia began, is notable for the absence of stability in economy, constant ups-and-downs of country’s economy, which lead to the same ups-and-downs in demand for all kinds of goods and regular redivision of property. All this cannot but affect franchisees. Taking into consideration that most of franchisees have to open their businesses in tenancies because of the shortage of own means, such a change of the owner negatively affects the work of both franchisee and franchise system in general. Redivision of markets, very often using non-market methods, can also reduce the efficiency of franchise systems. Franchising, as mentioned above, is based on cooperation of two types of independent entrepreneurs – franchisor and franchisee, both of which are legal persons. So not only franchisor but also franchisee has to invest their initial capital into the system development. Taking into consideration that franchisee has to bring one-time franchise payment, so the franchisee’s initial capital must be rather large. Unfortunately, not all Russian entrepreneurs have enough capital. The attempt to get a bank loan as the initial capital faces a row of problems: franchisee’s rate of return, including all regular payments, can lead to the fact that the period of repayment of a loan will be rather long, and taking into consideration current loan rates, practically impossible; current legal system complicates lending out money to franchisees.

Nowadays the main problems of franchising in Russia are concentrated in the sphere of law. It is provoked by the fact that franchising as a system of relations is based on the system of contractual relations and must be supported by a strong legal basis. Increase of efficiency and development of franchising in Russia requires changes in legal system. These changes are aimed at:

• –    Creation of conditions for real competition between franchise system and traditionally formed mechanisms of realization of goods;

• –    Providing the facility of legal acts administration for participants of franchise system;

• –    Creation of transparency of franchise system and its elements.

All three aims are closely interconnected. To achieve these aims it is necessary to create a system of legal acts, by which entrepreneurs will have sufficient regulatory material for formation of contracts.

Most of the problems linked to the franchise the fact that entrepreneurs are poorly trained. They cannot act as an organizer of franchise systems, they cannot act as a franchisor, cannot work in the system as a franchisee. The solution to this problem seems simple, it is obvious that for this purpose it is necessary to create an educational system which would be trained and prepared to sufficiently our business in this area, but this requires huge resources and highly qualified specialists.

There are also disadvantages that are associated with the standard of the goods and restrictions on business. Franchising reduces competition, which affects the quality of the goods, which decreases. Eventually franchise system is less flexible than large corporations and, especially with small businesses.

Franchising recently developed a little faster than it was before. This cannot not to make us happy. However, this method of distribution franchise business is quite weak when compared with developed countries. You can safely say that franchising is very interesting and quite promising in the Russian Federation. He cannot develop only with the participation of foreign big companies, but limited to our operations.