Today’s Image of Franchising in Russia

Ekaterina Soyak
General Director
E.M.T.G.

The development of franchising in Russia, for a variety of reasons, is proceeding more slowly than in Western countries. However, its perspectives in Russia have long remained strong, making the current state of affairs an unusual one. The opportunities for effective development of the franchising model, in Russian circumstances, are confirmed by a significant number of Western companies operating here under that model, with thousands of local retail outlets.

The government has been creating a favorable environment and an adequate legal framework for fair business dealing over past years, establishing a base for welcoming the business of international market leaders. Just recently a number of international brands entered the Russian market (Le Pain Quotidien, Nobu, Burger King), following the example of Hard Rock Cafe, T.G.I. Friday’s, KFC, Southern Fried Chicken, Subway, Sbarro, Starbuck’s and Costa Coffee, who have already secured their franchise development in Russia.

Russia has not experienced as severe an economic downturn as some other countries. In 2009, according to many Russia-based franchisors, the demand for reliable franchises has multiplied several-fold, this being a confirmation that people have turned to reliable franchises to start their business and invest carefully.

As of today, a bit more than 400 Russian and foreign franchisors are operating in the country.

Franchising in Russia is mainly dominated by companies working in sectors of the food and restaurant business, and by retail outlets involved in the sale of clothing, accessories and jewelry. But there is every reason to expect that developments in other areas of the Russian economy will follow, as has been shown in the experience of Western (and not only Western) countries. If so far it has been on a small scale, the question will be the appearance of major international companies working on the franchising model. And now is an objectively strong moment for their appearance. There are many strong arguments for that to happen.

Some foreign businesses that work in the franchising market are sometimes put off by certain faults in Russian laws that regulate that sphere of business. The relationship between franchiser and franchisee is regulated by the law titled “Agreement on Commercial Concessions,” which does not fully represent the specific factors in the business, namely the model of franchising. However, such regulations do not present practical difficulties for the two sides involved in such commercial relationships. The Russian Franchising Association has been determinedly, and for some time, lobbying for changes in this part of Russian law, to bring it into conformance with the real state of the franchising business in Russia. The quicker franchising develops in Russia, the sooner we can expect results in that field.

The future course of franchising in our country:

The global economic crisis has had a significant effect on the Russian economy, with many small businesses closing. As a result, a whole space in the economic sector has been vacated. A deficit in goods and services in these sectors can be felt now, when the effects of the crisis in Russia are far from over. When the crisis is alleviated, such a deficit will be felt even more strongly. The situation is that whole sectors of the Russian market are underexploited by as much as a third and await the arrival of new business concepts.

After a wave of bankruptcies of small businesses, working independently and not on the franchising model, as a result of the financial crisis, the Russian business community, and those who aspire to enter it, will likely reach their own conclusions. The great majority of small businesses working in Russia on the franchising model have managed to keep their place in the market, regardless of the economic crisis. Such a verdict is supported by the long-established Western practice that franchising is an ideal model for small business development. Many Russian businessmen, who were unable to develop their own small business models independently, have already made the choice for a franchising model. The market, and small business as well, is waiting for investors working on a franchising model.

The contribution of the state in the development of franchising in Russia:

The stability of the economic and political situation in Russia at the end of the new decade is significantly higher than that of the state in the 1990s. Contemporary Russia is no more unstable, for business purposes, than the majority of European countries. The levels of Russian law, on the economic front, in general meet fully all international criteria.