Franchising: Essence and Experience in Russia

Financial University under the Government of the Russian Federation

International Finance Faculty

 

 

 

 

 

 

 

Tumanov Vitaly Vladimirovich

1 course Group IFF 1-1

 

 

“Franchising: Essence and Experience in Russia”

 

 

Tutor – Slobodyanik Victor Vladimirovich

 

 

 

 

 

 

 

 

 

 

 

 

 

Moscow, 2012

Table of Contents

 

 

 

 

 

 

Introduction…………………………………………………………………..3

 

Chapter 1. Theory of Franchising...………………………………………….6

 

§1 Terminology of Franchising. Understanding of Franchising…………….6

 

§2 Main Models and Features of Franchising……………………………...11

 

Chapter 2. Practice of Franchising. ..……………………………………....16        

 

§1 Foreign Practice of Using Franchising………..………………………...16

 

§2 Experience of Franchising in Russia….………………………………...27

 

Conclusion………………………………………………………………….30

 

List of Literature……………………………………………………………32

 

 

 

 

Introduction.

 

The Conversion to the free market economy supposes the development of different forms of entrepreneurship, and the problem of developing small business is one of the most important ones. It is very hard to organize your own firm in the traditional way, so the search for different new and innovating business models takes place. In the last year, a big number of enterprises, working under the labels of big enterprises that are well-known, was created. It is obvious that the creation and development of the net of branches and offices would have taken much more time, and huge investments of cash, which were decreasing through the last years. Because of these factors, the new business model started to be widely used in Russian Federation. This business model is called “Franchising”.

 

Franchising is nowadays recognized as the most efficient model, that helps to increase the productivity of small business. It helps to unite the pros of the small and big business practice. Enterprises, that work under the franchising model this way become more strong in the market competition.

 

Nowadays, franchising system covers 50 branches of economy on the American market: from the internet to banking, being the tool of distribution of goods and services, using which, the franchisee gets from the franchiser the rights for usage of the brand label and operational system, in exchange for the right of controls by the franchiser, and some payments (royalty).

 

 

 

Any firm, that is classified as a small business is able to create its own brand and register it, but to make it successful, the firm has to put into it huge numbers of resources. A sharp advertising is necessary, as well as participation on the exibitions, and other work. Nowadays, small businesses can not afford such investments. It is much more easy for the small business to buy the right for usage of the popular brand, using the franchise. In this case, the enterprise which is then franchiser gives to the franchisee the needed equipment and technology, studies the employee, when the franchisee undertakes to use the brand of this exact enterprise, wherever it is situated.

 

Looking at the worldwide practice and Russian practice, we can say that the main advantage of franchising is the decrease of the risks, so in the developed industrial countries, franchise in mainly used by the physical entities, and small businesses, which are economically active and manage their retail shops by themselves.

 

Franchising is getting more and more popular and wide-used nowadays, but franchising in Russia needs to be studied to create a complex knowledge of this business model. All of these show the actuality of the chosen topic.

 

The aim of this work is to study the theoretical basis of franchising system, and analyse the worldwide and Russian experience of using a franchise. To accomplish this aim, it is necessary to solve the next problems:

 

 

 

 

 

 

 

 

 

• Go through the theoretical basis of franchising.

 

• Study different types and models of franchising.

 

• Determine the main pros and cons of the franchising system.

 

• Study the worldwide experience of franchising functioning.

 

• Study problems and perspectives of developing franchising in Russia.

 

 

As the leading scientists, that studied and explored franchising, I would like to note Philipp Kotler and Scott A. Shane as the foreign scientists, and S.A. Sosna and E.N. Vasil’eva as the Russian scientists.

 

The work consists of the titular page; table of contents; introduction; 1 chapter, divided into two paragraphs; 2 chapter divided into 2 paragraphs; conclusion; and list of literature. 

 

In the 1^st Chapter the theoretical questions of franchising are studied. The definition and terminology are given, types and models of franchising are studied. 

 

In the 2^nd chapter, the experience of franchising in different countries is studied. The experience of UK, Germany, France, USA, Hungary and Czech Republic are studied. Russian experience, and the perspectives for Russia are studied. 

 

In the conclusion the main outputs, taken from the work are given.

 

Chapter I.

Theory of Franchising.

 

 

§1.Terminology of franchising. Understanding of Franchising.

 

The word “franchising” was generated from French “fran-chise”, which means “a benefit,  a privilege”. Later on this word started to be used in the English-speaking countries. It is defined as “The practice of using another firms effective business model”. [5]

 

Thirty-three countries, including the United States, China, and Australia have laws that regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising. [2] 

In Russian Federation, the model of franchising is called “Commercial concession” and has a definition if the Civil Code of Russian Federation: “By the agreement of commercial concession, one of the sides (right-holder) undertakes to the other side (the user) to give the exclusive right to use the brand name, services, secret commercial plans, brand label, etc. in the business with, or without a time limit. ” [1]

 

To say in the simpler worlds, franchising is the experience of using other firms business strategy (basically, it should be a firm with a well-known brand and image), as well as using its label, brand name, commercial information and other specific features, which will help the user to allocate a good position on the market for some payment.

 

Moreover, the right-holder undertakes to give consultations, and advises to his client.

 

 

 

 

Terminology of franchising:

 

Franchise – is a right to possess economical activity under the principal of franchising, given in the agreement. [15]

 

Franchiser – physical, or legal entity, selling the agreement on the basis of the franchise.

 

Franchisee – physical, or legal entity, acting under the agreement of bought franchise.

 

 

The agreement of franchising has two sides: the franchiser and the franchisee.

 

The franchiser, being the right-owner, gives his rights to the franchisee on some circumstances. The franchisee acts on the market with the given reputation of his franchise, and uses the franchises brand image and commercial system.

 

There can only one franchise and many franchisees in the agreement. So the franchisees create some kind of web, which works under one brand. [15]

 

The franchisee works under the circumstances that are worked out in the agreement, working under the name of the successful firm, and giving a part of profit to this firm. It important to add that in that kind of relations, both: franchiser and franchisee are legally independent. [5]

 

The franchiser can start working under the franchising agreement as a way of developing his business if:

 

Ÿ The firm has a strong label, that is easily recognized by a consumer from all the others.

 

Ÿ There is the commercial strategy in the firm. Moreover, the specific logistic and marketing strategies, that are proved to be effective are being used.

 

Ÿ A comparably strong mass demand can be prognosed for a long period of time.

 

 ŸProfit, taken from the future work of franchiser and franchisee should be higher, then the profit from working alone. The profit should cover the franchisees expenses, and give the franchisee and acceptable profit left.

 

 Ÿ The future franchiser is ready to open all his commercial and business-working secrets to the future franchise, and is ready to give him all the helping information, he will need in the future. [4]

 

 

Main features of franchising:

Ÿ The license for the brand is given to the franchisee.

Ÿ Franchisee is educated for developing his business under the commercial strategy of the franchise.

Ÿ Franchisee is independent from the franchiser.

If even one of this features is absent, it is not the franchising, but a license agreement, or business relations with the elements of franchising. [19]

 

 

 

 

 

 

Functions of franchiser and franchisee under the agreement of franchising.

 

Functions of franchiser:

Ÿ Gives help to his partners while they are choosing the area of business placement.

Ÿ Gives recommendations on placement of the trading web, working on the advertising

Ÿ Consults the franchisee on the planning, management, and dealing with the trading operations.

Ÿ Sometimes gives some financial help

Ÿ Finds better suppliers, provides market researches, works on general advertising campaigns.

Ÿ Controls the quality of goods and services in the franchising web to make consumers come back. [19]

 

Functions of the franchisee:

Ÿ Has to complete the duties of selling goods and services, that are dictated by the franchiser.

Ÿ Unifies and standardizes the activity of subdivisions, that are included in the firm; marketing campaigns and given services.

Ÿ Controls his business.

Ÿ Works with clients. [19]

 

 

 

 

 

 

 

 

 

 

Rights of the franchiser and the franchisee under the agreement of franchising:

 

Rights of the franchiser:

Ÿ Expansion of the production and selling the goods and services; getting the additional profit.

Ÿ Expansion of the experience of business development on the basis of the inverse informational connections.

Ÿ Getting the additional profit from giving the rights for using the brand label, brand style, intellectual property.

Ÿ Saving financial resources from the absence of the necessity of creating the subsidiary enterprises, additional spending’s for the technical basis, because the franchisees can have them in their property. [3]

 

Rights of the franchisee:

Ÿ Use of the intellectual property of the franchiser.

Ÿ Open his own franchising enterprise.

Ÿ Get the standardized complex of services, needed for the enterprises placement.

Ÿ permanent technical and consultation help from the franchiser.

Ÿ Economy of resources and time on advertising, training, marketing studies, search and shipment of resources, creating and placing the label, creating the business strategy. [3]

 

 

 

 

 

 

 

 

 

§2.Main models and features of Franchising.

 

Types of Franchising.

 

On the way of working, different types of franchising can be determined:

 

1. Marketable Franchise – the franchiser sells the goods not to the retail, or wholesale firms, but mainly to the franchisees, which do not sell the same goods of the rivals. Under this circumstances, franchisee buys the right for selling the goods and services with the brand label from the head enterprise.

 

With this model of franchising, the product is delivered to the consumer in the condition, in which it was produced by the franchiser, and the label, under which it was produced becomes the guarantee of the quality. Franchisees often provide the after sale service. In this model of franchising, the franchiser in the producer. The main franchising right is the right for using the label of franchiser.

 

 

 

2. Production Franchise – the enterprise, is giving equipment, composition, the right to use the brand label and the general advertising basis for the production and distribution of the goods to the franchisee with the necessary condition of quality control.

 

A producer to expand the production of his goods and entering new markets with it uses production franchising. Production in different regions must not be differentiated.

 

3. Service Franchise – is used by the enterprises of the service sphere to enter the new markets and building a unique web. It is the complex of marketable and production franchise. This model is actively used in beauty services, everyday life services, touristic business, and educational business. Franchisee is given a right to act under the brand of franchiser. Franchiser has a complex of patented rights that are given to the franchisee on the consequences of the agreement.

 

4. Business Franchising – is the most popular model of franchising. This model, where the franchiser gives the franchisee not only the whole complex of rights, gives him his own methods and ways of commercial activity, but works on the preparation of the work of franchisee: helps him in planning the operations, creating the logistic infrastructure, possessing the juridical status. Along with this, the franchiser gives the license for using the brand image and label, the way of trading, goods, services, and needed equipment. It is mainly used for opening stores for selling the complex of goods and services under the brand name of franchiser.

 

The franchisee fully identifies with the franchiser and becomes a part of corporate system. Under such circumstances, the franchiser can be an enterprise, mining primary products, a producer, a wholesale, or retail firm, or just the owner of the rights that are given to the franchisee under the agreement. In this model, all the firms in the system must work with the unite strategy, style and comply the intrasystem interests. [21] [5]

 

The model of business franchising gives an opportunity not only to expand the business inside the sphere, and close branches, but also to include different courses of business into the system. Good reputation of the firm in this sphere, using this model of franchising, gives many opportunities for expanding the main firm (franchiser), as well as the firms, that will use this reputation to develop their own business (franchisees)

 

 

 

Approaches to franchising.

 

There are many variants of working with franchising. Three of these approaches are used more widely.

 

1. Regional franchising.

 

Choosing this approach to franchising, franchiser chooses to some market, which could some city, state, or a country with his product. Realizing that he could not have the needed capital and human resource for expanding fast enough, he gets help of the main franchisee. The main franchisee has a right not only to find the new franchisees in his region, but also to train them, and give them the help that is mainly given by the original franchiser. The main franchisee is included into the profit share, and, usually, payments into the advertising reserve. He uses the advances that are mainly used by the franchiser, and pays the licence fees, and fees for advertising right to the franchiser. An agreement between the franchiser and the main franchisee indicates what is expected from both sides, and the time, during that the franchisee does his work. After signing the franchising agreement, the franchisee pays the price of franchising that is controlled by the agreement, and the franchising pays the franchisee fees during the time period of agreement. The value of these fees is indicated by the quantity of new franchisees that have been added to the agreement. Unlike the other approaches, this method is beneficial for the both sides, because the franchisee is the chosen entity, and he has to be supported on all the period of agreement, which is beneficial for the both sides.

 

 

 

2. Sub-franchising

 

 In the sub-franchising method, the sub franchiser also expands to some new            territory and provides the early training, etc. The difference is that the franchisee works directly with the franchiser on the long-run period of time, and has a very limited contact with the franchiser. He pays the fees to the sub-franchiser, which pays some part of them to the franchiser. Under these circumstances, the sub-franchiser becomes a franchiser in his region, and the franchisee depends on his help.

 

 

3. Developing franchising.

Franchiser gives exclusive rights of developing some region to the group of investors in the franchising agreement. Investors either develop their own franchisees, or find ones. In the last case, rights of investor, as the owner of the franchise are limited. Taking the exclusive rights for the territory, the entity pays the franchiser fees, and has to open a certain quantity of trading spots in the time period, considered in the agreement.

 

The difference of the developing franchising from the sub-franchising is that the lower franchisees are connected with the franchiser as well as with the sub-franchiser. Under the agreement, the sub-franchiser undertakes to find and train the franchisees, consult, help and control them. The franchiser gives the rights directly to the franchisees, and stays in touch with them as well.

 

In both of these cases, the franchisee gets all the advances that are usually given in franchising: using the brand name, label, business strategy, early training, consultation, etc. The main differences are in the time period of franchising agreement, the contact of franchisee with the management, the entity to whom the franchisee pays the fees. [5] [13] [20]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 2.

Practice of Franchising.

 

 

§1.Foreign practice of using franchising.

 

After The Second World War, franchising was spreading in Europe differently, depending on the country, customs. Culture, and especially everything that is related to the type of economical and market system, and the level of development of the country. That’s why some countries chose franchising in the service sphere (like UK and Germany), others – in the sphere of distribution (France). [2]

 

On the institutional level, the system of franchising is represented and promoted by European Federation of Franchising (EFF), which is a non-commercial international association, established in 1972. Their main aims are:

 

1. Development of franchising in Europe.

 

2. Representation of franchising in international enterprises (European Commission, European Parliament and others)

 

3. Representation and development of franchising on the worldwide arena.

 

4. Exchange of information and documentation between the national associations of franchising from the European countries and other continents. [4]

 

 

 

In 1977 British Franchise Association (BFA), which was first to give precise definition of franchise as the control license, given from one entity (Franchiser) to another (franchisee). [5]

 

Nowadays, there are 4,500 franchising systems functioning in Europe, each of them in average has 37 partners, and their total commodity turnover is $150 bil. Even looking at these great numbers, the level of development of franchising in Europe is much lower then in the USA, where the amount of this kind of deals is over $800 bil. [2]

 

The first place in the development of franchising by the quantity of franchisers and franchisees belongs to the United Kingdom. Development of franchising as the part of national economic system started in 50^th – 60^th. Several factors helped to its development: change in the way of economical progress from producing to giving services, processes of urbanization, increase of wages. These factors helped to create the sphere of services, where the level of convenience and speed of giving the services started to have the same importance as the price and quantity. [6]

 

The fast-food sector has much more developed franchising system, than any other sector. It has the highest rate of spreading of this business scheme. The annual revenue in the franchising sphere is more than £10 bil.

 

In 2004, there were 568 franchisers in UK. In 2008 this number increased to 670. [2]

 

 

 

 

 

 

 

 

Several facts illustrate the situation in the UKs franchising sphere:

 

• The share of franchising in the sector of retail is approximately equal to 30%

 

• 90% of all the franchises are profit-gaining

 

• In 2008, 642 franchisers were registrated, which means that there is a 55% increase, comparing to the other 5 years.

 

• In 2008, 86% of franchisers and 79% of franchisee were awaiting an increase of their business in the next year [2]