Franchising: Essence and Experience in Russia

 

 

The next country that has a high level of franchising development is Germany.

 

The total number of franchising systems has reached 598, which are  represented by 28000 franchisees. The annual increase is approximately 7% for franchisers, and 17% for franchisees, which means that the franchising sectors is developing rapidly in Germany.

 

In 2010-2011, a 10-15% increase of franchising sphere is prognosed. Economical life ability of the franchising systems is proved by the next facts: in the last 5 years only 8% of enterprises were not profitable. The commodity turnover in the sphere of franchising is €22,4 mill. [4]

 

The highest rate of increase of franchising enterprises takes place in the sphere of fast-food, sphere of services, hospitality. A stable increase is awaited in all the spheres of franchising, the best perspectives are awaited in the spheres of fast shipments, office services, retail, house services.

 

France has the 3^rd place by the quantity of franchise systems in Europe (517 franchisers and 28851 franchisee). At the same time, France is the leader with 40% of European franchising market. Market of franchising in France, nowadays, is developing dynamically. The volume of franchising market in 2008 was valued as $32,5 mill.

 

 

The biggest part of franchise networks is working in the sphere of trade. The next is the sphere of services, hotel and restaurant businesses.

 

Franchising market, unlike the most other retail markets, was developing stable and rapidly.

 

Franchising plays an important role in the economical system of Italy. Even in the situation of economical stagnation, it became one of the few sectors, that was showing positive trends in the dynamics of growth. Annual increase of the franchising sector is 3% a year. In 2008 there were 502 franchisers and 26274 franchisees in Italy. With these numbers, Italy has moved close to such leaders as Germany, Great Britain and France. [6]

 

Liberalisation of the economical systems of central, and south-eastern countries, their wish to be a part of the commercial system, based on the investitions, motivate them to make a choice for franchising and independent business. The absolute leaders in usage of franchise systems are Czech Republic and Hungary. [6]

 

Hungary is the absolute leader of using franchise systems in central and south-eastern countries. In 2008, Hungary had 220 franchisers and 5000 franchisee.

 

 

 

 

In Hungary, this type of economical activety is relatively new, but even so, they have 250 franchisers and 20000 franchisee nowadays. 45000 people work in this sphere, and the sales volume is €2,6 mill., which is 5% of retail. The most part of the subjects of franchising work in the sphere of fast-food, photo-services, tourism, etc. [7]

 

Sucessful franchisers changed their methods on the Hungarian market, using sub-franchisers, giving financial assistance, and lower royalties.

 

In Czech republic, there are 79 franchise systems, and 260 franchisee. Czech Republic is in the start of a profitable franchising development. Food services are the most attractive for franchising. Because of the high profits and relatively fast paybacks, the best for the franchising zones are the zones, where the population has a high purchase ability.

 

In short time, wide-known enterprises accomplished to enter the Czech market. On the other hand, the franchisers from inside appeared, such are ETA (electric goods), Boty Roman Petr(shoes), Dobra Ajovna(tea production), Body Basics (cosmetics), Rapid Service (cleaning services).

 

Franchising in Poland is still a small part of business, nevertheless it firstly appeared here before the Second World War. Nowadays, there are approximately 170 franchisers in Poland: 105 domestic and 65 foreign. Annual turnover is 3,5% GNP. In Poland, the market of franchising is rapidly growing. Until 2002, there was and annual increase, approximately 10-15 networks a year. From 2004 it was 26 new networks a year, 2005 – 27, and 2006 – 39. The Absolutely highest  rate was in 2007 – from 64 to 258 labels, and in 2008 in Poland there were more than 300 franchisers. Franchising is being used more and more widely in the sphere of commercial activity, but low quantity of information and lack of crediting slows this process. [4] [6]

 

Franchising in Poland can count on help of Polish Franchise Association, an association that act with the aim of creating good terms for franchising, dealing with juridical and financial problems.

 

 

 

 

For franchising in Ukraine, 2008 was a good year. Franchising is already being used in 92 sectors, and is continuing to develop. Domestic franchisers occur in the spheres, where there are no foreign franchisers, or they work under other principals. Franchises become more varied every day, new sectors and technologies occur. Price range becomes more wide. Cheap franchises of house services and expencive restaurants and production occur:

 

• Increase in quantity of franchisers from 301 to 380(+26% a year)

 

• 84 to 92 sectors of economics (+10% a year)

 

• Quantity of franchisees increased from 18170 to 33631 (+85% a year)

 

• Appearance of new segment of network franchising business: finance. Development of banks on the franchise agreement. [18]

 

 

 

Todays level of development of European is characterized by the experts as the level of USA in 50^th-60^th. Experts say that franchising stimulates USAs national economics and increases the ability for entering and developing on the territories of other countries. From the point of view of national economics interests, it is an ability of “buying a workplace” for the population, and predictableness of business development. From the point of view of going worldwide – it’s the repitation of americain business, turnover of cash back to the country, additional commercial abilities for business and additional political ways of influence for the government. [23]

 

 

In the USA, franchising was firstly used by the company of Singer. Its was based on producing sewing machines (Singer Sewing machine company). Many experts say that exactly him – Isaac Singer – is the founder of nowadays franchising. From 1851 his enterprise made agreements with the firms-distributors for the transmission of the franchise – the earlier variant of nowadays franchising agreement. [9]

 

Until the 1950^th, most of the firms, that used the franchising system, used franchising as an effective method of distribution of goods and services These were the examples of the traditional franchising, or the first generation franchising.

 

Rapid growth of the franchising in the USA was stimulated by the law about the brand labels, made in 1946. Businessmen were getting the additional profit from giving others the right to use their brand labels under the different regulations and under the regulations of law gave the owners opportunities to develop their businesses without taking very high costs. [4]

 

American government uses government as one of the likable forms of international activity and supports wilings of franchisers to enter the territories of the other countries. American Ministry of Trade says that from all the methods of entering the foreign markets, franchise is the most popular, cheap and fast. International franchising is considered in the USA as a fast method of getting the foreigh currency with relatively low investitions abroad.

 

 

 

The main consequences of advantage of franchising from the other forms of international development are: lower costs on studies, promotion and development of infrastructure, maintenance and management. The opportunities of global activity increase, new countries for entering appear. The attractiveness of American franchises is mainly defined by the quality of the conseptions, and also the quality of management.

 

 

 

As all the successful franchisers, Singer was a strong businessmen with good business sense. His firm had a great success and sold its production easily. A very important distributional and marketing conception was made. This conception turned into the franchising that is known nowadays.

 

Franchising continued to grow as the industrial revolution in the U.S. was developing and mass production has led to the need to improve distribution systems.

 

Franchising in the automotive industry – is one of the oldest spheres of franchising in the economics. “General Motors” enterprise gave much influence on franchising. Not having enough capital to go to the retail. This firm started selling their vehicles through the system of dealers, that is still used in this industry. Among the first franchisees of “General Motors” there were owners of bicycle shops, which also sold cars. [5]

 

When Henry Ford started mass production of his famous “Model T”, he needed an effective system of distribution to transfer his cars to the consumers. As the “General Motors”, Ford didn’t have enough capital to open a big amount of retail points in a short period of time. So the firm developed a franchise network of dealers everywhere, where it was possible to. As this system was profitable, many producers started to use it, Nowadays, a big percentage of franchise sales refers to the automotive industry.

 

The advantages of the franchise conception were verified after the Second World War in the restaurant and hotel industries. The first serious breakthrough in franchising happened in 50^th, when the franchisees of the big restaurants had a great success.

 

In 1955 a classical franchise occurred – “McDonalds”. A network of restaurants of fast-food, selling hamburgers, was established by Ray Croc. He was selling his machines to the cafes and restaurants. When he started to sell his production to “McDonalds”, he was surprised by the quantity of clients. He decided to look at the activity of the company. The thing that surprised him the most was the fact that people were waiting in big queues to order food. Croc started to patent rights for his activity. He used all his capabilities to develop new production and advertising for creating a giant franchise enterprise. By the principal of franchising he could use all the energy and potential of thousands of businessmen to develop his enterprise. [8] [2] [5]

 

At the same time, Harlan Sanders established “Kentucky Fried Chicken”, and in 1959 “International House of Pancakes” started selling breakfasts through the franchising network on the territory of whole country.

 

Rapid growth of franchising in the USA started in the 60^th . Great amount of mini-hotels, small shops, restaurants, cafes, beauty shops and nightclubs occurred.

 

In 1970, the volume of sales of enterprises working under the franchising model was equal to more that $100 bil., which exceeded 25% of total amount of retail sales in the USA. In 1975, the volume of franchising sales doubled, and in 1990, the volume made it to the number of $716 bil., which doubles the number of 1980. 80^th in the USA are characterized as a period of big reductions of staff in the USAs enterprises. The managers of the medium level are the best candidates to transform into the franchisees – buyers of the franchise. They mainly have a relatively good education, have career ambitions, have the skills for hard work, but are not ready to start their on business from the clear start. Buying a franchise, the ex-manager, gets an opportunity to use great potential of free business with the everyday assistance of the franchiser, that is interested in the success of the franchisee.

 

 

 

 

Nowadays, franchising is the most rapidly growing method of business organization in the market structure. Statistic data of business development in the developed countries show that in the 5 year period, more than 85% of small firms, end their lives. In the same period, less that 12% of firms, using the scheme of franchising, were closed. So, from 10 newly made firms, only 1 ends its existence. International Association of Franchising (IFA) says that every 8 minutes of work time, a new franchisee occurs in the USA. Here are some facts in numbers that show the level of development of franchising in the US. [7]

 

There are more than 2000 franchising systems, in more that 75 types of activity. Quantity of franchise enterprises reaches the point of 767000. One franchiser has 380 franchisees in average. But the biggest part of franchisers have less that 100 franchisees. Near 80% jf franchising systems demand investitions from $50 to $250 thousand. But that doesn’t mean that systems with a low level of investitions don’t develop. Near 20% of systems have the invitational rate below $50 thousand. Royalties, that form the basis of franchisers revenue, are 3% to 6% in average. [10]

 

Franchising is regulated by the two norms in USA: Federal regulation and Government regulation on the level of States. There are differences between the federal instructions and the instructions of states, moreover, the requirements of states are tougher, than the federal ones.

 

USA – is the biggest in world franchising country, that has the most developed special franchise legislation, big court practice. The big experience of the country helped it to allocate pros and cons of franchising.  [4]

 

USA is an undisputable leader and birth giver of franchising system. In the end of 2009, USA had 883292 franchisees, which has given $9,5bil. Of working places, and made $844,7 mil. of production for the national economy. [4] [3]

 

Giant volumes of franchise business in USA, have involved big business layers into USA, where like in no other country the polarization of the positions of franchisers and franchisees are seen. There, the franchisers are strong on the markets, and the franchisees are strongly supported by the society. So, the Congress of the USA usually comes back to discussions about the problems of franchising.

 

In my opinion, the success of American franchising is mainly based on the government protection, very developed brand advertising, stable business-strategy, strong marketing, and the business standards as a whole.

 

 

 

 

 

 

 

 

 

 

 

 

 

§2. Experience of Franchising in Russia.

 

In Russia, the interest in the development of business under the conceptions of franchising is becoming higher and higher. Quantity of organisations, that are developing under the franchise agreement increased from 50 in 2001 to nearly 750 in 2008, which characterizes the demand for this business format in Russia. Only in 2008, the quantity of franchises, compairing with 2007, increased by more, then 40%. [23]

 

Franchising developed in Russia from the start of 90^th, when several domestic franchisers occurred(mainly in the fast-food sphere). Some people say, that the year of birth of franchising in Russia is 1993, when “Baskin Robins” sold its first franchise to Russia. [20]

 

The development of franchising in Russia was stable until 2004, when the rapid growth of franchising started, providing the rapid increase in the quantity of franchises. There are 3 main sphere of franchising in Russia: retail (46% share), fast-food (22% share) and services (32% share). [10]

 

 

 

 

 

 

 

 

 

 

 

 

 

The most known franchise brand in Russia are:

 

• Subway

 

• KFC

 

• Росинтер(“Il Патио” and “Планета Суши”)

 

• Мастерфайбр

 

• SELA

 

• Savage

 

• Big oil enterprises.

 

Many Russian franchisers have their own and franchising products abroad.

 

Russian Association of Franchising (РАФ) was established in 1997. The CEO is Aleksander Mayer. This association is a member of the World Franchise Council – the worldwide franchising council. RAF is helping the members of association to develop their businesses, and lobby their interests in government and other organizations, popularize franchising. It organizes and takes part in different thematic conferensions , publishes books on franchising, has an online catalogue of franchises. More that 40 enterprises are the members of this association. [23]

 

 

 

 

The only legal document, which regulates franchising in Russia, is 54 chapter of Civil Code of Russian Federation. In March 2009, RAF has given its recommendations for changing the 54 chapter of CC, which are made to correct the main problems: terminology, questions of registration of agreements, informational questions, etc.

 

There is only one specialized jounal on franchising in Russia – “Купи брэнд. Франчайзинг в России.”. But many Russian commercial journals publicize articles on franchising (“Коммерсант”, “Секрет Фирмы”,”Управление Компанией”.). In the last years several books on franchising were publicized in Russia. [23]

 

The biggest exhibition on franchising is BuyBrand, which is held for 8 years in Moscow.

 

Experts say, that regional franchising is developed the most in Permskiy kray, Krasnodarskiy kray, and Tatarstan republic.

 

The sphere of consulting on franchising is developed in Russia. The strongest members of this market are: “Магазин готового бизнеса - Deloshop” and “Fransh стратегия роста”. [19]

 

The worldwide tendentions of franchising development are applicable in Russia. It is related to the basic pros of franchising, and the need of association of resources in the globalizing world. It is worth to say that before some moment, the law regulation of the intellectual property, including some kind of regulations for relations like franchising as a whole, didn’t give any chance for Russian franchising to develop.

 

There is some specifical moments in any country. It is related to the social and economical, cultural and psychological, legal, and other factors.

 

 

 

 

Conclusion

 

 

Concluding the results of the study of the information, which showed the practical importance and its efficiency, the outputs can be stated in this way:

 

The study of franchising in total and in Russia concretely was done in this course work. On the basis of the stated information, we can say that the role of franchising in economy of any country is extremely high, because franchising is the most efficient way of distribution, in which the goods and services are distributed on the terriroties inside countries as well as worldwide.

 

From the results of the course work we can see that franchising exists for a long period of time, on is continuing to develop. Nowadays there is the classification of the types of franchise, and the structure of franchising business model.

 

It can be stated that business function efficiently under the franchising system. Exactly this business model gives an opportunity to use the proved to be successful technologies, already successful label. All these opportunities can be given by the enterprises that already have the experience of managing the business, has capital, not only the material, but also the informational one, that is very important if you know how to use it properly.

 

 

 

 

The law and government regulations in Russia were studied also. From the study, made on it, it can be stated that the law regulations on franchising  should be widely developed in our country to get to the level of USA and Europe.

 

Good control and unification of all the franchises to the standards of franchiser will influence the correct was of development of franchising in Russia.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

List of Literature.

 

1. Гражданский кодекс Российской Федерации.
2. I.Alon. Service Franchising: A global Perspective
3. S. Spinelli. Franchising: Pathway to Wealth Creation
4. F.Hoy, J.Stanworth. Franchising: An International Perspective
5. M.H.Seid Franchising for Dummies
6. I.Alon International Franchising in Industrialized Markets: Western and Northern Europe
7. S.Price The Franchise Paradox: New Directions, Different Strategies
8. J.F.Love McDonald’s: Behind the Arches
9. Артеменков И. Стоит начать с франчайзинга
10. Бондаренко Ю.А. Франчайзинг и перспективы его развития в
11. Брагинский М.И., Витрянский В.В. Договорное право. Книга Третья
12. Довгань В.В. Франчайзинг: путь к расширению бизнеса
13. Ленц Е. Ретейл-франшизы
14. Масленников В.В. Предпринимательские сети в бизнесе
15. Мендельсон М. Руководство по франчайзингу
16. Никифорова И. За чистоту жанра фирмы
17. Новосельцев О. Оценка коммерческой концессии
18. Панина М. Фаза активного развития франчайзинга на российском рынке
19. Практикум по франчайзингу для российских предпринимателей.Под
20. ред. Силинга С.А.
21. Рогов В. Франчайзинг - эффективная форма сотрудничества
22. Суханов Е. Коммерческая концессия
23. Тотьев К. Коммерческая концессия
24. Франчайзинг - собственный бизнес под маркой лучшей фирмы
25. P. Kotler Basics of Marketing
26. Ф. Котлер Основы Маркетинга
27. С.А. Сосна, Е.Н. Васильева: Франчайзинг. Коммерческая Концессия.