Until recently, the retail real estate market was one of the most dynamic and rapidly expanding markets not only in the capitals but throughout all of Russia. Developers seeking to meet the growing consumer demand were building shopping centers while retail operators were expanding their chains. Franchising was one of the tools used by agressive retailers when they grew and forayed into regions. And the franchising market in Russia remains active today.

Franchising Types:

There are several franchising models. The first one is the provision of a master-franchise (or general franchise) to the partner. The franchisee not only receives the right to open branded stores, but also to grant the franchise within the confines of a certain agreed upon territory (however, the latter right is not always granted). Such a system is implemented in Russia by such companies as MEXX, Naf-Naf, Springfield, Rosinter (Rostiks KFC, Planeta Sushi, Il Patio), Gloria Jeans Cafe and others. Such are the expansionary plans of S’Oliver even though it is having certain difficulties in identifying the master-franchiser and temporarily inaugurating stores in certain cities where it already has partners.

The second method consists in the parent company entering the Russian market on its own and handling its own expansion in the capitals (Moscow and St. Petersburg), and a regional expansion through franchising. And here we are talking about Russian companies as well, which are opening stores in the capital on their own, while in the regions they are expanding through franchising. There are some clear examples such as Savage, Depeche Mode, SELA, Finn Flair. Colin’s in Moscow and Podmoskovie, and in certain regions, is expanding essentially on its own, and in other cities through partnership agreements. This approach allows the retail operator to develop his own chain rather quickly and without running major financial risks. The third method consists in the presence of a representative in Russia (or an individual from the company responsible for the territory), which handles the identification of potential partners and controls their activities. The final decisions and approvals are taken at the head office. This is the method that was chosen by Mango and Terranova.

It should be noted that each method allows the brand to buy out the franchisee: the whole chain or just some of the stores. The owner of Motivi initially decided to expand by masterfranchising, and afterwards the parent company entered the Russian market and bought out the brand name titles. The company is presently opening its own stores and developing franchises in the regions. It is also opening some stores (Mango, Promod). Incidentally, some retail operators do not implement franchising and prefer expanding on their own, such as H&M, Louis Vuitton, Chanel, and McDonalds as well.

Operational Methods

There are several operational methods implemented. One such method is the provision of the merchandise by the brand and stringent control over the product and pricing (Terranova, Mango, Orsay, Camaieu). Another method consists in a mandatory yearly purchase of an agreed upon volume of merchandise (Naf Naf). And not only may there be a fixed purchase volume, but also a yearly growth ratio which implies an expansion of the franchise chain.

The Pros and Cons

Let’s review the pros and cons of franchising for each of the participating parties. Let’s start with the franchiser. A definite pro for him is the absence of any major investment in the chain’s expansion over a certain territory (country, region, etc.), which allows him to greatly expand over a specific territory, which he wouldn’t be able to do on his own for several important reasons: financial, temporal, administrational and others. The presence of a local partner allows the brand to share the risks of expansion, as a local player is better acquainted with the Russian market, with experience in the retail real estate business, better understanding of how to better organize the stores’ operations.

There are however some definite issues and risks for the franchiser. As seen in the past, even with a relatively developed market, it is quite difficult to find an appropriate partner in Russia that would meet all the requirements. Also, just as complicated, is the process of controls over the partner’s operations. As a result, one of the reasons why many international brands work on their own is the possible tarnish to the brand’s reputation. Furthermore, the possible theft of the business’ organizational technology, whereby a franchisee that purchases a franchise for a period of 2-3 years and the required instruments and skills, opens his own business, just slightly changing the technology and name. Such cases were identified especially with regard to the restaurant business.

Let’s take a look now at the interests of the other party. The purchase of a renowned franchise allows first to exploit a proven and developed business system. Implementing a working model and recognized brand name allows the franchisee to lower the risks, advertising costs, and provides a consumer base loyal to the brand. The franchiser assumes the training and support of an experienced partner. And just as important is the guaranteed supply of merchandise. The cons include the need for substantial financial investments, stringent control over the operations, and the responsibility over all the possible market risks. With regard to the terms that the brand may request from the franchisee, they are essentially technical (size of surface, power and water supply requirements, sewage and so on); there are also certain location criteria (the nature of the shopping center or retail street, location within the shopping center). Furthermore, there is a requirement for financial resources essential for the store’s inauguration, working equity capital or debt financing.

Current Situation

By reviewing the current situation we see that no substantial changes have occurred on the franchising market. We can note that the control by the head offices over the operations of the franchises has substantially stiffened (identification of offers, concordance of commercial terms, concordance of technical issues and so on). Furthermore, certain franchises that have encountered difficult crisis conditions haven’t been supported by their partners: there were practically no facilitating measures with regard to discounts or supplies. This brought about certain franchisees refusing to cooperate with the brands. It is most interesting that certain companies, having decided to expand on their own, faced higher leasing rates than those when they worked with partners. This was caused by the fact that some major franchisees which had the rights to commercialize several brand names were entering shopping centers with all of those brands at once, or at least with part of them, in order to bargain significant discounts from landlords. Such privileges aren’t always available to one tenant, even if popular on the retail real estate market.

As a conclusion…

Having reviewed the current situation, we can assert that its future development will be determined by the following factors. On the one hand, franchisers are interested in future expansion; on the other hand, the potential franchisees lack the required financial resources for expanding. Incidentally, expensive brand names have rather conservative expansionary plans, which means that they can expand essentially through their own efforts. And in the long run the situation will evolve according to the overall macroeconomic situation, the dynamics and structure of the consumership.