American Franchisors Aim at the Markets of Brazil, Central and Eastern Europe

 Such prominent franchisors as McDonald’s and Subway plan to enter the markets with a steadily augmenting portion of middle class customers (including Chinese and Indian markets).

Stagnant economic situations in the USA hamper business development in the country. Therefore, most franchisors choose to expand their businesses abroad. For instance, Curves (a fitness franchise) and Subway (a chain of sandwich restaurants) significantly increased the number of their foreign partners over the last year. The key player in the fast food industry – McDonald’s – also preferred to open new restaurants abroad rather than in the United States. In 2009 only 53 restaurants were opened in US cities and towns while other countries of the world welcomed 286 new restaurants. It’s noteworthy that in 2008 the proportion was equal.

In 2009 American franchisors aim mainly at the markets of Brazil, Central and Eastern Europe. The scope of their interest also includes such countries as India and China with the increasing portion of middle class customers.

Active overseas growth of American franchises is also influenced by the difference in financing structure. As a rule, American companies that sell their trade mark abroad help their foreign partners to acquire the necessary funding or finance them. At the same time their domestic partners have to develop the business based on their own resources or bank loans. That is why the development of franchising networks in the USA naturally slowed down in 2008 with the unfolding of the credit crunch. 

Foreign investors consider partnership with famous American franchisors to be very lucrative as American companies offer a well-known brand and proven business models. “We offer low expenses and very simple operation techniques”, says Subway’s Development Director Don Fertman. “This is the type of business everybody can participate in”. Beginning from January 2008 Subway has opened 1,432 overseas and 1,230 domestic restaurants. During the last five years the chain doubled its presence in the foreign countries and now has 8,817 restaurants outside the USA.   

The development strategy of Curves is similar to that of Subway. Beginning from this February 612 new fitness clubs have been opened abroad and only 19 clubs in the USA. Curves’ major market is Japan where the company has 744 fitness clubs opened. In May 2009 Curves came to China and plans to enter the Indian market this autumn. “With our concept of fitness clubs exclusively for women we bring something truly foreign to these markets”, points out the company’s CEO Jim Johnson. This concept can be especially successful in Muslim countries where due to religious customs men and women traditionally have separate rooms for any public activity.     

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Russia’s Financial Forecast: 2010-2011

Promising Predictions

Initial analytical forecasts show that the Russian consumer market is rather powerful, and in 2011 it’ll be the largest one in Europe. According to the latest data, by 2010-2011 Russia will become the largest European customer base. Already this year, about 85 million Russians are expected to become active buyers. This figure will increase by 5 million within the subsequent year.

The Ministry of Economic Development and Trade anticipates the population real income growth at 8-10 % a year for the next 3 years. The data emphasizes high income growth rates and population changes consequently. For the next 4 years,  consumer goods sales will increase 20-30 % yearly. These figures indicate well-established and stable middle-class economic demographic formations in Russia.

Understanding the Structure

Russia is divided into 7 federal districts. The Central (Moscow as the center), North-West (St.Petersburg), Volga federal district (Nizhniy Novgorod), Ural district (Yekaterinburg), Siberian (Novosibirsk), Far Eastern (Vladivostok) and finally, Southern (Rostov-on-Don). Centers of the federal districts and large regions (Tatarstan, Bashkortostan, Krasnoyarsk and Khabarovsk territories, Tyumen region) are more economically developed and investment-attractive.

The first Russian top five redions are Moscow, Moscow region, Kazan, Yekaterinburg, St. Petersburg. Khanty-Mansi Autonomous Area stands separately (with Khanty-Mansiysk as the capital). In terms of geography, it’s part of the Tyumen region, but considering living standard and per capita income, this small district with 1.5 million people (1% of the total Russian population) enjoys 2nd place persistently, going after Moscow.

According to average monthly per capita income, its rate can vary from 7 to 9 times in different regions. Primary high-production regions benefit most. The income rate in the Nenets Autonomous area is the highest. Caucasus republics have the lowest one.

Learn More About Russia’s Financial Future>>>

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Russia gets Frozen Treats from Down Under as New Franchise Expands

New Zealand Natural Ice Cream achieved more than 30 percent growth of export sales in 2008 and just launched its first site in Russia, the 21st country to be granted a licence agreement.  

The east coast island of Sakhalin is the location for the latest outlet; the new master franchisee plans to open more branded stores on the east coast of Russia, then expand to the densely populated west coast to open outlets in Saint Petersburg and Moscow.  

New Zealand Natural Ice Cream managing director Shane Lamont said “Russia is a notoriously difficult market to break into. We weren’t sure if the first consignment of product would even get through the border, we are very fortunate with our choice of master licence holder, as they have strong contacts and understand the problems and challenges of doing business in Russia.   

“First feedback from our new Russian customers is that they love our ice cream, it is in a quality bracket they have never experienced before. They comment on the exceptional mouth feel; the creaminess and texture.”  

Lamont added “The New Zealand Natural franchise network is also showing outstanding growth in China and the US, where both countries have aggressive store opening programs underway.”  

The ice cream brand is also available through more than 1000 supermarket outlets across America and Asia, including Vietnam, Cambodia, Japan and Indonesia.  

The brand’s manufacturer, Emerald Foods, recently won a total of 21 awards across 12 categories in the New Zealand Ice Cream Manufacturers Awards.   

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The amount and type of fees for remuneration under a franchise agreement may be freely agreed upon by the contracting parties. A fee may be structured as a lump sum, a royalty based on sales or other measures, a commission deduction from any sales proceeds or mark-up earned by the franchisee, through any product imported and sold by the franchisee from the franchisor or other commercially negotiated terms. However, a franchise agreement may not be concluded for free, which may be a concern in case of an agreement between affiliated companies.

Another area closely scrutinized by both the tax and customs authorities is the allocation of any franchise fees between use of a system and the import of product for sale in the franchise. 

For example, Customs Code provisions require that any franchise fees for the marks or system be included into the cost of any product imported for sale in the franchised business (e.g., to prevent a designer handbag selling for $800 retail being imported at its material cost of $100 with a separate $700 license fee to the foreign franchisor).

While this is common under many customs regimes, the Russian authorities sometimes try and apply it to service businesses as well, for example claiming a license fee for a branded concept restaurant should be applied to the customs value of small items – coffee or marketing materials – imported as part of the relationship.

Franchise fees are treated favorably from a tax perspective. The franchisee should be able to fully deduct for profits tax purposes any franchise fees paid under a valid franchise agreement.

A foreign franchisor can generally avoid any need to register any local business or tax presence in Russia ( provided they do not themselves engage in the franchise business locally) and can receive the franchise fees free of any withholding tax provided the franchisor is based in one of the many countries with which Russia has a double taxation treaty.

Understanding Franchise Law:
Registration of the Executed Franchise Agreement

The Civil Code requires parties to register signed franchise agreements with two state authorities: the tax authorities and the Federal Service for Intellectual Property, Patents and Trademarks (Rospatent). Registration with Rospatent is compulsory if the franchisor grants to the franchisee the license of any trademark(s) or other IP enjoying legal protection in Russia.

Documents for registration of the franchise agreement both with the tax authorities and Rospatent may be filed either by the franchisor or the franchisee. The agreement should be registered with the tax authority which registered the franchisor as a legal entity in Russia. Where the franchisor has no legal presence in Russia, which will typically be the case if the franchisor merely franchises its business system to a local Russian franchisee and does not itself operate the franchised business locally, registration with the tax authority should be done by the franchisee where it operates the franchised business.

A foreign franchisor may undertake the obligation to register the agreement with Rospatent itself, which it frequently does given its concern in protecting its IP rights, but they may do so only through a duly licensed Russian patent attorney. A Russian-based franchisor or the local franchisee must also make the application through a patent attorney.

The registration requirements also apply to any amendments and/or termination of the franchise agreement. A unilateral termination of the franchise agreement may only be registered by the tax authority; the registration of a termination with Rospatent will only be accepted following the agreement of both parties and not on a unilateral notification by one of the parties. Obviously this can cause an issue where one party does not wish to terminate the agreement and refuses to sign the termination request with Rospatent.

The franchise parties may not assert the benefits of the agreement in relations with third parties (i.e., use of the trade mark, holding oneself out as a franchisee to others, claiming an exclusive territory, etc.) only after it is registered with tax authorities. However, lack of such registration does not invalidate any rights under the agreement between the contracting parties. Without registration with Rospatent, the franchise agreement is technically void.

The tax authorities legally must register the franchise agreement within five business days of filing the required documents. Generally they comply with this term. Rospatent, legally is required to register the franchise agreement within two months from filing, however, in practice Rospatent does not observe this and the registration can extend to three or more months. This is something to be mindful of when planning for any contract as it may delay implementation of the franchise relationship. In such cases where the parties are ready to go but are awaiting the Rospatent registration, the parties assume the risk of a legal challenge should it arise.

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U.S. Retail Lull Means Prep Time for International Expansion
Mexico, Asia, Russia seen as likely markets

The Franchise Model continues to be popular with low risk;Outlets also seen as growth engine

U.S. retail giants in home furnishings, food and clothing are expected to push into emerging markets such as Mexico, Brazil and China, once the U.S. economy and cash flows improve, executives said.

“There are a lot of retailers who are in defensive mode right now, but a lot of retailers still have ambition to go abroad,” said Anthony Buono, executive managing director of CB Richard Ellis, the world’s largest commercial real estate services company.

Global retailers are eyeing new markets, Buono said at the International Council of Shopping Centers’ Recon retail real estate show in Las Vegas last week.

Growth in Latin America, the Middle East and Asia as well as the prospect of a shrinking domestic economy is causing U.S. corporations to look abroad.

U.S. brands already expanding globally include Collective Brands Inc, owner of PayLess, which has its highest-performing stores in Colombia and Dunkin’ Brands, which is operating Dunkin’ Donuts shops in 31 countries from Bulgaria to Qatar.

Wal-Mart Stores Inc is due to open its first cash-and-carry store in India on Saturday. AutoZone Inc, Gap Inc and Brinker International, the owner of restaurant chain Chili’s, are expanding in Mexico.

Frozen yogurt maker PinkBerry, which has inspired cult-like status in its home market of Los Angeles, is opening a store in Kuwait City this summer, with another in Dubai to follow.

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Joe Albright, Wal-Mart’s vice president of international real estate, said diverse formats designed to appeal to many had made Wal-Mart’s international unit a $100 billion business.

For many retailers, franchises and joint ventures offer common ways to expand because they minimize risk.

“It gives us an outlet to sell our product in, but we’re doing it with a third party, who puts up the capital to open the store,” said Levi Strauss spokesman Jeff Beckman. He added Levi’s is now seeking “opportunistic” deals afforded by the economic downturn.

Brinker, operator of Chili’s, plans to open up to 18 eateries in Mexico this year, adding to its portfolio of nearly 200. AutoZone is looking to add to its 160 stores in Mexico.

“We’re here to do deals,” AutoZone director of real estate Terry McKee said while at the convention.

The top brands sought by foreign consumers, according to a study by mall developer, Taubman Centers and Shop America Alliance, are: Nike, Levi Strauss, Gap, Polo and Abercrombie & Fitch. All of these retailers are planning overseas expansions.

Abercrombie says international stores will eventually make up half of total sales from the approximately 8 percent today.

VF Corp, owner North Face and Vans, plans to open 70 stores this year, pared back from its previous rate of 100, with most on a proportional basis in Europe and Asia.

Besides full-price stores, retail outlets are another venue for global growth. U.S. brands are keenly interested in outlet stores in Russia, especially in Moscow, said Neil Thompson, chief executive of outlet developer Fashion House Development. His company is opening 16 outlet centers in Russia.

“I get two (calls) a week,” from U.S. companies interested in opening stores first in Russia, Thompson said.

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Golden Tulip Hospitality Group, has signed a development and representation agreement with IFK Hotel Management, a Moscow-based hotel management company.

Golden Tulip proudly announces the recently signed development & representation agreement with the Russian hotel management company, IFK Hotel management. This agreement enables the Golden Tulip Hospitality Group to continue its growth by entering the promising Russian market.

IFK Hotel Management is a professional company specializing in hotel and (hospitality related) property management in Russia. As official representative of Golden Tulip Hospitality Group, IFK hotel management will bring forward the brands Tulip Inn, Golden Tulip, Royal Tulip, George & CO and BRANCHE Restaurant, Bar & Lounge.

Hans Kennedie, President & C.E.O. of Golden Tulip Hospitality Group comments: “We are very pleased to announce Golden Tulip’s first entry into the Russian Federation and the co-operation with IFK Hotel Management. The years of experience on the Russian hospitality market of Mr. Izmaylov and his management team will be of high value for the global development of the Golden Tulip portfolio.”

Marsel Izmaylov, CEO of IFK Hotel Management, adds: “Golden Tulip’s brand recognition and its proven success track record gives us the necessary tools to develop new projects in this region. I am delighted to be a partner of Golden Tulip Hospitality Group and intend to put Golden Tulip’s brand into leadership positions in the Russian market. I am sure we can bring “local flavours” to almost half a century hospitality traditions of Golden Tulip.”

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Britain’s third biggest retail group – Sainsbury’s – looks for an opportunity to enter the Russian market. Until now, Sainsbuy’s was only in UK. Fall 2009 marks deadline for final decision on Global Expansion.

The third biggest retail group in Great Britain Sainsbury’s is actively seeking an opportunity to start operations in Russia. Several top managers from Sainsbury’s have already visited Russia. According to the local market players, the British managers plan to study the Russian retail industry for 3 months in order to make a decision concerning their business in a new market by autumn. Goldman Sachs consulted Sainsbury’s about the issue. A representative of the bank notes that Goldman Sachs is considering obtaining an M&A mandate for Sainsbury’s in Russia.

Headhunting agencies and a number of investment bankers in Moscow are already aware of Sainsbury’s plans. According to a Moscow banker, Sainsbury’s has already negotiated a possible deal with representatives from X5 Retail Group (retail groups Piatyorocka, Perekrestok, Karusel and others), Victoria, and Paterson.

Victoria’s president Nikolay Vlasenko confirms he has met with five top managers from Sainsbury’s who work in the company’s headquarters in the departments for procurement, logistics and strategic development. As Mr. Vlasenko says: “This visit reminded me of Wal-Mart’s arrival in Russia. Although Sainsbury’s is now interested only in Moscow.”

Sainsbury’s is the third largest retail group in Great Britain. The company was established in 1869 and now has 792 stores, most are mainly a supermarket format. Last fiscal year (ended on the 22nd of March, 2008), the company’s sales amounted to $30.5 billion with a net profit of approximately $519 million.

In 2007-2008 Sainsbury’s lost market share in the food retail sector (in 2008 the company’s market share was 16.3% ceding to Tesco and ASDA), points out Antonia Branston, a Euromonitor analyst. “In the short run it would be more logical for the company to strengthen its positions in the domestic market,” believes Ms. Branston. Though, in a longer run Russia can be considered as the most reasonable market for the company’s foreign expansion in future. “Western retailers are already present in most Eastern European countries,” says Ms. Branston, “in the Czech Republic, for instance, their market share amounts to 50%.”

Last year in Russia, the five biggest food retailers (including the German Metro Group and the French Auchan) accounted only for 11% of the market (according to the Russian Federal Statistics Service, the retail turnover in the Russian food sector in 2008 approximated to $235 billion) while all chain retailers together comprised 34-35% of the market. Sainsbury’s will have a good opportunity to enter the Russian market if the company takes over a local retailer. But the British chain will face stiff competition with Carrefour, Auchan and Wal-Mart.

In 2009, the French retail group Carrefour opens its first hypermarkets in Russia – in Moscow and in Krasnodar – and will probably take over the Russian retailer Sedmoy Kontinent. In November, 2008, Terry Leahy, the general director for Tesco (a retail group present in 13 countries, including China and Thailand), also announced his company’s plans to enter the Russian market.

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One way the Financial Crisis has manifested itself Worldwide, is that Franchise Entrepreneurs/Operators are more selective with their ‘Currency’  and more discerning in their views of what would constitute an absolutely ’Slamdunk’ Master Franchise opportunity.  
Conversely, as we all know, without steadfast persistence and honest effort on the part of their Country/Master Franchisees, even the most promising Franchise Concepts are not guaranteed success. It is vitally important that a Franchisor expanding into new Territories and Markets avoid any mistake when it comes to choosing the right Partners!

To cite a positive example, we can look at the Sbarro Franchise in Russia. In 1996, a Russian entrepreneur named Merab Elashvili decided to start his own restaurant business, his first step was to travel around Europe in search of a suitable format. There were lots of variants, including many franchising opportunities which at that time were quite new to the Russian market. He ultimately chose Sbarro as his Franchisor, because they offered decent quality for reasonable price. Moreover, the company provided substantial support at the start-up stage of a new project. To Merab, all that seemed necessary to do was just follow the instructions and succeed! Of course, Sbarro was eager to share all its ’secrets’ with a new partner.

By the summer of 1998 there were already two Sbarro restaurants in Moscow. But then, in August, the Russian financial system faced a hardly predictable crisis. Many Russian businessmen shuttered their enterprises. Merab Elashvili was wise enough to understand that all people still need to eat. Additonally, this was a local crisis and the rest of the and World and Sbarro had no ’secret sauce’ to apply to the situation. It’s Russian Franchisee showed great foresight and  initiative and instead of downsizing; started to expand the Sbarro chain throughout Russia – to Saint Petersburg and all the other major Russian cities. Naturally, in 2002, 2004 and 2006 the franchisor named Sbarro’s Partner of the Year, (for obvious reasons). Sbarros sit on almost every street corner in Moscow and are conspicuous throughout Russia, today.

The key to success, any where, is the understanding of the fact that the Franchising model doesn’t automatically mean outstanding achievements for a Franchisee. It requires hard work from both sides and IT HAPPENS IN RUSSIA! Nevertheless, even in the US, there will  always be people who believe that with the simple act of buying a franchise, paying a lump sum payment and royalties; they are buying a 100% guarantee of success. They believe that the training and support that a franchisor provides will allow them to just have to calculate their income…

The truth is, local entrepreneurs know local customs and conventions, all ins and outs. And this knowledge – coupled with the benefits of a Franchise – yields good results provided that the franchisee doesn’t sprawl about on a chair and wait for some miracle to happen to his business.
 
The franchising industry in Russia has seen a steady growth in demand over the past decade. There are more and more people in the country who want to set up their own business and utilize the best practices of their more experienced colleagues. Though, the growth in demand for franchising opportunities of all sorts and kinds also means a proportionate increase in the number of those not so ambitious types who look not for partnership, but for a carefree existence. Real players will be very attentive to all the details of the Franchise Offering. They will want to know everything about how a Franchisor will help them with hiring suitable staff and training them, providing them with all the methods and techniques necessary for an efficient operation, etc. At the same time these are the Pros who understand that a franchisor can teach and guide, give advice and consult them but cannot assume the responsibility for all the risks that any business is bound with. They CAN understand that the Franchisor doesn’t own a Franchisee’s business!
 
Luckily, more and more entrepreneurs in Russia have become aware of the advantages Western Concepts have and look for the best offers. It is essential for Franchisors to pick up those businessmen who understand the simple truth of franchising – a franchise doesn’t give one fish; it gives a man (and woman) a fishing rod and teaches them how to fish.
Though the number of Russian entrepreneurs ready to start up new businesses have been reduced, the interest in franchising, of those that do remain, remains rather vivid. Moreover, the number of those who want to survive the hard times with the help of a proven business model has increased over the last 6 months. There is always a positive side of an otherwise negative situation. For Franchising in Russian, the financial crisis hitting the country created a unique opportunity for Western Concepts, as well, to explore the new market.

 There is more commercial real estate available on the market, cheaper rent, reduced salaries for staff – these and other factors testify to the fact that for those who want to enter the market and establish their business here with Partners like Merab Elashvilli; the time for action has come.

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Real Estate Revival Confirmed by Data
Official data has confirmed the revival on the Moscow real estate market that participants have been talking about for several months.

In March and April, there were nearly twice as many apartment sales on the second hand market than in January and February: 9,124 compared with 4,626, respectively, according to data from the Moscow branch of the Federal Registration Service.

“The March-April figures reflect the demand bubble that we recorded in February-March,” said Dmitry Taganov, director of Inkom’s analytic center.

“And the lower indicators in January-February reflect the fall in demand at the end of last year,” he said.

Without question, there are more sales now compared with January and February, said Grigory Poltorak, president of Best Realty. “People are recovering: They were promised housing for next to nothing, but the miracle never happened, and sellers aren’t significantly lowering their prices,” he said.

Demand is slowly returning, and buyers are more and more making purchases, said Alexei Kudryavtsev, head of marketing at the real estate company MIAN.

“We haven’t noticed a significant change. Altogether the situation hasn’t gotten worse, but nor has it gotten better,” said Omar Gadzhiyev, managing partner of Panorama Estate. “Demand has become more active, but it has an observational character,” he said.

Compared with last year, there are several times fewer deals being concluded, said Poltorak of Best Realty.

But Federal Registration Service data does not confirm that view: In January 2008, there were 1,951 purchases registered, compared with 2,674 deals in the same month this year.

On average, the first four months of this year saw a fall of 26 percent compared with the same period last year.

More than half of this decline can be explained by the steep drop in the number of mortgage deals. In the first four months of this year, only 1,094 mortgages were secured, compared with 3,622 in the same period last year.

If not for the deals lost because of the fall in mortgages, the year-on-year drop would only be 12 percent, said Alexei Dorosh, director of sales at mortgage broker Kreditmart.

The rate of decline of dollar-denominated offer prices for Moscow apartments has slowed and by the end of April stood at about 0.5 percent to 0.8 percent per week, several times less than in January and February, according to IRN.ru.

IRN.ru put the maximum dollar price at $6,122 per square meter on Oct. 6 — now it stands at $4,206.

But deals are rarely concluded at the offer price. “If you sell an apartment at a big discount, it will go quickly. But if you hold it at midmarket price, then it will take a while,” Gadzhiyev said. “Calls come in immediately for those apartments whose owners are lowering the prices by at least 10 percent.”

There is some haggling now, but no serious discounts like those that developers are giving.

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