Over the next couple of days our ‘Franchise in Russia’ blog will explore the fertile franchising ground that is now maturing in the Russian Federation, ripe for the harvest. Today’s points of interest seek to uncover the basic tenets that create such a desirable market in Russia with respect to international franchising efforts.

1. Demographic situation in Russia
The demographic situation in Russia has begun changing for the better this year. Presently the total amount of working population in Russia is a bit over 90 mln people (the correlation between men and women is almost equal). But in terms of the current rise in births we forecast increase in capable of working, and solvent population.

Migration also causes consumer inflow, as the number of incomers is 4 or 5 times as much than that of outgoers.

2. Russian economy
In 2007 a sharp increase in retail trade turnover was registered in Russia. In November retail turnover went beyond 1 bln. RUR. (that’s 27, 1 % more than in November, 2006). Retail trade growth rates and consumer demand reached 15, 6%. Besides, according to the Federal State Statistics Service data, we conclude that Russians began now more often preferring shops to markets.

For three years in a row foreign-trade turnover has been increasing quarterly. The monthly sums of money, Russians spend, are steadily and significantly increasing. Per capita income is increasing as well.

The 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 IC data “Troika Dialogue”, by 2010-2011 Russia will become the largest European customer base. Already this year about 85 mln of Russian are supposed to become active buyers. This figure will increase in 5 mln. a year. The Ministry of Economic Development and Trade anticipates the population real income growth 8-10 % a year for the next 3 years. The account emphasizes high income growth rates and population charges consequently. For the next 4 years consumer goods sales will be boosting 20-30 % yearly. All these data witness middle class formation in Russia.

3. Economic advance in regions
Russia is divided into 7 federal districts. The central (Moscow as the centre), North-West (St.Petersburg), Volga federal district (Nizhniy Novgorod), Ural district (Yekaterinburg), Siberian (Novosibirsk), Far Eastern (Vladivostok), 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 (six)-Moscow, Moscow region, Kazan, Yekaterinburg and 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 mln. people,1 % of the total Russian population)enjoys the 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 producing regions benefit most. Income rate in the Nenets Autonomous area is the highest one (305454 RUR.). Caucasus republics have the lowest one.

4. Franchise legislation
Like most countries, Russia doesn’t have special franchise laws of its own. Russian franchising legal framework is Chapter 54 of RF Civil Codex, called “Commercial concession or franchising”, that lacks the notion” franchising» in itself. Instead of franchise contract the same commercial concession agreement is used, with an optional licensing agreement enclosed. The both agreements are to be registered in the Russian patent agency and the Ministry of Taxes and Levies as well. As entrepreneurs see, inferiority of Russian legislation is the main cause of backward Russian franchise market. Therefore Russian franchising association is working out an amendment project for Russian government of Chapter 54 in RF Civil Codex, under which some root changes are not planned, but the universally-recognized terms will be added. The definition of franchising must be noted and deciphered, precontractual responsibilities of franchisers and franchise described etc.

Commercial concession agreement doesn’t distinguish international and national franchising. Nevertheless a franchise agreement needs to be adjusted for Russian market. Franchise agreement is specifically to be registered in Rospatent agency to legitimate the franchiser’s activity. There’re also some specific features in clerical correspondence.

In our next entry, we will analyze the Russian market in further detail, including the data behind the actual franchisors themselves who are helping to establish our new common market.

In the mean time, check us out at our main site: www.intfran.com !

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The Franchise Revolution in Russia

The Russian business community has developed a greater understanding of franchising as a business method and has a growing interest in it as well. This has come about as a result of three main factors. First, both the business community and consumers are better educated about established brands, resulting in brand value and recognition. Second, many Russian entrepreneurs have discovered that working with established brands requires the utilization of modern business practices and technology, giving them more efficiency and, therefore, an advantage over their competitors. Finally, being associated with an established brand may offset certain risks characteristic of the Russian economy. In order to take advantage of these favorable factors, many entrepreneurs have turned their attention to franchising, and more and more private Russian enterprises and entrepreneurs seek partnerships with recognized Western companies.

Statistics on franchising in Russia vary widely, but in general they tend to support several observations. Since 2000, the number of franchising systems in Russia has grown from 54 to approximately 300, with some sources estimating as many as 600. There are over 160 domestic franchising businesses in Russia, with a total of 2,900 franchisees. On average, each franchisor has six franchisees in Russia. The fast food and retail sectors represent the largest shares, 22% and 46% respectively. Development of the service sector is slower, but growing. About 43% of all franchisors are in the Moscow region (Central Federal District), 15% in St. Petersburg and northwest Russia (North-Western Federal District), and about 12% in the Urals.

Several well-known U.S. franchises have successfully entered the Russian market. Among the most visible brands are: AlphaGraphics, Baskin Robbins, Candy Bouquet, Carl’s Jr., ChemDry, Chips Away, Crestcom, Domino’s Pizza, Fastrackids, Gold’s Gym, Jani King, KFC, LMI Consulting, Mail Boxes Etc., Kwik Kopy, Century 21, Office 1 Superstore, Papa John’s, Pizza Hut, Pizza di Roma, Sbarro, Subway and Starbucks. Restaurants, including fast food, are in great demand for U.S. franchise models. U.S. market presence is also highly visible in business education and training services, business services, children’s services/preschools, cleaning services, and automotive services. The majority of non-U.S. foreign franchises in Russia are from western Europe, mainly the U.K., France and Germany.

Many franchises operating in Russia share certain distinctive characteristics. Most franchisors select Moscow and/or St. Petersburg as their entry point for Russia, where consumer markets are strongest. Fast food franchisors, in particular, have multiple storefronts in Moscow. However, there is also a steady growth in the next tier of consumer markets - cities such as Yekaterinburg, Nizhny Novgorod, Krasnodar, Kazan, etc. Many local storefronts are larger than similar locations abroad and many are owned and managed by the same company that owns the master license.

Some factors limit the growth rate of franchising in Russia. The same factors that impede development of Russian franchises may also operate to prevent foreign brands from entering the Russian market. Cumbersome licensing regulations often stand in the way of expansion through the sale of sublicenses. Lack of knowledge and information about existing business opportunities in franchising also prevent potential investors from becoming franchisees, especially in the regions. Lack of transparency, still plaguing the Russian business environment, often seriously complicates the process of choosing the right business partner and compromises royalty payments, further contributing to many companies’ preference to manage their own stores. Loose contractual discipline and weak legal enforcement often jeopardize observation of contractual obligations between partners. And finally, franchises face excessive bureaucracy and corruption, still prevalent in the Russian economy.

Despite these negative factors slowing the development of franchising in Russia, the market continues to show signs of sustained growth. The Russian Franchising Association has been active since 1997 and currently has 40 members. Its main goal is to popularize franchising in Russia by providing information and support to franchisors and franchisees. Another reflection of the dynamic growth of the franchise market is the steady growth of participation by both domestic and international brands in the BuyBrand International Franchise Exhibition, which has been held annually in Moscow since 2003.

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The increasing trend of globalization opens up new markets for small businesses. The international market fuels the growth of many small and even home-based business; however, many small businesses are hesitant — even paralyzed — by the thought of going global. Some believe that it’s too risky or complicated because of different languages, cultures, and business practices. However, small businesses should not be afraid. Below are five myths to going global that no small business should fear:

MYTH 1: “I Don’t Have the Capital to Fund the Growth”
Many small businesses believe they can’t go global because they don’t have access to the funds and resources larger companies possess. Just as Columbus was bold enough to push his notion that the world was round and ask for money to explore the seas, small businesses too must look around for these types of opportunities. If a small business has the capital to support its domestic business, this should give it the confidence to make the international leap.

If a small business is considering “going global,” it doesn’t need to do it alone. There are a number of options available, including the Export-Import Bank of the United States (Ex-Im Bank), the U.S. Small Business Administration (SBA), and the U.S. Department of Agriculture’s (USDA) Business & Industry loan program.

Organizations like the SBA offer export information and development assistance to help small businesses take advantage of export markets, including trade counseling, training, legal assistance, and publications. The SBA’s Office of International Trade works in cooperation with other federal agencies and public- and private-sector groups to encourage small business exports and to assist small businesses looking to export. The office actively markets SBA’s loan guaranty programs, which reduce the risk that banks face when they extend a loan to a small business exporter. Did you know that the SBA is a very strong advocate for women entrepreneurs and offers many programs and services to help them succeed? Did you know that on average, 85 percent of Ex-Im Bank’s transactions directly benefit U.S. small businesses?

MYTH 2: “It’s Too Uncertain and Confusing”
Many small businesses have the perception that conducting business with trading partners overseas can be risky. The high usage rate of stolen credit card numbers adds risk to international credit card payments. Therefore, credit insurance can help mitigate the risks by protecting the value of your receivables. By guarding the bottom line against nonpayment or slow payment of invoices, you can breathe easier about your decision to conduct cross-border trade.

Credit insurance can be used on a case-by-case basis; for example, used with new customers (as you do not have visibility into their payment histories) and then removed once more solid relationships with them are established. In addition, did you know that some businesses offer an international “Collect on Delivery” (COD) service that provides a fast, secure, simple payment alternative for international trade?

MYTH 3: “Shipping Across Borders Is Too Costly”
Before small businesses sell abroad, they first need to determine how to get their goods from Point A to Point B. Today, shipping companies have become more creative, resourceful, and valuable by offering shipping software applications for customers with low- to high-volume shipping needs. Whether it’s a single handcrafted piece of jewelry or 10,000 engine parts being shipped, there’s a cost-effective solution. This allows businesses to accelerate, streamline, and enhance not only their shipping processes, but financial and customer service processes as well. In addition, shipping companies offer freight consolidation; air, ocean, and ground transportation; customs clearance; and direct delivery to multiple addresses within the destination country, all through a single source.

It’s important for small businesses to take the time to research and understand the different shipping methods. The shipping process involves knowing the costs associated with how long the goods take to deliver, proper packaging, what international trade regulations apply, and what bottlenecks might impede timely delivery. It is important that every package goes insured and customers should know that, in addition to the shipping costs, there may be import duties or brokerage fees that are their responsibility. Planning ahead counts in the international arena.

MYTH 4: “Start Local, Grow Global”
This is no longer true. The Internet has become one of the greatest communication tools in history. The growth in the international Internet population means boundless potential business for U.S. companies, particularly from consumers who are eager to buy products they cannot obtain in their own countries. In some cases, going global via the Web is the antidote to going out of business.

However, there are some things small businesses should consider: Does your Web site need to be translated to open potential markets to you? Does your shipping table calculate international shipments? You may offer products that cannot be easily obtained in various parts of the world, so even if the shipping rates seem exorbitant to you, they may be acceptable to your customers.

MYTH 5: “No One Pays Attention to Small Businesses”
In 2003 there were approximately 5.6 million businesses (with 500 employees or less) in the United States, according to SBA Office of Advocacy estimates. Small businesses, indeed, are the engine of the U.S. economy. More and more you find large businesses catering to small and medium-size businesses.

According to the SBA, small firms represent 99.7 percent of all employers, generate 60 to 80 percent of net new jobs annually, and account for 97 percent of all U.S. exporters. As a result, small business success in international markets is extremely important to the welfare of the United States.

Going global doesn’t have to be a foray into frightening, undiscovered territory. By banishing these five myths, your small business can realize the full potential of globalization and capture dramatic revenue growth.