A rather difficult economic situation in most countries of the world has affected all aspects of business including the franchising industry. Therefore, it is time to study the ongoing changes in the economy and, particularly, in franchising in Russia.
Most sectors of the Russian economy has seen a significant business slowdown caused by an abrupt drop in demand for almost all kinds of goods and services, by a reduced scope of financing opportunities and available loans and, as a result, by numerous payment failures. All spheres of business, including franchising businesses, have to react to it in different ways.
The first and most wide-spread reaction to economic difficulties is to cut down on expenses and to start to economize on everything. At present it is vividly illustrated by mass lay-offs and payroll reductions. In the retail industry it can also be seen in the reducing number (or complete abolition) of free services, e.g. free plastic bags in supermarkets. The ultimate stage of this kind of measures is a partially or completely frozen business. It happens either in the form of shorter working hours or of an indefinite period of total inactivity. From the buyers’ point of view, to cut down on expenses and to save on everything one can save on means fewer purchases and less expensive counterparts of usual goods. At the same time certain companies – with a few franchising concepts among them – have managed to take advantage of the economic crunch. For instance, many QSR’s have increased their sales volume due to the fact that new clients have turned to fast food restaurants from higher priced cafes.
The second type of reaction reflects changes in corporate policies that aim at stimulating the demand. This kind of measures includes various discounts and promotion activities. Franchising stores are lavishly decorated with bright posters announcing unbelievable discounts – sometimes 50% or even 70%. It is mostly seen in the garment and footwear retail chains. The second type of reaction to the economic hardships also covers certain attempts to help buyers with financing a purchase. For example, one of the largest Russian car factories – Gaz – offers its buyers to pay a portion of the interest rate in case a bank loan is involved in the purchase of a car. The regional government of Nizhniy Novgorod (where the factory is situated) also tries to incite people to buy Gaz cars. The official offer is 50,000 rubles (about 1,640 USD) to everyone who decides to exchange their old car to a new one from the Gaz plant.
Most far-sighted entrepreneurs and top managers choose the third type of reaction – to critically study the range of their goods and/or services in order to change it in accordance with the current situation. The same car factory – Gaz, for instance, has announced a soon to appear new variation of their popular model with a much cheaper engine. Retailers and wholesale companies have also started to offer “anticrisis” versions of their goods and services.
The forth way to react to the difficulties of the world economy is less widely spread and includes attempts to improve and optimize marketing and sales techniques. However, more and more entrepreneurs turn to analyzing the efficiency of advertizing and opt for cost-effective partisan marketing instead of more conventional means of advertizing.
Franchising concepts in Russia start to change as well against the background of the above mentioned changes in different spheres of business. The general drop in demand for all kinds of goods and services has affected the potential buyers of franchises, i.e. the investors. Some time ago buying a franchise was considered as one of the safest ways of capital investment but now the situation has changed. The profitability of many franchising concepts reduces. Potential investors understand it and show less interest in buying franchises. The number of investors in the retail sector has significantly decreased. Unfortunately, some Russian franchising concepts have already faced forced closings of their franchisees. Although none of the Russian franchisors have shut down so far, there are already a couple of cases of totally frozen businesses.
Speaking about the garment and footwear retail chains it is worth mentioning that the worst situation is seen in the mid-priced segment. Clients can be now divided in two basic groups: those who don’t feel any difference because of the world economic crunch and are used to buying whatever they like constitute the first group and tend to buy expensive goods; and the rest of us who have to be more careful with their spendings fall into the second group and buy predominantly cheap goods. There is less and less demand for mid-priced goods. Thus retail stores of this price segment are forced to shut down. It can easily be seen by a growing number of free spaces in shopping centers. Therefore, the drop in demand also affected the development and introduction to the market of new franchising concepts in Russia, especially in the retail sector.
Nevertheless, potential investors who are willing to invest their money in a new business with the help of a franchising model can still be found in Russia. First of all, they are the people who try to secure their capital against inflation and vague economic perspectives.
The economic crunch revealed the most stable businesses. These are the companies that increased their sales volume instead of reducing all activity. And sometimes it happens not “instead of” the crisis but “thanks to” it! The majority of these businesses fall into the production and service spheres which can be regarded as a positive trend (taking into consideration the fact that there are not so many production franchises either in Russia or in Western countries). Investors are more willing to start a new business in the sphere of production or services than in the retail sector as in the longer term this type of investment is considered more secure. The investors’ interest to the above mentioned spheres is also influenced by the following factors:
1. Many qualified specialists have been laid off in these spheres and are now eager to work, even for a lesser salary.
2. A growing amount of unoccupied commercial real estate gives a chance to find an appropriate property with a lesser rent.
3. Buying a franchise helps to start a new business in a short period of time and thus to diversify the existing business assets reducing commercial risks.
4. And the most important factor – any franchising concept must have reliable proof of its success. If the business overcomes the economic hardships and moreover introduces a new franchising concept to the market, it is worth studying this business offer. “Crisisproof business” may become a new quality mark for a franchise.
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