Franchise Concept Development In Russian Regions: Barriers And Features

Regional franchising: terms and features

Working as a master franchisee, or sub-franchiser, an entrepreneur has much more ways to make a profit than concluding a single traditional franchise agreement.

In traditional franchising, a business owner usually offers goods or services directly to the end customer, for example, at a retail outlet. Choosing a master franchise, an entrepreneur has several important advantages:

• When a master-franchisee sells a franchise to a buyer in the regions, they get a part of the franchise fee in return. Some agreements allow the master (sub-franchiser) to retain up to a half of the franchisee’s net fee.

• The master-franchisee has an opportunity to open their own additional franchise outlets at a much lower franchise fee.

• The master-franchisee receives permanent monthly royalty for the services or goods sold in the region. After having found their own franchisees in the regions, a master-franchisee receives revenue within the rest of the franchise term, usually from 2% to 4% of the franchisee’s revenue each month.

• In case real property is included in the franchisee’s location description, often a master-franchisee can participate in the development and improvement of such territories (regions) and get other types of income related to real property. This type of income is not necessarily received by a master-franchisee.

The main responsibility of a master-franchisee is to act as a business consultant for their franchisees and help them succeed in their own business. The following key features are typical of a classical version of master-franchising (Ingram, 2016):

• Very few clients: in this case the clients of a master-franchisee are ordinary franchisees. The master helps to support a small number of franchisees, each of whom can own several franchise outlets.

• Very few employees. Usually, at the start, a master-franchisee works without staff and employs the personnel as the business continues to grow.

• Very little office space: many master-franchises can start working from a home office and then (as the business grows) rent an external office later, if necessary.

• The master-franchisee can generate capital much faster than a usual business. As soon as several franchise outlets are set up or open, the business value increases significantly. The master not only has an existing business with cashflow, but also additional franchise opportunities, which gives an entrepreneur a higher business rating. Instead of a classical revenue growth (by 2-3 times) for the majority of traditional businesses, regional franchising can increase revenue by 4-5 times on average (Bruce, 2012).

• The master-franchisee do not need to have a prior working experience in a certain industry. An extensive industry training and support from the chief franchiser are included in initial investment.

Prior to opening a franchise outlet in the region, it is necessary to consider the following features of conducting business on the periphery:

• Know the advantages of the region – as a rule, life expectancy of regional businesses is higher by 30% than of those in big cities, and big city residents spend twice as much time on commuting to work and back home – the time which could be spent on more important things.

• Be like-minded. Regions mean a community spirit, that is why if you want to succeed, it is in your best interests to be as involved in local communities as possible. The more you are involved, the stronger your client base is (Chao, 2013).

• Choose a perfect location. Due to high density population in all parts of a big city, less busy districts still have a tendency to intensive traffic. When you are in a provincial town, you have to be a little more experienced when it comes to selecting (or accepting) a location for your business as everyday people traffic is more limited (Bajwa & Siddiqi, 2011).

• Do the networking. No one is a better source of information about the region than the owners of other local businesses, therefore, if possible, try to create a community of like-minded people who may give you valuable advice about this area.

• Choose a supporting franchise. Some franchisers offer more support than others, so make sure you have chosen the one who makes franchisee support their priority. When you run into problems, you do not want to be made a fool of, so make sure that you have chosen a brand which will grant an access to other franchise owners and other support staff in the company.

Barriers for a franchise network

However, in addition to the goal of creating and successfully operating a network for both parties, the participants in this market identify a number of barriers and problems in understanding and developing regional franchising. According to experts and players in this market, franchising as a business model could become even more widespread if not for a number of serious barriers. Thus, Russian Franchise Association specialists conducted a survey of businesspeople who franchisers wanted to see as their potential franchisee candidates (figure 01 ). In accordance with the results of this survey, there have been formulated certain barriers hindering the development of a franchise network. Admittedly, as examples of barriers and risks they not only mentioned those conditions which were actually present in the economic environment of the country but also simply subjective motives (not willing, not aware of, not interested in).

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Another factor that hinders franchise development is an insufficient number of available project financing tools. For instance, in Western Europe, a business support system from various commercial organizations is well developed, for example, banks issuing loans at reasonable interest rates.

Lack of a specific legal framework for franchising

One of the serious problems which really exists in the Russian economy is a weak legal framework and unfair practices of the players. About 80% of franchisers behave unfairly: give false information to partners and fail to provide them with adequate support. That is why there is a need for the system of accreditation of those companies which sell franchises. At present, however, it is up to franchisees to conduct risk assessment. Excess negative experience can lead to buyers giving preference to popular brands and double-checking the franchisers.

Activity of pseudo-franchises

If a positive trend of franchise development is its active growth, then the reverse side of the coin is the growth of the so-called “pseudo-franchises” (Goryakina, 2019), i.e. such companies which either have no own outlets or have one or two, but still offer to buy a “network” franchise from them. In this case, it is important for the franchisee to carefully select a partner. In order not to be deceived by an unfair franchiser, it is better to verify everything that the franchiser claims – to pay a visit to the head-office of the company, have a talk with the employees who accompany the franchisee’s business, talk to franchisees who are already in business.

The Analysis of Regions Chosen for Franchise Network Expansion

Initially, the research was based on the effective selection of those regions which are the most suitable for a successful franchise concept development in the regions. Obviously, business expansion in depressive regions is not considered by successful franchisers due to several reasons: no suitable franchisee candidates with adequate investment potential, no expected demand from financially reliable customers, etc. So, for the development of their business, franchisers opt for the regions which are leading the market according to a number of social and economic factors (Table 01 ).

Franchise Business Growth Estimations

The study of statistical information, including the data on the franchise market structure in Russia and in RF regions, as well as the rating analysis of Russian leading regions in terms of the level of social and economic development, allow to suggest and highlight certain directions of the most active sectoral and regional franchise development in Russia (Figure 02 ).

Primary Research Results

The results of the survey among franchisers with franchises located in regions allow to make a rating of networks (Berdina & Berdin, 2020).

The position that the network takes in the rating is determined by the number of contracts concluded in 2018. If two different brands have the same number of contracts, then the one that leads in the total number of contracts takes a higher place. The overall growth of the number of franchise applications was 300% in January 2019 as compared to January 2018.

1C, the software provider for business process automation has been in the top position for four years in a row in the general rating and in IT rating. 1C consistently concludes 650-750 contracts with franchisees per year, while cancelling about 90. The company’s total number of contracts at the end of 2018 was 8,906. 1C explains its leading position by the availability of their franchise and by the interest of end customers in business process automation. The current top ten most popular franchises included one of 1C’s partners – “First Bit” (№10) (Melnikova & Lindell, 2019).

Franchising is actively developing in the segment of car maintenance service and car spare parts stores (“EuroAuto”, Auto3N). The favorite company in 2018 rating was Fit Service car maintenance station (№3 against the 17th place in 2017). According to Rospatent, in 2018, it concluded twice as many franchise agreements (121) as during the whole prior period of active franchise sales. The boom in a number of franchisees was triggered by Fit Service federal marketing campaign launched in the middle of 2018.

Franchise concepts in the sector of food items are in stable demand. They are offered mainly by producers of meat, milk, cheese, ice cream, confectionery, etc. Among them are “Chebarkulskaya Ptitsa” (or “Chebarkul Bird”) which has opened a total of 192 franchise outlets within three years in Chelyabinsk and neighbouring regions, “33 Penguins”, which has launched 250 café – stores around Russia since 2006, “Zorka and Milka”. The rating also shows newcomers to this segment: “Dobryninsky” (it has opened 49 outlets in Moscow within a year of franchise sales), and “Remit”, which has opened 27 stores in Moscow and the Moscow region. A good result in this segment has been shown by “Fasol”, which has doubled the dynamics of opening new stores, and has risen from the 19^th place in the rating to the 9^th (Berdina & Berdin, 2020).