Franchising in Russia – Trends and Key Figures 2014-2015

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By Elena Likhacheva,
Editor-in-Chief www.buybrand.ru

Amid the sanctions which are still very much alive, the still unstable rouble and the shaky Russian economy, the question of investing into Russian business is as sensitive as ever, and each investor finds his or her own way of making the best of the situation. Looking at international brands operating in Russia, one notes that, despite a general decrease in global brands on the market in 2014, as compared to 2013 and 2012, there still are plenty of new kids on the block. 32 new international brands entered the Russian market over the past few years.

MOST NOTABLE NEWCOMERS ARE: MONCLER, AGNONA, SANDRO, MAJE, HOOTERS, KRISPY CRÈME, SHAKE SHACK, PRENATAL MILANO.

Ekaterina Soyak, CEO EMTG

While international brands are out to get their share of the market, Russian entrepreneurs are becoming interested in brands that show a stable franchise development. Crisis conditions serve as fertile ground for Russian franchises. The crisis of 2008 proved the feasibility of international franchising concepts – businesses did not just survive, but have shown dynamic development and growth.

The Russian Franchise Association estimates that the Russian franchising market has been growing by 25% per annum over the last five years. Comparing the Russian market with the Brazilian, Australian, and South African markets, and with the dynamics of franchising development, one can expect the total value of franchising companies’ contribution to Russian GDP in 2020 to amount somewhere between 300-500 billion roubles, with over 2,000 concepts, more than 100,000 points of sales and about 2 million employed and self-employed people.

International companies face the same problems as Russian companies, both in retail and in food services. A drop in demand and decrease of average takings, is clearly not very good for further business development. On the other hand, a decrease in rents and market competition gives foreign companies a chance to successfully join the Russian market and consolidate. For example, Finnish network Hesburger’s master franchisee (which also controls Cinnabon and Auntie Anne’s) considers the crisis as a world of opportunities thanks to a decrease in rent costs and plans to launch 15 restaurants here over the next few months.

Experienced franchisers from around the world see the crisis as an excellent time to form new partnerships. This is doubly so for the fast food business.

“A crisis is the prime time for franchising, – says Yekaterina Soyak, CEO, EMTG that organises BUYBRAND, the largest Russian franchise expo, – And there’s a logical explanation: before, people making money in oil and gas and other industries were investing in real estate, luxury cars and yachts, but now, when it’s about saving their money, they look into franchising. Another point to consider: franchising companies have better business models and management systems, so, when a crisis comes and independent businesses struggle to survive, franchisers easily swallow them up. In addition to that, franchisers themselves tend to ‘clean up’, so to speak, their businesses from the inside. Yes, we closed a number of our locations, including franchised businesses, and just look at the outstanding results we’re having. Some say that they’ve never had such profits; even before the crisis. They owe it to closing locations that were really more image-making than anything else. Take, for example, a busy central street (Tverskaya, Nevsky prospect etc.,) – before, companies just had to be there for the sake of it; you can’t really make any profit there. Today, these locations are being closed, and the companies benefit. A crisis can also revitalize the catering industry, in a sense: companies re-evaluate their relationships with producers, find new ones, lower net cost and, as a result, grow stronger. This is what I myself see happening today”.

Today, about 1,000 brands in Russia being franchised. The majority are in retail – 54% (mostly non-food), 25% are food services, 20-22% are general services.

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Food services are gradually growing stronger in Russia with the fast food segment enjoying rapid growth. That is typical for any market, above all for developing markets, and Russia is no exception. The crisis has not only had no negative effect on it – it has helped it develop. 900 catering establishments in Moscow have closed since December 2014 (that’s 8% of total catering locations in Moscow), and 3,000 are in the process of closing, but there are hardly any fast food restaurants among them.

Experts note that only 2 segments of the market have been unaffected by the crisis: elite restaurants and fast food. The middle class establishments with average bills of 2,000 roubles or less were hit the hardest. The fast food segment in Russia is the least vulnerable at the moment – the tougher the economy, the more dynamic its development. Globally speaking, that’s a good sign for Russian franchising as a whole. Fast food is the segment where a Russian franchiser learns to properly communicate with their partners, and these skills, in time, will be adopted by the whole franchising market.

It’s also worth noting that, despite the sanctions and the Russia-West confrontation, new networks are still coming to the market, and fast food networks are no exception. During last September’s BUYBRAND Expo, the Schlotzsky’s fast food restaurant concept was introduced to the market, as well as Café Bene, with their international network of over 1500 coffee shops (!), and an authentic UAE franchise (Reem Al Bawadi restaurant). A number of Russian franchises participated as well: Chaikhona №1, Cuba Libre, Sushi Wok, and others.

“Speaking of ‘vintage’ participants, – adds Katherine Soyak, – I’d point out British SFC brand. One of its owners, Andrew Weathers, sells their franchises for over 10 years now and has been with us for more than one crisis. And he still represents their concept here in Russia. Note that they have signed 7 contracts during the last expo.” So, you still can and you still should invest in Russia. And, perhaps, now’s the time.