City Hosts Franchising Festival

By Yelena Minenko

The St. Petersburg Times

Published: September 12, 2012 (Issue # 1726)

VALERY VOLKOV / VEDOMOSTI A man shops at retailer Pyatyorochka, a popular Russian franchise.

Bad attitudes and lack of state support are hindering the development of franchising in Russian, one expert said ahead of the National Franchising Festival due to be held in the city this week, which aims to address the issue of developing small and medium-sized businesses in Northwest Russia.

“The term franchise differs in principle in Russia and abroad,” said Dmitry Potapenko, business coach and former general manager of the Pyatyorochka network in the Central Federal District. “In all other countries, franchising is when, let’s say, a family of two or three people buys a license and runs the business. In Russia, family businesses don’t exist. When people start a business here, they won’t stand behind the cash desk. They think, ‘I’m the big boss and I should have a have whole bunch of subordinates.’

“Franchising is when your profit is your salary, and in Russia this is only true of some kiosks. We have a lot of small businesses that behave like huge corporations. That is why the level of franchising development in Russia is so low,” he added.

Potapenko is one of the experts taking part in the Franchise Festival, due to be held on Sept. 14 and 15. He will conduct a master class on Sept. 15.

“Every day new enterprises open in St. Petersburg and the Leningrad Oblast,” said Tatyana Bogomyakova, business development consultant at Subway Russia Service Company, during a seminar devoted to franchising at the Leningrad Oblast chamber of commerce and industry.

“The first questions that future entrepreneurs are confronted with are what to open, and how to open it. In most cases, the franchising concept comes to help with its precise guide for action,” she said.

Franchising offers the franchisee the advantages of low business risks, a popular brand, promotional support, and an existing successful business model.

The franchiser, on the other hand, gets instant access to a wide network of branches without having to put up major investment, since the cost of the opening is paid by the franchisee. The franchiser also receives payment for the license and monthly royalties.

There are, however, inevitably disadvantages too. Franchisers make less profit from a franchisee than they could get from running the enterprise themselves. They cannot fully control the financial activity of a franchisee, and risk acquiring a bad reputation from one of the branches reflecting on the rest of the company. The franchisee, in turn, lacks independence; the extent of their freedom depends on the contract signed.

In recent years, the opinion has emerged that the term franchising has lost its meaning and its primary vectors in the modern Russian economy. Today franchising is not about making a profit from selling business models and management systems, but simply about the expansion of a specific trade name’s presence on the market.

The main sectors in which franchising is used as a model are retail and food outlets. One of the biggest franchising networks in Russia — and a participant in the Franchise Festival — is the X5 Retail Group, which is virtually the only company in the food store sector to use the franchising model.

“CityMag [chain of convenience stores] was a pilot project in our company’s franchising program,” said Valery Tarakanov, CEO of X5 Retail Group’s daughter company Express Retail, in an interview with Praktika Torgovly magazine.

“A few years ago hardly anyone was familiar with the term, and small businesses were afraid of such collaboration. This led us to the idea of a ‘lite’ version of a franchise. Our partners worked under the name CityMag, but ordered consumer goods according to their own discretion and independently managed their retail outlets,” he explained.

Today franchising at X5 Retail Group is getting closer to its original meaning with the development of independent outlets under the names Perekryostok Express and Kopeika in the Moscow Region, and the Pyatyorochka discount stores in northwest Russia.

According to data collected by the Deloshop company, there are currently about 600 franchises in Russia. About 70 percent of them are franchises of domestic companies.

“Today there are a lot of franchising associations and people who create franchises out of the blue,” said Potapenko. “The word itself is limited today, it has been trampled down. I know that out of 600 well known franchises, only 50 work well and effectively; the rest are just fakes. All this discredits the market.”

One of the reasons why franchising isn’t experiencing qualitative growth, beside economic and social issues, is a lack of government support. In other countries, a franchise company doesn’t require official registration, but in Russia, a contract for a commercial concession has to be registered with Rospatent, which leads to delays caused by bureaucratic processes. In addition, there is no legislative basis for franchising. For example, in the U.S., there are about 100 federal laws regulating franchising in one way or another, while in Russia there are none.

“For small and medium-sized businesses to develop, the number of controlling authorities and registration papers needs to be reduced,” said Potapenko.

“They say that franchising will help the development of small businesses, then they’ll write a nice report about how some 24 franchises were opened, forgetting that even in little Germany there are 6 million small businesses, but in Russia, there is nothing even to talk about,” he added.

“Until we start seriously considering ourselves an entrepreneurial society and thinking about its development, nothing will happen — we will sit and show off in front of each other that instead of size 41 shoes we have started wearing size 43, and consider that qualitative growth,” he concluded.

More than 1,500 people are expected to participate in the National Franchising Festival, including businessmen, potential investors of the northwest region and large franchising companies, such as Ecco, Melange Group, Milavitsa, Subway, Rosbank and others.

The National Franchising Festival takes place from Sept. 14-15 at the Park Inn Pulkovskaya hotel. Entrance is free of charge, but participants are required

to register on the festival’s website, www.nffrussia.ru.