The franchise in Russia: Huge opportunities in a big market

Over the last 20 years Russian franchising has gone a way other countries spent twice as much time on. “Russians are slow starters, but they drive fast.” Last year Russia has outrun a lot of European countries, e.g. Germany, by a number of franchise points of sale (74,600 versus 72,700).

Though the current turnover of the Russian franchising market makes up only 3.5% out of the whole value which is 3 times less than, say, in the USA, it has an enormous development potential. It seems obvious now when such giants as Subway, Baskin Robbins, Zara and H&M are expanding in the Russian market; however, at the beginning of the 2000s only some people realized the bright future that lay ahead of franchising.


One of the first persons to grasp it in time and to assess perspectives of Russian franchising was Ekaterina
Soyak, head of EMTG, who 11 years ago launched an annual exhibition known as BUYBRAND Expo. The first exhibition barely managed to attract 20 franchise exhibitors. Nowadays BUYBRAND Expo is not just the most significant event for Russian franchising, but is also part of TOP 5 global franchise business exhibitions and the largest exhibition in Eastern Europe and the former Soviet states. Traditionally BUYBRAND Expo is supported by the Russian Franchise Association, the Chamber of Commerce and Industry of the Russian Federation, Moscow Chamber of Commerce and Industry, “OPORA Rossii”.


Current trends

So far, the most fast-developing Russian franchising segment is fast food followed by clothes retail and service sector. As for fast food, neither the last political crisis related to the situation in Ukraine, nor the so-called sanctions imposed by the USA and the EU could slow down its rapid development. Beside the expansion of local chains, every year more and more foreign franchisers come to Russia no matter what.


The American chain Burger King launched in Russia in 2012 made a real breakthrough in the development of huge territories of Russia – the chain’s franchise points are popping up like mushrooms after a spring rain across the regions. There are now over 60 restaurants in Moscow only. For such giants as Pizza Hut and Starbucks, Russia is still among the priority growth areas.


Just like all over the world, concepts requiring little initial investment, providing high profit despite of modest average purchase size – such as Wetzel's Pretzels, Crispy Crеam, Nathan’s and Pretzelmaker – are very popular in Russia. By the way, the last brand is introduced to the Russian market by the regional company Alendvic rather than by Moscow. This company has vast experience in promoting foreign franchises in the Russian market (it was this Perm company that ensured successful launch of the British brand SFC). Note that entering the Russian market from regions rather than from Moscow is quite a popular trend among a constantly increasing number of both foreign and Russian franchisers. Lease rates in Moscow could put anybody at a loss, so this is as well a least-evil solution. Certainly, seeking a firm footing in the regions is typical not only of fast food franchisers but of retail and service companies as well. In other words, we are currently observing two opposite trends: moving tough competitions of federal chains to regions and coming of regional chains seeking to acquire a federal status to the capital. Recently a number of successful regional franchises has grown: "Vilka-Lozhka" chain owned by Novosibirsk company "Food Master", the Irish pub chain “Harat’s Pub” (a Russian operator with the central office in Irkutsk), the ice-cream shop chain “33 penguins” (Omsk), and many others.


Against the background of the depressive European and overfloated American apparel markets, Russia has become a kind of escape for fashion retailers. Here they can count on 6-7% sales growth, while in other countries 1-2% growth is considered a great luck. The biggest global players such as Zara and H&M have already trodden their paths to Russia. In the last couple of years their lead has been followed by second-tier retailers. At first the large companies spent money on researching the Russian market, then they tested it and learnt the hard way; now when it is stable and not that scary, when there is more transparency and more information available, even smaller and more prudent companies can make their first steps. Among the new brands in Russian market are Scotch & Soda, Mohito, Takko Fashion, OVS Michael by Michael Kors, and others.


The oldest British department store Debenhams has decided to try fortune in Russia once again. This retailer had already entered our market in 2006. Stefanel which was introduced to the Russian market in 2004 and since then has changed several partners is also back. After closing all the shops in 2011, the company has returned with a new distributor – The Denim Star Project.


Out of the top 10 brands to be launched into the Russian market by 2015, 3 brands come from the USA, 2 – from Great Britain. Russia is also waiting for some brands from Mexico, the Republic of South Africa, Spain, France and Italy.


Among them are:


1. The “education through play” theme park of the Mexican chain KidZania (Innova has got the franchise) to be opened in 2015 in “Avia Park” shopping centre at Khodynka Field.


2. The American bar Hooters (the license belongs to “Brooklyn Nets” basketball player Andrey Kirilenko and his partners). The first bar has already been opened in Moscow.


3. Disney store – an international chain of toys and clothes stores with the Disney world merchandise (both “Detskiy Mir” and Inventive Retail Group have applied for franchise).


Russia is also waiting for the British brands House of Fraser and Blue Inc, the South African restaurant chain Nando’s, the French labels Pimkie and Lefties, the European chain of kids goods Prenatal, etc.


And by all means, Russia is eager to welcome the famous Italian brand EATALY. Its launch was declared a year ago by one of its founders Luca Baffigo. According to the latest news, the flagship deli will be located at one of the central squares in Moscow – Square of Europe.


Last year, for the first time in the history of Russian merchandising, the share of trade concepts made up less than half of the total quantity (47%). Such change was caused above all by the growth of service sector franchises. Hostel chains (Dostoevsky, Bear Hostels), entertainment centers for kids (“Panda-Park” adventure park) or even such exotic business as the chain for assessment of human abilities by fingertips (since 2013 InfoLife has opened 300 new points and entered the international market) are developing rapidly.


Russian franchising is characterized by increasing competition – the number of concepts in each segment is growing. The struggle for potential franchisees is intensified due to the limited number of them. Thus, promotion, demonstration, correct presentation of brands are becoming more important – first of all, at specialized exhibitions such as BUYBRAND Expo. Today participation in such major events not only brings about new partners but is also an essential image element of franchise proposal.


This year the exhibition is held under the slogan “Brands in the City”, and the entire exhibition space will resemble a big city inhabited by both people and brands. Brands of the big city are huge opportunities for your business. This year more than 200 brands from 20 countries will take part at the exhibition, and each one will have its own address: 414 Fifth Avenue; 17, ViaDelCorso; Tverskaya st, 177; etc.

BUYBRAND Expo 2014 is the concentration of everything that embodies a big city for us: energy, style, new exciting opportunities, best people and best brands from all over the world.