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THE MAIN PROBLEMS OF FRANCHISING IN RUSSIA

THE MAIN PROBLEMS OF FRANCHISING IN RUSSIA

Kiselev V. M.

the scientific leader

Doctor, Professor of Marketing in the Kemerovo institute (branch)

The Russian Statement University of trade and economy

kisselev.vm@mail.ru 

Sjaglova J. V.

PhD in The Kemerovo institute (branch)

The Russian Statement University of trade and economy

y.syaglova@mail.ru

Schultz O. E.

The post-graduate student in The Kemerovo institute (branch)

The Russian Statement University of trade and economy

kisselev.vm@mail.ru 

 

Reference: Kiselev, V.M. The main problems of franchising in Russia / V.M. Kiselev, J.V. Sjaglova, O.E. Schultz // Current trends in commodity science: 10th International Commodity Science Conference. IGWT Symposium Series.- Poznań University of Economics; Polish Commodity Science Society, Poznań, Poland, 17th – 18th September 2009

 

The solution of many economic problems of modern Russia requires new economic mechanisms. Franchising is one of such mechanisms. One can assert that nowadays franchising is the only known instrument allowing to increase the efficiency of small business. It gives the possibility to unite the advantages of small and big businesses.

In Russia the interest to this economic instrument revived in 1990-s when practically simultaneously some franchise systems, both domestic and with invested capital, appeared. However excessive hopes for the development of franchising have failed. Nowadays it makes sense to analyze the arisen problems and reasons which led to the appearance of such hopes.

The most important economic problem of franchising in Russia is absence of stability. Returning to the definition of franchising, firstly it is a system of relations which is enforced once again by the system of contracts. Naturally such system, also uniting economically independent entrepreneurs, becomes inertial. Last decade, in which the rapid development of franchising in Russia began, is notable for the absence of stability in economy, constant ups-and-downs of country’s economy, which lead to the same ups-and-downs in demand for all kinds of goods and regular redivision of property. All this can not but affect franchisees. Taking into consideration that most of franchisees have to open their businesses in tenancies because of the shortage of own means, such a change of the owner negatively affects the work of both franchisee and franchise system in general. Redivision of markets, very often using non-market methods, can also reduce the efficiency of franchise systems. Franchising, as mentioned above, is based on cooperation of two types of independent entrepreneurs – franchisor and franchisee, both of which are legal persons. So not only franchisor but also franchisee has to invest their initial capital into the system development. Taking into consideration that franchisee has to bring one-time franchise payment (flat payment), so the franchisee’s initial capital must be rather large. Unfortunately, not all Russian entrepreneurs have enough capital. The attempt to get a bank loan as the initial capital faces a row of problems: franchisee’s rate of return, including all regular payments (royalty fee, payments to the centralized advertising fund and others), can lead to the fact that the period of repayment of a loan will be rather long, and taking into consideration current loan rates, practically impossible; current legal system complicates lending out money to franchisees.

Nowadays the main problems of franchising in Russia are concentrated in the sphere of law. It is provoked by the fact that franchising as a system of relations is based on the system of contractual relations and must be supported by a strong legal basis. In modern legal system of Russia the term «franchising» is mentioned only once, in chapter 54 of the Civil Code of the Russian Federation (CCoRF), where it is stated: „commercial concession“ is the synonym to the term „franchising“. However, even the most superficial analysis of this chapter allows to affirm that the term „commercial concession“ is considerably narrower in its meaning than „franchising“. In Russia one has to found franchising on the complex contract based on the number of the articles of CCoRF and legislative acts i.e. on „evasive“ law schemes. All this makes it difficult to use franchising in Russia. Increase of efficiency and development of franchising in Russia requires changes in legal system. These changes are aimed at:

  • Creation of conditions for real competition between franchise system and traditionally formed mechanisms of realization of goods;
  • Providing the facility of legal acts administration for participants of franchise system;
  • Creation of transparency of franchise system and its elements for controlling units.

All three aims are closely interconnected. To achieve these aims it is necessary to create a system of legal acts including:

  • Civil Code of the Russian Federation, comprising basic regulations of franchising employment in Russia;
  • Federal Law of the Russian Federation «About franchising in the Russian Federation»;
  • Laws regulating the rights for intellectual property and responsibility for their violation;
  • Tax Code of the Russian Federation and associated laws and subordinate regulatory acts.

In this system it is necessary to elaborate and adopt a new franchising law and make amendments to the rest of the standard acts, which should make both law and terminology of franchising approximate to the world practice, as it is especially important for creation of franchise systems involving international capital.

As a result, entrepreneurs will have sufficient regulatory material for formation of contracts, where depending on the chosen work plan they will use such or such regulations and choose model agreements. In regulations, concerning the right for intellectual property and responsibility for its violation, franchise schemes, which are absent at present, must be taken into consideration.

It makes sense to give tax benefits to the participants of franchise systems. It is stipulated by three reasons:

  • Practical absence of widely-known trade marks and brands in Russia attracting a potential consumer. Creation of such brands requires huge expenditures, what reduces the efficiency of franchise systems;
  • Increased expenditures of franchisees, for which license royalty, flat payment and payments to the centralized advertising fund are very significant.
  • Obligatoriness of conformity of external forms and labor conditions (uniform, interior etc.)

These expenditures, especially in the period of «initial hype» of Russian trade marks, won’t allow franchise systems to compete with traditional systems of production and sales of goods. In some years of working according to the franchise schemes recognizable Russian goods of high quality probably will be able to cover these expenditures without problems.

Economic and organizational problems of franchising naturally are very important but they also hold back the development of franchising and social-and-psychological problems. The first thing organizers of franchise systems in Russia face is the absence of Russian experience and entrepreneurs’ (potential franchisees) fears of franchise system failure in general. Reference to foreign experience, as a rule, is taken rather skeptically, and an objection follows that not all western experience does work in Russia and especially in present conditions. This problem can be tackled only by the way of scrupulous gaining and generalizing of Russian experience, both negative and positive, of franchising in Russian systems and in systems using foreign investments. Traditional neglect to intellectual property is becoming a truly burning problem of franchising in Russia. In Russia one values the goods having material form but franchising assumes transmission of intellectual property and payment for it. Before intellectual property is respected in Russia, without of which franchising will be ineffective, long-term and systematic work, supported by law plus economic methods, must be done. And respect to somebody else’s intellectual property must be spread out regardless of its protection with legal methods. One more very important social-and-psychological problem of franchising is that entrepreneurs, potential franchisees, are afraid of «losing their faces». It is natural that an entry to franchise system requires working within the standards defined by the franchisor from franchisee. However, working in a large franchise system gives such experience to the franchisee which is impossible, with some exception, to obtain independently, and this experience compensates the rest of the losses.

As mentioned above, the biggest part of franchising problems, and not only social-and-psychological ones, is connected with the absence of experience of entrepreneurs, who could act as franchise system organizers and work in these systems as franchisees. The solution of these problems is rather trivial: it is necessary to create an educational system which would allow to make Russian entrepreneurs mature in the sphere of franchising. This system must have two directions: general, providing promotion of franchising as an economic instrument, and narrow, providing consultations to franchise system subjects on the concrete economic problems of franchising. These two directions must supplement each other. Broad education in the sphere of franchising may be organized on the basis of training centers, which should be placed all over the territory of Russia. Both potential franchisors and potential franchisees will be educated in these centers. At the initial stage of creation of franchise systems franchisors can use these centers for training their franchisees and workers of these franchisees. Narrow direction deals with management consulting on problems of franchising. This consulting has to cover not only general problems of franchising but also certain sections.

The following is especially important: legal aspects of franchising; cooperation between franchisors and franchisees; organization of bookkeeping; staff recruitment and human resources management. This direction can be hardly regarded as educational. It is management consulting (business-consulting), which should supplement education. Education and consulting may be carried out in educational-consulting centers where there are consultants’ or entrepreneurs’ associations.

Summing up the analysis of franchising problems, it is possible to pass on an opinion that there are good enough opportunities for the development of franchising in Russia. But to realize these opportunities, certain conditions must be created. It is necessary to initiate legislation about franchising and making corresponding changes to laws and standard acts, relative to it. It is necessary to join the government program on support of small enterprise of franchise development system. It is very important to create the system of tax benefits for franchisees especially at the initial stage of franchise system development. It is reasonable to afford an opportunity to use simplified bookkeeping system for franchisees. It is required to create a network of educational and consulting centers on franchising not only in the center but also all over Russia.

Киселев Владимир