A broad overview
Franchises are performing well across the Russian domestic market and, according to forecasts, chains will expand beyond 2,500 brands and 200,000 outlets to create up to 4 million new jobs and add about US$7.5 billion to Russia’s GDP. Clearly that will be welcomed by Mr Putin and the government.
Franchise opportunities might typically require an initial investment worth ca US$25,000. Royalties do not normally exceed 5% or are generally replaced by the obligation of minimum purchases from the franchisor as established in the contract.
- Traditional marketing is losing its relevance. So there is a clear swing to digital marketing and influencers using social networks to hype sales.
- Multi-brand franchisees are on the rise because their strategy improves cash flow and is also a security buffer by reducing risk.
- Health and education franchises do well. Russians focus less on subsistence and more on bettering themselves. We are therefore seeing lifestyle choices driven by social, ethical and personal choice – and some choices are to avoid digital and impersonal service!
- Standards of living are still volatile owing to an economic downturn, though that is less true in Russia than in the CIS. There are armies of loyal customers driven by desires for healthy living standards, proper nutrition, organic products and more. Increased customer-centricity. Savvy operators are customizing their products and services, offering clients a menu
In general retailers face considerable difficulties, especially in fashion as they compete with online stores such as Lamoda and Wildberries. Some retail segments still show growth, such as fixed-price shops, shops with domestic alcohol production equipment and organic food stores. Vape shops (for electronic cigarettes) have grown exponentially but adjustment is inevitable as such growth is ultimately unsustainable. With quite a variety of franchise models, brands and markets, generalisms are difficult and there have been winners and losers in Russia. Russian Business Council (RBC) research shows that the share of franchising in fashion retailing plunged from 26.7% in 2017 to 22.9% in 2018. Meanwhile the RBC says that franchised caterers grow their share of the market by 5% to 10% a year so now account for the majority of outlets.
Franchising is based on the reliable replication of proven concepts so any successful freestanding business, including a start-up, might merit the launch of franchises. In Russia. And bearing in mind what has already been said, a franchise that requires a minimal up-front investment by the franchisee is going to have an appeal. Of course for the franchiser ultimately the profitability is more likely to be driven by franchisee talent and effort than it is by franchisee investment.
Which niches are most in demand? Pawn shops, microfinance services, affordable cosmetics and perfumes (usually European-made), inexpensive hairdressers, discount shops and convenience stores. Even the catering is aiming for cheaper offers and simplified versions of fast food e.g. mobile bars with minimum prices, food trucks, ready-meals with familiar Russian dishes and discount catering (affordable celebratory events in restaurants). Family cafes or bakeries and wine-bars too. We should mention spas. Beauty salons and fitness clubs. Oh, and language schools, online courses and training schools.
Meanwhile in Moscow and other big cities farm-shops, healthy / organic / ecologically sustainable foods, Japanese / Korean cuisine and exotic cosmetics stores are growing.
On the subject of foods, Russian providers are experimenting more and mixing it up in respect of genres and origins. This may reflect the increasing trend of populations to become homogenous. But eclectic mixes of foods and drink can do well. Meanwhile exhibition kitchens and restaurant-bars with a takeaway service are popular.
Digitization and online trading are evolving apace. McDonald’s is perhaps leading the way. Their system, encouraging customers to use the electronic terminals themselves and place then pay for their orders, limits queues at the cash desk. It speeds everything up and doubtless saves staffing costs. It will be copied for sure.
Notwithstanding the aforementioned smart systems as already employed by McDonalds, not everybody wants to rely on digital technologies. More and more consumers hate the disconnection between service-providers and service-users. So they seek one-to-one human relationships for which they will pay premium prices.
For this reason small family-run restaurants, mini-bakeries, wine shops and even small shopping centres have become increasingly popular. Wine shops and bakeries are stand-out growth areas. So these are almost age-defying in the same way that vinyl records and cassette tapes have recently made a comeback in the West because customers want something tangible to hold in their hands.
Back to franchises, in Russia bakery networks are doing well and they require little investment so there is a queue of would-be franchisees. And pizza outlets still haven’t saturated the market, though it’s questionable as to whether new players can compete. But coffee-shops have peaked.
Food & Beverage
Incidentally, for more information on business opportunities in Russia within the catering sector please see our article ‘How is profitable restaurant business in Russia?’.
The Russian Z generation are not brand-loyal. They are fickle, forever surfing the internet, following social media recommendations that reflect fashions and opinion-makers, making a disproportionate number of purchases (compared to their elders) online.
They’re easily led by graphics and generally avoid text. So they are steered by Instagram, Youtube, etc. Thus content must be well-adapted for tablets and smartphones. Accordingly shops, restaurants and service providers able to communicate with consumers via mobile apps are winning the lion’s share of custom. Barring impulse purchases, these kids only visit high-street stores and malls to physically handle the goods. Then they actually buy from cheaper suppliers online.
Franchising in Russia
The most popular Franchises in Russia are those requiring an initial investment of up two million rubles, the equivalent of 25,000 euros. Royalties, when requested, in general, do not exceed 5%. Either this or they are generally replaced by the obligation of minimum purchases pre-established in the contract.
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