RUSSIA: FRANCHISING IN THE LARGEST COUNTRY ON EARTH - Russia may win in terms of sheer land mass, but when it comes to franchising
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FEATURE
RUSSIA:
FRANCHISING
IN THE LARGEST
COUNTRY
ON EARTH
Russia may win in terms of sheer land
mass, but when it comes to franchising
potential, the country’s story gets a
little more complicated
48 GLOBAL FRANCHIS E | ISS UE 5.5
WORDS BY KIERAN MCLOONE
“You may be in demand
P
olitically, socially, and franchise markets within Russia.
financially, Russia is To ignore Russia’s other
often viewed as a
literal world apart
large cities would be a mistake,
however, and these include St.
and trendy in somewhere
from what we’ve come to
understand as western culture.
Petersburg (with around 5.5
million inhabitants), Novosibirsk
like the U.K., but because
This could be due to the fact that (1.66 million), and Nizhniy nobody knows you in
Russia, it’s all about
Russian culture and news isn't Novogorod (1.25 million). In total,
widely publicized in the West, Russia has 12 cities with over
which extends to the current
positioning of its burgeoning
one million inhabitants, and a
further 201 smaller cities that providing value”
franchise industry. contain between 100,000 and one
You may be surprised, then, million people. As expected from brands within the country are
to learn that past its mysterious a country so large, the on-paper of Russian origin, and of the
exterior, the Russian franchise opportunity for franchisors in remaining 35 per cent, nearly
industry isn’t just similar to Russia stretches as far as the eye half of that figure is comprised
what can be found in the West; it can see – and then some. of U.S. organizations.
arguably borrows many lessons Russia’s franchise industry
and best practices from the was first established in the early
market, too. 1990s, following the collapse of
the Soviet Union. Despite the
A business behemoth past decade seeing considerable
Before we dive deep into what instability in the Russian
franchisors and entrepreneurs economy, the country’s franchise
can expect from Russia’s industry is estimated to be worth
business landscape, it’s around $7.5bn, and
important to understand what consists of roughly
kind of country we’re dealing 1,450 different
with in the first place. franchise brands;
Russia is almost double the size with more
of the U.S., and covers a whopping than 50,000
17 million square kilometers, individual
making it the largest country in franchisees
the world. Russia is so large, in operating in
fact, that its surface area makes Russia.
up one-eighth of the earth’s 65 per
total. Across that vast expanse cent of
are around 144.5 million people,
situated in several key cities
around the country. The capital,
Moscow, is home to roughly 12.7
million residents, and is often
regarded as one of the main
GL O BAL FRANC HIS EMAGAZINE .CO M 49
FEATURE
“There’s not a single franchisor I can think McDonald’s hopes to launch its
800th site in Russia; showcasing
of that wasn’t backed by international a true success story of a foreign
brand within the country.
concepts taken from the West” But proven success in the U.S.,
and even a wider international
market, doesn’t always
guarantee prosperity in Russia.
The universal appeal of McDonald’s launch in January
Square burger favorite, Wendy’s,
the golden arches 1990 was something to behold,
encountered this in 2014 when
Many of the franchises currently and saw more than 30,000
it announced that it would be
operating in Russia could be people queuing around the block
closing all eight of its Russian
considered relatively young, from 4:30 am to get their first
locations. This announcement
with 45 per cent having been taste of American fast food.
came only four years after
established in the market for less Unlike other U.S. concepts
Wendy’s first entered Russia,
than five years. that have come and gone since
and at the time, the brand
There are of course some then, McDonald’s remains a
planned to open 180 locations
notable outliers of this trend; popular investment choice in
throughout the country.
namely, the brand that arguably Russia and has seen exponential
With the announcement of
started it all: McDonald’s. Known growth in the 30 years that
these closures, a spokesperson
as the first major success story it has operated. Just this
for Wendy’s told Bloomberg that
for franchising within Russia, year, in fact, the organization
its Russian franchisee "has not
McDonald’s was introduced announced that it would open
expressed interest in growing
after a partnership between new locations in Russia’s far
Wendy's business in Russia, nor
the Moscow city government east in December 2020, in
have they shown that they have
and the brand, which saw the cities such as Khabarovsk
the resources to successfully
government take a 49 per cent and Vladivostok for the first
operate the existing restaurants
stake in the Russian entity. time. With these openings,
on a long-term basis."
Gary Chaglasyan, the World
Franchise Associates’ Russian
representative, emphasizes the
need for caution, and not letting
the success stories of brands
like McDonald’s cloud strategic
thinking: “A brand could be huge
in your country, but in Russia,
nobody knows about it. You
may be in demand and trendy
in somewhere like the U.K., but
because nobody knows you in
Russia, it’s all about providing
value. Brands should definitely
think about promotions and
marketing before entering the
Russian market.”
Local success story
So what kind of approach works
well in the Russian market?
If Wendy’s struggled to gain
a foothold half a decade ago,
what could the brand have done
differently today to instead
prosper and develop throughout
the region? The answer can be
found in a local Russian pizza
chain, which has used this past
decade to exponentially grow;
both within Russia, and in 13
countries around the world.
50 GLOBAL FRANCHIS E | ISS UE 5.5
Dodo Pizza was founded as a development of Dodo IS, Dodo’s
brick-and-mortar restaurant brand tech platform that allowed the
in 2011, and has since pivoted to brand to achieve outstanding
being a delivery-first operation results in less than a decade.”
centralized by a proprietary tech While some of the key
platform called Dodo IS. With 550 differentiators offered by Dodo
locations in Russia and many Pizza don’t seem exclusive to pivot to suit evolving trends, and
more overseas, it’s something of to the Russian market, they make sure franchisee relationships
a domestic success story and can serve as important reminders are at the forefront of all ongoing
provide some key insight into the to international franchisors strategies. Not exactly revelatory
Russian consumer mentality. that nailing the basics can observations, but crucial pillars that
“Fyodor Ovchinnikov, the make all the difference when some foreign brands seem to forget
founder of Dodo Pizza, saw huge entering a new region: “Dodo when attempting Russian growth.
potential in the pizza market – in developed a format that was
Russia and globally,” says Max better suited to the market with Moscow or bust?
Kotin, chief storyteller for the well-designed dine-in areas and One of the other lessons that can be
brand. “He wanted to revolutionize more balanced mix of dine-in/ learned from the success of Dodo’s
the way this business is managed delivery operations,” explains Pizza is that while Moscow is the
capital of Russia and often regarded
as its prime franchise market,
incoming brands would do well to
“Some brands find that Moscow explore other areas as part of their
national strategy.
is too hard to crack with all the “Previously, brands just focused
on Moscow. Moscow and St.
competition, so they start from Petersburg were the main cities,”
says Gary Chaglasyan. “Moscow
some other regions” is comparable to New York, and
St. Petersburg is like California.
The rest of the country was less
developed a few years back, but
by developing a proprietary cloud- Kotin. “Also, the brand’s radical now, all of the cities that have over
based tech platform that would be transparency and commitment to one million inhabitants are nicely
deeply integrated with the brand’s the win-win principle in building developed and can be approached
managing system. partnerships attracted the most with a good strategy.
“There was also very little gifted and ambitious franchisees “Some brands find that Moscow
competition across Russia since and suppliers; this also allowed us is too hard to crack with all the
Domino’s Pizza and Papa John’s to connect our franchisees with competition, so they start from
focused their efforts on Moscow investors and help them raise some other regions. They slowly
and left the rest of the country capital that would otherwise be grow outside of Moscow, and then
almost unattended. This allowed hard to attain given the state of develop into the city. The reason
Fyodor to launch his first highly the financial market in Russia.” brands tend to look at these main
successful unit, scale the network The key takeaways from this cities, though, is that they have
fast through franchising, and use take-away success story? Find a better supply chains, distribution,
profits to reinvest them in the niche in the market, don’t be afraid and large markets.”
GL OBAL F RAN CH IS E MA GAZ INE .CO M 51
FEATURE
Fortune favors rates, which are a huge issue that as it found that Russian sources
the prepared stop a lot of brands from entering of supply didn’t meet its high
Give or take a few high- Russia,” says Chaglasyan. “Brands standards. As a result, the
profile failures, franchising in are usually western, based in the ice-cream franchisor built its
Russia may seem a surefire U.S. or Europe, and all of their own $30m factory in Moscow’s
way to develop your brand. fees are in USD or Euro. Many of Ostankino district in 1996, which
After all, household names them have their own products produced 70 tons of ice-cream
like McDonald’s, Subway, and which aren't manufactured in every day upon opening. This
Burger King reportedly open Russia, so they need to import was certainly a solution, but not
around 70 to 100 new locations them from their own suppliers necessarily one that smaller brands
in the country every year, and overseas. Due to that, they need could enact at a moment’s notice.
the proven growth in both to pay shipping and transport Overcome these issues,
international and domestic fees, which increase prices. however, and Russia can be a
tourism means that brand “What's worse is that you're fertile market for the right brand
awareness is organic and reliable. working in Russia so it's based on to mop up swathes of customers,
As it turns out, though, there’s rubles. Just this year, the ruble who are hungry for international
one main barrier to entry when fell down by 20 per cent. Over the concepts and their best practices.
it comes to Russian franchising: last four years, that was almost While franchising is still a
the economy. And while this can 50 per cent. But we still have to relatively new concept to Russia,
be a challenge in every single pay the USD figure for royalties; there’s starting to become a
country a franchisor may try to the spending power here went national understanding of
penetrate, there’s some unique down, but the cost to work with the model’s benefits. Case in
problems presented by Russia’s brands doubled.” point: in the first four years of
unpredictable and volatile Baskin-Robbins was faced franchising in Russia, 42 brands
financial situation. with high import fees when it opened in the country, which is
“The main problem is exchange first attempted Russia in 1988, approximately 10 new concepts
per year. By 2018, this number
had increased by more than 50
“The Russian market could be times. By 2030? Russia could
become a world contender on the
second to America – trust me” franchise stage.
52 GLOBAL FRANCHIS E | ISS UE 5.5
INTERVIEW
Vitaly Sorokin, area director Russian
federation for Franchise World Link
Franchise World Link works with which means that a potential
entrepreneurs, franchisors, and franchisor can bring its high
various kinds of franchisee to help standards of service and really
businesses grow all around the stand out. There’s also a very
world. As the area director for strong labor force within the
Russia, Vitaly Sorokin has a deep country, and there are many
immersion in the market, and segments of the market which
understands what makes it tick. are yet to be developed by a
leading brand.
Q Why do you think many
Russian brands have Q And what about the
challenges of the market?
only developed within the
past ftve years? A The main challenge is
the absence of the term
A I think it’s mostly
because people are now
communicating more than ever
‘franchising’. Officially, it’s not
recognized, and all contracts
are called ‘commercial
thanks to the internet. When I concession contracts’.
worked at DHL, we used internal In Russia, we also have
mail and sent messages in a paper a unique property system,
envelope; now, Russians can find where property belongs to the
everything they need in a minute. government. This is different
They can find franchises and from the West, of course, and I
compare which models work best used to handle a project between
for them; outside of that, though, Germany and Russia where there
there isn’t much advertising for was a lot of unfamiliarity with
the franchise model within Russia. our system. That being said,
I’d certainly like to see many
Q Are Russians receptive to
international brands?
more western franchises in the
Russian market.
A Russians like foreign
concepts because they’re
interested in quality and Q Do you have any advice
for entrepreneurs
standards, which all emerge from looking to penetrate Russia?
the West. There’s not a single
franchisor I can think of that
wasn’t backed by international
A You can’t take a model from
one country and apply it
directly to Russia. There are
concepts taken from the West. different consumer categories
That’s not necessarily America, and rental rates which set the
but we see franchising as a market apart. Trying to introduce
western way of doing business. a franchise without any kind of
After all, we cannot reinvent the adaptation could result in a high
wheel when the model came about risk of losses.
over 100 years ago. If approached properly, though,
the return on investment is
Q What are some of the
main appeals of Russia
for franchisors?
considerably high. Find the
right approach, recognize the
differences, and there’s success
A The opportunity in Russia
is huge. People here aren’t
spoiled when it comes to service,
to be had. The Russian market
could be second to America –
trust me.
GL OBAL F RAN CH IS E MA GAZ INE .CO M 53
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