Discusses opportunities for U.S. franchisers and legal requirements in the market.
Franchising emerged as a business model in Russia following the adoption of formal franchise legislation in 1994. Since 2000, the number of franchising operations in Russia has risen from 54 to more than 2,600. Retail trade constitutes 57% of all active franchises, followed by services at 25%, and fast food at 16%. According to data from the Russian Franchising Association, 65% of all franchise concepts are established domestically, and 35% are foreign, of which 12% are American. The most popular franchises are those that require investments between $15,000 and $150,000. Approximately 14% of Russian franchise entrepreneurs are ready to invest $150,000 – $500,000 and 4-6% have the means to invest over $500,000. The market for restaurants/food concepts is the fastest growing, in terms of franchise entry: 52% of chain restaurants and cafes are franchises; this market is currently showing the most reliable returns, especially in the fast-food segment. Coffee-to-go concepts are also becoming more popular and are growing rapidly. The retail clothing sector also has a sizeable percentage of franchised stores at 23%. Foreign and domestic brands that provide high quality products at affordable prices continue to open new sales points in both Moscow and the rest of Russia. About 35% of children’s retail outlets are franchises. In addition, a growing interest in educational/developmental franchises has been observed in recent years.
In the services sector, franchises such as EMS fitness salons and barber shops are gaining more popularity. Beauty salons and medical centers are also in high demand among entrepreneurs. Demand for modern hotels is growing annually, with the increased popularity of Russia as a travel destination. According to the Russian travel industry organization, inbound tourism to Russia grew by 20% in 2017 (versus 2010), and domestic tourism increased by 85% (also versus 2010).
Until 2011, the legal framework surrounding franchising in Russia was an impediment to the development of the sector and strongly favored the franchisee. On July 18, 2011, Federal Law No. 216-FZ on Amendments to Part II of the Civil Code was signed into law, and more effectively balanced rights and obligations for parties of a franchise agreement. Specifically, the Law on Amendments (1) expanded the list of permissible restrictions under franchise agreements, such as use of intellectual property and pricing provisions; (2) amended provisions on the franchisee’s preemptive right to conclude a franchise agreement for a new term; and (3) established new terms for unilateral early termination of a franchise agreement. Although enactment of this legislation is considered a significant development, Russian franchising legislation remains cumbersome, and it is highly recommended that franchisors seek professional guidance regarding legal, real estate, tax, and Customs issues.
For a franchising agreement to be valid, it has to be executed in written form. The grant of the right to use the intellectual property under a franchise agreement must be registered with the Federal Service for Intellectual Property, Patents and Trademarks (Rospatent). Absent such registration, intellectual property rights are not considered granted by a franchisor to a franchisee. Prior to the execution of a franchise agreement, any trademarks to be licensed must already have been registered with Rospatent or the World International Property Organization (WIPO), with Russia identified as a designated country.