— The franchising market in Russia grew in 2023 compared to 2022. What does this relate to?
– This can be explained by several factors. The first is the profitability of franchises in the market. Some investment instruments have become invalid in 2022-2023. At the same time, both entrepreneurs and investors are always looking for new ways to invest capital. One of these ways is to start a profitable business. Franchise allows you to reduce business risks thanks to a proven business model.
Second, franchises with low barriers to entry are thriving. The trend of the last five years is that the number of franchise companies is simultaneously increasing and the average size of the minimum investment in them is decreasing. Frankly, there are more people with savings of up to 5 million rubles than those with capital over 10 million rubles, so this trend works for the popularity of franchising.
Third, growth is driven by the largest segments of the franchising market. If we talk about the top 3 areas in terms of annual turnover, today these are restaurant business, FMCG (Fast Moving Consumer Goods) – retail and medical services. Among them, only retail revenue has been increasing annually over the past decade. This makes sense because it meets daily demand, basic needs. Realizing this, entrepreneurs are increasingly investing in such franchises, especially the Pyaterochka franchise.
In general, franchising has become one of the alternatives to the stock market. But there are important differences between them. The stock market often involves passive investing.
If a person invests in a franchise, especially the Pyaterochka franchise, it is not enough to just invest money – you need to be involved in management. To do this, the partner must either manage the store himself or hire a team. Therefore, the franchise is often evaluated by people with management experience. For example, senior managers of large companies who have accumulated capital after many years of work and want to be released.
— Speaking specifically about Pyaterochka, what have you experienced in the last year regarding franchising?
— Our franchise network increased by 89 stores in 2023. This is plus 38% by 2022; This is the largest annual increase in the history of Pyaterochka franchising. It is particularly important for us that one-third of these discoveries come from new network partners.
We want to make a new breakthrough in 2024. Currently the Pyaterochka franchise network has 330 stores and we plan to double this number by the end of the year. That means four times more stores are opening compared to a year ago.
— Over the past two years, many major brands have left Russia or officially ceased their activities, including developing their own franchises. How has this affected franchising in general?
“Against this background, many existing franchisees who have previously worked with international companies have turned their attention to Russian brands. At the same time, some local companies started to create their own franchise models. For example, in 2022, more than 400 networks launched franchises for the first time.
Those who have worked with a franchise before want to further develop their business and increase their capital. However, doing this within international brands is often impossible for objective reasons.
That’s why entrepreneurs turn to Russian franchises. We are not talking about beginners, but experienced franchisees who have certain expectations from the parent company.
Their main requirement now is to ensure that the brand is recognizable with wide coverage and heavy advertising support. Each of these elements reduces the risks of investing in a project.
— The interest of experienced businessmen in the franchising market is understandable. And if we talk about entrepreneurs who are now faced with a difficult choice: become a franchisee or dive into developing their business from scratch? What are the advantages and disadvantages of the first way?
— The main advantage of a franchise is the reduction of risk. This is especially true for people who only have recruiting experience. Essentially, such a novice entrepreneur has a certain source of resources and an idea of what he wants to do, but lacks experience and support.
According to statistics, many entrepreneurs who establish startups either go bankrupt or suspend their business in the first year. This is mainly because they face strong competition and need to invest a lot of time and money in promotion. This reduces the liquidity of investments.
While having your own business idea requires trial and error, the franchising model is more predictable. If we consider the Pyaterochka brand, more than 21 thousand stores are open in all regions of the country. When a partner walks into a business, they see statistics about stores in the area and location of interest and understand what to expect. Brand awareness guarantees quick access to break-even point.
Also, the amount of preparation work is less in the franchise business. In franchising, preparation takes 2-3 months, but when starting a venture from scratch, this period can take a year or more. Meanwhile, other players are not standing still, competitors are emerging and market capacity is shrinking.
These examples generally show well how an entrepreneur, by engaging in a franchise business, significantly reduces the risks of bankruptcy and closure, especially in the first 1-2 years.
— How does Pyaterochka monitor quality standards in all its franchise stores? Ultimately, for the company, this story is about recognition and reputation.
— Our main rule is that the buyer does not guess whether Pyaterochka came to his own retail outlet or to a partner store opened under a franchise. We have service, quality and safety standards and they are the same for all stores in the network.
We have many tools to monitor these standards, some of which are automated.
For example, we personally check each franchise store on a monthly basis using a checklist, from the appearance of the facade to the availability of goods. If there are deficiencies, we ask the franchisee to correct them and then return to repeat the checklist.
In general, our partners understand that with the Pyaterochka franchise they become representatives of a large brand and this imposes certain obligations.
— Do you get feedback from customers who visit franchise stores?
— For us, guest satisfaction is one of the key performance indicators. We constantly monitor how customers evaluate each franchise store. Even without visiting, you can understand how things are going from the supply, number of staff, cleanliness and appearance.
— Is it possible to predict a store’s payback period?
— We have our own methodology for this, based on 25 years of experience, statistics from our partner and own stores, and data on the location where we plan to open a new store. We take into account population density, the cost of housing in the surrounding area and many other parameters. We carry out such a multi-factor evaluation even before opening, and this allows us not only to understand the amount of investment in the store, but also to predict with 90% accuracy what the revenue will be.
We do not make unrealistic promises to franchisees and are quick to say that the payback period for a franchise is generally 36 months. Experienced entrepreneurs who have been working with us for over a year know that it is possible to get a payback in 18 months in a successful location. However, we always announce a longer period for new partners.
— What are the statistics of partners who started with a store, opened it as a franchise, and after a while owned, for example, 2-3-4 stores?
– This is one of the main indicators by which entrepreneurs evaluate the effectiveness of a franchise – whether it is possible to scale the business, that is, open one point after another and get the same result.
Most of Pyaterochka’s partners open several stores: On average, each franchisee has about 5 outlets, and 11% of partners manage more than 10 stores.
— If an entrepreneur comes to you who is interested in your franchise and has the resources to start the business, but his experience is far from the retail industry, how would you structure your work?
— We actively assist our business partners in other regions who will open their first franchise store at every stage, starting from location selection. Before renovating the facility, we provide the partner with specifications, plans, technical specifications for the builders, contact details of all suppliers and contractors. So the partner does not need to think about how to build his store – he will have a turnkey solution.
We then help select and train staff. After the launch, we conduct regular checklists on the operation of the store and make recommendations so that the partner can see the results.
This type of support is especially important for budding entrepreneurs who have not yet worked in the FMCG retail industry.
— What advice would you give to an entrepreneur who is currently faced with this difficult choice: own a franchise or dive into developing his business from scratch? Where to start if he makes a choice in favor of a ready-made business?
— I recommend gathering as much information as possible before making a decision. When choosing a franchise, first look at how long the company has been in the market. The longer the better: if the business is young, you will participate only at the formation stage. You also need to be realistic about the parent company’s promises. Franchises that ask for refunds in 3 months or more may be disappointing.
An important indicator for evaluating a franchise is the ratio of closings to openings of franchise outlets. If a brand opens 100 stores and closes 50 stores, this is a red flag.
For example, with the opening of 89 franchise stores in Pyaterochka last year, only 5 closed and 4 were relocated.
— An important point for a franchise is the source of investment. It is better to rely on your own available funds and not take out a loan for a franchise, especially if this is your first business.
And of course, it is important that the field of work you enter arouses interest and that you want to learn and develop in that field. We will also support those who are on the same path as us.
— What do you see as the main tasks you will face in the development of the Pyaterochka series in 2024?
– Improve our product – our franchise. Everything is important: how it looks, how it works, what it contains, how we promote it and how we position it in the market. We will continue to develop the business model and support tools for our partners.