Franchising in the Largest Country on Earth
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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 FRANCHISE | ISSUE 5.5 WORDS BY KIERAN MCLOONE olitically, socially, and franchise markets within Russia. financially, Russia is To ignore Russia’s other “You may be in demand P often viewed as a large cities would be a mistake, and trendy in somewhere literal world apart however, and these include St. from what we’ve come to Petersburg (with around 5.5 like the U.K., but because understand as western culture. million inhabitants), Novosibirsk This could be due to the fact that (1.66 million), and Nizhniy nobody knows you in Russian culture and news isn't Novogorod (1.25 million). In total, widely publicized in the West, Russia has 12 cities with over Russia, it’s all about which extends to the current one million inhabitants, and a positioning of its burgeoning 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 GLOBALFRANCHISEMAGAZINE.COM 49 FEATURE McDonald’s hopes to launch its “There’s not a single franchisor I can think 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. McDonald’s launch in January The universal appeal of Square burger favorite, Wendy’s, 1990 was something to behold, the golden arches encountered this in 2014 when and saw more than 30,000 Many of the franchises currently it announced that it would be people queuing around the block operating in Russia could be closing all eight of its Russian from 4:30 am to get their first considered relatively young, locations. This announcement taste of American fast food. with 45 per cent having been came only four years after Unlike other U.S. concepts established in the market for less Wendy’s first entered Russia, that have come and gone since than five years. and at the time, the brand then, McDonald’s remains a There are of course some planned to open 180 locations popular investment choice in notable outliers of this trend; throughout the country. Russia and has seen exponential namely, the brand that arguably With the announcement of growth in the 30 years that started it all: McDonald’s. Known these closures, a spokesperson it has operated. Just this as the first major success story for Wendy’s told Bloomberg that year, in fact, the organization for franchising within Russia, its Russian franchisee "has not announced that it would open McDonald’s was introduced expressed interest in growing new locations in Russia’s far after a partnership between Wendy's business in Russia, nor east in December 2020, in the Moscow city government have they shown that they have cities such as Khabarovsk and the brand, which saw the the resources to successfully and Vladivostok for the first government take a 49 per cent operate the existing restaurants time. With these openings, stake in the Russian entity. 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 FRANCHISE | ISSUE 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 explore other areas as part of their “Some brands find that Moscow 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.” GLOBALFRANCHISEMAGAZINE.COM 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.