Status of the franchising market in Bulgaria 2012
A survey conducted in the period February - May 2012 by Franchising.BG
About the survey
We present you the third survey on the franchising business market in Bulgaria conducted by Franchising.BG. The main purpose is to present the current status, development, issues and challenges, the influence of the economic conditions, the perspectives and forecasts for the development of the franchising business model in Bulgaria.
The survey was based on questionnaires and telephone interviews and 144 franchisors and 385 franchisees operating on the Bulgarian market participate in it. The survey does not include data about chains which offer franchise but still do not have an open and operating franchise unit.
The survey covers only companies which offer the Bulgarian entrepreneurs the opportunity to start a new small and medium size business. Hence the representatives of franchise systems who possess the franchise rights for Bulgaria but do not have the right to give third parties the right to open a new unit are left outside the scope of the survey.
The survey takes into account the two levels of sales – the sale of the business model of a given company to franchise partners and the sale of goods and services offered by the chain to the end users.
The survey was conducted by the consulting company Franchising.BG, which maintains the Catalogue of Franchises in Bulgaria. The company assists entrepreneurs in buying, selling or creating a franchise. Franchising.BG organizes the only exhibition for a new business Franchising Expo which in 2012 will be held for the 4th time on 16-17 November 2012 in Hall 3 in the National Palace of Culture.
RESULTS
HOW MANY ARE THE FRANCHISORS IN BULGARIA?
The tendency for fast growth in the number of franchise companies continues and again for another year there is a serious growth in the number of foreign and Bulgarian franchisors developing business on the Bulgarian market. Currently there are 92 companies with operating franchise chains. Contrary to the previously held surveys which present all companies offering franchise, this year the results show only data about the franchise chains with operating franchise units.
Despite the penetration of international franchisors, 56% of all offered franchise business opportunities come from Bulgarian companies.
WHEN DO COMPANIES START OFFERING A FRANCHISE?
The Bulgarian franchisors start offering a franchise, on average, 5.73 years after being established. Few are the companies which have developed franchise business systems after their 10th year of operation.
WHEN CAN RETURN ON INVESTMENT BE EXPECTED?
With the different business models in the different sectors it varies from 2 months to 5 years and it is heavily dependent on the franchisee’s potential. It is safe to say that entrepreneurs with previous managerial and sales experience achieve the desired level of sales and profits much faster. The ROI period is significantly shorter with the low cost franchises in the field of services which do not require expenses for renovation, rent and employees’ salaries. Presented as a percentage the results are similar to those of the preceding survey and show that 48% of the franchisees return their investment in an year, 31% in two years, 21% within 3 and more years.
HOW MANY UNITS IN THE FORM OF FRANCHISES ARE THERE?
At the moment of conducting the survey the franchise chains’ units in Bulgaria were 3368, which is a 16% increase compared to the previous results. An interesting fact is that the franchisors’ own units constitute 16% of all operating units and the other 84% are owned by the franchisees.
WHAT IS THE PROFILE OF THE CANDIDATE FRANCHISEE?
There are several groups of people willing to buy franchise rights.
- Businessmen with business management experience, having certain capital to invest and desire to start a new business – this is the group of the “serious” entrepreneurs and the percentage of successful deals with them is very high.
- Entrepreneurs who want to start an additional business resort to franchising because this way they spare themselves the necessity to spend years in developing the business model.
- The candidates with no business experience are a group which wants to take advantage of the strength of the brand when starting a new business and of the offered business management know-how.
- A new group has started forming of candidates who turn to EU financing for starting own business. This is a niche which can be used by the low cost franchises so they can soon turn into national chains.
WHAT PART OF THE BUSINESS ACTIVE POPULATION KNOWS WHAT FRANCHISING IS?
Franchising grows more and more popular in Bulgaria but, unfortunately, not a big part of the business active entrepreneurs know about the matter and the way the franchising business model works. According to the survey 27% of the candidate franchisees know enough about it and do not need consultation on the specific matter. Franchisors share that about ¼ of the received inquiries comes from competent entrepreneurs, and the other ¾ mainly ask questions about the essence of franchising as a business model.
WHAT IS THE REASON TO BUY A FRANCHISE?
The main reasons for the fast development of the franchises are: the offering of a strong and familiar brand, on one hand, and the proven business model providing know-how and good practices, on the other hand. An important aspect is the constant support by the franchisor who in many cases is engaged with the trainings in keeping records and paperwork, choosing location, marketing and advertising support and others. The results are similar to those of the previous survey. 55% from the interviewees say they have bought a franchise because of the strong brand, 62% - because they want to be a part of a national chain, 75% actually buy the ready know-how for starting business. Each of the interviewees has given two of the possible answers.
WHICH ARE THE MOST COMMON CONFLICTS BETWEEN A FRANCHISOR AND A FRANCHISEE?
The conflict situations in a franchise chain are rare but still not non-existing. An important issue is franchisees to comply with the particular know how and good business practices. Common violations are changing the supplier of a given product and not meeting the quality requirements of the franchisor. 15% of the franchisors agree with the above said and the same percentage also points out not keeping the contractual clauses and mainly the financial part.
More and more franchisors realize the importance of finding the right partner than expanding the chain at all cost. The chain is as weak as its weakest part is. Attracting one wrong partner may influence the entire structure and harm the business and the established brand image.
WHICH ARE THE PARAMETERS OF THE “MEDIUM SIZED” FRANCHISE?
Franchise fee: the franchise fee is one time paid fee, paid upon opening a new unit and it includes staff training, specialized training of the manager and, in some cases, equipment, initial marketing events, etc. Currently the average amount of the initial franchise fee is 17 825lv. In the countries with a developed franchise culture the fee is twice higher. In the States, for example, the average initial franchise fee for opening a new unit is $40 000. There is a tendency among franchisors to have the initial training on their own expenses and their aim is to lower the investments needed for starting the business so it is more accessible for entrepreneurs.
Monthly royalties: every franchisor develops their own strategy for monthly deductions from the franchisee’s turnover. There are four major approaches for that – to deduce percentage from the turnover, a fixed sum, percentage from the turnover combined with a minimum fixed sum or not to take monthly fees but set an obligation to purchase the offered products only from the franchisor. The average amount of the monthly deductions is 6.2% from the monthly turnover.
Fee for a national advertising fund: when there is such a fee, usually it is between 2% and 4% depending on the sector; the average is 3,5% which is a decrease with 0.3% compared to 2010 and 0,7 % compared to 2009.
Overall investment for starting a franchise business: 38 454lv. The data from the survey conducted on the website of Franchising.bg shows that approximately 67% of the candidate-franchisees want to start a new business with an investment up to 10 000 lv., 23% up to 50 000lv., 4% over 50 000lv and 6% over 100 000lv. What makes an impression is the higher percentage preferring to make an investment over 100 000lv than an investment over 50 000lv.
Number of units: statistics shows that a franchisor in Bulgaria has 28.4 units on average, owing to big chains which form the large number of franchisees.
Average term of contract: 4.5 years
How much can the profit from the franchise business be: 74% of the franchise partners share the opinion that “The profit from my franchise is bigger than the sum needed for the allowance of my family” which is a return to the levels of 2009 after the slight decrease in 2010.
HOW DO NEW FRANCHISE SYSTEMS APPEAR?
The franchise systems can be imported or developed Bulgarian models of well-established companies. The invasion of the international chains grows and more and more foreign companies see development opportunities on out market. The cost for developing a franchise chain starts from 12 000lv. and in its full variant it can include: all necessary documents, trainings, administrative expenses, software, hiring and training a franchise manager, marketing the franchise, etc.
WHICH ARE THE GREATEST IMPEDIMENT AND THE GREATEST OPPORTUNITY FOR THE FRANCHISING DEVELOPMENT IN BULGARIA?
The biggest impediment continues to be the poor knowledge in Bulgaria about how the franchising model operates. The awareness grows but with a slow pace. 85% of the franchisors agree with that and as a solution they see the penetration of international chains whose popularity will show the advantages of the franchise partnership.
The opportunities for developing franchise business in Bulgaria are huge. Entire sectors offering goods and services are still not developed and have the potential for establishing national chains – optical stores, dry cleaning, nurseries, transportation and moving services and others.
CONCLUSIONS
- The franchising business is a proven working model and the opportunities it gives for starting a new business are a certain way to success using the brand’s strength.
- The low cost franchise concepts have potential for fast growth.
- The entrepreneurs’ awareness about the franchise opportunities grows but with a slow pace.
- There are market niches and entire sectors in which there is no operating franchise system and at the same time they have potential for development.
- The survey shows the rapid development of the franchise model in Bulgaria in the past 3 years which is a premise to expect its faster and faster popularization.
- The Bulgarian franchisors are competitive against the international companies and manage to position their brands and know how.
ABOUT FRANCHISING AROUND THE WORLD
Franchising is the most successful business model of the modern world. It allows an immediate start of an own business by becoming a part of a franchise chain and using its brand name and the developed know how of its proven business model.
Different franchises have different mechanisms but, in general, when you buy a franchise you start your own business with your firm, with your investment, at your own risk, but under the brand name of the franchisor and by following established procedures for successful business management.
This is the proven least risky way to start business. According to the studies of the International franchise association 82% of those who have started business by buying a franchise continue to be on the market after their fifth year of operation. Only by 20% of the independent new companies enjoy the same success. Forecasts show that in 2035 over 50 % of all products and services worldwide will be sold under the franchising principle.
