Status of the Franchising Market in Bulgaria 2010

Survey conducted in the period August - October 2010 by Franchising.BG

About the Survey

We present you the second survey on the franchising market conducted by Franchising.BG. Its aim is to establish the status of franchising in Bulgaria, the present-day challenges it faces, the affect of the economic recession on it, the perspectives and expectations of entrepreneurs about the future of franchising.

The results are based on the information received through completing questionnaires and conducting structural interviews with 69 franchisors and 241 franchisees. The respondents operate in sectors which offer opportunities for starting a franchise business in Bulgaria: restaurants, real estate, retail, services for citizens or businesses, etc. The survey includes data from companies with at least 3 operating franchise units. Additionally, accounting and statistic information has been used.

The ways in which franchising expands are various, however, traditionally the survey concentrates only on the franchise systems which give opportunities for starting new small and medium sized business. The task of the survey is to determine the potential of companies to develop by selling their franchise and the opportunities of small and medium entrepreneurs to start business by buying a franchise. Hence, in the survey have not been included franchise businesses (financial institutions, fashion stores, media projects, fast food restaurants), which do not give other entrepreneurs the opportunity to start a franchise business, although they themselves have started by buying franchise rights. This could be the case with two main cases: first – if an entrepreneur has obtained the regional franchise for Bulgaria then all units which are opened in the country are his/her ownership. And second – for some businesses it is enough to open only one unit in a given country (for example, when it comes to a franchise of a magazine).

As in the survey from 2009, when preparing the questionnaires the difference between business with end-users and the very development and sale of the concept of this business under the form of a franchise is taken into account. The first case is about the business of separate entrepreneurs who have bought franchise and open a store, restaurant or other franchise unit. And the second case – about successful companies which start selling other entrepreneurs the right to use their brand name and proved business model.

The survey was conducted in the period 16 August – 29 October 2010 by the consulting company Franchising.BG. The aim of the company is to popularize and develop franchising in Bulgaria, to consult and create franchise systems and to mediate in selling and buying franchises. Among the projects of Franchising.BG is the exhibition Franchising Expo 2010, which will be held on 26-27 November in Hall 3 in the National Palace of Culture.

Results

How Many are the Franchisors in Bulgaria?

The boom of the franchising market, which has been observed for the past years, continues in 2010 as well. Since the end of 2007 up till present day the number of companies offering franchise in Bulgaria has multiplied four times. The survey from 2009 forecasted that by the end of 2010 138 companies would offer franchise in Bulgaria. Those expectations have been exceeded and presently 198 franchises offer independent entrepreneurs the opportunity to start their own business by buying a franchise. 64% of these are Bulgarian companies and 72% of them have been on the market for over 5 years.

How Many Vacant Job Positions do Franchise Companies Open?

Since the beginning of the year up till 29 October, despite the economic recession over 2300 new vacant job positions were opened and currently over 9500 employees work in franchising units in the country.

When Can Return on Investment be Expected After Starting a Franchise Business?

It is strictly individual for every business and it depends mainly on the capabilities, motivation and efforts of the franchisee. As a result of the economic recession the average period for return on investment in starting own business by buying a franchise has increased from 17 to 26 months. 64% of the interviewees claim that the investment in their franchises returns by the end of the first year. With 29% of the franchises the made investment returns for a period up to 24 months and with 7 % - for a period up to 3 years or more.

How Many Units have been Opened Upon Buying a Franchise?

According to franchisors’ data 2954 franchise units are expected to operate in Bulgaria in the end of 2010. Traditionally, the greatest number of franchises is in the food sector (32). In comparison with 2009 franchises are now offered in 14 new sectors.

Who Looks for a Franchise?

Most of the candidates are operating entrepreneurs. They want to redirect to a new business or look for an additional business. Employees and investors are still relatively less active in looking for franchises. The development of those two groups’ interest in franchising (current employees and large scale investors) presupposes the greater development of franchise chains in Bulgaria.

Why do Entrepreneurs Apply for a Franchise Instead of Starting Their Own Business?

When answering the question “Please give us the two main reasons why you have decided to buy a franchise”, 56% say that they do it because of the strong brand name, 46% - to be part of a national or regional chain (an interesting fact is that in the preceding survey this answer received 59%), 78% - because they will receive ready-made technology and training, 7% - because of the possibility to buy goods, materials, adverts and others on preferential prices, 13% have given other answers.

How Many of the Franchise Candidates and of the Business Active Population in the Country are Familiar with the Franchising Principles?

Franchisors share their opinion that only 37% of the candidate franchisees who contact them are familiar with the principles of the franchising model. Yet this is a step ahead in comparison with 2009, when this percentage was 28%. Franchisors estimate that only a quarter of the active business population knows what franchise actually is.

Why do Franchisees Drop Out of Franchise Systems?

For the period 1 January – 29 October 2010 7,6 % from the franchisees dropped out of the business. Like last year, the main reason for closing the units is the insufficient available capital to resist the market stress. In contrast with the previous survey, however, when 63% from the interviewees have given high rent expenses as a reason for dropping out of the franchise system, in 2010, according to 68%, the main problem is the decreased buying power of the clients. 21% think they have not studied the business well before entering into it. 18% from those who have dropped out think that the franchisor has not provided enough support. “Other reasons” (family, health, a competitor appearing nearby, etc.) has been given by 13%. The sum of the percentage is over 100 as the interviewees have given more than one result.

How does the Economic Recession Affect the Business of Franchise Chains?

For natural reasons the procyclical sectors of the economy are affected by the crisis in a greater extend. According to the interviewees, depending on the sector, the decrease in the turnover is between 10% and 35% on average. (In comparison, last year the stress was more serious and some sectors registered decrease up to 70%).

67% of the interviewees think the decrease registered by their companies is less than the one registered by independent entrepreneurs of the same sector who do not operate as a franchise. They believe the main reason for that is the higher and more constant quality of the services offered by franchises as well as the fact that consumers trust more the more popular franchise brands. According to 79% of the interviewees once the recession is over, those operating as a franchise will have greater market share owing to the fact that part of the independent entrepreneurs will have dropped out of the market.

The tendency of entrepreneurs redirecting from the affected by the crisis sectors to franchising businesses continues to grow. They have capital and business experience but they do not have the necessary know-how, which usually takes years to develop. The main reason why franchising is among the most preferred by them variants is that it offers the ready-made technology for operating the business and there are much shorter terms and fewer risks.

Conversion franchise is still not very popular in Bulgaria. We talk about conversion franchise when an existing business joins a franchise system and agrees to operate under the franchise’s brand name, to follow its rules and pay royalties.

The economic recession facilitates the recruitment of employees for the franchise chains. This opinion is shared by 84% of the interviewees. The average number of candidates who apply for low qualified job has grown four times in comparison with 2008.

Which are the Most Common Reasons for a Conflict Between a Franchisor and a Franchisee?

As a main reason for misunderstanding franchisors give the insufficient preciseness in following the work standards in the franchise system (22%). 82% of the franchisors claim that for the last 3 years they have become much more strict in selecting franchisees. This experience has made 56% of the franchisors to include additional texts and requirements for financial stability.

Which are the Parameters of the “Medium Sized” Franchise?

Franchise fee: the average fee collected by franchisors for starting franchise business is 4200lv. In comparison, it is around $40 000 in the USA. In 2009 the initial franchise fee was 5900 lv.; the decrease is explained with the fact that for franchisors it is much more important to increase the members participating in their chains than to gain income from initial fees.

Monthly royalties: the companies who collect such fees set them about 4,7% of the turnover on average. Some franchisors fix minimal fee (for example: 5% of the turnover but no less than 500 lv. per month), with others (usually with the forms of distributional franchise) there are no such fees but the franchisors are obliged to buy the offered by them goods only from their franchisor.

Fee for national advertising fund: 3,8% - when such fee is collected. Here a decrease in the received in 2009 result of 4,2% is observed again.

Overall investment in starting franchise business: 30 600lv.

Number of units: the franchise chains in Bulgaria have 13,4 units on average.

Average term of contract: 4,8 years

How much can the profit from this franchise business be: 68% of the franchisees agree with the statement: “The profit from my franchise is bigger than the sum needed for the allowance of my family”.

How do New Franchise Systems Appear?

The average sum which the new Bulgarian franchisors invest in developing a new franchise system: operations manual, contract, branding, software, tests for candidates, training of a franchise manager, popularization of the franchise and other administrative expenses, is 51 000lv.

Which are the Greatest Impediment and the Greatest Opportunity of the Franchising Development in Bulgaria?

For 89% of the franchisors the biggest impediment of the development of franchising in Bulgaria is the poor knowledge about the advantages of the business model. Entrepreneurs as a whole do not have not only knowledge, but also experience which would help them recognize franchising as “their” business. As the biggest opportunity for the development of franchising is still considered the presence of a great number of undeveloped franchise niches – mainly in the field of services and retail where whole branches with no offered franchise exist (contrary to Bulgaria, in the USA you can start own business in categories like: dry cleaning, house repairs, nurseries, accounting houses, etc.).

How Many Percent will the Share of Sales Made by Franchise Businesses in the Bulgarian Economy Increase in the Next 5?

According to the expectations of the managers of franchise companies, the share of sales made by franchises in the next 5 years will increase enormously, with views varying greatly – mainly in the interval between 200% and 400%.

Conclusions

• Franchising is going through a rapid development but its real boom in Bulgaria is yet to come.
• In many traditional for franchising sectors no franchise systems have been offered yet and there is a potential for serious future development in them.
• The independent entrepreneurs see in their joining a franchise system an opportunity to survive or to redirect to a new business.
• According to entrepreneurs franchising offers lower risk and higher security and is attractive for the fact that it offers proved business models and recognized brand names.
• Franchise companies in Bulgaria still face the poor knowledge of the Bulgarian business about franchising.

About Franchising Around the World

Franchising is the most successful business model of the modern world. It allows everyone to start immediately an own business by becoming a part of a franchise chain and using its brand name and the developed know how of its proved business model.

The mechanisms of different franchises are various but, in general, when buying 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 operating a successful business.

This is the proved least risky way for starting 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 the fifth year. The same success is enjoyed only by 20% of the independent new companies. The forecast is that in 2035 over 50 % of all products and services worldwide will be sold under the franchising principle.

You can download this article in text file by clicking here.

Answers of the most frequently asked questions about franchising you can find here
More about the history and evolution of franchising you can learn here
The full text of the survey is published here