A survey conducted by FRANCHISING.BG in July – September 2009
Contents
About the survey
Main questions and results:
- How many new franchise units have been opened?
- How many new jobs did franchise companies create?
- When can return on investment be expected after starting a franchise business?
- How does the economic recession affect franchise chains?
- Who looks to buy a franchise?
- How many of the candidates and of the business active people in the country are familiar with the franchising basics?
- Why do entrepreneurs prefer buying a franchise instead of establishing their own business?
- What are the parameters of a “average” franchise?
- Which are the most common conflicts between a franchisor and a franchisee?
- How do new franchise systems appear?
- How will the share of sales made by franchise businesses increase in the next 5 years?
- Which are the greatest problem and the greatest opportunity of franchising development in Bulgaria?
Conclusions
About franchising around the world
About the Survey
This is the first survey on the franchising market, conducted in Bulgaria. Its aim is to determine how well-developed franchising in Bulgaria is, what challenges it meets, how the economic recession affects it, what the perspectives and the expectations of the entrepreneurs about the future of franchising are.
The information in the survey is gathered through questionnaires and structural interviews with 34 franchisors and 126 franchisees: restaurants, real estate, retail, services for citizens or businesses, etc. The survey includes data from companies which have at least 2 operating franchise units. Additionally, accounting and statistic information has been used.
The present survey focuses on franchise systems which offer opportunities for establishing a new small- and medium-sized business. Its aim is to determine the opportunities of small- and medium-sized entrepreneurs to start a business by buying a franchise. Hence, the survey does not cover franchise businesses (media projects, financial institutions, fashion stores, fast-food restaurants), which started by obtaining franchise rights but do not offer to other entrepreneurs the opportunity to start a franchise business. The main reasons for this are two. First, if an entrepreneur has obtained the regional franchise for Bulgaria, then all units opened in the country are owned by them. Second, some businesses do not require opening units in different cities (i.e. if one buys the franchise for to publishing a magazine, they need one editorial office).
The survey separates sales to consumers of goods and services from development and sale of the business concept itself. The first case is about the business of separate entrepreneurs who have bought a franchise and opened a shop, a restaurant or other franchise units. The second case - about successful companies which start granting the right to use their brand name and proven business model to other entrepreneurs.
The survey was conducted during the period July, 10 – September, 15 2009 by FRANCHISING.BG. The aim of the company is to popularize and develop franchising in Bulgaria by consulting and creating franchise systems, and by mediating in the sale and purchase of franchises. Among the projects of FRANCHISING.BG, is Franchising Expo which takes place in the last week of November in Sheraton Hotel, Sofia.
Results
For the past two years the franchising market in Bulgaria has been booming. Since the end of 2007 the number of companies offering franchise in Bulgaria has tripled. Yet, by the end of 2008 their number was no more than 60. Since the beginning of 2009 over 20 new franchise systems have started operating in Bulgaria. By 1 of July 2009 over 80 offer their franchise rights for starting small businesses. 62% of these are Bulgarian companies and 68% of them have been on the market for more than 5 years.
How many units have been opened upon buying a franchise?
By the end of 2007 the number of trading sites operating as franchises had been 776. New 702 units were opened in 2008, which constitutes an increase of 90% in only a year. Franchisors expect that trading sites in the country operating as franchises will reach 2156 by the end of 2009 and those will be over 2900 by the end of 2010.
The highest number of franchising systems (over 15) operates in the fast food and restaurant business. 7 companies offer franchise for starting a business in the real estate sector.
For the period 1 January – 1 September 2009, 8% of the franchisees dropped out of the business. The main reason for closing sites down is the insufficient capital available to resist the present economic conditions. As a reason for dropping out of the franchise systems 63% of interviewees give the high rental costs which, after the setback of the economic environment in Bulgaria, make business unprofitable. According to 49% the main reason for that is the decreased purchasing power of customers. 19% believe they did not research the business well before joining it. Only 16% of those who have dropped out think that franchisors did not provide enough support, and 12% give other reasons (family, health issues, appearance of a competitor nearby, etc.) The sum of the percentage is over 100 as interviewees have given more than one answer.
How many new jobs do franchise companies create?
In 2008, the franchise units created 2370 new jobs. Regardless of the economic recession over 3300 new positions were opened since the beginning of this year until 1 Sep. Presently, over 8000 employees are working in franchising businesses throughout the country.
When can return on investment be expected?
It is strictly individual for each business and depends on the skills and efforts of the franchisee. Since 2007 the average period for return on investment made upon starting a franchise business has been 15 months.
73% of the interviewees claim that the investment in their franchise returns by the end of the first year. For 24 % of the franchises the investment is returned in 24 months, and for 3% - in 3 years.
How does the economic recession affect franchise chains?
Different market sectors are affected differently by the recession. The interviewees share that depending on the sector the decline in turnovers is between 10 % and 70%. Among the most affected businesses are real estate and other sectors related to buying on credit. The least affected are franchises in the fast food business. 63% of the interviewees think that their companies’ decline is less than that of the independent entrepreneurs in the respective sector, which do not operate as franchisees. As a main reason for that they point out the fact that franchise companies work under a more popular brand name and offer products of a more constant quality. According to 82% of the interviewees, when the recession is over, regardless of the decreased sales, those operating as franchisees will have higher market share since some of the independent entrepreneurs will have dropped out of the market.
According to franchisors due to the restructuring in the economy many entrepreneurs from sectors affected by the crisis are searching for new opportunities. They have capital and business experience, but they lack the necessary know-how. In this case franchising is among the most preferred options because it offers proved business model, takes shorter time start the enterprise and is less risky.
Because of the crisis a number of small entrepreneurs face the dilemma - whether to fight the economic conditions till full exhaustion of their financial resources or to join a big chain. Thus, the so-called conversion franchise is practiced more and more often in Bulgaria. This is an opportunity for an already existing business to join a franchise system by agreeing to operate under its name, in accordance with its policies, and to pay fees for that. The interviewees point out the lack of crediting as a main problem; it cuts the financing of the enterprises and decreases clients’ buying power. The percentage varies in different sectors, however, an average of 73% of the interviewed agree that “The crisis will be over when banks start crediting again.”
The economic crisis has a positive impact on the possibility to provide employees for the fast developing franchise structures. This opinion is shared by 82%. The average number of candidates for low-qualified positions has almost tripled in comparison with the same period of the previous year.
Who looks to buy a franchise?
An interesting fact is that the greater part of candidates are operating entrepreneurs who either want to redirect to an entirely new business or aim to develop a franchise in addition to an existing enterprise. On one hand, this is a result of the economic crisis, on the other – it is a reflection of the fact that employees and investors are not familiar enough with franchising. In the USA a typical franchise candidate is an employee who wants to be “his own boss”. There, additionally, it is typical for investors to buy regional and master franchises for large territories or whole countries. Generating an interest in franchising in these two groups (employees and large-scale investors) presupposes an even stronger development of franchise chains in Bulgaria.
Franchisors share that only 28% of the candidates for their franchise are familiar with the principles of the business model. Despite the advantages of franchising, the society is poorly informed about it and according to the franchisors’ estimate only 19% of the Bulgarians running a business know what franchise actually is.
Why do entrepreneurs prefer buying a franchise instead of establishing their own business?
When asked to give the two main reasons to buy a franchise, 52% of the candidates say they do it because of the strength of the established brand, 59% - because they want to be a part of a national or regional chain, 72% - because they will receive training and proved business model, 9% - because of the opportunity to buy goods, supplies, advertising, etc. at preferential prices and 8 % give other reasons. What is interesting here is that the franchisees in Bulgaria believe more in “security of the group” than in the strength of the brand name.
What are the parameters of the “average” franchise?
- Fee: the average fee required by franchisors for starting a franchise business is 2970 EUR. In comparison, it is $40 000 in the USA.
- Royalties: for the companies which require such fees – 4.9% of the turnover. Some franchisors set a minimum fee (i.e. 5% of the turnover but no less than BGN 500 per month). Third franchisors (usually distribution franchises) have no such fees, however, franchisees are obligated to buy the offered goods only from their franchisor.
- National advertising fund fee: 4.2% - when such fee is required.
- Overall investment to start a franchising business: BGN 29 500 (15 000 EUR).
- Number of units: the franchise chains in Bulgaria have 11 units on average.
- Average contract duration: 5 years.
- Profits from franchising business: results vary immensely and depend on many factors: location, size of business, competitors’ activity, how well developed the business is, personal efforts of the franchisee, etc. As a whole 73% of the franchisees agree that “The profit from my franchise is bigger than the sum needed for the allowance of my family.”
Which are the most common conflicts between a franchisor and a franchisee?
Conflicts arising in franchising chains are rare. As main reasons for misunderstandings, franchisors give: „not observing the work standards in the franchise system” (19%) and “violation of contract agreement” (13%).
According to 76% of the franchisors their experience in the past two years has made them more demanding when choosing a franchisee and observe if the latter understands the procedures required by the business model. This experience has made 46% of the franchisors to set higher requirements for franchise candidates and companies have introduced additional tests or requirements for financial stability.
How do new franchise systems appear?
36% of the new franchises which have started operating in the country in the past 12 months are “imported” international chains and the remaining 64% are Bulgarian companies that developed their business by offering franchise. The average sum the new Bulgarian franchisors invest in developing a new franchise system – operational manual, contract, branding, software, tests for candidates, training of a franchise manager, popularizing the franchise and other administration costs - is BGN 48 000 (24 000 ЕUR).
How will the share of sales made by franchise businesses increase in the next 5 years?
Franchise managers are positive that the share of sales made by franchise companies in the next 5 years will increase enormously, the views varying greatly from 200% to 500%.
Which are the greatest problem and the greatest opportunity of franchising development in Bulgaria?
Practically unanimously – 92% of the franchisors define the lack of information as the greatest problem for franchising development in Bulgaria. Both entrepreneurs and the general public are unfamiliar with this model and the advantages it offers. What is given as the greatest opportunity for franchise development is the presence of an exclusively large number of undeveloped franchise niches. Especially in the fields of services and retail there are whole sectors in which not a single franchise business is being offered (i.e. unlike Bulgaria, in the USA you can start an independent small or medium sized business in different categories such as: auto repair shops, dry cleaning services, house repair services, accounting companies, etc.).
Conclusions
- In the conditions of economic recession franchise systems are more stable due to their more recognizable brand names and the constant quality they offer. Thus, in joining a franchise chain independent entrepreneurs see an opportunity to survive the crisis.
- The interest in reliable business models and proven brands is increasing due to the lower level of risk they involve.
- The main problem which franchise companies face in Bulgaria is the lack of information about franchising basics.
- Despite its steady growth, the real boom of franchising business in Bulgaria is still to happen.
- There are many sectors with no operating franchise system and they have the potential for great development in the future.
About Franchising Around the World
Franchising is the most successful business model of the modern world. It allows everyone to start their own business immediately by joining a franchise chain and using its brand name and the developed know-how of its proven business model.
It is a unique form of goods and service distribution, which only in the USA generates sales for over $1.5 trillion annually. Franchising has the ability to capture greater market share than standard business. An interesting fact is that in the USA only 8% of the retail businesses are franchises, but they generate over 40% of all retail sales in the country. According to the latest data of the International Franchise Association only in the USA there are over 2 500 operating franchises and 909 253 companies offer or have bought a franchise. They employ over 11 000 000 people which is more than 8% of all people employed in the private sector.
The individual franchises are different; however, in general, when buying a franchise you start your own business, with your own company, with your own investment, at your own risk but under the trading mark of the franchisor and by following the established procedures for running a successful business.
It has been proved this is the least risky way to start a business. The International Franchise Association’s research shows that 82% of the entrepreneurs who have started a business by buying a franchise are still on the market after 5th year of operation. Only 20% of the independent new companies enjoy the same success. The forecast is that in 2035 over 50% of all products and services in the world will be offered by franchises.
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