Models of Franchising Franchising in the Economic Crisis Franchising Specifics The Franchising Market in Southeastern Europe Randall Nelson Country Manager Curves Bulgaria and No + Vello Bulgaria

What is Franchising? Franchising is a method in which the owner of a business or service, known as the “franchisor”, offers the right to operate and manage his product & service to others, the “franchisees”, in return for a fee and ongoing royalty payments. Franchisor Know How Support Trademark Franchisee Initial Fee Monthly Royalty Infrastructure

Why is Franchising Effective? Franchising works as a network of interdependent business relationships that allows a number of people to share: 1. Brand Identification and recognition 2. A successful and proven business model. 3. A proven marketing and distribution system. 4. Access to training and operational support. 5. Access to a specific product, equipment & technology.

Overview of Franchising Modern franchising began in the 1950s after Dunkin Donuts, Kentucky Fried Chicken and McDonald’s are founded. Today franchising accounts for 50% of all retail sales in the United States. Prior to 1980 over 90% of franchises were from the United States. Now less than 50% of franchises are from the United States. A 1999 study by the United States Department of Commerce found that 97% of franchises were still operating after 5 years of opening. The same study found that 62% of independent businesses closed after 6 years of being opened. Today food remains the leader in the franchising sector with 60% market share. Service industries are having very strong growth in the franchising world.

Models of Franchising Master Franchise Area Developer Direct Franchising Joint Venture Partnerships Direct Licensing and Distribution

Master Franchise Model Master Franchisee Develops a Country or Region Master Franchisee can sub-franchise Master Franchisee and Franchisor establish franchise fees, royalty fees, training fees, etc. Master Franchisee is responsible for distribution of products, equipment, etc. FranchisorMaster FranchiseeSub-Franchisee

How are initial fees determined? Size of the territory or area Potential of the market Number of possible units Possible sub-franchise fees Cost for the initial training and support for sub- franchisees

Area Development Franchising Model Area Development Model is sometimes used in larger markets or geographical areas. Franchisor directly controls market through a local presence or office. Area of defined population. Option for sub-franchising. Controlled growth.

Area Development Model Franchisor Area Developer Corporate Units Franchisor Area Developer Sub- Franchisees

Unit Franchising Model Franchisor sells the franchise directly to franchisee. A regional office is responsible for operations and training. Franchisor Unit Franchisee

Joint Venture Partnerships The Joint Venture partnership is followed by large companies that do not franchise directly but expand internationally through partnerships with well developed companies. Starbucks has joint-venture partnerships in Europe, i.e. Grupo Vips in Spain and Portugal and Marinopoulos Group in Greece for development in the Balkans, Cyprus, Austria and Switzerland. Starbucks USA Marinopoulos Greece Starbucks Bulgaria

Direct Licensing & Distribution Common for clothing retailers that license a distributor or producer in a respective country to produce, distribute and market their clothing line. Retailer A Producer A

Franchising in the Global Economic Crisis The franchising sector has proved to be one of the most successful and dynamic sectors during the current crisis. Although there have been declines in the USA, emerging markets in Latin America, Asia, Africa and parts of Eastern Europe have experienced strong growth in the franchising market. According to Franchise Development Services (FDS) in the United Kingdom which publishes the Franchise Magazine and the Franchise Directory in the UK, there has been strong growth in the franchising market in the UK primarily from people who have been made redundant.

Franchising in the Global Economic Crisis Why is franchising succeeding in the global crisis? 1. Proven Business Model and Brand recognition. 2. Marketing program. 3. Many qualified people have lost their jobs and are looking for self-employment. 4. Many qualified specialists have been laid off and are looking for employment even with lower salary requirements. 5. A large amount of unoccupied commercial real estate gives a chance to find attractive offers for leases. 6. Buying a franchise allows consumers to open a business in a shorter period of time thus allowing faster diversification. 7. The competition is likely to be weakened in a recession and consumers are looking for a brand and concept they can trust. 8. Franchises selling low cost products and services are seeing strong growth in the current economic crisis. 9. Sectors like food, health and beauty are among the least affected.

Franchising in the Global Economic Crisis Challenges: 1. Access to credit. 2. High unemployment in many markets affects demand. 3. Consumers in some markets have reduced spending. 4. Though the safest way of opening a business franchising also has risks.

Franchising Contract Duration All franchise contracts have a period of validity. The average industry contract is 5 to 10 years. Some companies have contracts that are between 15 and 20 years. Most contracts are renewable after expiration. Franchisors and franchisees discuss the operations and management of the franchise before deciding to renew.

Applying to become a Franchisee What do Franchisors look for in a franchisee? 1. Business experience and entrepreneurship. 2. Financial background. 3. Commitment. 4. Belief in the concept.

Franchising in Southeastern Europe Southeastern Europe is a very dynamic market for franchising. Greece is one of the leading markets for franchising in Europe with multiple international franchisors present in the market. The accession of Bulgaria and Romania to the European Union in 2007 has made both countries very attractive for international franchisors.

Franchising in Southeastern Europe What do franchisors look for before expanding to new areas? 1. Political Stability: With Bulgaria and Romania in the EU and NATO and the expected entry of Croatia, Macedonia, Serbia and Montenegro into the EU, international franchisors feel secure. 2. Economic Development: Although income levels in both Bulgaria and Romania and the Western Balkans remains below that of Western and Central Europe disposable income has grown strongly in the last 5 years creating a new and dynamic consumer base. 3. Consumer Attitudes and Market conditions: Consumers in Southeastern Europe generally place important value in brands and although there are a number of international franchisors present in the market there is still significant market potential.

Franchising in Southeastern Europe American franchises present in the market: Fast food: Coffee: Real Estate:

Franchising in Southeastern Europe Fitness: Others:

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