Development of franchising in kazakhstan: challenges and issues
Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011
Author: Kaziyeva Raissa, Kazakh Economic University in honor of T. Ryskulov, Kazakhstan
Buying a franchise is a popular choice for
starting a business because the assumption is that the franchisor is selling
business success; he or she has created a successful business, and therefore,
the franchise business you buy will automatically be successful, too.
This is not necessarily so.
Although franchising is a relatively new
business concept in Kazakhstan, entrepreneurs are becoming increasingly
interested in pursuing this business model . In the past several years,
spending and consumption patterns in Kazakhstan have begun to resemble those of
the West, creating demand for name brands and recognizable retail stores. Additionally,
Kazakhstani companies have accumulated financial resources that, combined with
a lack of available investment instruments, are stimulating interest in
franchising as an investment tool.
There is no single registration agency for
franchising, and consequently there is no reliable statistics on franchising in
Kazakhstan. Industry specialists indicate that since 1998 to 2004 the number
of franchises in Kazakhstan has grown to approximately 150, with about 1,150
franchising outlets. The Kazakhstan Franchising Agency states the total number
of all franchises and brands operating under a franchising or similar agreement
(January 2010) are 350 .
Given transparency issues and lack of
statistical information in the market, it is difficult to define the combined
sales turnover of franchises operating in Kazakhstan. Based on industry
specialists’ best estimates, the approximate turnover is in the range of $550
million. On average, each franchisor has 2-3 franchisees in Kazakhstan.
Franchising in Kazakhstan
Most franchises operate in the following
sectors: retail, business services (especially accounting services), consumer
services (hairdressing salons, cleaning, dry cleaning), mass media, and fast
food. About 60% of all franchises are in Almaty, 30% in the country’s capital
Astana, and the rest are scattered over oil industry related cities in the west
of Kazakhstan .
As noted by Jan Bezemer (a board member
of the Netherlands Franchise Association (1998-2007) and initiator of and
teacher at the Franchise University Nederland, a board member since 2000 of a
large franchise company) cooperation is a word that is easier to pronounce than to give
substance. In the business practice we find cooperation especially as so-called
“strategic forms of cooperation”. Companies combine forces in large investments
in infrastructural projects, development of expensive oilfields, spreading of
risk in projects etc. But it also happens on a smaller scale . Franchisors
cooperate with dozens and sometimes hundreds of entrepreneurs who as
franchisees use the brand name, marketing, economies of scale, know how and
experience of the parent company. This is also a strategic form of cooperation
because a franchise agreement usually has a first term of five years or more.
All units of the franchise organisation are clearly recognizable as belonging
to one, big, strongly managed organisation with a clear concept. A unity on the
outside with diversity on the inside with lots of different types of entrepreneurs
all of whom adopted and adapted to the centrally managed concept.
The sustainability of any socio-economic system, as we can see from the numerous
researches and studies, is based not so much on formalization
of its structure, quantity or quality
of its components, but on the nature and characteristics of the
internal links among them.
The variety and elasticity of these
links ("invisible links") as well as their
adequacy to those circumstances took place within the external
business environment can make the system (including
the franchising one) to be the stable
enough even in the conditions of the crisis
Classification of the franchise business structures with the
breakdown on a character of interlinks between the systems
components may be given as follows.
Fig. 1. Franchising
A – commercial-format
B – business-format;
C – hollow format.
Socio-economic systems of various formats which are represented on
Figure 1 have the following specific features:
- General participation of its Members;
- Common initiative;
- General number of common practices, formalized and unformalized
rules of conduct and knowledge.
In general it is the content of meso-system: internal content and
nature of relationships including the interconnection between the participants
of franchising, organizational and industrial relations.
In the first case (Figure 1 – “A”) the meso - system of
organizational relationships is mainly based on the formalized structure –
Distributing Agreement. The relationships between the Franchisor and Franchisee
are not seemed to be strong enough (see the dotted lines).
In the second case - "B" - (business format) -
formalization of the structure of relations is based on attraction of the
Franchisees into the full cycle of economic activity of the Company -
In the case of the “hollow-type” franchising (Figure 1 – “C”) - the
Franchisor’s product/services are the organizational and managerial relations
it provides with involvement into the system (network) of those
participants-franchisees from the production and sales sector, including the
infrastructure required and etc.
The “hollow firm” - is not a classic but extremely promising
franchising scheme of relationships. Such a firm is operating using its own
brand, marketing service and sales system, but it produces nothing. Absence of
the production base makes the hollow-type firm to be very mobile, i.e. it can
easily change the markets or work on several markets simultaneously.
Hollow-type firms are very important in creating new markets as well as on
those markets with the fast-changing market conditions.
The particular example of variation of the hollow-type
firm-franchisor is the Kazakh firm “ShBS”. “ShBS” has developed a unique format
of the franchise – “workplace” – “Showcase”. The showcase is designated for
promotion and sales (both on Kazakhstani and foreign markets) of high-tech
health care products manufactured by the South Korean Producer .
Franchising systems have a very large energy and information sense
mainly because they are based on the direct share with traditions, knowledge
and technology. As a result we can use not only the stereotypes both of
everyday and labor conduct, but also the “ancient traditions” which are
organically interwoven with the reality. The history is full of business ideas.
And among the potential links to these ideas we have the ethnic Kazakhs going
back to their historic homeland.
It is known that in XVI century the economy of Kazakhs was mainly
based on various types of crafts the majority of which was connected with
handling and processing the stock-breeding products. At all times the Kazakhs
were engaged both in leather and felt fabricating process as well as in
painting thereof in different colors using the techniques of pressing,
applications and ornamental stitching. According to Ibn Ruzbihan’s words, the
Kazakhs had produced different multi-colored felted fabrics with unusual ornaments
and very elegant and beautiful raw-edge belts. The Ottoman author of XVI
century, Seifi Chelebi, also had confirmed that the Kazakhs achieved a rather
high level in their domestic crafts. “Their (Kazakhs) caftans are made of the
basil and painted in different colors that make them look like satin. They are
water-and-moisture-proof mainly due to the properties of some herbs growing
there, which are used for treatment of the leather” .
“Well-forgotten past” in the modern technological format is able to
give an existence of many business ideas, successful promotion of which is
possible, including within the frameworks of the hollow-type franchising.
Informal communicative relations arising between the participants
are one of the prerequisites of franchising relationships stability (in all
Without trust of the stakeholders the business would not survive,
which in ex- Soviet countries is very remarkable because individuals are trying
to create successful small business in a social climate with the lack of trust
and other elements of social capital and civil society. It is a known fact that
communities and societies with high levels of social capital and trust,
compared to those with low levels of social capital, are much likely to be
open, fluid, creative, effective and efficient in economic and community
Kazakhstani entrepreneurs fully appreciate the role of trust in
their efforts to create sustainable enterprises. Trust creation has a two-fold
impact. First, it is crucial for the establishment of sustainable economic (and
social) relationships. Second, trust creation, leading to meaningful
associations with fellow human beings, is a natural phenomenon and necessary
for total individual fulfillment.
As noted by experts, one of the major mistakes of the franchisors is
that having sold a franchise, they do not consider it necessary to continuously
monitor the development of established franchising system .
In our view, the following aspects are basically important.
First, definitions “to monitor” and “to control” mean, in this case,
not so much supervision of franchisee as adjustment in accordance with market
а) and actions of franchisor itself (its policy);
б) and actions of franchisee.
In other words, purpose of monitoring carried out by franchiser is
adequate response from all participants (both parties) of franchising relations
to changes in the market.
Secondly, the franchiser shall remember that users accept each
franchisee-entity as a part, a link of a whole circuit; they are combined by
united trademark. And if only one of the franchisee makes a miscount in its
activity – it will be able to reflect negatively on the whole franchising
system (“The chain is not stronger than its weakest link”).
In conditions of financial and economic crisis contradictions
typical for franchising relations become inevitably sharp. One of the problems
is to provide confidentiality of the commercial secret, which content is the
franchiser’s intellectual property. As required by Civil Code of the Republic
of Kazakhstan and Law of RK “About complex entrepreneur license (franchising)”,
it is assumed to transfer the right to use by the franchisee the trade name and
other franchiser’s intellectual properties.
The information both (i) protected by patents of invention, useful
models and industrial designs, and (ii) know-how protected within the
frameworks of commercial secret protection, shall be transferred.
In this case, the following is basically important. “Know-how”
transferred on the right of use loses its status as it cannot be recognized as
“know-how” information to which there is free (though lawfully) access for
third persons. Indeed, experience shows that although the franchising agreement
prohibits the franchisee to disclose such information, it still happens.
Does it mean that the franchiser-owner loses the right to protect
the confidentiality of certain information (“know-how”) and take steps to
protect it? No, on the contrary, this right must be active, since it serves as
one of the motives (in particular, for the franchisee) for long-term business
partnership with the franchiser-company.
It’s other matter that the protected “know-how” by the franchiser
should not restrict the direct business activities of the franchisee. Here the
secrets between the partners cannot be, because it reduces the effectiveness of
the entire system.
Then what is the franchiser’s intellectual power? The franchiser’s
“know-how” should be identified, secured and enclosed, mainly, in the field of
organizational and managerial mechanism, providing the support and the
progressive development of the franchising system as a whole. How, what
techniques, methods, tools and methodology used by the franchiser to maintain
the stability and efficiency of the system - is its “kitchen”, and the things
are created here that attract more and more new franchisees into the system.
An important recommendation for franchisers is the urgency of
careful approach to selection of entrepreneurs - the potential franchisees.
It should be noted that the risks of participants’ misconduct in the
franchising relationships correspond to the international business community.
Considering the age of “start up” of Kazakhstan franchising, it’s especially
urgent the problem, how the franchisers can protect their business against
unfair attacks from franchisees, and how, in its turn, to prevent the
One solution - the use of pre-testing techniques for partners with
respect to their readiness and adjustment for effective interaction. Such
1) to minimize the subjectivity of the respondents’ self-rating;
2) to identify the system of values, allowing to carry out a
preliminary assessment of the compatibility of the project participants;
3) to make a preliminary assessment of the project participants’
4) to identify the most popular training areas.
There is another serious contradiction, enclosed in the franchising
nature. On the one hand, franchisees, members of the same system, are partners
interested in developing of this system as a whole. On the other hand, they are
supplying to the market (often working at a local market) the same goods /
Creation of such mechanism of interaction between the franchisee
within the system, who is able to provide the synergy of cooperation,
partnership, is especially valuable in the crisis conditions. This is the
franchiser’s mission, and it’s organizational and management skills, working
for the capitalization of the brand, can be disclosed here.
Due to problems of overcoming the financial crisis it is important
to pay attention to another aspect. Reproduction of business structures in the
format, called as franchising, has a great energy-informative sense in the
context of the economic activity evolution.
Thanks to the reproduction process we can see the accumulation of
innovative energy into the business environment and its further promotion. It
is known that it is the basis for shifting the equilibrium being special for
crisis situations and going on trajectory of the economic growth. The transfer
of organizational and managerial techniques is not impeding, but on the
contrary, stimulating the innovative activities of Franchisees (in comparison
with the transfer of other technologies requiring the “retranslation” skills of
the receiving party only).
Franchising – is a large-scale coaching in the framework of real
(“field”) business conditions of this or that country.
Business reproduction in the franchising format – it is not a
“cloning” process: country factors (legislation, consumer preferences, etc.)
require from the participants to have the same business skills – evaluation of
business-idea risks; its development taking into account the special factors of
both local and national market, etc. Therefore, the franchising being the
coaching – is the process of simultaneous training of all the
parties-participants or members.
1. “Franchising in Kazakhstan” written by The U.S. Commercial
Service (April 2009) http://www.agentstvo.kz/
2. Kazakh Franchising Agency «Franchising Agency – NAE» Ltd.
3. http://www.agentstvo.kz/ press- center/ bulletin/
4. Jan Bezemer “Cooperation in franchising really works” - Arnhem (the Netherlands) in cooperation with Agency for Franchising, Almaty - http://www.
agentstvo. kz/ press-center/
5. SME. Proposals to Stimulate Development in Kazakhstan. Edited by Kaziyeva R.K., Sidelnikov V.V. - Almaty: F. Ebert Foundation in Kazakhstan, 2008, p. 11
6. Klyashtorny S.G., Sultanov T.I. Kazakhstan. The Book of
Chronicles of three millenniums. – Alma-Ata, Rauan, 1992, p. 337-339
7. Franchising Actual Problems in conditions of the Global Financial
Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011