Development of franchising in kazakhstan: challenges and issues

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 [1]. 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 [2].

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.

Table 1. 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 [2].

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 [3]. 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 turbulence.

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 Formats:

A – commercial-format “products/trade mark”;

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 - Franchisor.

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 [4].

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” [5].

“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 presented formats).

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 endeavors.

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 [6].

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 situation:

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 franchisees’ risks.

One solution - the use of pre-testing techniques for partners with respect to their readiness and adjustment for effective interaction. Such techniques allow:

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’ trainability potential;

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 / services.

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.

BIBLIOGRAPHY

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. http://www.agentstvo. kz/

3. http://www.agentstvo.kz/ press- center/ bulletin/ bulletin_august.pdf

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 Crisis./ www.franchisinguniverse.ru/content/