Guiding Lines: From Retail to Real Estate and Back

Russian retailers are different. Most of them raise buildings for own use and large shopping centers with a view to let space there to other operators. For example, revenues from real estate operations make up, perhaps, the largest share in proceeds of Ramenka, a Turkish firm that runs the Ramstore supermarket chain.

On the other hand, developers previously involved in commercial property construction diversify their business by launching own retail outlets. Lack of experience and ties with suppliers is a huge obstacle, indeed, but both problems are solved through franchise deals with well-known retailers.

In early April, DVI Group, involved in construction of shopping centers across the country, announced its no less enthusiastic plans to build a chain of clothing stores under franchise deals. To that end DVI has bought a franchise for a Turkish brand Adilisik from City Star, the company that holds the general license to use the brand in Russia, and for the Russian brand Lo from Quoll.

DVI is set to open stores measuring 130 to 300sqm in its shopping centers in Perm, Yekaterinburg, Izhevsk and other Russian cities. Other clothing retailers agree that an opportunity to operate outlets on the premises of own retail centers represents a clear competitive advantage.

Tvoi Dom retail centers developed by Crocus International had been letting space to Perekryostok supermarkets for years before the developer decided it needed a retail business of its own and revised the terms of its franchise deal with Perekryostok. As a result, supermarkets at Tvoi Dom malls have been renamed Tvoi Dom, though they continued their operations using Perekryostok’s know-how. In particular, they continued to purchase goods from Perekryostok’s distribution center.

Retail companies actively selling franchises are trying to clinch partnerships with landlords renting out retail space, by promising them high rate of returns. For example, the Kopeika retail company claims that EBITDA margin at stores operating under franchise deals with Kopeika stands at 2 to 3 percent where the store rents space and 5.5 to 6.5 percent if the store owns the property.

The demand for franchises of nationwide retail chains grows annually while offers are still scarce. Expofair, organizer of the franchise show exhibition, has reported that Russian franchising sector is still small with only some 200 franchisers active in that sector where Russian firms account for 63.9 percent, while in Europe local franchisers make up 93.7 percent. This shows that Russia’s market is still underdeveloped, but also that international operators show keen interest in it.

At this, in terms of growth of that sector, Russia tops the world ranking as the number of franchisers doubles each year. The number of franchisees exceeded 1,200 firms by late 2005, a 20% rise per year.

Expofair estimates Russia’s franchising market (total franchising payments) at $4.63 billion in 2005, 12 percent higher than in 2004. Retailers hold the lead on the market, accounting for 31.2 percent of the total number of franchisers operating in Russia and 35 percent of Russian franchisees. Public catering ranks second with 27.3% franchisers and 22% franchisees, followed by services sector (11.7% and 16% respectively).

On average, there is one franchiser per six franchisees in Russia. Most (some 43%) are based in Moscow and central Russia, over 15% are active in St. Petersburg and in northwestern regions and about 12% in the Urals Federal District.