Licensed to sell

Data published by the Profit System consultancy show that this year the number of franchise stores on the Polish market may total 50,000. In 2011 the figure was 42,500 - a 5,300 rise on the previous year. The share of franchise stores in shopping centres varies depending on a centre's size and location. Marek Błędowski, the commercial director of ApsysPolska, says that for the Manufaktura centre in Łódź (which was opened six years ago) the proportion is 5 pct (over 300 units). "The leasing process for the Łacina shopping centre in Poznań, which is to open in 2014, has shown that the number is going to be larger. In smaller cities the share will rise even more," he adds. In the projects of Gemini Holdings (Gemini Park Bielsko-Biała and Gemini Park Tarnów) franchise stores account for 13 pct - 15 of all the leases signed. As for NoVa Park, opened on April 18th in Gorzów Wielkopolski, 10 pct of the 150 stores are franchise units. The franchise market is thriving on the current direction of the development of the retail space market in Poland. Smaller cities are gaining a larger share of the retail space offered by developers, leading to an increasing interest from retail chains in such locations. "The Polish market had 746 companies offering franchises last year. These included 116 newcomers and 67 firms that have pulled out of selling their licences," Profit System's experts reveal. The strategy that many well-known brands follow is to only open partner branch offices, mostly licensed, in cities below a certain population. "My estimates are that soon 70-90 pct of the most well-known brands will be available in smaller locations, mostly via franchises," says Szymon Mińczuk, the leasing manager of Caelum Development, the developer of NoVa Park. The trend hasn't escaped the attention of retail chains. "We perceive retail projects carried out in smaller cities as constituting an opportunity to develop our franchise chain. With all the projects in those locations, new retail space is being created, which is necessary for the chains to grow. This is not only an opportunity for operators, but also for local entrepreneurs," believes Grzegorz Lipnicki, the vice-president of the management board of Top Secret. Companies' eagerness to find potential partners is clearly visible in their flexibility and from the new types of partnership they create. "The Polish franchise market is still young. In most cases potential partners are unprepared to accept the comprehensive franchise models offered by operators. This is why we are trying to adjust our concept to franchisees' expectations and help them take their first steps in the business, particularly in smaller cities," explains Grzegorz Lipnicki. This has an influence on the actual offers. Deposit franchises under which the costs of supplying goods to stores is offloaded onto the head office, has become the standard model. And this is not all. "Recently we have noted an increase in the activity of retail chains promoting new concepts, and even new models of financing such agreements. In some cases brand operators even offer to take out a loan instead of the franchisee - this is the case with Auto-Spa car wash," adds Łukasz Tomczak, the marketing manager of Caelum Development.
Solution to the crisis
There is one more reason for the growing interest in franchising. Retail operators consider it to be a tried and tested concept for hard times. "Franchising is a good way to develop a chain during an economic slowdown. But in such cases we carry out a prior analysis to check whether the store will be profitable in a given location," says Grzegorz Lipnicki. Ewa Ściubidło, an associate director of The Blue Ocean Investment Group points out that more and more chains are planning to increase the number of their stores through franchising. "Representatives of different companies are coming to us looking for partners to open new outlets. The main benefits of this solution include reining in the costs of preparing a store, which are borne by the operator/manufacturer, and that a partner runs the store according to specified standards and may be subject to on-site control on daily basis. Moreover, the chain then develops and sales revenue goes up," explains Ewa Ściubidło. The practice shows that in hard times developers are more willing to sign contracts with head offices. Working together under such conditions is a test for both parties. "The general rule is that the harder the situation on the market, the more developers take risks and sign contracts with franchisees. On the other hand, the owners of franchise chains transfer some risk to franchisees. This encourages developers to become more flexible. They try to 'entrench' leases with standard security clauses, and also with provisions such as the obligation of the owner of the franchise chain to take possession of the store, or with a trilateral clause under which joint financial liability for the potential failure of the franchisee lies with the owner of franchise," explains Krzysztof Gawełk, the president of the management board of GREM. Marek Błędowski concurs, claiming that established developers prefer to sign deals with head offices. "It is sometimes the case that the chain recommends a certain franchisee to us. In such a case we check the developers for their reliability and credibility, taking into account the head office's opinion," says Marek Błędowski.
A fly in the ointment
The biggest problem faced by the franchise market are the high costs of setting up businesses and the consequent difficulties in obtaining financing for operations. According to Tomasz Górski, a senior negotiator in the retail department of Cushman & Wakefield, this factor is holding back the development of the sector in Poland. "In order to start a franchise business one has to have the funds for the licence agreement as well as other future liabilities. Store fit-out and equipment, furniture, supplying it with goods - all this requires money. Not every investor can afford it," he explains. Retail chains indeed regard this as a big problem. "Potential franchisees have a difficult start, so it is very important to give the beginners a hand and help them find financing. There is also an asymmetry in the agreements signed between the managers/owners of the shopping centres and franchisees. We believe that it is the operator who should negotiate the terms of the lease instead of the franchisee, or at least provide him with legal representation" asserts Grzegorz Lipnicki.
Relations between franchisors and franchisees should also be fixed, according to developers. This is particularly obvious in the case of licensed premises operating in shopping galleries. "Franchisees are left on their own while not having been properly prepared to run their businesses. On the one hand they are very eager, but you can see the lack of proper training or marketing support from the chain, as well as weak sales promotion, and poor pricing strategy and distribution," adds Krzysztof Gaweł. The list for the interested parties is even longer. "First of all, smaller towns where new buildings have not yet been raised lack premises of the standard stipulated in the franchise agreement. The second problem are the high costs of setting up a store. For instance, according to the requirements of fashion chain Simple (for the CH Karolinka shopping centre in Opole), 1 sqm of space should cost PLN 4,500, and the store has to measure at least 100 sqm. The third problem is the high running costs - namely the rent. To sign a five-year lease one has to be 100 pct sure that for the entire period there will be sufficient funds to pay the rent," says Rafał Migdałek, the owner of the Beata company, the franchisee of brands such as Reserved, Mohito, 4F and Yups. He advises those willing to set up a franchise business to check the franchisor's creditworthiness and financial standing. He also claims that each new centre, even if it is the most prestigious one on the market, has to entrench itself and win loyal customers. "In my opinion it is much easier to open a store in a shopping centre that already exists, by leasing premises equipped with the necessary installations, than to start a business in a newly built centre. The second option would be to open a store on a high street," he concludes.
Inform and advise
The current franchise market in Poland is making it finally possible for big brands to be sold in smaller towns where the brands themselves would probably not consider opening up their own stores. However, better communication in this field is required, and this not only concerns franchisee-franchisor negotiations. "The developers, owners and managers of shopping centres should actively cooperate and act as intermediaries in relations with such retailers - and this is very important," claims Szymon Mińczuk. Other developers also emphasise the necessity of promoting the franchise concept. "A manager should in any case be a source of information, an intermediary or even a counsellor for potential franchisors and franchisees. Some shopping centres, including those I am in charge of, have an active strategy in this respect. Offers of partnership are displayed on our centres' websites. A potential tenant should be provided with all the necessary information by the management of the centre. I think that it would be a good idea to organise a fair or a conference for investors interested in cooperation. But the commercial success of the centre and a marketing strategy that helps tenants make profits is the best advertisement, as nothing motivates people more than the success of others," emphasises Krzysztof Gaweł.
The Polish franchise market is slowly warming up. But is it red-hot yet? No, this will take some time. But the benefits are already tangible. The lessors and the retail chains have local entrepreneurs to negotiate with. Consumers in provincial towns can now buy famous brands. And local authorities can start counting the tax revenue generated by the new franchisees.
Michał Wiśniewski
the franchise consultancy director of Profit System
Polish concepts a cut above the rest
Our observations show that the number of franchise systems is set to grow further. By the end of 2012, the Polish market could see up to 820 concepts based on franchising principles.A total of 555 (75 pct) of the franchise companies operating in Poland are domestic systems. They are growing in popularity abroad as well, often in CEE countries, and are particularly gaining in strength in the Czech Republic, Slovakia, Ukraine and Russia. The potential of the Polish franchising market has been appreciated by 191 foreign operators. In 2011 the following international chains made their debuts on the Polish market: Camel Active, Fit Curves, Häagen-Dazs, Arthur Moorey Dance Studio and DKNY. Latvian chain Attirance, which manufactures and sells natural handmade cosmetics, is also planning to open franchise stores.