Paper to be presented at the EMNet-Conference on"Economics and Management of Franchising Networks"

Vienna, Austria, June 26 – 28, 2003www.univie.ac.at/EMNET

FRANCHISING NETWORK AS A GROWTH STRATEGY

– CONSIDERATIONS IN POLISH MARKET.

Anna Barbara WróbelWarsaw School of Economics

Ul.Niekłańska 30/103-924 Warsaw

PolandTel: 0048-608792437Fax: 0048-22-6177316

E-mail: awrobel@sgh.waw.pl

AbstractThe paper is a part of the author’s Master Thesis research on “Franchising As A Modern International Growth Strategy”. The purpose of this paper is to discuss the following issues: (1) What is franchising and why should it be considered a growth strategy? (2) Is franchising network a growth strategy in emerging and transition markets such as Poland? (3) What are the practical considerations and examples for expanding a franchising network in Poland? The paper refers to strategic international management. It describes franchising as an option for companies considering various growth strategies. In addition, the paper discusses crucial economic and legal issues and prerequisites, when expanding a franchising network abroad. The paper focuses on Polish market, which is subject to dynamic franchising systems expansion. Strong influence of global economic situation as well as the trend towards supporting entrepreneurship at the dawn of Poland’s accession to the European Union, suggest that Poland will remain an attractive market for franchising network growth. Finally, a synthetic and up-to-date picture of Polish franchising industry is presented. What is more the paper describes specific cases of franchising network expansion in Poland (i.e., inbound, outbound and internal systems growth) gathered and prepared by the author in course of her research.

KeywordsFranchising Networks, International Management, Growth Strategy, Poland, system expansion

Acknowledgements

I would like take this opportunity to thank all the experts that have contributed to this paper during interviews and consultations; through their insights on franchising industry, illuminating suggestions; direction to further sources of information and – last but not the least – encouragement throughout the research process. What is more, I would like to thank Mr Josef Windsperger for giving a young franchising adept a chance to participate in the EMNET Conference and share insights on Polish franchising market at such a prestigious forum.

I. Introduction

Franchising has been long an unknown formula in the Polish market. It is still

a mysterious topic to many would-be entrepreneurs or business students. Meanwhile

franchising has become a significant and successful business method in many industries and

many countries. It will most probably continue to grow in importance in the coming years.

Adapted as a growth strategy in some 75 industries, franchising is now practiced in more than

100 countries1. The leading franchise market – United States - witnesses a new franchise unit

opening every eight minutes and every twelfth start-up business operates within franchise

network2.

The thesis of this paper is that franchising – when understood and treated

as a business philosophy and operational method - is a phenomenon with growth potential

in emerging markets such as Poland, especially suited to current economic trends

e.g., globalisation, growing uncertainty and increased demand for specialised products

and services.

Primary evidence for this thesis is the number of local franchising systems that

in Poland surpassed the number of foreign systems operating in 2002 (55.7% over 44.3%)3.

Number of direct franchising sector employees exceeded 100 thousand. What is more,

recently, Public Relations initiatives as well as lobbying for better legal franchising

environment have become much more frequent and visible. Just a few days ago (24-26 th June

2003), the First International Franchising Fair took place in Warsaw. There are many

reputable systems to choose from – together with their experience and strategies. With good

practice in place, adherence to a franchise system takes on average only 6 to 7 months.

1 Source: Franchise Group Urges Modernising business Rule. PR Newswire, 2002, 25 th June. Available at global.factiva.com. 2 P.Domarecki, Firma pod obcą marką. Profit, 2003, June, pp.90.3 Compare S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.1.

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A. Franchising definition in Polish market

Franchising might be described as a strong strategic alliance, favouring long-term success,

where each of partners should invest resources and competences in order to gain strategic

advantages. In franchise relationship, these resources and competences are not only sustained

but also protected. According to M.Siebert companies franchise for one

of three reasons: time, people, or money4. Franchising is a growth strategy relying

on three elements: (1) exploitation of original idea of a product or service; (2) capacity to

pass the know how onto partners; and (3) capacity to mobilise human resources.

As the paper describes Polish franchising reality, it is necessary to understand the nuances

of franchising definition functioning in Poland, as suggested by Polish Franchisers’

Organisation5. It is based on the European Code of Ethics definition and completed with

several Polish characteristics6. These are, for instance:

(1) Stable, contractual relationship binding the franchiser and franchisee, resulting in

franchiser’s obligation to provide the franchisee with know how – throughout the

contract period – and obliging the franchisee to pay franchising fees to franchiser and

to render various services according to the contract provisions.

(2) Economic, legal and organisational independence of parties involved, in Poland

reflected, for example, in proprietary fiscal counters.

Franchising definitions are multiple. Another one suggested by Polish authors (A.Koch7)

describes franchising as a market expansion method of a given business activity via an

organised network of uniform units, operating the business on territories distant from the

initiator’s headquarters. Third parties run the units at their own account and on their own

4 Compare M.Siebert, Should You Franchise Your Business, www.ifranchise.net. 5 Compare section dedicated to the Polish Franchisers’ Organisation (POF) at www.franchising.info.pl. 6 As the secondary purpose of the paper is to present Polish market considerations for franchising – reference is mainly given to Polish literature and press. Nevertheless the paper is based on a thorough review of international bibliography. 7 See A. Koch, Umowa franchisingowa, Ruch Prawniczy, Ekonomiczny i Socjologiczny, zeszyt 3/1980, s.51.

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behalf. The initiator authorises them to use successful operations technique and uniform

external image, which symbolises the technique for consumers in exchange for financial

remuneration.

B. Advantages and disadvantages of franchising

Whole new sectors in Poland and worldwide are embracing the franchising formula that

can effectively combine a foreign concept with local understanding of the market and

necessary adaptations. Franchising aggregates the core competences of a large enterprise

(resources and approaches such as R&D or professional marketing) and of an independent

small business (motivation and understanding of local market). Thus franchising especially

boosts the development of small and medium enterprises and increases self-employment.

Benchmarking of best practices can be applied throughout whole systems and cross-border

learning and testing is facilitated. The general decision to franchise requires a trade-off

between potential benefits arising from lower costs, rapid market expansion and risk sharing,

and the disadvantages of reduced financial upside, strategic freedom and brand control. From

the franchisee perspective, beginning in franchised business is much easier than with an

independent start-up - even in the same sector – but without the possibility to use a

recognised name. Thus the multiplicity and extension of franchising systems. Nevertheless,

franchising is not a magic formula and analysis of many failures shows that clear vision,

preparation, and proper feasibility study are indispensable elements of success. M.De

Mendez8 notes that even the best franchising strategy requires constant care and

improvements, as both the external market circumstances and internal specificity of franchise

relationship constitute a challenge. The key to success in franchising are successful

franchisees – notes M.Siebert9 – and many experts confirm the idea. Therefore equilibrium in

every aspect of the franchise relationship is a key to success of the whole network. See

8 M.De Mendez, Comment reussir en franchise, Dunod, Paris 1989, pp.119.9 M.Siebert, Should You..., op.cit.

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Appendix 1 for a detailed comparison of advantages and disadvantages for parties involved in

franchising relationship.

M.Strzyżewska10 notes that internationalisation of franchising operations is

a relatively new phenomenon that recorded especially fast growth in 1990s

with development of information technologies, dynamisation of communication between

markets and uniformisation of some lifestyles and consumer behaviours. Franchising suits the

processes - with integrity of business concept expressed, for instance, in product, brand,

enterprise identity, enterprise image, promotion, staff behaviour.

II. Franchising as a growth strategy

Growing worldwide presence of franchise systems used as principal or auxiliary expansion

mode, suggests that the formula is gaining importance and appreciation

in the range of international development strategies. Grouping independent entities under the

same brand and the synergic effects of their motivations benefit the whole system

and accelerate the growth of the network. Large multinational companies more and more

often choose franchising option and it constitutes a sure choice for smaller enterprises that

possess limited resources. In this respect this modern strategy might be well called a strategy

of the future. Successful global development requires more attention to be given to

infrastructure issues related to suppliers, dependability of franchisees, as well as the political

and economic stability of the foreign country.

M.Romanowska and A.Zorska present basic sets of expansion or growth methods in

foreign markets. The company might choose organising direct or indirect export, opening a

subsidiary, acquisition of an existing local company, finding a strategic ally – a local or

international partner. The methods vary in level of costs and risk as well as in direct benefits

to the company (compare Fig. 1a). Franchising is located in the middle of the graph,

10 M.Strzyżewska in M.K.Nowakowski (ed.), Biznes międzynarodowy – obszary decyzji strategicznych, Wydawnictwo KeyText, Warsaw 2000, pp.211.

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representing a reasonable strategy that involves substantial benefits to the company as well as

acceptable risk level and mid-level costs. T.Gołębiowski ranks similar strategies by level of

control as well as risk and time involved in expansion (compare Fig. 1b).

Figure 1: Foreign markets entry methods.

a) by level of economic benefits and costs/risk involved;

Source: Based on M.Romanowska, Zarządzanie strategiczne firmą, Centrum Informacji Menedżera, Warszawa 1996, pp.98 and A.Zorska in M.K. Nowakowski (ed.), Biznes międzynarodowy – obszary decyzji strategicznych, Wydawnictwo KeyText, Warsaw 2000, pp.287.

b) by level of control and time/risk involved.

Source: Own elaboration based on T.Gołębiowski, Materials For International Business Management, Szkoła Główna Handlowa, Warsaw 2002.

Licensing and franchising offer a decent level of control while minimising uncertainty and

time necessary to achieve success. E.Baranowska-Prokop11 notes that risks associated with

franchising are mainly connected with trust relationship built between partners, their

11 E.Baranowska-Prokop in T.Gołębiowski (ed.), Marketing na rynku instytucjonalnym, Polskie Wydawnictwo Ekonomiczne, Warsaw 2003, pp.114-116.

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low costs and risk high

low

econ

omic

ben

efits

high

export

licensing

franchisingjoint-venture

partial acquisition

subsidiarymerger or

full acquisition

low

cont

rol

h

igh

low time and risk high

indirect export

franchisingor licensing

joint-venture

branch exportor subsidiary sole-venture

agent or distributor export

supply contractsor assembly plants

qualifications and commitment to standards set by franchiser – also given varying mentality

of consumers in different markets.

In broad terms, the decision to set up a franchise operation abroad will usually arise out of

one of the possible situations:

(1) An existing franchiser, who previously: (a) has developed a specific product/service

and wishing to quickly establish an extensive distribution network, has build a

franchise system at local/country level; (b) has specifically set out to develop a

business concept that he would be able to franchise; and is now wishing to grow

internationally and expanding the franchise system seems a logical consequence of

past experience and evolution of the enterprise. Having developed the business

concept the franchiser must be absolutely convinced not only that he has a

franchisable business proposition, but also that franchising is the optimal method of

international expansion.

(2) The prospective franchiser is currently operating a successful established business

which (s)he now wishes to expand internationally. For some specific reason

franchising appeals to him as a method of achieving this expansion.

In considering various conditions of growth, a company - potential franchiser should be

aware that there are two possible expansion drivers. The Push option implies that franchiser

through marketing efforts, following a strategic franchise development plan, drives the

expansion. The franchiser will actively search for new franchisees (proactive). In a Pull

option a domestic franchiser, who attained a significant market presence, attracts the attention

of foreign investors, who approach him. In such a case, international expansion is driven by

the international demand (reactive) for a suitable product or service. International expansion

of locally successful franchise system as well as decision to choose franchising for foreign

growth should be based on economic calculation. There might be push and pull factors –

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changing, less favourable situation in home market (market saturation, decreasing spending

power) as well as opportunities appearing in foreign or/and global environment (global sing

consumer segments, economic upturn and increasing demand for specific products/services)

may force or induce an entrepreneur to go abroad. When making strategic decision to

franchise it is important to bear in mind that the idea that anything at all can be franchised

with the minimum of effort is completely unfounded, and that in fact the franchiser will have

to give very careful consideration to all aspects of his operation. Especially the legal and

economic environment of franchised operations need to be carefully considered before

decision to launch franchised operations in particular market is taken. Finally, when

international franchising strategy is being designed, there are several prerequisites and best

practices that could contribute to franchiser success or at least prevent failures in major

strategic areas, such as: franchisee selection or start-up assistance. There are no fix-it-all

solutions in the world of franchising and success factors depend heavily on the type of

franchised business.

An analysis conducted in line with my research goal, shows that franchising used in local

and international growth proves effective, provided that the strategy is thoroughly designed,

carefully implemented and supported by a relationship of trust and mutual commitment of

partners to their interdependent success.

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III. Franchising in Poland

This Chapter gives a detailed picture of franchising sector in Poland, which might be

especially interesting for foreign systems willing to understand its situation as well as

international franchising associations or consulting companies that prepare market analysis

for their members and client companies.

Although the Polish market might serve as an model for Central and Eastern European

Countries (CEEC), taking into account the degree of market economy development, long-

term priorities (e.g., EU membership); general consumer awareness and lifestyles; it is

necessary to point out that Poland is to much extent specific in the region, given the country’s

size (40mn population; 12 large cities; geographic distance) and culture. For instance,

cosmetics and body care retailer - Drogerie Natura, may consider Czech Republic or Hungary

too small to enter, while Poland has the potential to make the concept profitable – with at

least 300 interesting locations. Thus the description of Polish franchising sector might serve

as an initial tool, while a detailed market analysis is a must when choosing to expand in

another CEEC.

Michał Wiśniewski names the following global trends as the most influential for

franchising networks growth: (1) growing demand for branded products and services –

further enhanced by global communication and access to information as well as

uniformisation of lifestyles; (2) counter-cyclical interest in franchising operations reflected by

increasing franchise acquisitions during recession and unemployment growth as well as

expansion of franchise networks via consolidation of individual businesses that wish to

compete in stagnating economy thanks to central purchasing, advertising and business

development.

Mark Siebert suggests that there is a life cycle of global franchising (see Fig. 2 below).

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Figure 2: Life cycle of global franchising.

Source: Own elaboration based on M.C.Siebert, Global Franchising – The Surf Is Up!. The Successful Franchising, 1998, October, pp.58.A. Franchising sector in Poland – an overview

The CEEC, with emerging market economies are popular targets for global franchisers. In

1998 it was forecast that franchise networks in Europe would grow by 30-40% by 200412.

Emerging markets are ample and provide real growth potential. Experienced franchisers are

easily able to discount their competitive advantages here, although the investment risk is

higher than in stabilised, mature markets. Scarce information or business assistance as well as

poor communication infrastructure are the most common risk factors. Use of franchising for

growth of inbound systems in Poland as well as expansion of outbound networks is

influenced by transformation processes in Polish economy - on macroeconomic scale - as

well as lack of experience of Polish entrepreneurs (potential franchisees and franchisers) – on

microeconomic scale.

12 The European Franchise Federation (EFF) forecasts. B. Pokorska, Franchising w Polsce: stan i kierunki rozwoju, Instytut Rynku Wewnętrznego i Konsumpcji, Warsaw 2000, pp.97.

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Introductory StageFranchising is first introduced to the population as a whole, usually by strong global franchisers such as McDonald’s and KFC. A few progressive local companies may begin exploring franchising. Examples: China, Moldova.

Early AdoptionArrival of secondary foreign brands and the initial development of local franchise concepts – usually by large and established local companies responding to the influx of franchised competitors. Examples: Indonesia, Peru, and Spain.

Rapid Vertical ExpansionSimilar to the US franchise boom in 1960s – franchising expanding rapidly, but primarily within a limited number of traditional categories (e.g., fast food, automotive, hotel). In global markets, this stage is characterised by accelerated introduction of foreign franchises along with the development of smaller domestic franchise companies. Examples: Argentina, Chile, and Philippines.

Horizontal ProliferationLike the US in 1980s and 1990s – an increasing number of domestic business categories utilising franchising for expansion. Franchises from around the world aggressively target these markets for expansion. Early domestic franchisers begin targeting global markets of their own. Examples: the UK, Brazil, Japan.

ExportA number of mature franchise categories and aggressive efforts by domestic franchisers to franchise within the global marketplace. Example: the USA.

Next to well-known global networks such as McDonald’s, 5 à Sec or Midas, there are local

systems such as Molton, Vistula, Troll (clothing); Drogerie Natura (cosmetics and body

care); Pożegnanie z Afryką, A.Blikle (cafeterias); Chata Polska, Groszek, Piotr i Pawel

(grocery convenience stores); and PKN Orlen (petrol stations and car service13) – to name just

a few. This proves that the Polish franchising sector enters maturity stage with more and

more Polish companies realising that franchising might be a good growth strategy. At present

68.7% of franchisees operate in local systems, while 31.3% have bought a foreign franchise14.

Franchising sector in Poland has been recording fast growth of at least 12 systems per year

since 1997 (see Fig. 3). However, the industry has not been free from spectacular failures

such as Norwegian Rema 1000 supermarkets system inability to build successful

relationships with Polish franchisees15. Nevertheless, as much as 15 systems plan to sign their

first franchising agreements in the nearest future.

Figure 3: Number of first franchising agreements signed per year (1989-2003).

Source: Own elaboration based on S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.17.According to B. Pokorska16, franchising globalisation process is as well reflected in Polish

market. It is a virtual laboratory where we are able to watch new, strong systems expand in

various niches and already existent networks improve their operations by investment in 13 Currently two petrol manufacturers and distribution operators – PKN Orlen and Rafineria Gdańsk operate franchised petrol stations. The difference is that the latter relies entirely on franchise network – thus treating it as strategic business format and investing heavily in development of best practice rules; while PKN Orlen uses franchising as complementary method both in Poland and in Germany. 14 S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.9.15 See A.Kondratowicz, Remą w płot. Gazeta Wyborcza. Available at www.franchising.info.pl. 16 Compare B.Pokorska, Franchising w Polsce..., op.cit., pp.6 and 100-103.

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logistics, brand building, and service development. Polish franchising landscape changes very

fast. In 2000 B.Pokorska stated that foreign franchise systems were already an element of

Polish economy, while the interest of Polish individual investors and companies in growth

through franchising was growing very slowly17. Meanwhile, current figures as well as

increased media coverage prove that the last three years brought a real boom in Polish

franchising. The main franchise actors in Poland are: (1) global networks focused on

reinforcing their market position and territorial expansion – they may be limited by difficulty

in new, profitable sites localisation; (2) master franchises of foreign systems concentrating on

own-units development and brand building; (3) experienced newcomers in fast food and retail

sectors, entering market niches; (4) Polish franchisers and SME operators with growth

projects, looking for high quality franchisees and alliances with other systems.

Apart from research papers published by Polish franchising experts such as Barbara

Pokorska, Agnieszka Tokaj-Krzewska or Krzysztof Zięba18; interesting publications and the

most ample franchising information for both franchisers and franchisees operating and

willing to start a business in Poland is available from portal www.franchising.info.pl run by

Profit – a consulting group specialised in franchising, belonging to Horwath Franchise

Services Group based in London. They have recently published the first report on franchising

in Poland, giving the most up to date picture of Polish franchising sector19 and launched the

first Polish magazine specialised in franchising20.

17 Ibidem, pp.100. 18 Ibidem. Compare as well B.Pokorska, Rynek franchisingowy w Polsce. Handel Wewnętrzny, 1999, nr 1; A.Tokaj-Krzewska, Franchising. Strategia rozwoju małych firm w Polsce, Difin, Warsaw 1999; K.Zięba, Działalność franchisingowa w Polsce i w wybranych krajach Europy. Zeszyty Naukowe Politechniki Gdańskiej. Ekonomia, 2000, nr 38.19 S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003. Available from www.franchising.info.pl. 20The franchising portal operators claim it is visited by 6 th Internauts per month. The magazine as well - is said to have quickly gained attention and become widely recognised source of information, In addition, franchising issues are being well covered in other business press such as Profit – a magazine that has recently published an ample dossier on franchising opportunities in Poland.

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Franchising is attractive for both the Polish entrepreneurs and consumers, who still

perceive franchise network consistency and service standards as important value added.

Therefore most of the systems quickly gain client confidence and loyalty, further enhancing

franchising success. According to the report mentioned, franchising systems in Poland

contribute 3.2% of the GDP, which is still little compared to developed franchising markets

(up to 15%).

There were more than 120 systems operating in Poland in 2002 with distribution leading

the race (50.8% - with the following categories leading the ranking: grocery; clothing and

footwear; petrol; luxury goods) and services following it (48.8% - respectively: cafes, pubs,

restaurants and hotels; hairdressers and beauty parlours; education and training)21.

The growing number of service franchising in Poland might be a locomotive for growth of

this sector as a whole and restructuring of Polish employment. Although franchising is

present in most of the areas, the report suggests that the white-collar franchising niche (direct

services to business – e.g., tax advisory; stationery suppliers; cleaning services) is almost

empty22. Poland still lacks enterprises specialised in new generation services such as full-

service legal and financial consulting; house-office cleaning services; on-line translating

21 The largest systems operated respectively: Avans (RTV and household appliance stores) – 408 units; Kodak Express – 400; Drogerie Natura – 276; Big Start (jeans and casualwear) – 250; and Groszek (supermarkets) – 216 units. Franchise systems in Poland vary in terms of number of units operated; employment; revenues; and preferred location. Recent Profit magazine dossier on franchising presents franchises in three “investment required” categories: (1) under 30th EUR – e.g., National Car Rental, ‘Together’ matrimonial agencies, Mr. Hamburger fast food, Eurostop travel agencies, Five o’clock coffee and tea shop, Yogen Fruz, JDJ language schools, Mamuśka Cheesecake Shop, Yves Rocher; (2) 30-75th EUR – e.g., Cezar multi-service points, Chata Polska stores, Drogerie Natura retail outlets, A.Blikle cafeterias, Camille Albane hairdressers, Cafe Nescafe, Jean Louis David, TelePizza; and (3) over 75 th EUR – e.g., Avans stores, Subway, vegetarian restaurants Green Way, Perfect Clean laundries, Palmers lingerie boutiques, Kodak Express, Dr Irena Eris Cosmetic Institutes, Midas, McDonald’s, Etam, Leader Price, E.Leclerc, Mexx, Quiosque, etc. Authors analyse as well which type of advantages each of categories offers and what kind of competitive edge it requires in order to succeed. See P.Domarecki, B.Możdżyński, J.Stępień, Dossier – najlepsze franczyzy do wzięcia. Profit, 2003, June, pp.92-107.22 An interesting example of successful B2B (or white-collar) franchise is Dokumenta – enterprise specialising in office paper files electronic archivisation and physical destruction. Dokumenta is a Polish concept based on similar US franchises. It now operates 12 units (1 own + 11 franchised) in the largest Polish cities, covering most of the market. It is one of Polish concepts that have strong potential for out-bound success, as all businesses need to cut archivisation costs and rent. Source: interview with M.Wiśniewski, Profit System, Poland, 23rd May 2003.

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agencies. These B2B service niches together with production franchise sector still offer

potential for growth.

Most of franchisees operate in distribution (71.6%), which may result from a relevant ease

of building a distribution network as compared to service outlets (27.7%), which require time

and money consuming preparations, training and operational manual creation. Polish

franchising sector is quite concentrated with 5 largest systems (4,1% of all franchisers)

gathering 42.9% of all franchisees. At the same time distribution systems possess most of

company-owned outlets (81.3%), while service systems focus on developing franchised units

(only 18.6% of company-owned outlets operating in Poland). Additionally, distribution

systems dominate as far as revenues are concerned with 91.1% (with petrol stations and

grocery chains at the top of the ranking) of the total franchising sector revenues, while service

systems bring 8% of the revenues. The proportion seems reasonable as retail chains achieve

higher revenues at lower margins. Michał Wiśniewski (Profit System)23 stresses that the

dominance of distribution is one of Polish franchising sector characteristics resulting from the

country’s economic history. Small and medium retail outlets were traditionally present in the

market. Poles have always been entrepreneurial and had so called “guts for commerce”.

Witnessing fiercer internal competition and strong external chains entering the market, many

traders decided to consolidate force and learned how to operate in franchise networks. At the

beginning of the 1990s they created small wholesale centres, which later started to organise

they own retail units, thus becoming wholesaler-retailer franchisers. For instance -

Pożegnanie z Afryką – coffee shops and cafeterias grew from coffee wholesale centres.

Additionally, it is worth mentioning that Polish franchise systems had brought 17.8bn PLN

of revenues in 2001 (i.e., 4.86bn EUR; 4.35bn USD24 - 76.3% of total), while the foreign

23 M.Wiśniewski, Profit System, Poland, 23rd May 2003, op.cit.24 2001 average annual exchange rates: 1PLN=0.273095EUR=0.24445USD. All exchange rates come from www.oanda.com.

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systems had total revenues of 5.3bn PLN (i.e., 1.45bn EUR; 1.29bn USD - 22.7%)25. As

evidenced by the report, networks between 500 and 1000 units generate the highest revenues.

Meanwhile, as far as employment is concerned, the number of persons employed directly in

franchising exceeded 100 thousand in 2002, which corresponds with 2.5% of enterprise

sector employment. Franchisees employ almost 70 thousand people (an average of 7

employees per unit), while over 33 thousand are employed in franchise system headquarters

and company-owned units (270 employees per system). This shows that operating a franchise

system requires not only proper franchisee recruitment but also substantial mobilisation of

franchiser’s human resources.

Figure 4: Localisation of franchise network headquarters in Poland.

Source: Own elaboration based on S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.11-12.

Fig. 4 shows that most of franchise network headquarters (50.8%) are located in

mazowieckie voidvoiship, with Warsaw market (department stores, shopping centres) being

the biggest advantage. In addition, Polish franchising systems are bit more dispersed and only

38.2% operate in mazowieckie voidvoiship; with other traditionally entrepreneurial regions

following: wielkopolskie (13.2%); malopolskie (8.8%); upper and lower Silesia (7.4% each).

25 S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport..., op.cit., pp.7-9.

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50.8%

12.3%

8.2%

7.4%

5.7%

4.9%

B. Franchise networks in Poland – inbound versus outbound potential

Fig.5 presents the number of franchise systems in Poland compared to selected countries.

The number of systems operating in Poland is still low compared to other European

countries. For instance, there are already 595 systems in Spain, where population is

comparable to the Polish one. See Appendix 2 for a more detailed statistics.

Figure 5: Number of franchise systems in Poland compared to selected countries.

Source: S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.18.

It is possible that Poland’s accession to the EU will encourage many foreign systems to

enter Polish market. Foreign systems will gain more confidence in Polish economy, overall

political and business risk will decrease. Companies will no longer face completely different

legal, monetary and social environment. Thus first 2-3 years after EU enlargement might

distort current domination of local systems as many new systems would be interested in

conquering the ample market. The movement may be especially visible as many systems go

in groups – and successful entrance of one hairdresser franchise (e.g.., Jean Louis David) is

likely to encourage others to come and benefit from the overall increase of market pie (e.g.,

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Franck Provost, Jacques Dessange). The number of franchising systems in Spain increased by

100% over the first two years of EU membership26. Nevertheless Polish systems will be

appearing as well in response to competition and as a result of better market communication

and concept transfer27. Meanwhile, Polish systems will rather expand locally before deciding

to export the concept. In such case market size will be deceiving and may cause loss of

international expansion opportunities to systems originating in small markets such as Czech

Republic, Slovenia or Hungary (which would be comparable to the dynamism of some

Belgian systems versus slow international expansion of French concepts). Take Fornetti, for

example, a system that had to go abroad to grow, as Hungarian market was quickly saturated.

At the moment 57.4% of inbound systems in Poland come from the EU. In general the

ranking of foreign systems is led by France, the US and Germany. Many franchisers choose

Poland as a foothold for expansion in Central Europe, Middle East and Russia. Surprisingly,

although Mediterranean life and fashion style is popular in Poland, Italian, Spanish and

British systems are not very active here. It seems that there is much more market and cultural

proximity between Poland and the US or France, than Poland and Germany or the UK

(usually exporting to Commonwealth markets prior to other directions). Fig.5 presents the

split of inbound franchise systems in Poland by the country of origin.

26 See P.Domarecki, Firma pod obcą marką. Profit, 2003, June, pp.89.27 Drogerie Natura, for instance, are said to start the franchise network in response to Rossmann market success.

17

Figure 6: Inbound franchise systems in Poland by country of origin.

Source: Own elaboration based on S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.10.

Currently, most of foreign systems in Poland are developed through local office of the

mother company, but the number of Polish master franchisees is growing – they now develop

15.6% of the systems. Global franchisers are looking for master franchise partners in Poland

– the largest potential market in Central Europe. Management delegation to master

franchisees and compliance with global standards provide high effectiveness whatever the

distance between franchiser and franchisees, allow to individualise the network supervision

and growth, taking into account local market cultural and economic characteristics.

Although retained at home by the size of local market, many Polish systems have good

potential for export. Take Dokumenta (see footnote); Mamuśka Cheesecake Shop28; Drogerie

Natura (planning to grow in CEE region); or PKN Orlen petrol stations (acquired German

chain and now is converting it into two franchise networks).

28 Started by Polish expats in Australia in 1993 and now growing in New Zealand and Europe from a Polish foothold of 12 units – out of which 10 are franchised. The system opened 140 units during its first three years in Australia. One of its main advantages is probably that franchisees are offered ready-to-operate units. Source: www.franchising.info.pl.

18

TOTAL = 54

France

USA

GermanySweden

Switzerland

Spain

Japan

Australia

Austria

Hungary

Other

C. Franchising growth barriers in Poland

B.Pokorska draws attention to new challenges Polish economy faces, such as improvement

of legal, organisational and economic franchising environment. As far as barriers and

prospects for franchising in Poland are concerned, the most important problems faced by

franchisers are: (1) lack of potential franchisees with minimum capital for initial investment29,

combined with skills and managerial experience as well as knowledge of franchising industry

and operations of a given system; (2) lack of general information on franchising as a business

method as well as on specific systems30; and (3) lack of modern legal regulations facilitating

set-up and operations of franchise networks as well as guaranteeing rights of parties involved.

Michał Wiśniewski mentions lack of basic business education at high-school level (still the

highest many future franchisees attain)31. There is no consistent education program on

franchising that small and medium entrepreneurs could follow. The capital barrier also results

from unclear legal regulations – e.g., definition of property that often excludes mortgage

collateral and limits credit availability. It is important to mention that what constitutes a low

initial investment in developed economies, is often a high entry barrier for entrepreneurs in

Poland32. Unfortunately, financial institutions do not offer any products tailored to franchise

29 Ongoing franchising fee as well as initial fee is often calculated into the price of goods delivered by franchiser. This solution helps the franchisees to adhere to a system without required capital at hand. See S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski, Raport..., op.cit., pp.20-23.30 It would be interesting to investigate how many foreign franchisers have intention to export their system to Poland (or to Europe in general). This may be conducted in cooperation with foreign Franchising Associations. Another survey could check if the influx of foreign systems into Poland would be counterbalanced by an increasing number of Polish franchisers expanding locally or/and exporting to tap foreign markets. A concluding postulate would also be to transform the way franchising – a very practical domain – is taught to students and entrepreneurs at universities, in business schools and in specialised courses. Igor Pavlin from Slovenian Franchising Association suggests a laboratory with hands-on experience in franchising to be the best method to educate future managers and entrepreneurs. Instead of teaching solely ex cathedra, Professor Igor Pavlin added practical cases, business plan and other elements of real franchise development to his courses. I.Pavlin, Slovenian Franchise Association, General Secretary, (Telephone interviews), 6 th and 12th November 2002. In addition, national franchising organisations that will be described in the next Section might launch specialised franchising universities or ally with reputable higher education establishments to create franchising programs for graduate or post-graduate students.31 This results in poor franchisee awareness of potential pitfalls and tricks used by franchisers, who aim to dominate the franchise relationship. It is often too late to advise to disappointed franchisees, when they come at problems with franchise contracts that were not previously consulted with neither lawyer nor business advisor. Interview with M.Wiśniewski, Profit System, Poland, 23rd May 2003, op.cit.32 Initial investment may vary from 10th USD to 100th USD; ongoing fees are of 3 to 6% of gross sales on average while marketing fee equals 1-3% respectively.

19

networks, as they do not perceive franchisers and franchisees to be attractive customers –

which proves Polish franchise market development gap to the EU or US. In addition, Polish

legal system is still underdeveloped as far as franchising regulations are concerned (e.g.,

disclosure requirements)33. It is only recently that a ban on sublicensing has been removed

after an active lobbying actions undertaken by Polish Franchisers Organisation and Private

Employers Confederation. Such obstacles discourage franchisers from expanding their

networks as any financial aid to franchisees means loss of main franchising advantage –

financial risk reduction. These barriers add to general problems of Polish economy at the

moment. As the government fails to implement any entrepreneurship facility tools, common

business approach is that authorities are unable to help and should therefore at least try to

minimise their negative influence. With reference to information gap, it is important to stress

the need for active franchising promotion via specialised trade shows or franchising

information centres.

Analysing the British franchising sector in the 1980s, P.Hall suggested, for instance, that

the press would have an important role to play in the development of the industry, which at

that point lacked widespread public understanding. Almost fifteen years later, we might

observe similar situation in Poland, where media in general supporting the idea of small

business development, do not cover real alternatives for such entrepreneurship. Thus

franchising information is focused in several specialised media such as the franchising portal

and the Franchising magazine mentioned above or regional business guides such as Warsaw

Business Guide34. Apart from these, there are not many actions that promote franchising

image among would-be franchisees. Dossier published by the Profit magazine is probably the

33 Compare K.Bagan-Karluta, Umowa franchisingu, C.H.Beck, Warsaw, pp.86-118 and 145-146.34 Compare Business and Economy Guide – Warsaw – Local Business Network, Biznes Warszawski, Warsaw 2003, pp.71-73, for contact information of franchise systems such as: A.Blikle, Kodak, Dr Irena Eris, Marks&Spencer, McDonald’s, Yves Rocher.

20

first one to give such ample and explicit coverage to franchising in view of explaining the

method to entrepreneurs and attracting franchisees aware of the network challenges.

Finally, taking into account Poland’s accession to the EU and structural funds available to

SMEs, national and regional agencies supervising the funds could help to open and run

franchising information points. Any forms of assistance to franchisers and other investors are

especially scarce in emerging markets. Therefore it could be crucial for Polish Franchise

Association or Polish Franchisers’ Organisation to benchmark its foreign and international

counterparts. Adhesion to the European Franchise Federation and creation of Polish Code of

Ethics in Franchising are among first tasks. B.Pokorska stresses that a useful role of

franchising associations would be as well to create a model franchise agreement taking into

account current legal environment and creating an even position for franchiser and his

franchisees35.

Established features of foreign franchise industries are franchise brokers and consultants36.

They are often associated with or recommended by franchising associations approached by

prospective franchiser or franchisee. Arnaud le Grelle from the BFF37, stressed that the non-

profit Federation does not want to serve as a consulting company to individual franchisers,

therefore it developed a special membership status for all kinds of reputable advisory entities

(associate member), which provide individual consulting to BFF members and other

enterprises seeking assistance. In Poland the initiator of franchising portal – Profit System

35 Given volume constraints and business profile of the author, the need for up-to-date legal regulations is not analysed in this paper. Meanwhile it seems that legal environment adjusted to international standards could have positive impact on the image of Poland as target franchising market, as well as help Polish systems to export their concepts. Compare B.Pokorska, Franchising w Polsce..., op.cit., pp.104-107.36 For instance, iFranchise Group – a US consulting company – provides its clients with research and feasibility services; franchise development; implementation services for new or existing franchisers; international expansion services and other growth services; as well as franchisee services such as franchiser suitability analysis?. According to M.Siebert?, 40% of iFranchise US clients are companies new to franchising wishing to establish a network; 40% are well established franchisers looking for international growth opportunities and 20% are large manufacturers converting their distribution channels into franchised networks – with higher level of control. Nick Bibby from Bibby Consulting Group emphasizes that most of his clients need clarity, focus and direction in establishing and implementing a growth strategy via a franchise network. Nick Bibby, Bibby Consulting Group (USA), (Telephone interview), 16th August 2002.37 Arnaud le Grelle, Belgian Franchise Federation, Executive Director, (Belgium), 4th September 2002.

21

(established in 1998 – now associated with Horwath International and Martin Mendelsohn’s

Eversheds) – claims to be the only consultancy to offer complex legal and business services

(including PR) to franchisers throughout their concept development and network operations.

Michał Wiśniewski complains that although Profit works with the most successful Polish

systems, it has been less successful in attracting foreign clients. What is more, the company

competes with many dispersed advisory boutiques – lawyer, advertising and research

agencies.

D. Franchising systems in Poland – practical comments

During my research, I have examined several companies that have been growing and that

are going to successfully grow using a franchise system. They represent various concepts and

types of franchising, starting with retail distribution franchise of Marks&Spencer, through a

business format innovative Dr Irena Eris Cosmetic Institutes, to traditional fast food network

of McDonald’s restaurants. Each of the companies is at different stage of growth and has

been applying franchising in a unique way – adapted to their business characteristics. See

Appendix 3 for detailed description of a chosen case – Dr Irena Eris Cosmetic Institute.

Interesting enough, each of the businesses puts a special emphasis on the value and

importance of key elements such as brand image, selection of franchise partners and complete

package of franchiser’s support services. This confirms the importance of universal

prerequisites and issues crucial for establishing a sound franchise network in Poland and

internationally in general. What is more, we might notice that in each of the cases – the

franchise system does not only sell a product or a service – but a whole philosophy expressed

in brand identity. Thus Marks&Spencer provides its customers with broad range of garments,

accessories, home furnishings as well as financial and information services, combined with

convenient terms of sale. Dr Eris Institute offers complex beauty care completed with a take-

away set of products. McDonald’s adds value through quick service, children entertainment,

22

or drive-through option. The philosophies are inscribed in the franchise packages and

franchise relationship is a unique media of transferring the philosophy onto consumers38.

Having seen success of worldwide-recognised systems coming to Poland, many of new

franchisers start to target Poland for a successful expansion. Yogen Fruz – frozen desserts

points of sale franchiser present in 80 markets and operating over 5000 units – has opened

almost 20 units in Poland since May 2002. Portuguese Jeronimo Martins that operates

Biedronka discount stores system, plans to invest heavily to reach 2000 units and saturate

Polish market in 6-7 years – growing from current 638 points of sale. Nestle – global food

concern that has 60% stake in global instant coffee sales and controlling over 20% of global

coffee market – basing on company’s experience in the UK started a chain of Nescafe

Cafeterias in Poland in 2002 and now operates 8 franchised units with a view to grow

dynamically.

Meanwhile, there is no need to look far for franchise opportunities. There are also multiple

examples of franchisable business concepts in Poland. Take a rare example of production

franchise – Indeco – that manufactures customised wardrobes and doors. Indeco operates 2

own production units and 74 franchised ones with over 250 exposition offices around Poland.

Drogerie Natura, mentioned above, represents a wholesale-retail system with 58 own self-

service cosmetics and body care retail outlets and 250 franchise licences issued. The network

– started in 2000 and managed by a successful wholesaler Polbita Sp. z o.o.(set up in 1990) –

is now a leader in its sector in Poland. It is also one of franchise systems, which support

franchisees with credit facilities designed in cooperation with chosen banks. Drogerie Natura

plan to open 150 new units over the next 2-3 years, and after the period wish to expand

38 Furthermore these example companies will be able to diversify and stretch their concepts as long as they suit the main philosophy. This goes in line with FFF forecast that competitors will switch from price-wars to service-wars?. Therefore, for instance, we may see, one day, yoga classes at Dr Eris Institutes; kids’ theatres or kindergartens run by McDonald’s; and Do-It-Yourself or gardening accessories sold at Marks&Spencer. All of these – provided that the consumer wants it. What is more franchise systems will be the best possible channels to respond to the demand in time.

23

abroad. A typically Polish concept is Chata Polska network of convenience stores. It

distinguishes itself from foreign-owned competitors by associating its brand with traditional

Polish values such as close relationship with clients, hospitability, openness, wealth. The

network (at the moment comprising 130 outlets that generate about 90mn EUR of annual

revenue) was established in 1997 by an association of retailers from Western Poland. In order

to gain good coverage and overcome obstacle of scarce prime locations, Chata Polska takes

over existent outlets. Another advantage of the network is centralised purchasing (60% of

product range – the remaining 40% come from regional contracts) and marketing. An

additional incentive for franchisees is that they hold stakes in the system and co-decide on its

long-term strategy.

Such cases could be multiple. For sure, success in franchising should no longer sound as

science fiction to Polish companies.

IV. Conclusions

In Poland, at present, each enterprise is faced with constant transformation of socio-

economic environment. In order to survive, business has to react quickly to consumer needs;

guarantee the quality in most detail possible; innovate constantly and increase freedom of

initiative left to partners. The number and percentage share of systems operating and growing

their networks internationally has been increasing steadily. Many of these systems have

already entered Polish market welcome by enthusiasm of local entrepreneurs. However,

international factors present additional burden, requiring a more careful approach that can be

time and energy consuming. Franchisers often follow a similar expansion pattern, first and

early on are often countries with geographical, cultural or language proximity. It is therefore

clear that Polish market might be long underestimated by franchisers, who deny taking the

risk of launching into unknown, culturally distant country. What is more, the general

24

economic and political uncertainty associated with emerging markets might add up to the

situation.

In case of emerging markets and especially in light of the CEEC accession to the EU, it is

in the interest of private and public sector to collaborate more on franchise popularisation.

Summing up – it is necessary to discount the opportunities created on one hand – by external

factors such as the EU expansion – on the other - by internal transformation such as growing

entrepreneurial spirit and business awareness of the Polish society.

Although on the global level information and education on franchising

is improving, it is still poor at local level – as illustrated by Poland. Even accurate statistical

data is limited and still needs some improvement to be collected in a standardised and

ongoing manner. Similarly, a more integrated approach to franchising legal regulations could

be beneficial to the sector and its sound growth.

Finally, although a lot remains to be done in terms of franchising environment in Poland, it

is necessary to acknowledge that we have witnessed substantial development over the last

years. Not only has Poland attracted world-class systems, but it has also allowed local

concepts to grow and gain recognition.

I am convinced that further research into franchising as well as other growth strategies in

Polish and other CEE markets could enrich my conclusions and add more specific

recommendations to what I have presented. I hope to be able to improve my own knowledge

on the topic and present it in my future academic papers.

25

References

Interviews Arnaud le Grelle, Belgian Franchise Federation, Executive Director, (Belgium), 4th September 2002. Igor Pavlin, Slovenian Franchise Association, General Secretary, (Telephone interviews), 6 th and 12th

November 2002. Mark Siebert, iFranchise Group (USA), (Telephone interview), 22nd July 2002. Michał Wiśniewski, Profit System, Poland, 23rd May 2003. Nick Bibby, Bibby Consulting Group (USA), (Telephone interview), 16th August 2002.

Books and articles1. Bachfeld A., International Franchising In The USA And In The EU, UCL, Louvain-la-Neuve 1996.2. Bagan-Karluta K., Umowa franchisingu, C.H.Beck, Warsaw 2001.3. Business and Economy Guide – Warsaw – Local Business Network, Biznes Warszawski, Warsaw

2003.4. De Mendez M., Comment reussir en franchise, Dunod, Paris 1989.5. Domarecki P., Firma pod obcą marką. Profit, 2003, June.6. Domarecki P., Możdżyński B., Stępień J., Dossier – najlepsze franczyzy do wzięcia. Profit, 2003, June.7. Franchise Group Urges Modernising business Rule. PR Newswire, 2002, 25th June.8. Gołębiowski T. (ed.), Marketing na rynku instytucjonalnym, Polskie Wydawnictwo Ekonomiczne,

Warsaw 2003.9. Gołębiowski T., Materials For International Business Management, Szkoła Główna Handlowa,

Warsaw 2002.10. Hasani S., Krawczyk A., Rejtner M., Słodkowski A., Wiśniewski M., Raport o Polskim Rynku

Franchisingu, Profit System, Warsaw 2003. 11. Hubicz K., Piękno w pięknie. Gazeta Wyborcza, Supermarket, 2001, 12th April.12. Koch A., Umowa franchisingowa, Ruch Prawniczy, Ekonomiczny i Socjologiczny, issue 3/1980.13. Kosmetyczny Instytut Dr Irena Eris (CD-ROM), Dr Irena Eris 2002.14. Niewinowska M., Właściciele sieci chętniej dają licencje fachowcom. Puls Biznesu, 2002, 7th

November.15. Nowakowski M.K. (ed.), Biznes międzynarodowy – obszary decyzji strategicznych, Wydawnictwo

KeyText, Warsaw 2000. 16. Pokorska B., Franchising w Polsce: stan i kierunki rozwoju, Instytut Rynku Wewnętrznego i

Konsumpcji, Warsaw 2000.17. Pokorska B., Leksykon franszyzy, Difin, Warsaw 2002.18. Pokorska B., Rynek franchisingowy w Polsce. Handel Wewnętrzny, 1999, nr 1.19. Romanowska M., Zarządzanie strategiczne firmą, Centrum Informacji Menedżera, Warsaw 1996.20. Siebert M.C., Global Franchising – The Surf Is Up!. The Successful Franchising, 1998, October.21. Tokaj-Krzewska A., Franchising. Strategia rozwoju małych firm w Polsce, Difin, Warsaw 1999.22. Toute la franchise 2002: les textes, les chiffres, les resaux, Federation Francaise de la Franchise, Paris

2002.23. Zięba K., Działalność franchisingowa w Polsce i w wybranych krajach Europy. Zeszyty Naukowe

Politechniki Gdańskiej. Ekonomia, 2000, nr 38.

Internet1. www.eris.pl 2. www.franchising.info.pl 3. www.ifranchise.net 4. www.oanda.com

26

Appendices

Appendix 1: Benefits and drawbacks of franchise system.

Subject concerned Benefits DrawbacksFranchiser Rapid expansion

Capital formationIncremental income and ongoing feesFeedback on market, idea generation, etc.Highly motivated franchisee managerResource pooling for advertising, R&DMitigation of risks (financial, commercial)Continued control over goods/services distribution – consistencyQuick response to changes (consumers, market)Reduction of product costsReduced management responsibility at outlet levelGain of prestige, especially through international presenceLess costly expansion

Loss of controlRisk – forming a competitorHassles

Franchisee Known but own businessProven/tested know how and productOften widely well-known product/serviceEconomical purchasing and other economies of scaleHigher likelihood of survival and successLarger scale advertising and R&DTransfer of training, support, consultation, other assistance and professional approachFinancing: third party is easier, possibly franchiser assistance; better investment, easier resalableCertain mitigation of risksImmediate consumer credibilityTime savingsCan focus on sales

Loss of independenceConflict of interestDecision-making limited

Consumer Product/service varietyKnown brand productCompetitive pricesIncreased/guaranteed quality

Less individual approachDecreased personalisationDecreased uniqueness

Economy Stabilised employmentSmall and Medium EntrepreneurshipEconomic growthInter-brand competitionProfessional standardsRedistribution of wealth

Expansion of large, international systems at the cost of traditional, local enterprises.

Source: Own concept based on A.Bachfeld, International Franchising In The USA And In The EU, UCL, Louvain-la-Neuve 1996, pp.vi-4.

27

Appendix 2: Polish franchise sector compared to selected countries.

Country Year Systems(number)

Franchised Units(number)

Average Number of

Units

Employment(thousands)

Revenues(bn EUR)

USA 2001 2294 449917 196 - -Germany 2001 950 56000 59 368 31.7UK 2001 671 30500 45 325 14.6France 2001 653 32240 49 - 30.5Italy 2001 606 36547 60 99 13.8Spain 2001 595 - - - -Netherlands 2001 415 16250 39 160 20.4Austria 2001 320 4525 14 - -Portugal 1999 320 3700 12 - -Sweden 1998 230 9150 40 71 5.7Hungary 1998 220 5000 23 45 2.6Belgium 1998 170 3500 21 29 2.4Denmark 2000 145 4000 28 - 3.6Finland 2001 140 - - - 2.9Norway 1998 125 3500 28 - 3.0Poland 2002/2001 122 10213 84 104 5.8Czech Rep 1998 40 80 2 1 0.8Ireland 1998 20 - - - -Latvia 2001 15 - - - -Source: S.Hasani, A.Krawczyk, M.Rejtner, A.Słodkowski, M.Wiśniewski Raport o Polskim Rynku Franchisingu, Profit System, Warsaw 2003, pp.18.

Appendix 3: Dr Irena Eris Institute - franchising case 1.

In 1998 Dr Irena Eris Cosmetic laboratory has been the first Polish cosmetics company to start operating a

franchise network of beauty parlours – Cosmetic Institute Dr Irena Eris. The idea of the Institute is to provide

every client with an access to professional, modern cosmetic services. Its philosophy is summarised in three

words: reliance, safety and reputation. Institutes offer a broad range of dermatological and beauty care

treatments; hand and foot care, as well as relaxation (massage, aromatherapy), hairdressing (in partnership with

Wella) and make-up services. The offer is holistic/complex and individual/personalised at the same time –

with possibility to consult specialists and doctors before any treatment is applied. Responding to current life

style trends – rush, stress and pressure to remain young and beautiful - Dr Eris targets both women and men,

aged 30–50, with stable financial situation. The company manages a computerised database of its clients that

not only allows to continue treatment in accordance with previous diagnosis, but also – above all – to mine

consumer data and target clients with appropriate marketing campaigns.

The success of Institutes relies heavily on the reputation of Dr Eris cosmetic products, which are now sold

in each of the Institutes for continued beauty care at home. Dr Eris – established in 1983 – is now a leading

cosmetics manufacturer in Poland with 250 employees and 17% market share. Eris cosmetics are sold in all

continents (except Africa) – building brand awareness in potential Cosmetic Institutes’ expansion markets.

Fig. 7 shows Dr Irena Eris franchise system logo, which will be probably adapted for language differences,

if successful expansion into foreign markets is to take place.

One of Dr Eris success factors are advanced R&D supported with heavy investment that allows to conduct

expensive research, which often breaks even only in 5-6-year time. Thus customer confidence is boosted with

strict adherence to top safety and quality standards. As a consequence, Dr Irena Eris brand awareness is growing

28

and the brand is gaining a base of loyal and satisfied customers. This is especially rewarding in business relying

heavily on word-of-mouth publicity.

Figure 7: Dr Eris Beauty Institute Logo – Growing Recognition.

Source: www.eris.pl.

Agata Bielecka, who claims that franchising has been the best method to protect and develop the brand of

Institutes, manages Dr Eris franchise business. At the same time a solid and proven brand determines the

success of franchisee business undertaking. Franchising agreement precisely formulates both parties’ obligations

and guarantees full commitment of a franchisee, which is not always true in case of own unit and a hired

manager39.

There are 3 company-owned units as well as 5 franchisees at the moment (total of 10 units) 40. A model pilot

Institute is situated in a stylish palace in Mokotow district together with Research and Development (R&D) and

training centre. Franchiser – present in the online franchising forum www.franchising.info.pl - sets clear

requirements for franchisees. The parlours are to be located in large cities (i.e., over 100 thousand inhabitants)

– in elegant and calm districts rather than shopping centres. The premise should be at least 130 square metres

and 3 metres high, at ground floor, with large display windows. It should be owned or on lease for at least 5

years. Franchisees are obliged to take part in initial business training as well as regular training aimed at

increasing customer service standards (e.g., effective response to client complaints 41). Medical or cosmetic

education and qualifications are welcome as well as experience in service sector, but the franchisee should be

first of all able to run an independent enterprise and follow franchise relationship rules. A.Bielecka mentions

three basic franchisee selection requirements: (1) financial resources; (2) brand awareness and (3)

understanding the company’s mission and strategy - which are confirmed by other Polish franchisers (e.g.,

Drogerie Natura and Chata Polska)42. Promotional materials of Dr Eris Institutes support that philosophy as

well, as they are meant to present the whole idea behind the business before entering into details of the

agreement43. Eris assists franchisees in organising their units. This sometimes includes help in taking out a loan

or leasing. Nevertheless these are non-standard practices, not provided for in franchise agreement and dependent

on specific franchisee situation. Meanwhile the agreement provides for business plan tools, consulting as to

localisation and personnel recruitment, premise adaptation project, training package, promotion. Eris provides

franchisees with ongoing support via know how sharing, open dialogue on cooperation and functioning of the

institutes, and integration events.

Estimated franchise costs44 include: premise adaptation 500-2000 PLN/sq.metre; cosmetic cabinet equipment

7500 EUR; hairdresser stand 13000 EUR; dermatologist’s cabinet 9000 EUR; plus furniture and other

equipment. The total cost depends on the number of cabinets, which is a function of the size of the city.

39 A. Bielecka during Online Franchising Expo at www.franchising.info.pl. 40 Ibidem. See as well B.Pokorska, Leksykon franszyzy, Difin, Warsaw 2002, pp.65.41 K.Hubicz, Piękno w pięknie. Gazeta Wyborcza, Supermarket, 2001, 12th April, pp. 3.42 M. Niewinowska, Właściciele sieci chętniej dają licencje fachowcom. Puls Biznesu, 2002, 7th Nov, pp.21.43 Kosmetyczny Instytut Dr Irena Eris (CD-ROM), Dr Irena Eris 2002.44 A.Bielecka at www.franchising.info.pl.

29

Eris plans to dynamically increase the number of Institutes in 2003 with 10 new units in Poland and 3

abroad. According to A.Bielecka - with none of competitors following Eris strategy - there should be no major

impediment to attain this goal45. The system uses push approach and is actively seeking adherents in Germany,

the USA, Lithuania, Russia and Columbia. As far as preliminary economic analysis is concerned A.Bielecka

stresses that Eris faces varied competitive environment in each of markets. It has strong position in the US

professional beauty care sector, while facing difficulties in Russia. The company’s unique proposition has

always been top quality products and guarantee of results when using them.

Appendix 4: Polish brand with potential – franchising case 2.

Wedel – Polish chocolate manufacturer could expand its Chocolate Cafeteria concept. It has well-established

brand name that the company is proud to worship; as well as connotation with the best Polish chocolate

manufacturer, who uses unique know how and controls the whole production process - starting with the cocoa

grain – thus assuring high standards. The Chocolate Cafeteria (combined with a shop) in Szpitalna St in Warsaw

is reputable for top quality hot chocolate and currently is adding some other products based on chocolate

recipes to the menu. It has specific stylish interior (that could still be upgraded to match the brand identity) –

especially given the architecture of the building. It is immediately associated it with elegant Vienna Cafeterias,

which enjoy popularity and in the past - similarly to Wedel – waited long to enter the franchising industry.

Wedel could use downtown locations, for instance, in old squares that are being elegantly refurbished in many

Polish cities. Having said this, we should remember that cafeterias, fast foods and other restaurants have been

and will be the most popular and successful franchise systems; therefore there is high probability of positive

results and lots of benchmarking opportunities for Wedel. Furthermore, customers get value for money at

Wedel – prices of hot chocolate are competitive compared to non-branded drinks in other Warsaw cafeterias. In

addition, combining the cafeteria with corner-franchise or simply a small chocolate shop in a room next door

could leverage and boost the brand loyalty. The only obstacle to establishing Wedel franchise is that the

cafeteria would need to carefully select suppliers of additional products such as coffee or sodas – in order to

avoid cannibalisation or teaming up with potential competitors in chocolate sector (e.g., Nestle, Kraft). Thus the

concept may not be flexible enough to compose an attractive product assortment. M. Wiśniewski mentioned that

such an impasse situation is often characteristic to manufacturers who wish to establish a franchise network.

Nevertheless, there is already a successful Polish system based on family business and traditional brand

name, which combines cafeteria format with sales of top quality cakes, sweet snacks and ice-cream – A.Blikle –

that now operates 7 company-owned units in Warsaw and 3 franchised cafeterias outside Warsaw46. Although it

might compete with Wedel in terms of upper-shelf clientele and traffic in midday hours, there is large difference

in terms of pricing as well as consumer segments that both systems would target (with Wedel concept having

wider recognition thanks to its lower prices).

45 Ibidem.46 Three franchised units operate in Płock, Gliwice, Częstochowa. Blikle was planning to open 2 cafeterias in 2002 in Toruń and Kielce; and further 7 franchised units in 2003 (Łodź, Poznań, Cracow, Radom, Gdańsk, Warsaw and its surroundings). Initial franchisee capital investment varies from 150 to 250 thousand PLN depending on location and size of premises. Initial franchise fee is of 20 thousand PLN and Blikle does not require any ongoing fees. Source: www.franchising.info.pl.

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