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Franchising

Overview

Kazakhstan is a leader in Central Asia in the area of franchising. Although franchising is still a fairly new business concept in Kazakhstan, it is drawing increased interest from entrepreneurs. In 2002, the Parliament adopted a Law on Franchising providing legal grounds for franchising development. In the past several years, spending patterns in Kazakhstan have begun to resemble those of the Western world, creating a demand for name brands and quality products. Kazakhstani companies have accumulated financial resources that, combined with a lack of available investment instruments, is also stimulating interest in franchising. Kazakhstan is obviously a franchising leader in Central Asia and can serve as a gateway to the growing economies of the Central Asian countries.

There is no single registration agency for franchising systems. Consequently, there are no reliable statistics on franchising in Kazakhstan. Industry specialists indicate that since 1998 the number of franchising systems in Kazakhstan has grown from about 20 to approximately 120 with approximately 1,000 franchising outlets. The Kazakhstan Franchising Agency states the total number of all franchises and brands operating under franchising or other similar terms is approximately 300. Domestic franchising is just starting to develop with 20 local franchises and 200 franchising outlets.

Kazakhstan is characterized by a large number of franchisees working on the basis of sub-franchising agreements with master franchisees based in Russia or Turkey. Only a few foreign franchisors work directly with Kazakhstani partners. There are several reasons for this including a small market size of 16 million people combined with low population density and the virtual absence of Kazakhstani entrepreneurs in the international franchising market. Kazakhstani entrepreneurs find it easier to work with Russia-based franchisees instead of foreign owners because Kazakhstani and Russian consumers share the same language and a similar mentality. Thus, sub-franchises bought from a Russian partner can be used in Kazakhstan without significant adaptation. However, as Kazakhstan becomes more and more integrated into the international market, the number of direct franchising agreements is expected to grow.

Given the market’s lack of transparency, it is difficult to define the combined sales turnover of franchises operating in Kazakhstan. However, industry specialists estimate approximately $500 million. On average, each franchisor has 2-3 franchisees in Kazakhstan. The industry is developing most intensively in Almaty, Astana (capital of Kazakhstan) and a few other large cities. 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. Roughly 60% of all franchisors are based in Almaty, 30% in Astana, and the rest are in cities in the oil-rich region in western Kazakhstan.

Several well-known U.S. franchises have successfully entered the Kazakhstani market. Among the most visible brands are: Baskin Robbins, Crestcom, FasTracKids, Sbarro, Pizza Hut, KFC, Office 1 Superstore, Tiffany Marble, FitCurves, Hyatt Regency, Marriot and Intercontinental. The U.S. Commercial Service in Kazakhstan is working with a number of prospective franchisers that are either finalizing agreements with local partners or in the midst of constructing their first outlets in Kazakhstan. Fast food restaurants are one of the areas in great demand for U.S. franchise models. U.S. market presence is also visible in business education and training services, business services, and children’s services/preschools. The majority of non-U.S. foreign franchises in Kazakhstan are from Russia and Western Europe, mainly the U.K., France, Germany, Spain, and Italy.

Some factors limit the growth rate of franchising in Kazakhstan such as: weak legal protection of intellectual property rights, lack of long-term financing opportunities, lack of transparency in Kazakhstan’s business environment, and low awareness of Kazakhstani entrepreneurs of franchising opportunities. Despite these negative factors and considering the small population and low population density in Kazakhstan, this sector has significant potential for development.

U.S. franchisors should focus marketing efforts on the growing middle class, estimated to be as high as 15-20% of the population and responsible for 50-70% of the financial value of all goods sold in Kazakhstan. Multibillion dollar investments made by oil companies in Kazakhstan are creating a retail market for locals employed in the energy and related services sectors, as well as for the growing expatriate communities. According to levels of income, the middle class can be roughly divided into two groups:

  • the lower middle class, employees with salaries of $12,000-24,000 per year per person (70% of the middle class) and
  • the upper middle class, with salaries of $24,000-60,000 per year per person (30%).

To understand the potential for franchising in Kazakhstan, it is important to consider the rapidly developing retail infrastructure of new shopping malls. The development of hypermarkets (i.e., megastores that include grocery stores), which is accompanying and spurring retail growth, is opening up new opportunities for franchisors. In the past ten years, about twenty new hypermarkets opened in Almaty and Astana. The process is echoed by other major cities on a smaller scale. According to investors involved in developing new trade centers, retail infrastructure development is far from saturation and will continue growing. In 2010, several new hypermarkets were opened in Almaty, including Metro Superstores.

Best Prospects/Services

According to experts, franchising is quite attractive for businesses that are interested in sales of business support services (business consulting - audit and accounting services, advertising, HR related services, technical consulting), housing construction and repair services, education services (tutoring, foreign language courses), leisure and entertainment, fast food, medical and cosmetic services, retail sales, and other personal services (laundry, footwear and clothing repair, delivery services etc).

Currently, the majority of local potential franchisees are seeking agreements with franchisers operating in the following sectors:

  • Fast-food and casual dining;
  • Retail sales (clothing, footwear, furniture, sporting goods, supermarkets, gasoline stations);
  • Auto repair and maintenance services, gasoline stations;
  • Hotel chains for low and medium income travelers;
  • Printing and copying services, photo-shops, etc; and
  • Body/health care services (beauty salons, gyms, etc.).