New Legislation Improves Franchising Opportunities in Kazakhstan

One of the sectors of Kazakhstan's economy that presents the greatest opportunities for franchising expansion is food services, particularly fast-food restaurants, coffee shops, and other types of catering. Currently, a combination of growing discretionary incomes, particularly in the capital of Almaty, and rapid expansion of local food processing industries has resulted in increased business opportunities in the food services sector. Moreover, competition in this sector is limited and potential is great for a franchise employing proven management techniques and established brand identity. The positive experience of several Russian-based restaurant franchising companies indicates that local consumers eagerly embrace food service novelties and the market is far from saturation.

Another promising sector is home improvement, particularly construction (including construction materials, techniques, tools, and equipment) and do-it-yourself products. Since 1999, the construction sector in Kazakhstan has been growing at 18Ð22 percent annually, largely due to the rapid development of so-called elite residential construction (primarily apartment buildings and condominiums), development of new government and corporate office facilities, and private residential construction (stand- alone houses). In addition, discretionary income growth, expansion of local and multinational companies, and increased sophistication of construction contractors have created a demand for style and quality and also expanded the potential market for foreign furniture, decoration, and tools and equipment.

Professional home maintenance and repair services are virtually nonexistent on the market, although demand is significant. Many Kazakhstanis now own their apartments and seek to improve their residences but either cannot find or afford to hire someone and, therefore, are doing the work themselves. Companies providing materials and tools to do-it-yourselfers, have the potential to occupy a large market niche. Local consumers view U.S. brands positively. Although developing this market niche may require considerable marketing efforts to raise awareness and motivate buyers.

Considerable potential exists also for franchisers looking to sell automotive spare parts and tools, provide car repair and maintenance services, or to open roadside convenience stores and car washing stations. The number of privately owned motor vehicles in Almaty increased from less than 100,000 in 1993 to more than 460,000 in 2002. To a lesser extent, the trend has been replicated throughout the country. Despite the skyrocketing number of new vehicles, professional washing and maintenance services are in early stages of development, and the selection of quality tools and spare parts is limited. Consequently, franchising arrangements targeting those consumers willing to pay extra for quality, professionalism, and particular brands represents a significant market niche.

It is worth noting that the market is receptive to the idea of combining products with after-sale service/installation as a value-added strategy to win over more customers on the basis of quality and education about the product. U.S. firms that invest in quality product and service training of their franchisee can help ensure a good reputation for the brand, as well as fewer problems associated with warranties and product misuse.

Franchising potential is also seen for retailers of brand-name apparel and for specialized clothing stores (e.g., children's, teenagers, big and tall, lingerie). Over the last several years in Kazakhstan, spontaneous flea market-type establishments selling often smuggled clothing items have gradually lost market share to stores offering higher quality apparel. Considering that in Kazakhstan clothing markets have reached a certain degree of saturation and most consumers can distinguish authentic brand-name items from counterfeit, pricing policy and brand positioning will be key to success of any franchising operation dealing with clothing. Specialized stores are new to the market, thus store specialization and appropriate price policy can serve as the foundation of an effective market penetration strategy. However, this niche opportunity is centered on Almaty.

Market Size and Competition

KAZAKHSTAN FRANCHISE ASSOCIATION

The Kazakhstan Franchise Association (KFA) is a nonprofit, nongovernmental industry group promoting franchising in Kazakhstan. It was created in February 2002 with the support of the U.S. Agency for International Development. In June 2002, KFA became an associate member of the World Franchise Council.
KFA has four types of members: franchisors, franchisees, suppliers, and potential franchisees. KFA intends to represent franchising by offering a variety of services, including educational events, lobbying, consultation, and matchmaking programs.
Kazakhstan Franchise Association
Mr. Andrey Zaharov, President
Tel: +7 (3272) 474-771ÊÊ Fax: +7 (3272) 479-160
Email:Kazaf@mail.ru

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)

Given the emerging state of the Kazakhstani franchising market and differences in valuation techniques, it is difficult to provide franchising market-size estimates. Based on 2001 experience, it is believed that annually the market can absorb $5Ð7 million worth of franchising arrangements (excluding sales of associated materials, equipment, and supplies).

The market is not geared toward specific price ranges of franchising agreements. Companies selling expensive franchising contracts, as well as their less famous competitors offering less sophisticated arrangements, can penetrate the market. Potential rates of return on investments will serve as the key decisive factor for Kazakhstani partners to work with a particular franchiser. However, the experience of existing Kazakhstani franchisees indicates that the market is most receptive to franchising contracts with initial fees of up to $100,000 and overall start-up costs ranging from $150,000 to $500,000.

A limited number of franchising agreements have been implemented in Kazakhstan to dateÑonly 35Ð40 operations are officially registered as franchisees. Russian and Turkish franchisors hold some 90 percent of market share. Finnish, Dutch, and French companies also operate on the market. Currently, restaurant and fast food are the most typical franchising arrangements in Kazakhstan. However, since the adoption of the franchising law, a clear trend toward franchising contract diversification has emerged. Recently launched franchising outlets include an upscale fitness center and a number of apparel boutiques. Several automobile dealers claim their contracts with major regional distribution hubs qualify as franchising arrangements.

A strategic approach should be taken to penetrate this market. U.S.-based companies proposing franchising arrangement to Kazakhstani counterparts should be prepared to be involved in market development processes including, but not limited to, cultivation of reliable suppliers, introduction of quality standards and controls, and promotion of appropriate business ethics and legal provisions.

For more information on doing business in Kazakhstan, visit BISNIS Online at www.bisnis.doc.gov/kazakhstan.htm.

Andrey Chursov, a former BISNIS representative in Kazakhstan, is currently a Ph.D. candidate at the Moscow State Institute of International Relations (MGIMO).