Franchising: an underestimated way to success

RIGA - Franchising may appeal to entrepreneurs because of the seeming lack of risk, but there are several important issues to be considered before one rushes to buy the rights to a brand name - particularly in Latvia, where the procedure is in its infancy.

The first serious franchised companies started to appear here in 1991, soon after independence. McDonalds' was among the most famous, although its Latvia franchise is held by a Polish company. According to Marina Krupnikova, business development director for the international auditing company Deloitte & Touche, obtaining a franchise is not easy for all. "Many business people were turned down with the argument that the market is too small, too underdeveloped and that people here don't have the necessary experience," she said.

There have been a couple of Latvian success stories though. One is the arrival of the U.S. ice-cream giant Baskin-Robbins, whose network of ice-cream parlors spans the world.

Eight years ago the company's Latvian director, Vladimirs Bakalo, stopped by an ice-cream parlor in Moscow and was immediately hooked. He decided to start a Baskin-Robbins branch back home in Latvia and applied for a franchise. "The company sent a few of their experts and after the evaluation I was given permission to start selling the brand," Bakalo said.

As of 1995 he has been director of Baskin-Robbins Latvia, a chain which now extends to more than 10 parlors in Riga alone. There is one big Baskin-Robbins parlor in the sea-side resort of Jurmala, 20 kilometers from Riga, but soon, Bakalo hopes, the business will expand even further. "The problem is that this ice cream is very expensive and not an every day purchase," he explained.

One problem international companies could face in Latvia is poor quality local products, said Bakalo. Baskin-Robbins does not produce its ice cream in Latvia because the company believes local milk products are below its standards. "We went around and asked dairies if they could do certain things for us to improve their quality, but they said they couldn't," he said.

Baskin-Robbins turnover in Latvia last year was around $190,000, according to the information available at the Latvian Enterprise Register.

There are also tax issues to think of before signing up with a major corporation. Krupnikova said it helped to have business experience in Latvia before throwing oneself into a new venture. "Mainly, there are certain differences regarding taxation," she said.

Any franchise will have its own structure, own ways of operating and its own ways of settling payments with the franchise owners. But one thing all owners have in common is they expect to be paid for allowing people to use their name.

Pauls Gusts, marketing manager for Lufthansa City Center, thinks franchising is an under used form of business in Latvia.

"Franchising as a business option is overlooked," he said.

One of Lufthansa City Center's biggest tasks in its early years was accommodating delegates at the European Bank for Reconstruction and Development's meeting in Riga last year.

Gusts is enthusiastic about the advantages of holding a franchise. One is that customers visiting his company's office in Riga will find the same service and appearance as they would in any of the company's offices in the world. Lufthansa City Center's Latvian turnover reached $7.5 million last year.

But sometimes it is necessary for franchise holders to alter standard practices to suit local conditions. "There are small differences in how we operate in different countries." said Andris Ribaks, technical manager for U.S.-franchising-car-rental company AVIS. "In England we drive on the left hand side for instance," he said. AVIS in Latvia has an approximate turnover of $800,000 annually.