Bulgaria–Bullish on Franchising
January 2008 Franchising World
Bulgaria’s franchise market is still mostly unexplored and untapped.
By Miroslava Marinova
Bulgaria is an often overlooked, but potentially profitable country for franchisors interested in international expansion. The country that was once behind the Iron Curtain is now moving with a groundswell of economic change. A stable political climate, strong economic growth and favorable legal environment in a country of more than seven million people present opportunities that international businesses, including franchising, are now beginning to recognize.
Since the collapse of the communist system in 1989, Bulgaria has been a parliamentary republic ruled by a democratically-elected government. All major political parties support the government’s efforts to ensure a healthy business environment that attracts and sustains foreign investments. The coalition government of Prime Minister Sergey Stanishev, like the preceding governments, remains committed to the macroeconomic stability of the country.
In 2007, Bulgaria officially became a part of the European Union. It is also a NATO member since 2004. The country had to overcome various hurdles throughout the transition, such as domestic problems inherent to post-communist countries and an insecure political environment in the Balkan region and the nearby Middle East. Nevertheless, Bulgaria accomplished profound reforms and achieved a remarkable transformation which made its successful integration into the Euro-Atlantic community possible. Proof of that is a further reinforcement of U.S.-Bulgarian bilateral relations through the Defense Cooperation Agreement signed in 2006. Bulgaria is also the leader in the multilateral peacekeeping force for Southeastern Europe, known as SEEBRIG, and sustains excellent political and economic relationships with its neighbors in the Balkan region.
Conservative fiscal policies, structural reforms, and pegging the Bulgarian currency “lev” to the euro has created a stable macro-environment over the past decade. The emerging country is one of the fastest developing economies in Europe. Its average real GDP growth was 4.8 percent from 2001 to 2004, steadily increasing to 6.2 percent in the first quarter of 2007, a trend that is expected to continue.
Bulgaria offers various financial incentives to attract foreign investment. The tax rate will be the lowest in the EU beginning in 2008, when recently approved 10 percent flat tax for both businesses and individuals will take effect. The corporate tax in Bulgaria is currently 10 percent. The lowered tax will make the country’s business environment comparatively attractive by minimizing the fiscal burden to businesses. It will also stimulate healthy competitiveness among businesses by reducing a common practice in many parts of the world–tax avoidance.
The improving standards of living additionally increase the attractiveness of Bulgaria’s commercial environment. The inflation, while still high for the EU, has remained stable around 6.5 percent in 2005 and 2006. The inflation is generally slowing down, but in 2007 it was expected to increase slightly, due to recent agricultural losses.
The Bulgarian legal framework is very accommodating to foreign franchises. Currently, there are no franchise laws or specific regulations pertaining to this business model. In general, no specific registration or government approval is required in order to establish a franchise enterprise. Franchisors must comply with the provisions of the Bulgarian Commerce Law. No restrictions are imposed on repatriation of earnings, capital, royalties, or interest. Intellectual property rights are recognized and protected.
The Investment Promotion Act, last amended in 2006, was designed to encourage foreign investment. The act stipulates equal treatment of foreign and domestic investors and creates conditions for improved administrative services. It further includes an investments incentive package and encourages implementation of investment projects over a period of up to three years. It is this law that explicitly recognizes intellectual properties and securities as a foreign investment.
U.S. franchisors are further protected by the U.S.-Bulgaria Bilateral Investment Treaty from 1994. It includes obligations to U.S. investors such as national treatment and most favored nation status, the right to make financial transfers freely and without delay, international law standards for expropriation and compensation, and access to binding international arbitration.
The Bulgarian government has established the infrastructure necessary to provide adequate and effective protection of intellectual property. Bulgarian law protects the acquisition and disposition of property rights. All intellectual property laws are harmonized with EU legislation, the Agreement on Trade-Related Aspects of Intellectual Property Rights, and other international acts. Bulgaria is a member of the World Intellectual Property Organization and a signatory of the Paris Convention for the Protection of Intellectual Property. All intellectual property of any of the Paris Convention treaty’s 171 contracting states, including the United States and most European countries, is equally recognized, protected and accessible domestically and abroad.
The registration of trademarks, trade services and all intellectual property is filed with the Bulgarian Patent and Trademark Office. The Council of Intellectual Property Protection, which is a part of the Bulgarian Ministry of Culture, coordinates intellectual property protection and enforcement. The Bulgarian Commerce Law grants the exclusive right for a trade name to be used only by the merchant who has registered it. In case of infringement, the interested party is free to seek an injunction, as well as damages.
The Bulgarian Commerce Law also mandates that procurators, agents, assistants and representatives protect trade secrets and their good name as merchants. Business methods can be kept as a commercial and production secret under the Law on Protection of the Competition.
Despite the presence of a good legal base, the country’s judicial system is one of the major obstacles to developing international business. It is generally ineffective and weakens investor confidence in the courts’ ability to enforce successfully the law. Corruption in the administration and government bureaucracy are also common and may slow down business start-up and operations. Organized crime additionally raises insecurity. Other areas cited by international businesses as necessary to facilitate conducting business in Bulgaria are improved creditor rights through improvements to bankruptcy law and procedures, and improved accounting standards and risk assessment.
The market for international franchise brands in Bulgaria is uncluttered. In their search for better value, Bulgarian buyers are very receptive to Western goods and services. With the opening of the borders and increasing financial independence, Bulgarians are extending their travels abroad and developing more cosmopolitan tastes. Consumers are frequently exposed to Western trade names resulting in a high level of awareness and trust in them. In addition, many foreigners are visiting or moving to Bulgaria, bringing with them a knowledge and demand for franchised brands.
The capacity of the Bulgarian market to consume franchised goods and services has grown with the rise in disposable income in recent years. The average total income per capita rose by 20 percent from June 2006 until June 2007. The increasing income plus easier credit available to consumers trigger a rise in consumption. In 2007, the consumption growth rate has grown to 7 percent. Consumer demand is highest for products and services of consistently good quality, reliable service and moderate pricing. A considerable niche population is willing to pay premium prices for superior quality, both real and perceived. The Western origin and the popularity of the brands abroad enhance the brand equity of the international franchises in general and allow for charging higher prices. For example, several popular Western quick-service franchises, which in the United States compete mainly on price, are able to charge premium prices on the Bulgarian market mainly because of their Western image.
The commercial climate in Bulgaria encourages the development of private franchise ventures. As understanding of the franchise business model expands and people become more aware of its advantages, more and more Bulgarian entrepreneurs are becoming interested in the opportunities it offers. The economic transition of the country has further created many opportunities for successful private enterprises. Today, entrepreneurs with experience and resources are looking for new opportunities to reinvest and expand their capital. In addition, more and more Bulgarians learn about Western business. They combine their knowledge of market economy with their understanding of the local business environment to undertake private ventures. They also view franchising as an attractive prospect.
Franchise Development and Perspectives
Encouraged by the supportive commercial environment and the large market potential, franchising has recently experienced a significant surge. Over the last five years the international franchise systems in Bulgaria have more than doubled in number. The first franchises and licenses in the country date back to the communist system–in the 1970s contracts were signed with Hertz, Novotel and Sheraton.
Today franchising is present in many different industry sectors, including beverages, cosmetics, education, fast food, gas retail, hotels, and real estate brokerage. Among the most popular international franchisors with a firm presence in the Bulgarian market are Arexim, Bally, Benetton, Berlitz, Best Western, Century 21, Dunkin’ Donuts, ERA, GNC, Golden Tulip, Hertz and Avis, Hill International, Hilton, KFC, McClean, McDonald’s, Monsieur Bricolage, NEOSET, OMV, Pizza Hut, Radisson, Remax, Shell, Sheraton, Snelling Staffing, Superstore USA, Office 1, PMC Management, and Wilson Learning. Bulgarian-founded franchise systems have also emerged on the market. Policontact, a Bulgarian franchisor, is in the employment services industry. Happy, another Bulgarian franchisor, is the largest restaurant chain in the country. Today, Happy operates more than 20 domestic and several international outlets.
Despite the swift development of licensing and franchising over the past years, Bulgaria’s franchise market is still mostly unexplored and untapped. A study by the Bulgaria-based International Executive Service Corp. indicates that franchised business in Bulgaria is likely to be very cost-effective, primarily due to relatively low real estate prices, favorable wage rates for both qualified and unqualified labor, and very strong market demand.
Franchise professionals indicate that best prospects for franchisors in the country are in the automotive products and services, hotels, laundry and dry cleaning, and restaurants divisions. Good opportunities also exist in convenience stores, ice cream and yogurt, hardware stores, and specialized retail stores. Further promising options are baked goods, candy, equipment rental centers, eye care, and snacks. Currently, the U.S. Commercial Service office is working on franchise projects in the automotive, architectural and educational sectors.
No Bulgarian financial institutions are specialized in financing franchise development. However, banks, EU programs and special funds that support small and medium-sized business also provide credit financing for franchise projects. The Bulgarian Franchise Association offers guidance on financing opportunities.
BULFA, established in 1994, is a member of the International Franchise Association in Washington, D.C. It assists interested parties with information on franchise opportunities and regulations, and provides venues for meeting them with the Bulgarian franchising industry. In April, BULFA hosted “Franchising Days in Bulgaria 2007” in the capital. The theme of the seminar was “Internationalization of the Bulgarian Companies by Franchise.” It featured renowned Bulgarian and international franchise specialists and provided information, analysis and practical advice on the Bulgarian franchise environment and its opportunities.
Forms of Franchising
All forms of franchising can be applied in Bulgaria. No specific requirements or restrictions exist for the entry of a foreign franchisor. The prevailing methods employed are direct (unit) franchising, master franchising, regional development, joint venture, and establishing affiliates. Due to the relatively small size of the Bulgarian market, franchisors usually grant master franchises for the region, the Balkans or Eastern/South-eastern Europe. Currently most outlets are company-owned or owned by a foreign master franchisor. For example, KFC and Dunkin’ Donuts are owned and managed by Samex, a Bulgarian-Greek company; Pizza Hut is financed by Holland Capitals.
Most foreign franchisors have a single franchisee in the country. The franchisee is a regional developer or simply develops multiple units. The quick-service companies and the larger franchisors, such as Office 1 Superstore, Shell and OMV, have developed numerous outlets in major cities throughout the country. Office 1 Superstore, for example, has established a presence in 87 cities in the country, and developed more than 30 units in the capital alone.
Miroslava Marinova is a research analyst at FRANdata Corp., Arlington, Va. She can be reached at email@example.com.