Serbian Franchise Market- Interview with Marica Vidanovic, business advisor at Serbian Chamber of Commerce

The Balkan Market

• The last decades several companies that operate in Greece and other EU countries expand their business to the Balkan market. Each country though has its own specific characteristics and there are special factors that have to be taken into consideration for successful development. According to your expertise, which are the characteristics of your country’s market that international franchises should focus the most, in order to expand their business successfully?

While Serbian economy suffered from isolation during the 90ies, recent ten years of political and macroeconomic stability have rapidly transformed Serbia into the most attractive business environment in Southeast Europe. Given its recent high economic growth rates, this averaged 6.3% from 2004 to 2008, leading analysts to sometimes dub Serbia as the “Balkan Tiger”: 3rd most attractive manufacturing location (compared to 25th in 2004)-(2008 PricewaterhouseCoopers survey), 7th most attractive services destination among emerging economies (2008 PricewaterhouseCoopers survey) and 2nd most investment projects in Southeastern Europe in 2007 and 2008 – Ernst & Young.

The Ministry of Finance of R. Serbia expects the 2012 GDP growth to total three percent, increasing from this year's RSD 3,359bn to 3,614bn (some EUR 35.9bn) in the next year. The GDP growth per capita should increase from EUR 4,518.3 in 2011 to EUR 4,799.1 in the year to come. The ministry also expects the inflation rate to drop from 7.9 percent in 2011 to 3.5 percent in 2012.  According to projections, the euro value of exports should drop from 17.4 percent in 2011 to 13.5 percent in the next year, the import would also drop from 13.2 percent to 8.8 percent, current account deficit should increase from 7.6 percent in 2011 to 8.7 percent of GDP in 2012 while the external trade deficit would drop by 0.2 percent relative to 2011, thus totaling 15.1 percent of GDP.

• Which are the key factors of your country’s business industry in terms of competition, governmental priorities in economic policy, the geographical distribution etc?

Serbian industry today represents a diversified mix of focus on agriculturally fruitful land and experience in manufacturing industry. Traditionally based on cooperation with Western European companies key sectors in Serbia are base metal, food, electronics, clothing, pharmaceutical and automotive industry. An overview of key trade partners of Serbia reflects both its geographical position between east and west as well as the openness to cooperation with all countries. Key markets for Serbian products today are Italy, Bosnia and Herzegovina Germany, Montenegro and Romania, while Serbia mainly imports products from Russia, Germany, Italy, China and Hungary. Serbian economy suffers from constant trade deficit, which is the reason why Serbian Government is strongly supporting the further industrial development of the country, especially on export oriented sectors. In this sense the three sectors   declared as the sectors of special importance for development of Serbia are automotive, electronics and ICT industry.

• Which international concepts operate in your country and which are the factors, according to your opinion that attract them? Which factors will lead them to success in terms of entering in the market and developing in it?

First of all,  with Free trade agreement Serbia can serve as a base for duty-free imports and exports to a market of 1 billion people. It includes: The European Union,The United States of America,Russia,Turkey,

CEFTA,The European Free Trade Agreement states, Kazakhstan and Belarus.

Internally, with 9.5 million people, the Serbian market is the 2nd largest in South East Europe. The average net monthly salary rose from €91 in 2001 to €402 in 2008. Coupled with rapid consumer loan expansion, this fueled a sharp increase in local demand. This was reflected in double-digit growth of retail trade turnover on an annual basis.

Serbia’s tax system is highly conducive to investment. Apart from featuring the lowest tax rates in Europe, investments can benefit from possible tax incentives which create excellent start up conditions. Corporative Profit Tax is 10%, VAT 18%, salary tax 12%, annual income tax 10%.

Serbia’s labor forcecombines exceptional working efficiency with sizable labor supply. With a unique combination of high quality and low costs, it is one of the key factors in reaching a strong business performance.

As a logistics base, Serbia is the perfect location for a company to efficiently serve its EU, SEE or Middle Eastern customers. It borders the EU at the Hungarian, Bulgarian, and Romanian state lines, while offering the benefits of working outside the EU. Furthermore, owing to its position on the geographic borderline between the East and West, Serbia is often referred to as a gateway of Europe.

• Which business sector is most developed? How many brands operate in it? (if the number is possible to be given)

Franchising, as a business concept, is mainly applied in the service sector (hospitality industry – fast food restaurants, ordinary restaurants), then in real estate business, car servicing, business services, maintenance, hotel industry, tourism, etc.). It is the sector of services (together with agricultural production and food production) that is looked upon with great hope when talking about the economic development of Serbia and solving of numerous problems faced by the domestic economy.

The total number franchise brands operating in Serbia is about 120 and 25% of them are national brands with 1550 outlets. Total number of employees in franchising business is 18,500. 

Franchising in the Balkans

• Is franchising developed enough? Do investors invest on franchising?

Having in mind that franchising is very developed in the whole world and that its development is continued, this form of business is slowly entering Serbia. Awareness of the advantages of franchising is still not on the level it should be in the Serbian business circles. The activities performed by the Chamber of Commerce and Industry of Serbia on introduction of a high quality model of franchising business in Serbia are one of the key aspects  of faster economic growth of the Serbian economy and its integration into the global and European trends. It is important that, since 2007, the CCIS Centre for Franchising has managed to change the awareness of the advantages and opportunities of franchising in Serbia, through training programmes, conferences, consulting services and assistance in starting franchising business. A great number of potential franchisors come to the CCIS Centre for Franchising looking for advice and assistance in starting franchising business. In addition, from day to day we have a growing interest of Serbian companies in expanding their current franchising business, both in Serbia and abroad. This segment of franchising development in Serbia is very important, because it can be an easy way to export Serbian brands, and through franchising, also to export goods and services.

• Which is the legal framework for franchising?

Today in Serbia there are neither legal regulations for franchising, nor a legal framework for easier market analysis.   This influences largely the quality of franchise concept on the Serbian market and that is the reason why the CCIS, through its Centre for Franchising, highlights how important it is to verify the correctness of franchises that are either bought or created by domestic companies, by the CCIS. The recommendation and verification by the CCIS Centre for Franchising is very important in Serbia.

In view of the above said, the CCIS has started the initiative to create a legal framework for regulation of franchising and registration of such kind of business. In the meantime, The European Code of Ethics that is applied all over the world, serves as a “Bible” in mutual relations of franchisor and franchisee (ECE – the Code was elaborated with the aim to serve as a practical collection of basic provisions of ethical conduct of people engaged in franchising in Europe and the world).

• Which franchise concepts of your country operate already abroad or have the potentialities to do so?

Currently in Serbia, domestic franchise concepts accounts for only 25% of the total number of brands on the Serbian market. In spite of a small number of national brands, they are expanding through franchising on the EU market, neighbouring countries and also the USA market.   

• Which is the profile of the candidate franchisees in your country?

The profile of franchisees varies. Very famous and expensive brands (millions of euro) can be afforded only by a few companies or corporations. In case of “low cost” franchises, there is a great interest in them in Serbia. The amounts range from 20,000-150,000 EUR, and that is the target group of people for consultations with the CCIS Centre for Franchising

In the privatization process in Serbia, a lot of people lost their jobs. This is an opportunity for the citizens to pool their severance pays and start a new business through franchising. Franchising has a great advantage as compared with an individual start-up, because it is a much safer way of doing business. This is confirmed by the fact that only 10% of franchising units fail in the first five years, whereas this figure reaches as much as 80% with individual start-up.  

• Are the franchisees keen on Greek franchises?

Having in mind the similar mentality, food and cuisine of consumers in Serbia and Greece, and according to our analyses, there is great openness for appearance of the Greek brands on the Serbian market. We in the CCIS Centre for Franchising already have several requests to find franchisees in Serbia for the Greek franchise concept. Arrival of foreign brands increases competition and standards in business operations.

• Which franchise concepts/ sectors are the most popular in your country? Which is the greatest problem and the greatest opportunity of franchising development in your country?

Along with the non-existence of legal regulations on franchising, a great problem for franchising development is lack of understanding for this kind of business on the part of financial institutions. There are no special credit lines in Serbia that would support franchising. Lack of funds is the biggest problem for entrepreneurs and the unemployed willing to start business by purchasing a franchise.  

The CCIS Centre for Franchising has started the initiative for negotiations with banks in Serbia for opening special credit lines for persons that wish to start franchising business. We expect the results at the beginning of next year. 

Crisis

• Nowadays, Greece and other South European countries go through a crisis period. Is the market in your country affected by the crisis?

Before the onset of the global economic crisis, Serbia achieved a relatively high rate of economic growth over a number of years with real GDP growing at rates between 5% and 6% per annum. This growth was mainly generated by the non-tradable sector, driven by a large inflow of capital, leading to large external deficits, with a current account deficit of 15% of GDP and a trade deficit of 22% of GDP. These deficits implied that Serbia was consuming and investing well above its level of current output. The current account deficit was covered by foreign savings, as Serbia took advantage of financial integration with the EU, which enabled banks from neighboring EU countries to dominate the banking sector. However this economically rational ‘downhill’ flow of capital from developed to transitional Europe (Abiad et al., 2009) was quite excessive in the case of Serbia, taking into account underlying parameters (low per capita income and a low degree of financial integration). Thus Serbia exceeded her natural ‘speed limits’ of output growth, and became highly vulnerable to the various external shocks that struck her during the crisis. This experience has revealed the downside of financial integration with EU.

• Is the franchise industry affected?

The global crisis has impacted us all. Purchasing power of end consumers has decreased. However, franchising is the only type of business which has not been impacted by the global crisis, because it operates manly in the service sector. Group procurements and marketing, sustainability of goods and services distribution through a strong franchising network, and implementation of a profit proof business model, are the most important reasons for survival of franchise business concepts.

In any case, it is possible to facilitate appearance of domestic firms on foreign markets through franchising, because meeting the criteria of valid franchise concept will ensure easier acceptance of domestic brands on foreign markets, and domestic companies will have the possibility to expand the distribution networks of their products and services in a simplified way.