Franchise the Hungarian way

A brand name that promises profit and buying a business concept – this is franchise. We find well-working franchises and failures in both the Hungarian FMCG and Horeca sectors. László Murányi, the CEO of CO-OP Hungary Zrt. and president of the Hungarian Franchise Association only sees advantages in the franchise system.

His opinion is that in the current crisis situation franchise is a good opportunity for SMEs to develop as part of a well-established, bigger system. Coop’s franchise system is exemplary: if a shop decides to join, Coop examines whether it meets the necessary criteria to become a member, and then it is placed in one of the following three categories – Coop Mini, Coop ABC, Coop Szuper. By signing the franchise contract the shop earns the right to use the Coop logo and know-how.

The latter includes internal-external standardisation of the shop and certain business policy standards. For instance 60 percent of the selection of goods is the same in all Coop stores, on a regional level this ratio is 20 percent and the shop has 20 percent to decide about. Shops can choose from 700 private label products and purchasing and transportation are organised centrally, just like promotion campaigns.

CBA and Reál also work in a franchise system, but Attila Linczmayer, marketing director of Reál Hungária Élelmiszer Kft. told us that in their case the system was much more flexible than the official franchise definition. Members enjoy all the advantages of cooperating (better purchasing conditions, standard promotions, service contracts, marketing, etc.) and can keep a certain level of independence, in order to be able to adapt to their own, often very diverse micro-market conditions. From the manufacturer side, franchise’s most important target is specialised shops.

Among these bakeries are especially successful, it is enough to mention PékPont or Fornetti. One of the most successful FMCG franchises, Update is also developing most rapidly in this segment, they already have 10 units in Slovakia. Schobert Norbert, Update Zrt.’s owner told Trade magazin that franchise members are not allowed to deviate from the strict regulations laid down by the brand’s owner. Mr Schobert’s experience is that franchise partners often try to circumvent regulations, but he shows no mercy in these cases. Norbi Update rests on three pillars: 1. retail, where 15 percent of the complete portfolio is featured; 2. franchise stores, where the majority of products are sold; 3. home delivery, a dynamically developing segment (1,000 percent growth in just one year) in which delivery is done by licence partner Teletál Ételfutár – they take out 10,000 portions a day. Update’s position is the strongest among bakery and confectionery products, but demand is rapidly growing for their meat products too.

At the moment the company is in negotiations with several partners: what they expect is reliable, high quality and wide distribution – what they give is the country’s best-known lifestyle brand, central product supply, marketing, delivery twice a week and staff trainings every second month. What about franchise in the field of bars and restaurants? Well, there are not many success stories because the average Hungarian owner finds it hard to cope with the obligations of being part of a franchise. He is smart, he knows that a good name can be used well but he does not want to pay for the know-how as it is cheaper to ‘adapt’ ideas.

However, he is right in thinking that he knows Hungarian guests better than the franchise owner. Bad market surveying resulted in the disappearance of Dunkin Donuts, Wendy’s and Quick from the Hungarian market. If small businesses decide to cooperate, they can create great potential on the market. Purchasing cooperatives exist and some cooperations such as the Hungarian Restaurant Association were established with the goal of joint communication.

There are three types of forming a chain: 1. cooperation – several owners start a chain; 2. own chain – a successful restaurant owner opens similar units, often with the same concept; 3. franchise – others can use the concept if they pay for it and meet certain requirements. If we look back, we can see that the first Hungarian franchise owner was Fregatt in 1988-1989 with 9 partners. Sir Morik café chain collapsed really fast, while the looser system of Semiramis – which we can hardly call a franchise – still works well. Classic franchises are represented in Hungary by brands like McDonald’s and Subway – their requirements are hard to meet but they are seldom accused with abusing their market power.

Il Treno started out in 1992; in 2003 they launched Il Treno Express and established a fast food menu and structure. Partners can choose from two franchise packages and marketing director Péter Galántai told us that they are constantly looking for partners – at the moment only one of their 3 classic and 11 fast food units is run by a franchise partner. The owners of Gusto Burger & Café do not sell franchise rights yet, but they might do so in the future. KFC, Pizza Hut, Nordsee and Starbucks do work in a franchise system but their rights in Hungary are owned by enterprises that only expand the network with their own units. It is an interesting trend nowadays that specialised companies make complete creative plans or buy well-working models and try to sell them to franchisees.