Franchising in the Czech Republic

A. CZECH MARKET ANALYSIS
The current trend of world trade globalization dissolves rational borders to transfer financial and intellectual capital. Franchising, as a method of making business, has arrived in the Czech Republic as well. The franchising sector in the Czech Republic is steadily growing in proportion to the developing consumer purchase power and the concept of franchising is becoming familiar to an increasing number of companies and individuals. The number of franchises operating in the Czech market grew from five in 2000 to more than 90 companies in 2004. In addition to large multinationals such as McDonalds, KFC, OBI, Baumax, Marks&Spencers and Yves Rocher, which have already created their own franchise networks within the country, national companies have established their own franchise concepts and have often created successfully operating franchise chains. Also in the Czech Republic franchising systems support especially small and medium sized enterprises in particular and Delta-owned Paneria bakeries, the restaurants Potrefená husa or Švejkovy restaurace and tire repair service Barum are a few well known success stories. According to statistical data, this method of running a business is currently most established in retail, where more than two thirds of franchise networks operate, followed by other services and gastronomy.
Limitation of Franchising
Franchising as a marketing method is not as extensively used in the Czech Republic as abroad and also its development is rather different than in other countries. Although known world wide since the 19th century, franchising commenced in our country only in 1991. Forty years of communism, insufficient knowledge of the method, lack of information and missing practice restrained franchising from faster expansion. The Czech market lacked experienced managers and an established business environment. The lack of comprehensive and integrated knowledge formed the attitudes and expectations of the business sector and resulted in a distrust towards this kind of enterprise. In addition, there was an absence of specialized literature presenting this topic and no consultancy services specializing in franchising. Another major obstacle facing franchises intending to enter the Czech market was the lack of available domestic capital.
Financing the Franchise
Today this most common obstacle facing a potential investor in franchising is the difficulty in raising the capital. An investment in a franchise is not cheap matter. Start-up expenses differ depending on the type of business and also type of franchising chain. Initial investment costs generally range from CZK 10 thousand to 15 million, whereas the costs of national franchises are usually much lower than multinational ones. The initial inability of the Czech banking sector to accept the distinctions of franchise financing was broken in 2002 through the cooperation of various banks, in particular Komerční banka, which now offers the possibility to obtain the funds necessary for entrepreneurs-beginners to enter the Czech market, as well as for companies already in business. In 2003, Komerční banka made its first special loan to a franchisee of the French cosmetics retailer Yves Rocher. Financial experts now provide qualified consultancy regarding other possible financial resources such as state programmes, EU structural funds, Venture Capital, etc.
Differences of the Czech Market
Although franchising can remove the administrative, economic and technological barriers, there are some national limitations which must be considered when entering the Czech market. Franchisors should take into account not only language barriers, which are mostly overcome, but also different attitudes and expectations from local franchisees. Franchisors are often mistaken when they have expected Czech customers to have the same shopping habits as customers in their home countries. For example, although Czechs have slowly adapted to Western types of fast food they still prefer traditional Czech cuisine. Understanding this fact, some companies have altered their strategies. For example McDonald´s Company introduced a product called McBůček. McBůček was inspired by a favourite Czech meal and produced solely for the Czech market. To succeed on this market does not always mean to offer standardized and original products. Prague`s first Pizza Hut restaurant, for example, had to be closed because it imported too many ingredients for just one existing restaurant was not profitable. In short, research of Czech customer habits and the local market can be as important as the choice of a local partner.
B. NATIONAL REGULATION OF FRANCHISING Special Legislation?
Despite the increasing number of franchise chains operating within the country, the Czech Republic has no specific law or regulations for franchising, therefore no legal definition of franchising exists. This fact might be confusing in particular for foreign entrepreneurs, but on the other hand this business method does not directly need any special legislation to be passed since particularities of franchising are in the marketing sphere. Moreover, sometimes a rigid law is not able to correspond with up-to-date trends in the business sphere and the practical needs of franchising and could constitute legal obstacles for both parties of franchises. Nevertheless, the absence of special regulation certainly does not imply the absence of regulation at all.
Franchises as Innominate Contracts
Presently franchises are subject to commercial law as innominate contracts (contracts sui generic) based on the substance of the agreement between two parties through which the franchisor grants to the franchisee the exclusive right to run a business under the franchisor`s name in return for payments. This agreement contains elements of various contracts, such as an industrial property license contract, a contract on commercial representation or a contract with an intermediary; whereas these contracts are regulated by the Czech Commercial Code which grants the parties an extensive freedom to arrange the business relationship according to their will.
Depending on the franchisor`s business plan and strategy, franchising in the Czech Republic as well as in other countries can be realized through company-owned operation, direct franchising, master franchising, area developments or joint ventures. The necessity to take interest in the Czech law and involvement of the franchisor depends on the chosen method.
Impact of Czech Law
When entering the Czech market, the franchisor should certainly consider the impact of various legal areas and suitably combine their provisions and possibilities. For leasing property or rental equipment it is necessary to refer to the Civil Code and the Code on Lease and Sublease of Non-residential Areas as well as other law relating to real estate. Moreover, foreign franchisors have to conform to the provisions of Foreign Currency Law.
Depending on the type of business to be franchised, both parties need to take into account the administrative law, especially the Trade License Code, the tax and custom law and also regulations regarding fees, charges and licenses in connection with importing goods and supplies. As franchising is often called business under someone else`s name, each franchising contract should contain provisions regarding intellectual property law, especially trademarks regulation.
Franchising as a vertical agreement also interferes with Competition Law. Under Czech law franchising contracts are excluded from agreements harming competition by a general exemption for vertical agreements issued by Czech Office for Protection of Competition.
As for the franchising agreements concluded between a foreign franchisor and a local franchisee, the Czech law enables the parties to choose foreign law to govern their agreements as well as to arrange a jurisdiction of foreign court, either regular or arbitration, without any limitation. Considering practical experience, the law of franchisors home country is usually applied insofar as it does not conflict with Czech law.
As previously stated, there is no special regulation for this business method. On the other hand, some aspects of franchising are regulated by the Ethical Code of the Czech Franchising Association adopting the wording of European Code of Ethics for Franchising of 1972. Although not legally binding this act constitutes a legal guide for constructing the franchising agreement according to Czech law.
Conclusion
In connection with the accession of the Czech Republic to the EU, EU law was implemented and harmonized, and relevant legal regulations mentioned above are at present already fully compatible with EU law. Foreign entrepreneurs may expect standardized conditions, legal certainty and therefore can feel secure to access the Czech market. The Czech Republic is unquestionably ready to offer credible business partners, new opportunities within a market, with lower competition and lower costs.
Further Information
The Czech Franchising Association provides entrepreneurs interested in information about franchising in the Czech Republic with necessary information support and service, acquaints them with the catalogue of franchise opportunities in the Czech Republic and assists them in entering into the Czech market. For more information refer to www.czech-francise.cz.
For further details please contact: Dr. Giese, Ernst or Ms Vaculínová, TerezaGiese & Partner, v.o.s.Palác MyslbekOvocný trh 8CZ – 117 19 Praha 1Czech RepublicTel: +420-221 411 511Fax: +420-222 244 469giese@giese.czwww.giese.cz