Once the effects of the 2008 economic crisis have slightly faded away, in 2013, Promenada Mall, one of the most ambitious real estate projects in Bucharest started during the financial crisis, finally opened its gates. This brings the country’s capital and fashion hub to a total of more than 15 shopping centres attracting over 500,000 visitors every week. The area covered by shopping centres has doubled over the last years in Bucharest aiming to satisfy the shopping needs of the nearly 2 million people living in Bucharest.
The Romanian retail industry now welcomes the most important international players in the fashion retail sector, having entered the market either by way of franchises or local companies.
If you are an international brand owner having Romania on you radar, here are a couple of points you should be aware of.
1.To franchise or not to franchise
That is indeed the question. Which business model better suits brand owners eager to exploit the potential of the Romanian market? Franchising or setting up a local presence?
Pros…
- It’s cost-effective
In general, brand owners decide to begin franchising to avoid potentially risky financial investments, allocation of resources and time. In terms of financing, the franchisee is the one to provide the investment at unit level and pay the franchise fee to the franchisor. In return, the franchisor must ensure that the franchisee is provided with relevant know-how and adequate training. Therefore, while it is true that the franchisor provides the guidance, the franchisee does the legwork.
- Limited liability for the brand owner
Since it’s the franchisee and not the franchisor who enters lease agreements, commits to various services, pays the local taxes, franchising allows for a brand owner to expand into a new market with virtually minimum liability. Given the lack of a local entity subject to Romanian civil and tax law, the franchisor’s liability derives from the provisions of the franchising agreement.
…and cons
Franchise commitments may not be suitable if you want total control over your brand and its implementation on the Romanian market. Unlike the franchise business model where despite contractual provision it is more difficult for the brand owner to influence all business decisions, a direct local presence would allow an extensive and accurate implementation as well as constant monitoring of the methods, processes and operation systems adequate to the specificities of the brand.
On the negative end, an improper implementation may even lead in an extreme case scenario to the erosion of the trademark and reputation of the brand owner.
What does the market say?
While 10 years ago the franchise seemed to be the preferred business option, in the past few years more and more international retailers have opted to set up a local company, or to purchase their franchise businesses. The franchise continues to be the weapon of choice for luxury brands as it allows them the possibility to test the market without losing the flexibility to opt-out in case something goes wrong. As a famous example with Spanish flavour taught us, if business is good, from franchise to setting up local companies, there are only a few steps…
2.The Franchising Agreement is specifically regulated
Romanian franchising law requires that the franchising agreement clearly stipulates: (i) the rights and obligations of parties; (ii) the financial terms; (iii) the duration; and (iv) the conditions for amendment, extension, termination or assignment of the agreement. Termination clauses must provide the circumstances allowing termination without notice.
Insofar as the contractual term is concerned, it must allow the beneficiary to recover the investments made in the franchise. Moreover, the franchisor is required to grant the franchisee a sufficiently large notice period in case it does not want the agreement renewed (which is also a disincentive for brand owners to adopt the franchising model). In practice, many litigation proceedings are conducted on this provision, as the “sufficiently large” notice period is to be interpreted on a case by case basis.
The franchisor is also required to ensure that the franchisee advertises the fact that it is a separate, independent entity from the franchisor.
Care must be taken in so far as compliance with the Romanian competition law is concerned which prohibits anticompetitive behaviour and abuse of dominant position.
Where international brand owners enter into franchise agreements governed by foreign law, it is advisable that such agreements are reviewed from the perspective of Romanian franchising law as well as competition law in order to avoid any possible contradictions with the overriding Romanian legal provisions.
Secondly, where protection of the brand is one of the most important aspects, international brand owners and the franchisees should also contemplate registration of their licence over their trademarks, embedded in the franchise agreements, with the Romanian State Office for Patents and Trademarks, for opposability purposes.
3.Watch out for the advertising and consumer protection restrictions
In the past few months, inspectors from the National Consumer Protection Authority have been rather busy imposing fines to retailers who failed to observe consumer protection and advertising restrictions. The main aspects to consider would be the following:
· The information comprised on the packaging and advertising must be in Romanian language, although it is possible to have the information displayed in other languages as well;
· Consumers must be informed in an accurate, legible and easily understandable manner in respect of the main characteristics of the products;
· Retail units must display the identification data of the retail company, the direct number that can be used by consumer to file complaints as well as the contact details of the National Consumer Protection Authority.
· Product labels must indicate the textile composition and the instructions for use;
· % off or new price vs old price – Any price reduction announcement expressed in absolute value or as percentage must be clearly and unambiguously displayed for each product
· Clearance sales may be organized by retailers during the following periods:
> 15 January – 15 April (included), for fall-winter products;
> 1 August – 31 October (included), for spring-summer products;
· Liquidation sales and clearance sales are subject to a notification requirement with the local city hall within 15 days prior to commencing the sale operations.
· Promotional sales may be organised throughout the year, without any notification requirements, as long as the following conditions are met: (i) the sale is not performed “for loss”; (ii) the sale must relate to products that are either available or that may be re-supplied or to services provided on a regular basis, as the case may be; and (iii) the products/ services must be up for sale throughout the entire duration of the promotional sale, (alternatively, traders must inform consumers that the offer is valid within the limits of the current product stock).
Failure to comply with consumer protection or advertising legislation is qualified as minor offence and sanctioned by administrative fines ranging from approximately EUR 230 to EUR 2,300. The amount of fines may double in certain circumstances.
Others have made a fashion statement in Romania, what are you waiting for?
Cosmina Simion (Senior Associate) and Laura Leancă (Associate) are part of the Intellectual Property, Media and Technology team of the international law firm DLA Piper.