The Future of Latin America
Franchising World March 2007
Some excellent prospects, some serious challenges await those who franchise in this rapidly-changing region.
By William Le Sante, CFE
In the wake of current events involving the political changes in Latin America, it is understandably a concern that franchise organizations may look elsewhere in their quest to expand internationally. This attitude is completely justifiable.
With the insurgence of a “left tide” capturing a good percentage of recent political contests in the region, many established companies in the area remain cautious as to what is at stake. Although there may exist the possibility of justification for these changes, these will not play in the further development of franchise concepts in the region.
Looking ahead, these are some of the more interesting options.
Puerto Rico Many franchise systems classify Puerto Rico as part of their international territory. For years, franchise and retail concepts have recorded their biggest sales volumes in this tiny island of three million consumers. Until recently, Puerto Rico held records for achieving the number one volume for sales at retailers such as Sears, J.C. Penney’s and The Home Depot. The island population helped the Wal-Mart chain attain their highest volume of sales worldwide only to lose the distinction to Mexico City, a metropolis with 10 times the population. Puerto Rico falls under the guidelines of the Federal Trade Commission with regard to franchising and even though it is a small market, it is consumer-driven and should have strong consideration in companies’ international expansion plans.
Mexico With a new pro-business and pro-U.S. administration, this should continue to be the initial entry market for any and all U.S. franchise concepts. Mexico, for many years, has been a franchise-friendly culture adapting to U.S. systems and way of conducting business in a formal manner. U.S., European and Latin American franchise concepts are flourishing in this dynamic market. U.S. franchise concepts continue to be in high demand. There are franchise-related requirements with regard to registration and disclosures, but these are not as restrictive as those in the United States. There may be some additional restrictions placed on franchise systems in the future, but most experts feel these will not curtail future growth.
Central America These markets are the sleepers in the region. Franchise-friendly cultures are growing at a record pace with a large number of successful stories. Foodservice concepts such as KFC, Pizza Hut and Tony Roma’s dominate the franchise landscape with service concepts coming in a distant second. As for focusing on specific target market areas, consider El Salvador, Guatemala, Honduras and Panama as initial entry-level markets, with Costa Rica, Nicaragua and Belize to follow further down the line. Many franchise systems award development rights and treat these countries as one region.
Chile This country is a very attractive market with steady economic growth, a safe legal and business climate that accounts for the continued success in franchise expansion. Because of the limited size and the conservative nature of the local entrepreneurs, franchise companies should be patient and expect several meetings prior to any serious commitment.
Argentina Even though Argentina continues to recover from its last financial collapse at record-growth levels, it is still considered by most to be a very fragile market. Unemployment figures register as one of the highest in the Americas making for a very nervous investment climate at this time. Continued price-control measures and the rise in tourism are setting the stage for attractive future possibilities.
Uruguay Years ago, when a franchise or development agreement was awarded to someone in Argentina, this small neighbor was traditionally included as part of the package. This was mostly for two reasons; the size of the market and the dependence on Argentina for the majority of their exports. Uruguay took a different direction the last time that its neighbor went into financial crisis by reaching out to the rest of the world with their exports, solidifying free trade agreements and a very favorable and relaxed business climate. The last master franchise agreement this firm negotiated with a group from Uruguay, included the development of the concept for the region including Argentina and Chile as well.
Brazil The largest market (population wise) in Latin America continues to be a dynamic destination for seasoned franchise systems. The main obstacle is in overcoming the history of past failures of U.S. franchise concepts. These were due to many reasons, primarily, lack of support and understanding from the franchise companies’ perspective. These, accompanied by high real estate values and the success of established Brazilian franchise concepts, make it a difficult challenge for new entries in the market. There are still some opportunities in the service and education sectors. With 20 cities each exceeding one million in population, Brazil continues to be the lure of the Americas. There are franchise regulations in this market.
Colombia In spite of their challenges with guerrilla warfare and the drug trade, Colombia continues to show steady economic growth. Large population centers may lure the attention of some, however, safety continues to be a major concern and many franchise systems are deferring options when it comes to this Andean nation.
Venezuela Just as one thought that things could not get any worst, Pres. Hugo Chavez was re-elected for a third term. This will be a catastrophic blow to foreign investment and future business expansion in this now-declared communist state. In his inaugural address, Chavez vowed to introduce a new constitutional amendment to make him president for life. In this same speech, he declared measures to socialize (“seize”) private industry including the banking sector. With all of the uncertainties, and not a clear picture on how small businesses will fare, it is recommended to stay away for now and focus on other markets in the region.
Peru, Ecuador and Bolivia The socio-political landscape does not fare well for these Andean nations. Leftist governments firmly entrenched in power, assisted by deep financial crisis, make local sizeable investments unlikely. The poverty levels rate amongst the highest in the Americas.
With a larger combined population than that of the United States, the region continues to be the wise choice for expansion for many international franchise concepts. European and Australian brands have recently discovered the benefits of doing business here and have experienced rapid growth within their respective systems.
The franchise model has been well copied and adapted to local flavor making for successful launch of very interesting concepts within the region. Some of these brands have now ventured out of their respective regions and into U.S. markets. The latest success story is that of Pollo Campero of Guatemala. This uniquely focused chicken concept has shown amazing growth in the past couple of years, challenging the market share of some of the United States’ own local brands.
For franchise systems entertaining expansion into the region, the recommendation is to focus on growing as an extension of a company’s current borders, either into Mexico or Puerto Rico, creating a foothold and the necessary experience in adapting to the local business climate. Having said this, do not discount a truly qualified candidate no matter where he or she comes from. These are few and far between and if a concept draws the interest of one of these unique individuals, one must take a serious look.
Finally, education is the key. The perfect source for detailed and precise information is the International Franchise Association’s annual convention. This program holds several opportunities for further enrichment from the experience of others. The International Franchise Expo held in Washington at the end of March should also be considered as part of the agenda. Also travel to the area, if possible, as part of a group or mission, in an effort to further your educational experience firsthand.
William Le Sante, CFE, is managing director and CEO of Le Sante International. He can be reached at 305-387-5840 or firstname.lastname@example.org.