Doing Business : Latin America’s New Retailers : From fast-food outlets to shoe repair emporiums, franchising is booming. And its growth shows no sign of stopping.
A revolutionary movement is spreading through Latin America. Its best-known symbols are golden arches and a Kentucky colonel, but the movement goes far beyond fast food.
Radically and rapidly, from Mexico to Brazil and Argentina, franchising has begun to change the face of retailing in this region, as it previously did in North America.
As Latin American countries open their markets and consolidate economic reforms, foreign franchisers are rushing in. Many local businesses are adopting the franchise system as a vehicle for fast expansion. And new entrepreneurs are snapping up franchises, eager for a ready-made business with proven potential.
Franchising has taken Mexico and Brazil by storm since the late 1980s; it has made major advances in Argentina, and now it is sweeping into Chile.
Paulo Cesar Mauro, Sao Paulo-based president of PCM-Kushell International, said his consulting firm recently has helped 14 U.S. franchisers move into the Brazilian and Argentine markets. More are coming, Mauro said by telephone from Brazil.
“They have good opportunities to establish here, in Argentina, in Chile and some of the other countries,” he said.
Robert Jones, vice president of the Washington-based International Franchise Assn., agreed. “We consider that the Latin American region is a booming market for franchising,” Jones said. He predicted in a telephone interview that the next major surges of rapid growth will come in Venezuela and Colombia.
“They’re really just getting started,” he said.
Argentina
Argentine businessman Alberto Franichevich, 39, got started in franchising when he opened Latin America’s first Kidsports unit in 1992. Kidsports International, based in Reading, Pa., is a chain of recreation and day-care centers for children. An Argentine partnership headed by Franichevich owns the company’s master franchise for South America.
Since opening its first Buenos Aires center in 1992, the partnership has sold three more franchises here to other investors. The company helps the franchisees with site selection and design, management methods and training.
The franchisee pays for special supplies and equipment, including Kidsports’ funhouse-like obstacle course of plastic and steel. The contraption fills a big room with slides, tunnels, bumper bags and other devices.
Conducting a tour through a recently opened Kidsports franchise in the fashionable Palermo district of Buenos Aires, Franichevich also showed two gyms, a playroom for toddlers, rooms for parties and a cafeteria.
The owners paid an undisclosed amount for the franchise, made an additional investment of more than $1 million and will pay royalties to Kidsports, Franichevich said. Their income derives from membership and usage fees, plus rentals for occasions such as birthday parties. He predicted that the franchisees’ investment will be recovered in two to three years.
According to Franichevich, Argentina’s large middle class makes an ideal market for Kidsports centers, but it isn’t easy to find investors because not many people who are qualified to work with children have the capital needed for a franchise. “What we’re looking for is a couple of educators with a rich uncle,” he quipped.
Nevertheless, he said he expects to sell 25 Kidsports franchises in Argentina by 1996. And his ambitions do not stop at the border.
“We think in Chile we can have between five and 10 units, and in Brazil between 50 and 100,” he said.
Until the late 1980s, Speed Queen Laundromats was the lonely pioneer of franchising in Argentina, where hectic conditions in a closed economy discouraged most new ventures. Economic reforms under President Carlos Saul Menem, who took office in 1989, have lowered inflation to near U.S. levels and opened up the economy to investment and trade. And Argentina has blossomed with new franchises.
“Consultants in the area estimate that there are at least 100 franchisers in Argentina and that about 70 companies are studying the system with the goal of implementing it,” said Apertura business magazine in a special edition on franchising in September. Apertura listed scores of companies offering franchises in Argentina, with required initial investments starting at $1,200 for a small pharmacy.
McDonald’s, Burger King, Pizza Hut, Domino’s Pizza and Dunkin’ Donuts are here. So are Benetton, Bally and Cacharel, Holiday Inn, Heel Quik, Sir Speedy and many others, including a growing number of Argentine-based franchise companies.
Osvaldo Marzorati, president of the Argentine Franchising Assn., said Argentina has about 4,000 franchise outlets. Speed Queen is the biggest, with 900 outlets, and drugstore franchises also are numerous. McDonald’s has 20 stores, operated by a local master franchise named Arcos Dorados (Golden Arches).
Potential for further growth is huge, said Marzorati, a lawyer. “A lot of people come to the association asking what kinds of franchises are available,” he said. “There are more people interested than franchises available.”
In August, the association helped sponsor a conference on franchising in Buenos Aires that was attended by representatives of 25 U.S. companies. “They got leads, and they are now discussing master franchises,” Marzorati said.
Mexico
Mexico is the Latin American country with the most American franchises. Mexican economic reforms, including a 1991 law that barred the government from arbitrarily altering contracts with foreign companies, have fostered a franchising frenzy.
“It has been a boom,” said Enrique Gonzalez Calvillo, vice president for international affairs of the Mexican Franchise Assn. “It is a real explosion.”
The association reported that franchised outlets in 1992 employed 45,000 people and sold goods and services for $1.4 billion in Mexico. The number of franchisers in Mexico has grown from 20 in 1988 to about 200 today, with a total of 2,500 franchise units, Gonzalez said by telephone from Mexico City. He said 70% of the franchisers are foreign.
“All of the biggest U.S. franchisers are now operating in Mexico,” he said.
In some areas of Mexico, segments of the retail market may be saturated with franchises. And an economic slowdown to control inflation has reduced sales. So it is a time for more cautious franchising.
“Now you have to be more careful, more analytical of the market so as not to make mistakes,” said Gonzalez, a lawyer who has written a book on franchising. He added that some master franchisers in Mexico are now looking to other Latin American countries.
On Dec. 1, the Mexican Franchise Assn. will sponsor what Gonzalez calls the first “international franchising summit,” to be attended by the “head honchos” of major international franchise companies, national franchising associations and other entities.
Brazil
Brazil, with a population of 155 million, is already the biggest overall franchise market in Latin America, outstripping Mexico thanks to thousands of national franchises. And there is still plenty of room to grow, according to Bernard Jeger, chairman of the Brazilian Franchising Assn.
An association study said the number of franchise outlets in the country has grown from 3,200 in 1985 to more than 20,000. Annual growth has been more than 30% in 1992 and 1993. Only 11% of all franchises in Brazil are for foreign brands, Jeger said.
“Foreign franchises are in their children’s shoes, with only a few stores,” he said. “I think in the next two or three years they will really pick up and make franchising considerably bigger.”
Until last year, government restrictions on the remittance of franchise fees and royalties discouraged foreign franchisers. McDonald’s, which operated in a joint venture with a Brazilian company, was one of the few familiar foreign brands around.
But relaxation of the remittance rules has brought a rush of American franchisers. Pizza Hut has quickly built up a chain of 25 units. Domino’s, Arby’s, Kentucky Fried Chicken and Everything Yogurt have new master franchisers and are beginning to spread. KFC plans to have 108 units operating within three years, Jeger said, and Pizza Hut wants 450 stores by the end of the century.
“You have plenty of others who are negotiating master franchises in Brazil,” he said.
So far, the biggest franchiser in Brazil is the government postal service, which has franchised 2,000 post offices in the past two years and plans to keep expanding the privately run system. “It works really well,” Jeger said.
Jeger himself hopes to profit from continued expansion of franchising in Brazil. He owns a frozen yogurt chain called Nicecream with seven company-owned stores and nine franchises, and he plans to put 200 to 300 new franchises in modernized Brazilian service stations. He is also starting a franchising company for exterior wall coating.
Chile
Chile has less than one-tenth of Brazil’s population, but the Chilean economy is one of the most open and healthy in Latin America--a good environment for franchising.
“Right now, we are in a franchising boom in Chile,” said Fernando Vigorena, vice president of the Chilean Franchising Assn. “The number of people interested in buying franchises is incredible.”
Some Chilean and foreign companies began franchising in Chile under the 1973-90 military government, but Vigorena said the return of democracy in 1990 increased business confidence in the country’s future. “Then the boom began,” he said.
According to the monthly magazine of the Chilean-American Chamber of Commerce, Chile currently has 20 franchisers with a total of about 50 stores. All but two of the franchisers are foreign, mostly from the United States.
Domino’s Pizza, for example, has established four franchised Chilean outlets in less than two years and eventually plans to have 40.
As Chile’s economy grows, more people have access to a wide variety of goods and services that franchises can provide, observed Mary Lou Lathrop of the U.S. Embassy in Santiago. Lathrop said she sees an especially fertile market in Chile for franchised services.
“There is plenty of room,” she said. “You have to consider it’s a small market, but it’s a growing market.”
The same might be said of several other Latin American countries that, for the moment, remain all but untouched by the franchising revolution.
FRANCHISES IN WESTERN HEMISPHERE
Despite gains in Latin America, the United States still dominates the franchise system.
Country Franchisers United States 3,000 Canada 1,500 Brazil 400 Argentina 100 Mexico 200 Chile 20
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Country Total outlets United States 533,000 Canada 26,200 Brazil 21,000 Argentina 4,000 Mexico 2,500 Chile 50
Sources: Estimates based on data from PCM-Kushell and national franchising associations.
