Business To Go.

From cocada to churros, franchises give boost to Venezuela.

CARLOS SAUMA THOUGHT HE WAS ready when he created a franchise at the beginning of this year for his sweet coconut drinks known as cocadas. But he didn't expect to receive hundreds of phone calls from potential investors or to sell three La Cocada de Carlos franchises right away.

"Everything was just moving too fast," says the 42-year-old economist. "We had to take a step back and gear up production to meet the demand."

Sauma is among the growing ranks of Venezuelan entrepreneurs seeking franchises or turning their own ventures into successful chains. Four years ago, Venezuela had 30 franchises with some 300 retail outlets. Today there are 190 franchises and 1,800 outlets, according to Profranquicias, a Venezuelan franchise association. Increasing numbers of those franchises are homegrown. In 1997, 70% of franchises were foreign outfits; today 55% are Venezuelan.

With the numbers of franchises growing 20% annually, they're giving a badly needed boost to an economy still reeling from the 1998-1999 economic recession. Private investment is lagging, unemployment stands at 14% and the informal economy employs 52% of the workforce. Enter franchises, which are providing 50,000 jobs, although most are at the minimum wage of $210 a month.

Fast-food outlets make up 38% of local franchises, but dry cleaners, dressmakers and even drugstores have become chains, putting the country in third place for regional franchise sales with US$500 million last year, behind $13 billion for Brazil and $8 billion for Mexico.

The fad has even spawned its own service industry: Business schools offer courses in franchising, attorneys specialize in franchise law, banks advertise special financing plans and consultants are putting on franchise trade fairs.

As in most Latin American countries, franchises have existed in Venezuela for more than 20 years under such multinationals as McDonald's. But the recession has given franchising steam.

"A lot of professionals were getting laid off and were looking for something to invest their severance pay in with minimum risk," says Rolando Seijas Sigala, president of Profranquicias.

Proponents say the franchise model is ideal in Venezuela's roller coaster, oil-based economy since a known brand name minimizes risk. Franchises can also be very profitable. Sauma estimates that each store in his cocada chain will recoup its $12,000 investment within five months. That appealed to Jaime Leon who recently opened a cocada kiosk in a Caracas mall. "I can either leave my money in the bank and earn pitiful interest rates, or invest it in this," says Leon.

"Franchises give you a type of warranty for success," adds Ariel Acosta-Rubio, president of Corporation Churromania, which charges $20,000 per franchise and 8% royalties on sales. After Corporacion Churromania opened 40 Venezuelan outlets in just three years, the churro maker became the country's first to go international with a $350,000 outlet in Miami's Dolphin Mall. Moreover, the firm has sold master franchises in Brazil and Spain and is expanding in the United States.

To be sure, not all Venezuelan franchises are raking in profits. Graffiti, a retail clothing chain, franchised some 360 stores from 1996 to 2000. But many stores complained of costly overhead and the high expense of maintaining large inventories of imported merchandise. The company then spent $150 million to buy back the franchises and open a new discount chain in the empty stores.

The competition for franchises has also bred problems, including contracts with such exorbitantly high royalties and fees that franchises can't turn a profit. Congress is looking at regulating the industry.

Still, success stories are more common than failures and Venezuelans are gaining a reputation as franchise experts. Wendy's recently awarded a development contract for northern Mexico and the southern United States to the Venezuelan Wendy's developer, and Profranquicias is flooded with inquiries about taking Venezuelan franchises abroad. Perhaps Venezuela eventually will be known for an