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Home field advantage: Latin Americans build their own franchise industry with home-grown concepts. (Franchising).

Many still recall the days in the late 1980s when dozens of hungry faces lined up, ready to order their first McDonald's Quarter Pounder with cheese. Back then, big-name international brands, primarily from the United States, eyed Latin America for opportunities to expand, and many felt privileged that a touch of the first world was entering their country.

A little more than a decade later, McDonald's is heading for the exits. Once a Latin American franchising industry leader, the company reported a loss in the fourth quarter of 2002--the first in the company's history--and began shutting some of its glass double doors after approximately US$67.2 million in charges on investments in Latin America and Europe.

As the luster of some better-known global brands fade, emboldened entrepreneurs are expanding homegrown chains at home and abroad. They are attracted to the increasing development of domestic brands and low investment cost. Big global companies not only introduced brands but also the franchising know-how Now, entrepreneurs have developed their own businesses and, in some cases, are beating out the international pioneers.

Brazil's franchising industry grew 7% in 2002, five times more quickly than the country's economy, and is expected to grow 10% in 2003, according to the Brazilian Franchising Association. The region's franchises will continue to experience high growth during the next five years as Latin Americans continue to create concepts, analysts say, with Brazil and Mexico accounting for approximately 80% of the new franchises. The regional leaders in annual sales, not surprisingly, have the most-developed franchising industries.

The industry in Brazil generates approximately $7 billion in annual sales, says the Brazilian Franchising Association. "Brazil's homegrown franchises have caught up with U.S. counterparts," says William LeSante, managing director at franchising consultancy LeSante International. "They have done well with their own brands."

Central America is also rapidly climbing the learning curve. Guatemalan chicken chain Polo Campero's success at home has led to expansion into neighboring Central American countries and southern Mexico, and most recently in the United States--one of the most difficult markets to enter, analysts say, because of high legal costs and fierce competition. Polio Campero opened its first U.S. restaurants in 2002 and plans to open 200 units across the country in five years, betting its success on brand recognition among Central Americans living abroad and on high acceptance in the rapidly growing U.S. Hispanic market.

Know your customers. Successful domestic brands are regarded more favorably than big foreign names, say investors. Without any formal business experience, Brazilian Maria Sueli Cavalcanti picked a Brazilian shoe store chain called Mister Cat for her first franchise investment. Five years later, she now has six stores outside her hometown of Itagual in the state of Rio de Janeiro.

Based on the success of her first venture, she decided two years ago to open an O Boticario store, which sells personal care products such as cosmetics for women as well as shampoos, conditioners, deodorants and soaps for both sexes and for children. She now has two of them, "What is fascinating about O Boticario is that it is concerned with franchisees' training. Other franchises that I researched had strong brand names but weren't structured properly," Cavalcanti says.

O Boticario was one of the first companies in Brazil to choose to expand through franchising, instead of wholly owned stores. Pounded in March 1977 in the southern city of Curitiba, it is the Brazilian equivalent of U.K. skin and hair products company The Body Shop. Much like The Body Shop, O Boticario projects an environmentally conscious image and contributes a percentage of its net profits to a not-for-profit fund to promote environmental conservation. Along with strong products and smart marketing, the decision to franchise has allowed the company--a three-time winner of Brazilian Franchising Association awards for outstanding achievement--to grow quickly at home and abroad. "O Boticario is recognized around the country and is now going into other countries," says Cavalcanti.

The Brazilian company opened its first international stores in Lisbon, Portugal, in 1985, and now has outlets in Bolivia, Mexico, Paraguay, Peru and Japan. "A lot of them grow from their existing base: the Latin market. They feel it is easier for them:' says analyst LeSante.

In the midst of a fast-food boom in the late 1980s, Alberto Saraiva--born in Portugal and trained as a physician in Brazil--created Habib's, which has become the world's largest chain of Arab fast food restaurants. Building on its success in Brazil, Habib's has begun to export its concept. It opened its first international outlet in Mexico and was ready, too, to make a run at the U.S. market, but the Sept. 11 terrorist attacks intervened.

A better deal. While global brands brought franchising to Latin America, low investment requirements quickly made national brands a more popular choice. U.S. franchises require investments averaging $100,000, yet many major Mexican opportunities, for instance, cost half that amount.

In 1993, when most were capitalizing on the hype of U.S. fast-food, Mexican entrepreneur Gustavo Felix did just the opposite. He invested in a Mexican electronic components company called Steren. A decade later, he bought his second Mexican franchise, packaging and storage services company Todo de Carton. Felix chose homegrown store chains largely because the terms were more economical. "With foreign franchises, you have to pay in dollars," he says. "The exchange rate can affect royalty payments."

Ramon Vinay, president of Mexican consulting company Francorp, attributes part of domestic brands' success to affordability. "It opens the door to many people who don't have the money to open big franchises," says Vinay. The Mexican Franchise Association began operations in 1989 as McDonald's restaurants first entered the country. At the time, the association was made up of five U.S. franchisers and one Mexican company. Today, more than 60% of the association's members are Mexican.

Mexican companies have become the country's top picks, says the association. For the past two years, it has named Hawaiian Paradise, a Mexican snow cone and fresh fruit company, as the best franchise for under $10,000. The operation has expanded to 320 outlets throughout the country, offering packages complete with start-up material, equipment and training. While the return on a low-cost investment is smaller than that of the average international franchise in Mexico, many say it is a smaller risk. "You wouldn't jump out the window for that kind of money in the United States, but you would jump out of the window for that kind of money in Mexico," says Vinay.

Increasingly, franchises are gaining ground on the old independent start-up model for companies. Tried-and-true business practices, training and an established brand with years in the market often promise a greater chance of success than starting from scratch with a new name, product or concept, analysts say.

The rate of return on investment, too, is greater as they usually receive training, administrative assistance and marketing support from parent companies bent on making every outlet successful. Franchises are also a dependable investment during uncertain or volatile economic situations, analysts say. In Mexico, for instance, the 1995 peso crisis and the ensuing economic downturn closed approximately 6,000 restaurants. According to Vinay, only 30 of the 6,000 Failed businesses were Franchises. This phenomenon is largely due to the additional support investors receive from the brand's home office.

Introduced during the boom years of the 1990s in Latin America, the imported franchise model is now being exported to the rest of the world. The oldest and strongest Latin American brands are expanding beyond borders, bringing new and improved concepts back, in some cases, to the market of origin. Polio Campero, Guatemala's Fast-food chicken company, is invading Kentucky Fried Chicken's home turf. Only time will tell if Campero can pluck Colonel Sander's pride and joy, the U.S. Fast-food market.

Portuguese-language Edition Editor Carlos Adese contributed to this report.


HABIB'S: Brazilian restaurant Habib's, specializing in Middle Eastern food, faced fierce competition during the fast-food franchise boom in the 1990s. but a decade later has Fared well, becoming the No. 2 chain in the country. The company opened more than 200 outlets in a span of 14 years, including the latest addition to the Habib's network in 2000, six outlets in Mexico--its first international franchise.

HAWAIIAN PARADISE: Since opening its doors in 1993, snow cone maker Hawaiian Paradise has built 320 stores throughout Mexico. The Mexican company attributes a large part of its franchising success to its expansion plan and low-cost investment. For two consecutive years, the Mexican Franchise Association has named the snow cone maker the best franchise requiring investments under US$10,000. The awards noted the company's high growth and innovation.

O BOTICARIO: Among the pioneers in Brazil's franchising industry, the personal-care products company now has 2,100 outlets throughout Latin America and overseas as far away as Jaspan. The company has been awarded for its contributions to franchise development and the environment. Through its environmental conservation foundation, it established in 1993 the Salto Morato Natural Reserve, located in one of the country's most important Atlantic forests.

PEMEX: The pillar of Mexican franchising successfully operated 3,164 gas stations a decade ago when it decided to establish one of the country's first Formal franchise structures. Offering Franchises in gas and petrochemical products, the state-run oil monopoly has been recognized by the Mexican Franchising Association as a hot-growth opportunity, opening hundreds of stations in recent years.

POLLO CAMPERO: A 32-year veteran in the fast-food chicken business, this Guatemalan favorite has expanded into the rest of Central America and southern Mexico. In 2002, Pollo Campero opened five restaurants in the United States and expects its presence in the country to grow to 200 units within the next five years. It currently has more than 175 restaurants in nine countries.
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Comment:Home field advantage: Latin Americans build their own franchise industry with home-grown concepts. (Franchising).
Author:Guevara, Michelle
Publication:Latin Trade
Geographic Code:0LATI
Date:Apr 1, 2003
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