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Latin Beat

Buen vijae, franchisors-from an energized Expo in New York


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By now you have read the articles about the International Franchise Expo, held for the first time in New York: the large crowds, the overflowing exhibitors. All true.

Getting less attention is the overwhelmingly international flavor of the gathering. I don’t mean simply the roster of programs focused on cross-border franchising. It was beyond that. It was the large number of people attending those programs. It was the extraordinary number of countries represented among the attendees: 76. And it was the unusual number of foreign exhibitors: at least four from South Korea.

Getting less attention is the overwhelmingly international flavor of the gathering. I don’t mean simply the roster of programs focused on cross-border franchising. It was beyond that. It was the large number of people attending those programs. It was the extraordinary number of countries represented among the attendees: 76. And it was the unusual number of foreign exhibitors: at least four from South Korea.

Some of this can be explained by the facts noted in this column: the growing middle class, and the growing number of young consumers, in market after market around the world. And the lesser degree to which the economic downturn, especially the credit crunch, has affected non-U.S. economies.

Filling their dance cards

A franchisor principally interested in only a certain part of the world could, with some planning, have filled a dance card here exclusively with qualified candidates, indigenous franchisors and knowledgeable observers of franchising from that region. Take, for example, Latin America. There were times when it was almost possible to mistake this Expo for the one in Miami last January (and next January).

We were reminded that this region, with a gross domestic product exceeding $4 trillion and a larger population than the United States, has weathered the economic downturn reasonably well, due in large part to the relatively open economies, conservative banking systems and commodity price stability.

The Franchise Times/International Franchise Association/U.S. Commercial Service trade mission to Latin America, taking place as you read this column, is the latest evidence of the upsurge of interest in franchising there. And it serves as an appropriate moment for a quick overview of what’s happening.

The best known of the Latin American markets are, of course, Argentina and Brazil.

First, Argentina. As Argentina continues its long, slow and sometimes faltering climb back from the depths to which the economy fell (per capita, it was the 10th wealthiest nation in the world in 1913 and the fourth richest nation at the end of World War II), franchising has seen solid growth since first introduced. The absence of a franchise law probably helped, amid an otherwise well developed legal system. Franchisors will need, however, to pay careful attention to tax and trademark issues and the treatment of royalties, and recognize that certain clauses of the agreement such as termination and renewal may be subject to antitrust scrutiny.

Next, Brazil. The extraordinary position of Brazil in the world economy has been well documented: The fourth-largest economy in the world, with new offshore energy resources barely tapped and the stimulus from international sporting events still to be realized. The growth of franchising (the fourth largest in the world, and still heavily indigenous) has been striking:  It grew 17 percent in 2011, with 15 percent growth expected this year.  

Brazil is one of only two countries in the region with a franchise law (the other is Mexico) calling for presale disclosure. Failure to comply can have serious ramifications, but U.S. franchisors have become accustomed to the requirements. It is thus unsettling to read the draft bill introduced there earlier this year.  Among changes it would require (similar to the law in China, Vietnam and elsewhere): The concept must have operated for a minimum period of time before offering franchises in Brazil, and the disclosures required (which will now need to be in Portuguese) will be expanded.

Possible resistance in Chile

The trade mission is going to three other markets, each less well known to franchisors than Argentina and Brazil, but each of interest in its own way. Let’s take a look:

In Chile, the familiarity of U.S. trademarks is palpable, as is the receptivity. The proliferation of shopping malls with recreational areas, food courts and movie theaters have all been conducive to the growth of franchising. But U.S. franchisors need to be aware that the concept of subfranchising is not well understood, and that Chileans keenly recall the failures of some local franchisors when they sought to expand. Those spreading beyond Santiago, especially through subfranchising, may meet with resistance.  

Franchisors will also find that, while there is no franchise law, contractual language may be helpful in ensuring the enforceability of certain provisions, and that protection of your marks is essential. The bottom line: The franchise market is still in its initial stages.

On to Colombia. Colombia in 2012—for those who think first of an association with the Medellin drug cartels—may be something of a surprise. The number of franchises has doubled in the last 10 years, and the future is promising.

Some are forecasting that the economy, which grew by 5.5 percent last year, will grow by an average of 4.5 percent annually during the next decade. There is no franchise law, but the courts have held that in the pre-contractual period there is an obligation to provide the other party with all information necessary. The generally undeveloped legal system leaves room for uncertainty, but a recent proposal by the U.S. Commercial Service to push for franchise-specific legislation there has many observers scratching their heads.

Obvious ties in Panama

Finally, Panama. In general, Central America has been a good marketplace for U.S. franchise brands, especially well-known ones. Despite its small size, the most familiar country to most Americans in Central America is Panama, because of its obvious ties through the Panama Canal. And whatever lingering resentment may still exist about the Canal (the jibe is, “We stole it, fair and square”), that has long ago receded in the face of the general prosperity (the highest per-capita income in Central America) and the obvious benefits to the country from the opening to the world beyond. As to franchising, 95 percent are from abroad.

Franchising’s 15 percent annual growth has been spurred by the service-oriented economy, the presence of a relatively large middle class, strong demand for sophisticated goods and services, a well developed banking system, travel by many Panamanians to the U.S.—and,     perhaps most important, the construction of large shopping malls in Panama City and in a few other larger communities.  There is no franchise law and the competition law is inapplicable, but inflexible labor laws remain a significant challenge.

No short column can do justice to the opportunities and the challenges of these markets, just appearing on the radar screen of most international franchisors. It will be interesting to hear from the trade mission participants on their return.

Philip F. Zeidman is a senior partner in the Washington, D.C., office of DLA Piper U.S. He can be reached at Philip.Zeidman@dlapiper.com

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