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Editorial

FRANCHISING TRENDS IN MEXICO: A NEW VALUE

By Ignacio Dominguez Torrado Uhthoff, Gomez Vega & Uhthoff, S.C. Why a new value? Is Mexico avoiding the economic fallout that the world may be facing? In Mexico franchises are worth more? Is Mexico not a country that the global economic standstill is or will affect? The answer is, not really. Are Franchises in Mexico currently experiencing a boom? Perhaps. Are Franchises becoming an important aspect in Mexican economy? Certainly.

Due to the economic reality of the world and in particular the changes in oil policy and the fluctuation of its price, considering that oil exports is Mexico’s number one income, the Mexican Government had to explore new areas for economic growth that are not linked with the oil industry and has launched a not-so-new-but-kind-of-forgotten program to support entrepreneurs involved in the franchise business. 

The roots of this new program, that would be thoroughly described throughout this article, are based on the Federal Government’s program known as the “2001-2006 Company Development Program”, same that includes a special program which will allocate funds for the small and medium sized companies. In 2004 the Official Gazette published the rules of operation for the companies to be eligible to certain funds and prerogatives granted by the Federal Government.

The purpose of this program was to promote the national economic development by granting temporal support to projects that encourage the creation, development, strength, viability,  productivity, competitiveness and sustainability of the micro, small and medium sized companies.

After the Presidential elections of 2006, newly-elected President Felipe Calderon and its team on an effort to continue with the economic programs established by the past administration and that were providing some results to the economy, retook some of the development and support programs and launched on 2007,  following the usual red tape of all economic related government programs, new rules and regulations for the Company Development Program.

Within the Company Development Program, we find the so called “Franchises National Plan” that once is finally structured will grant, through the Secretary of Economy,  entrepreneurial companies the possibility to access a budget of approximately fifty million pesos, around 4.5 million dollars, in grants and collaterals for bank credits exclusively provided for these businesses.

The main topics of the Franchises National Plan are: 

  • Promotion of consultancy and decrease on its fees.- The Secretary of Economy, through its local state branches, will provide around forty to fifty percent of consultancy free of charge. This will also include any advice required for a new entrepreneur to develop a franchise. 
  • Create more Mexican Companies and provide academic courses to establish new businesses under the Franchise model.
  • Internationalization of Mexican franchises. 
  • Financing of franchises.- This will include not only the possibility for an entrepreneur of obtaining resources to develop a franchising program but also the possibility of obtaining resources to acquire franchises already in the market. 
  • Promotion of the franchise model throughout the country.

 An important question to be raised is why use the Franchises National Plan to access resources? Entrepreneurs will have a competitive rate for those financed monies, ranging between sixteen to eighteen percent, expecting it to drop in a few years to twelve percent. The funds would be unrestrictedly accessible to those entrepreneurs complying with the requirements of the program.  The program will grant support for the following areas: 

    Initial franchise Fee.- Through the program entrepreneurs will be able to obtain resources to pay the initial franchise fee of those franchises already on the market with proven success. This particular grant will have a maximum amount of approximately $23,000.00 US dollars. 

     

    1. Equipment.- Under this category entrepreneurs will be able to obtain funds to acquire different infrastructure, such as computers; telecommunication equipment, furniture, etc. This particular grant will have a maximum amount of approximately $28,000.00 US dollars.   
    2. Infrastructure.- This grant will help entrepreneurs to cover construction and remodeling costs of the franchise premises with  a maximum amount of approximately $48,000.00 US dollars.  
    3. Consultancy fees.- As previously mentioned, the government will provide advise and will support any new franchisor with the development of their franchise.

     All grants under letters a, b and c, mentioned above may not jointly exceed the approximate amount of $40,000.00 US dollars.

    The amounts aforementioned were not established in random by the Mexican Government but they refer to the reality of the franchise sector since the most popular franchises in Mexico are those where the initial investment ranges from $50,000.00 pesos to $250,000.00 pesos. In US dollars, such amount can be estimated in between five thousand to twenty five thousand US currency. 

    We have explained the benefits to be granted by the National Franchises Plan but we have not yet addressed the facts that have oblige the Mexican Federal Government to focus on franchises as an important business model and thus launch this aggressive support  campaign.

    Why is the Mexican Federal Government supporting franchises? Franchises in Mexico have highly appealing numbers for government officials and certainly for the economic reality that Mexico is living on. Although it would be disputable to attest that Mexico is living a franchise boom, it is undisputable that such method of doing business represents a high value not only for the revenue that is bringing to the government through taxes and direct foreign investment, but also in terms of employment and the impressive percentage in regard to the growing rate is currently experiencing when compared to other businesses. Specific facts such as high average growth, an appealing percentage of the Mexican Gross Domestic Product (GDP), employment and a world top ten on the rankings of franchises have driven the government to support this business model. The specific data is as follows:

    -         Franchise businesses represent five percent of the Mexican Gross Domestic Product (GDP), with an amount of approximately forty billion dollars annually, when the total Mexican GDP for the year 2006 was of a figure of about eight hundred thousand billion dollars. 

    -         The Franchise sector employs more than five hundred and fifty thousand employees -         More than fifty thousand points of sale.  

    -         It has had an annual average growth, for the past years, of between ten to twenty percent. -         There are more than eight hundred franchises available with at least the same number of trademarks involved.  

    -         Mexico currently holds the eight global position as to number of franchise businesses.  

    -         Of every hundred pesos an average citizen spends, fifteen percent is spend on a franchise. 

    -         Most of the most important global franchises have established a franchise in Mexico with success. 

    -         Mexico’s Franchise Expo has become the number one in visitors worldwide. Nowadays, the franchise sector comprises a variety of different areas and business opportunities. The most important areas of franchises investment in Mexico are as follows: 

    1. Fast Food and restaurant services with approximately twenty two percent of the whole franchise arena. 
    2. Clothing and accessories with twenty percent. 
    3. Education represents fourteen percent of the franchises. 
    4. Personal care and beauty with a nine percent. 
    5. Entertainment representing five percent of the franchise business. The Country of origin of the franchises established in Mexico can be divided into seventy percent from Mexico, twenty four percent from the United States of America and the remaining six percent from other countries, mostly European.

    Today, we are awaiting the formal announcement by the government of the initiation of the National Franchises Plan thus entrepreneurs can start to benefit from the whole Program and continue the growth that for these past years Franchises have had in Mexico. With the National Franchise Plan that is expected to run for at least the whole current administration until the year 2012, the figures are optimistic since the sector is supposed  to provide at least one million employments, at an annual percentage growth of about five percent and at least four hundred new franchises, with the consequent same numbers  of trademarks, bringing the number of franchises in Mexico to approximately twelve hundred thousand.

    We are certain that these kind of programs and supports by the Mexican Government will bring new trends in business opportunities not only to those Mexican entrepreneurs seeking to franchise their businesses and explore new markets abroad, but also to Foreign investors seeking to expand their businesses to Mexico thus granting Franchising in Mexico a New Value. 

    Foe more information please visit www.uhthoff.com.mx

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