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RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2595/01 1352215
ZNR UUUUU ZZH
R 152215Z MAY 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0808
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 002595 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD, AND EB/EPPD 
STATE PASS USAID FOR LAC: MARK CARRATO 
TREASURY FOR IA MEXICO DESK: JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN 
 
E.O. 12958: N/A 
TAGS: ECIN ECON EFIN EINV MX
SUBJECT: FRANCHISING IN MEXICO PART I: AN OVERVIEW 
 
 
Sensitive but unclassified, entire text. 
 
This is the first in a series of two cables reviewing the 
franchise sector in Mexico. 
 
¶1.  (SBU) Summary.  Buoyed by increased purchasing power, a 
commercial real estate boom, and greater investor confidence, 
franchises are transforming the retail sector in Mexico.  The 
franchise industry is an increasingly important component of 
the Mexican economy, creating thousands of new jobs and 
providing new opportunities for domestic and foreign 
investors.  Hampered in the past by a lack of small business 
credit, new private and public sector initiatives may enable 
Mexican entrepreneurs greater access to capital, spurring 
economic growth and development.  End Summary. 
 
FRANCHISE SECTOR GROWTH 
----------------------- 
 
¶2.  (SBU) According to data provided by the Mexican Franchise 
Association (MFA) and the National Institute of Statistics 
(INEGI), the franchise sector now accounts for over 5 percent 
of GDP, with more than 500,000 direct hire employees.  In 
2005, it grew by 17 percent, generating over 8 billion 
dollars in sales and producing 80,000 new jobs.  Franchising 
has also expanded geographically; while in the past most 
franchises were in Mexico City, today they are found in every 
region.  Approximately 68 percent of franchises are Mexican 
and 27 percent are from the U.S. - although chains from other 
nations, including Argentina, Brazil, and China, are planning 
large-scale investment in Mexico.  Most analysts predict that 
the growth rate will remain above 15 percent in 2006, with no 
sign of slowing. 
 
¶3.  (SBU) Foreign franchising in Mexico has had several 
growth stages, beginning with the introduction of the first 
McDonalds franchise in Mexico City in 1985, followed by KFC, 
Arby's, Subway, and others.  However, many of these companies 
were negatively affected by consumer unfamiliarity, over 
reliance upon U.S.-produced supplies (resulting in higher 
costs and uncompetitive prices), and the peso devaluation of 
1994-1995.  A key for the recovery of the sector was the 
passing of Article 142 of the Industrial Property Law, which 
codified legal protections for both the franchisor and the 
franchisee.  Although some franchises that closed in 
1994-1995 have yet to return, many have experienced 
resurgence by incorporating more efficient supply chains and 
superior product selection.  Despite the sector's growth 
since 1995, the market is far from saturated.  Roberto Ramos, 
president of the MFA, pointed out to Econoff that there are 
presently 55,000 franchise points of sale in Mexico - 
compared to 300,000 in Spain, a country with less than 40 
percent of the Mexican population. 
 
GROWTH DRIVERS 
-------------- 
 
¶4.  (SBU) Mexican franchise investors have traditionally been 
wealthy individuals with little interest in personally 
operating their branches, but this paradigm is changing. 
Increasingly, middle-class entrepreneurs are purchasing and 
managing franchises - according to data from the Mexican 
Franchise Association, 63 percent of new franchisees are 
making their first substantial investment.  Ferenz Feher, a 
leading franchise consultant, pointed out to Econoff that 
layoffs of Mexican professionals coupled with an earlier 
retirement age has created a large group of potential 
middle-class investors.  Ricardo Martinez explained to 
Econoff that he was an engineer who took an early retirement 
opportunity in order to purchase a Taco Inn franchise.  Five 
years later, he now owns three restaurants, two bars, and has 
hired 38 employees.  According to the MFA, 60 percent of 
non-franchise businesses fail within two years, while 95 
percent of franchises are still in business after their fifth 
year.  Given the relatively low cost of buying a franchise 
(from 5,000-100,000 dollars) and the greater security of a 
franchise investment, the franchise sector is empowering 
middle-class entrepreneurship on a large scale. 
 
¶5.  (SBU) Consumer credit is at an all-time high.  Bancomer, 
one of Mexico's leading banks, announced recently that the 
total amount of credit offered increased by 70 percent during 
the first trimester of 2006, with the number of credit cards 
growing by 124 percent.  As Mexicans are shopping and buying 
more, the resulting commercial real estate boom also fuels 
 
MEXICO 00002595  002 OF 003 
 
 
franchising growth.  Jorge Laventman, a real estate developer 
with GE Financial Services, explained to Econoff that 
shopping mall construction has risen by approximately 30 
percent over the last three years, with no sign of slowing. 
New commercial shopping centers are primarily filled with 
franchises, driving demand.  Jorge Yitani, master franchisor 
for Subway in the states of Puebla and Tlaxcala, is called 
weekly by a new shopping center requesting the placement of a 
new Subway branch. 
 
¶6.  (SBU) Franchising demand also drives itself.  Carolyn 
Bass, an intellectual property lawyer for Gallastegui 
Armella, the leading franchise law firm in Mexico, explained 
to Econoff that the majority of her clients are owners of 
family restaurants and stores.  As franchising expands 
throughout Mexico, especially in less populated communities, 
many local proprietors are threatened by newer, 
higher-profile chains.  The legal protection in the 
Industrial Property Law offers small business owners an 
opportunity to protect their name, logo - even their recipes 
- by registering as a franchise.  According to data provided 
by MFA, of the 180 new franchises created in 2005, 22 percent 
were small family owned Mexican businesses. 
 
¶7.  (SBU) Foreign franchisors have been more successful 
creating greater name recognition and developing a loyal 
customer base.  Learning from past experience, many US-based 
companies are better able to "tropicalize", or adapt their 
products for the Mexican market.  Yitani explained to Econoff 
the transformation made by Subway in the aftermath of their 
failed attempt to establish a viable franchise in Mexico in 
¶1995.  Today Subway conducts extensive market research 
regarding Mexican preferences, and varies its menu 
accordingly.  Increasingly, chains use consultants to assist 
with cultural transition; in Mexico City there are now five 
major consulting firms. 
 
FINANCING, ANYONE? 
------------------ 
 
¶8.  (SBU) While American investors are able to acquire 
financing from the Export-Import Bank or the Overseas Private 
Investment Corporation (OPIC), a deterrent to middle-class 
franchise investment in Mexico has been a lack of financing 
from Mexican banks.  Beginning May 9, 2006, HSBC will offer 
small-business loans to prospective franchisees, and the 
Secretariat of the Economy plans to guarantee 40 million 
 
SIPDIS 
pesos (USD 3.6 million) of those loans.  Luis Gonzalez, 
Director of Small Business Development for HSBC, explained to 
Econoff that the loan would cover up to 50 percent of the 
start-up costs of a franchise, with the interest rate and 
collateral determined on a case-by-case basis.  Despite the 
fanfare, however, Ramos and other members of MFA expressed 
doubts regarding the effectiveness of this program, given its 
expected interest rate of 20-22 percent. 
 
¶9.  (SBU) A new initiative by the Mexican Franchise 
Association in conjunction with EW Financial Services may 
offer greater potential for potential franchisees.  Ramos 
told Econoff that negotiations are taking place to enable 
various banks in the U.S., including Citibank and USBank, to 
offer small business loans through EW at an estimated 
interest rate of 7-8 percent.  Ramos stressed that while this 
agreement has not yet been finalized; achieving greater 
access to financing is MFA's top priority.  Isaak Sutton, 
co-owner of El Mundo de a 3 Pesos, the fastest growing 
franchise in Mexico, explained to Econoff that while the 
number of franchisee applications for his company rose by 50 
percent in 2005, 70 percent of the applicants did not have 
the funds required for the initial investment.  Increased 
financing options in the future may enable thousands of 
additional franchisees in Mexico, and spur the creation of 
thousands of jobs. 
 
JUST ENOUGH OF A GOOD THING 
--------------------------- 
 
¶10. (SBU) In January, 2006, as a result of extensive industry 
lobbying, Article 142 of the Industrial Property Law was 
amended, providing a new definition of franchises, mandating 
additional requirements for franchise agreements, and 
providing new standards for pre-sale disclosures.  Most 
industry observers, including representatives from the MFA, 
consultants, and franchisors agreed that the new changes were 
a positive step forward.  However, Ramos and other 
 
MEXICO 00002595  003 OF 003 
 
 
franchisors expressed concern that more regulation was 
looming, which could impede growth in one of Mexico's most 
innovative economic sectors. 
 
COMMENT 
------- 
 
¶11.  (SBU) With increased small business financing, a more 
secure legal environment, greater middle-class disposable 
income and confidence, and numerous underdeveloped areas 
outside of Mexico City, all signs point to strong continued 
growth of franchising in Mexico in the near future.  There 
are potential threats to the franchise sector - 
overdevelopment of the commercial real estate sector, with a 
corresponding risk to imbedded franchises, and 
over-regulation of a competitive and thriving marketplace. 
However, there is a growing awareness among policy makers in 
Mexico City that by stimulating middle-class investment and 
job creation, the franchise sector will be a foundation of 
future economic growth. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA