VZCZCXRO6838
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2633/01 1362201
ZNR UUUUU ZZH
R 162201Z MAY 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0849
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 002633 
 
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 II: PRESENT AND FUTURE 
TRENDS 
 
REF: MEXICO 2595 
 
Sensitive but unclassified, entire text. 
 
This is the second in a series of two cables reviewing the 
franchise sector in Mexico. 
 
¶1. (SBU) Summary.  Being driven by domestic and foreign 
investment, the franchise industry grew by 17 percent in 
¶2005. While U.S. companies presently comprise most of the 
foreign-based franchises in Mexico, a substantial increase in 
the presence of Central and South American, European, and 
Chinese investment is likely in the immediate future.  No 
longer confined to restaurants, Mexican franchises continue 
to grow and diversify, offering new products and services as 
well as building wealth and employment at home.  End Summary. 
 
NOT JUST MCDONALDS 
------------------ 
 
¶2. (SBU) Previously consisting largely of fast-food 
restaurants, the franchise sector in Mexico has experienced a 
strong and increasingly diverse resurgence since the recovery 
of the peso following the 1995 crisis.  Franchising expansion 
has been coupled with a corresponding explosion of creative 
concepts, encountering mixed success.  However, as the sector 
has matured, the five-year success rate for new concepts has 
risen from 55 percent in 1999 to over 80 percent today, 
according to data from the Mexican Franchise Association 
(MFA).  Services are the largest and fastest growing industry 
segment, making up approximately a quarter of all franchises 
in Mexico, closely followed by food and beverage chains.  The 
percentage of franchises classified as "other" with unique 
business models such as mobile compact disk stores, 
while-you-wait clothing repair, or business expense reducting 
consulting has risen to 35 percent, and represent a 
significant part of the sector's innovation and growth. 
 
THE NEW MEXICAN CONSUMER 
------------------------ 
 
¶3. (SBU) A key factor underlying the proliferation of 
franchise concepts has been the changing degree of social 
acceptance and reliance upon franchised services and 
products.  According to the National Institute of Statistics 
(INEGI), over 4 million Mexican homemakers have entered the 
workforce since 1995, increasing demand for take-out/delivery 
restaurants, childcare and educational services.  In 
addition, greater cross-border communication with the U.S. 
has led to familiarity and acceptance of American names, 
advertising and decorative styles, and products.  Similar to 
an earlier phenomenon in the U.S., the growth of Mexican 
suburbs and office parks has encouraged dining out. 
 
MORE EFFECTIVE TROPICALIZATION 
------------------------------ 
 
¶4. (SBU) Adapting a product to Mexican sensibilities and 
preferences is often known as "tropicalization".  During the 
first franchise boom, a number of successful U.S.-based 
franchises struggled to build a customer base.  Steven 
Pepper, Director General of "Yum! Restaurants International", 
the KFC and Pizza Hut master franchisor in Mexico, related 
his experiences to Econoff.  Pepper stressed that 
tropicalization is often a nuanced process necessary for 
survival.  Pepper cited the example of the Ms. Fields Cookies 
franchise, a company ultimately forced to close their Mexican 
franchises in the 1990s, partly due to a lack of adaptation. 
They only offered cookies, a strange product in a country 
where desserts are primarily bread-based - and the name "Ms. 
Fields" did not bring sentimental images to the minds of most 
Mexicans.  Even American-style franchises have tropicalized; 
Yucatan coffee is a staple of Starbucks' menu, and Subway 
sells a vegetarian avocado sandwich. 
 
SUPERIOR SUPPLY CHAIN 
--------------------- 
 
¶5. (SBU) Increased reliance upon Mexican suppliers has also 
increased the competitiveness of American franchises.  Jorge 
Yitani, owner of the Subway master franchise for the states 
of Puebla and Tlaxcala, told Econoff that the proportion of 
supplies imported from the U.S. has fallen from 90 to 35 
percent over 10 years.  KFC experienced a similar phenomenon, 
 
MEXICO 00002633  002 OF 003 
 
 
with its percentage of U.S.-sourced supplies dropping from 95 
to 40 percent.  Reasons for this change include a more stable 
Mexican currency, improved supplier reliability, and enhanced 
product quality.  With cheaper, more reliable supplies, 
franchises are now more competitive versus their local 
rivals.  For example, Pepper explained to Econoff that in 
1995, the meal price at KFC was 80 percent more than a meal 
purchased from a street vendor, but today it is only 15 
percent more expensive. 
 
FOOD AND BEVERAGES 
------------------ 
 
¶6. (SBU) Food and beverage chains continue to grow and 
diversify in Mexico.  According to Pepper, KFC already has 
11,000 employees and 400 million dollars in yearly revenue, 
and plans to add 20 additional stores this year (to 300 
existing branches), creating approximately 600 new jobs. 
Alberto Torrado of Alsea, the master franchisor of Dominos, 
Popeyes, Burger King, and a joint-venture partner with 
Starbucks, expects his company to grow by 15 percent in 2006. 
 This expansion is not limited to large established chains. 
Marco Empoli, the franchisor of Empoli Pizza, a Mexican chain 
founded in 2001, has grown from 3 to 21 franchises in two 
years, and hopes to add another 19-20 restaurants over the 
next several years.  Smaller U.S. franchises are also joining 
the fray - Pepper pointed out that Pizza Hut is now facing 
strong competition from new players such as Via Pizza, who 
entered the Mexican market in 2004.  Taking advantage of the 
trend toward healthy food consumption, there are new 
franchises such as Salad Creations and Delit, a Mexican chain 
offering frozen yogurt and fruit. 
 
SERVICES 
-------- 
 
¶7. (SBU) According to Ramos, services are included among 3 
out of Mexico's 5 fastest growing franchise concepts. 
Franchises proffering childcare, eldercare, tutoring, and 
arcades now fill today's more urgent needs.  Another example 
is "Two Men and a Truck", a U.S.-based franchise entering the 
Mexican market this year, reflecting a changing social 
dynamic.  The quest to discover underserved consumer demand 
has led to innovation - the Spanish franchise Naturhouse 
offers on-site dietetic counseling and a range of health-food 
products. 
 
YOUR WORLD OF THREE PESOS 
------------------------- 
 
¶8. (SBU) Included in the "other" franchise segment, "El Mundo 
de a 3 Pesos" (Your World of 3 Pesos) has been the fastest 
growing franchise in Mexico for two consecutive years. 
Co-owner Daniel Sutton told Econoff that since its opening in 
2003, El Mundo has added 300 stores, and they plan to have 
1,500 branches throughout Mexico by 2011.  El Mundo's 
strategy is simple - capitalize on the demand for cheap 
products by offering a range of items, such as kitchen 
utensils, cups, and deodorants, for three pesos.  Investment 
in an El Mundo franchise is accessible for the middle-class, 
requiring an initial investment of 20,000 pesos and a monthly 
fee of 10,000 pesos.  During a tour of their manufacturing 
plant 25 miles north of Mexico City, Sutton explained that 
initially El Mundo imported all of its products from China. 
Today 60 percent is manufactured in Mexico, thereby creating 
a new profit center, increasing efficiency of distribution, 
and creating 600 new direct-hire jobs.  El Mundo's success 
has provided a model for several new imitations, including 
"La Tiendita de 3 Pesos" (The little store of 3 pesos), and 
stimulates investment and job creation. 
 
FONART 
------ 
 
¶9. (SBU) Inaugurated in 1974 as a department of the Ministry 
of Social Development (SEDESOL), the National Fund for the 
Support of Artisans (FONART) offers franchising licenses to 
sell authentic Mexican handicrafts at home and abroad. 
Currently, there are 9 FONART branches in Mexico, 5 in the 
U.S., and 2 in Europe.  Alejandra Lopez, Director of the 
Department of Franchises, told Econoff that applications for 
new franchises are booming, and they expect another five 
branches will be opened this year (the average investment is 
100,000 US dollars).  While due to its relatively small size, 
 
MEXICO 00002633  003 OF 003 
 
 
FONART will probably not make a significant impact on the 
Mexican retail sector, the program provides a market for 
rural artisans and offers an interesting example of 
public-private sector collaboration for the promotion of 
economic development. 
 
NON-US FOREIGN INVESTMENT INCREASING 
------------------------------------ 
 
¶10. (SBU) While European, Latin American, and Chinese 
franchises account for only 5 percent of all franchises in 
Mexico, the recruitment of franchises from these regions is a 
high priority for the MFA, according to Ramos.  Taking 
advantage of the underdeveloped marketplace, companies such 
as Creppaletas (Brazilian restaurant), Broncearium (Spanish 
tanning salon), and Autowash (Italian automatic carwash) have 
recently entered the Mexican franchise sector.  Some of these 
are already offering significant competition - Pollo Campero, 
a Guatemalan franchise, was counted by Pepper as one of KFC's 
fiercest competitors.  This trend should continue in the 
future, as foreign franchises continue to develop stronger 
distribution chains and brand name recognition. 
 
COMMENT 
------- 
 
¶11. (SBU) The near future looks promising for Mexican 
franchising, and will likely provide a significant revenue 
and job-creation boost to the overall economy.  More varied 
than ever before, franchising continues to meet the changing 
needs of a changing society, with further diversification of 
services and products likely.  Although franchising in Mexico 
will continue to be a prime opportunity for American 
investors, it is no longer an "easy" market to penetrate, but 
rather an extremely competitive sector in which U.S. chains 
will have to utilize tropicalization, economies of scale, and 
maximize supply and distribution efficiency. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA