HONDURAS: FAST-FOOD BOOM CONTINUES AS FIRST

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002223

SIPDIS

SENSITIVE

STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN
TREASURY FOR DDOUGLAS
STATE PASS AID FOR LAC/CAM
COMMERCE FOR MSIEGELMAN

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV HO
SUBJECT: HONDURAS: FAST-FOOD BOOM CONTINUES AS FIRST
QUIZNOS OPENS



1. (SBU) Summary: Honduras, fast-food sector continues
to flourish and, with new entrant &Quiznos Sub,8 remains
dominated by U.S. franchises. Quiznos sees strong growth
potential in Honduras, based on the strong market acceptance
of U.S. brands and continuing economic growth. Quiznos did
not, however, benefit from an extremely generous tax
exemption scheme under which many of the early entrants to
the sector (based on the questionable justification that
fast-food franchises boost tourism) received a ten-year tax
holiday on income taxes, and a perpetual exemption from
import duties on capital equipment and process inputs. Those
laws have been tightened to offer benefits only to true
participants in the tourism sector, but it appears the early
entrants ) overwhelmingly composed of a small group of
economic elites ) will continue to receive those benefits
and continue to earn windfall profits. End Summary.


2. (SBU) On September 23, EconChief and Ambassador
participated in the ribbon-cutting ceremony for the first
Quiznos franchise in Honduras. In the works for over a year,
the new outlet cost $350,000 to construct and has the largest
footprint of any franchise outside the United States.
Quiznos representatives would not divulge the cost of the
national rights to the chain in Honduras, but indicated it
was &substantially more8 than the construction fees spent
to date. The outlet was the brainchild of Luis Rock, 23-year
old scion of Antonio Rock, the largest authorized distributor
of major motion pictures for over 40 years in Honduras, a
partner in the Multiplaza chain of movie theatres, and now
the new franchise holder for Quiznos operations in Honduras.
The younger Rock, a recent U.S. college graduate in Marketing
and Finance, serves as the Manager of the flagship store.


3. (SBU) The franchise agreement calls for the
construction of seven outlets countrywide, at a pace of at
least two new outlets per year (and a franchise fee of over
$20,000 per store). The aggressive expansion plan by Quiznos
Honduras is mirrored in other countries in the region,
according to Richard Eisenberg, Latin American Regional
President for Quiznos. Eisenberg told EconChief that Quiznos
is rapidly expanding beyond its regional base in Costa Rica,
where they already have nine franchises. Honduras is the
first to open, but will be followed in quick succession by
two stores in El Salvador later this year, and one in
Guatemala early next year. In all three countries, Quiznos
is following a similar business model, according to Pablo
Fernandez, Franchise Expansion Manager for Quiznos.
Fernandez told EconChief that Quiznos prefers to identify a
strong group or company in-country with whom they can sign
multi-unit deals for continued strong growth. Both the
Salvadoran and Guatemalan contracts include multi-year,
multi-unit deals, Fernandez said.


4. (SBU) At first the Honduran fast-food market might
appear saturated, yet receptivity to new chains remains high.
According to Eisenberg, the economic returns per outlet in
Honduras are projected to be among the best in Latin America.
Quiznos views this as a significant opportunity to capture
market share and remains enthusiastic about future prospects.
In the U.S., Quiznos reports it has risen to become the
number one provider of sub sandwiches, and expects to do the
same in Honduras. The entry of Quiznos should therefore
introduce some additional competition into the fast-food
market in Honduras, particularly for Jorge Siwady,s Subway
franchises.


5. (SBU) Though there are myriad U.S. franchised
fast-food operations in Honduras already, most are owned by
only a handful of firms or families. Eduardo Kafati, for
example, holds franchise rights to Burger King, Church,s
Chicken, Popeye,s Chicken and Biscuits, Little Ceasars
Pizza, Baskin-Robbins, and Dunkin Donuts. Similarly, Roberto
Larach (publisher of two major newspapers and a cousin of the
Canahuati family) holds the rights to Pizza Hut, Kentucky
Fried Chicken, and the Pepsi distributorship in San Pedro.
Wendy,s Hamburgers and casual dining restaurant Applebees
are owned by shopping-mall magnate Raymond Malouf. The price
impacts of this apparent market concentration vary with the
degree of competition: Little Ceasars, Dominos, and Pizza
Hut -- fierce competitors -- have reasonable prices and
frequently offer package deals and other specials. The same
rivalry can be seen between Burger King and McDonalds.
Wendy,s, inexplicably, is nearly as expensive as in the
U.S., and Dunkin Donuts, at nearly one dollar per donut, is
even more expensive in Honduras than in the U.S. Quiznos,
operator, the Rock family, is a new entry to this sector, but
is not without other connections: Antonio Rock is
brother-in-law to the powerful Canahuati clan, the family of
Ambassador to the U.S. Mario Canahuati and owners of a
multi-million dollar maquila operation.


6. (SBU) Most fast-food franchises arrived in Honduras
within the last decade. Two factors seem primarily
responsible for this rapid growth: First, the market, fed by
a growing economy and strong remittances growth, remains a
voracious consumer of fast food. The popularity of U.S.
chains in particular could be the result of the estimated one
million Hondurans currently resident in the U.S. and the
large numbers of Hondurans who have studied in the U.S. or
who visit there regularly and who are therefore familiar with
these brands. Second, until recently the tax law encouraged
this expansion of fast food chains by granting them 10 year
tax holidays on income taxes and near blanket waivers on
duties and taxes (using the dubious rationale that they boost
tourism and therefore should get the same tax breaks as
hotels.)


7. (SBU) On October 1, EconChief met with Vice Minister
of Commerce Salvador Melgar Ascencio, one of the drafters of
the tax exemption, to discuss its origins and current status.
Melgar said that one of the first tax exemptions was granted
to an early Burger King franchise. To qualify, a business
had to demonstrate that it was in a site of archeological,
historical, or architectural interest -- Burger King failed
that test on all counts. Nevertheless, Melgar said, the
exemption was granted. This &acquired right8 quickly
caught on and was granted to other similar franchises. In
its original form, the tax benefit was justified as promoting
tourism and promoting the import of capital goods that would
encourage growth of the sector.


8. (SBU) The benefits were subsequently memorialized in
the Tourism Incentive Law of December 18, 1998, which granted
ten-year tax holidays for tourism-related businesses, and
near-blanket waivers on customs and import duties. Melgar
lamented the way the implementation had spun out of control,
noting that the law was not intended to allow, for example,
duty-free importation of foodstuffs. When that law was
revised on June 5, 2002, the revision tightened the classes
of businesses that could benefit from the exemptions,
limiting it to hotels, resorts, tourist transport,
handicrafts, tourism promotion, and other clearly related
pursuits. Notable by its absence was the fast-food or
restaurant sector. While new businesses will not benefit
from the old law, Melgar said it was his understanding that
those fast-food franchises established under the old law
would retain those tax benefits, and, in essence, continue to
make windfall profits. Quiznos reportedly did not benefit
from the exemptions.


9. (SBU) Comment: Post is pleased to see a new U.S.
operation enter the market, not only to offer more selection
to the consumer, but also to diversify (slightly) the
ownership base of the sector. The franchise sector is
clearly a very successful U.S. export to Honduras, and Post
will continue to support its growth. Post will watch with
interest any developments in the tax code regarding fast-food
restaurants. Post suspects that as new entrants are forced to
compete without benefit of the old tax exemptions, pressure
will mount for closing that loophole to existing businesses
as well. End Comment.

PIERCE

Pierce