FRANCHISING IN MEXICO PART II: PRESENT AND FUTURE

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
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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
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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,

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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
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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