Finding area developers in Mexico

U.S. Commercial Service’s Mona MusaA franchise trade mission showcased 11 franchises to prospects in Mexico City and Monterrey in the latter part of 2014. Here’s an update on how deals are done south of the border.

Negotiating a lower price for a silver bracelet from a street vendor in Mexico is no big deal, but when a franchisee candidate wants to haggle over the franchise fee, all of a sudden bargain shopping isn’t so much fun.

But that’s a reality when doing business in Mexico. Don’t expect your franchise fee or even your royalties to be accepted in the first round of negotiations.

“It’s not a matter of devaluing your franchise,” Ferenz Feher, CEO of Feher & Feher, a consulting firm in Mexico City, told franchise trade mission participants at the first morning briefing. “It’s a matter of culture.” 

Mexican business people, he explained, want to feel good about having input into what they will pay. But it’s not all black and white. “You can say ‘no’ and the prospect won’t go away,” he said, adding a better plan is to find a solution involving give-and-take that benefits both sides.

This trip to Mexico City and Monterrey in early October was the eighth trade mission co-sponsored by Franchise Times and the International Franchise Association, and executed by the U.S. Commercial Service. Mona Musa, who works out of the Kentucky U.S. Commercial Service office, headed up the domestic effort. Her counterparts in Mexico had the arduous task of finding candidates in their local markets with the resources and wherewithal to become an area developer for a U.S. franchise. That job fell largely on Martha Sánchez’s capable shoulders in Mexico City and on experienced commercial specialist Manual Velazquez and newcomer Belen Gallegos, who is already a pro at the task, in Monterrey.

Another heads up from Feher was that one of the first questions a franchisor may encounter from a Mexican investor is whether he or she will have first right of refusal for other countries in Latin America.

It’s a legitimate question, since a “natural way to enter Central America is through Mexico,” Feher told the group of representatives from 11 franchisors. Whether a franchisor should offer those rights right off the bat is another question.

 “Mexico is a free-market economy with a mixture of modern and outdated institutions,” Feher said. “Have patience. We have high inequities in education and wealth distribution.”

Mexico can claim the richest man in the world—Carlos Slim—but also vast poverty. According to Feher, there are only 25 families in the whole of Mexico who are millionaires. The middle class is growing—about 44 million people fit into this desirable category for franchisors—but another 53 million are considered living in extreme poverty, he said.

The population may be 118 million, he added, but they’re not all consumers. “Don’t get excited (by that figure),” he warned, “unless you have something to sell every Mexican for a dime.”

The bonus of going just over the border is the franchise model is well known there; even the universities are teaching classes in it. Currently, about 80,000 people are employed by franchising in Mexico.

The flight may be shorter to Mexico than the other spots franchise trade missions have gone to, such as China and South Africa, but the deals won’t be quicker. Feher advised franchisors to be patient: A deal in Mexico requires a long-term commitment of both human and financial resources. “It can take a year to a year-and-a-half to make a deal,” he said. In addition, a U.S. franchisor must be willing to adapt its concept to both the Mexican business culture and its local tastes.

The good news is the agenda of the president, who is two years into his six-year term, is pro-business and he wants to do the things required to grow Mexico’s economy, such as raising taxes, deregulation, investing in health and education and improving labor laws, Feher said.

Getting out and about

This was a more mixed bag of concepts than in past missions. In addition to the ubiquitous food concepts, were some newcomers: Jackie Coan from Xtreme Lashes, an eye lash extension franchise, and Rob White and Chris Grandpre from Mosquito Squad.

One of the unavoidable drawbacks of a trade mission is that we often don’t see much of the city, except the scenery to and from the airport and on bus trips to the embassy and shopping malls. That meant for Mexico City, we weren’t privy to any of the upscale areas. Most of the cement-colored buildings we drove past were covered in graffiti. Traffic moved at a pace slightly above a standstill.

In the afternoon we toured the shopping malls, which were organized by themes. For instance, one we toured had a health club on the top level, athletic shoe and clothing stores on the second level, a grocery store on the basement level and healthy dining and vitamin stores throughout. Another center included a large wing where a variety of banks took up residence, including a wall of ATMs. Because traffic is so bad, the idea is to allow people to park once for several errands.

A reception at the consulting firm Feher & Feher’s offices, allowed the trade mission participants to informally introduce themselves to some prominent business people.

The next day we headed to the airport for our flight to Monterrey.

Bringing royalties to the royals

Monterrey is as different from Mexico City as New York City is from L.A. Graffiti, which was a constant embellishment in the country’s capital, was in short supply in the more modern Monterrey, that aligns itself more with Texas than Mexico.

Residents of Monterrey don’t tell strangers they’re from Mexico, but rather specifically from Monterrey, said Velazquez, commercial specialist and one of the organizers of the Monterrey portion of the trip. People from Monterrey are referred to as “Royals” by other Mexicans, he added, because of their attitudes—confident and competitive.

A note to franchisors, experts during the briefing said entrepreneurs in Monterrey want to be directly connected to the U.S. franchisor, not through a Mexican middle man (such as an area developer).

Monterrey is the third largest city in Mexico, with a population of 4.2 million, and the country’s second-largest economy. It enjoys the highest per capita income in Mexico. Monterrey is headquarters to large international companies and is privy to significant foreign investment. It also hosts an abundance of insurance companies. Monterrey drivers are notoriously bad, Gallegos says, only half in jest.

There was more elbow room in Monterrey, both on the road and at the one-on-one meetings where each brand had their own room. The benefit of such an arrangement is that representatives don’t have to overhear their competition selling or, more importantly, see the same great candidate they just talked to sit down at another brand’s table to talk.

After the meetings we toured the city. Brightly colored houses dot the hillsides and terrace restaurants have become popular, much to the surprise of the pundits who said Monterrey was too hot for outdoor dining. A trend is for restaurants to go inside malls, as opposed to stand-alone buildings, we were told. Leases are not as expensive as Mexico City and are in dollars, not pesos.

Our U.S.-brand hotel was across the street from a modern shopping center, which we walked to for a group dinner the first night. We divided up along culinary lines, half the group chose the seafood restaurant and the others an upscale Mexican food eatery, where we encountered guacamole topped with grasshoppers.

The last night we dined at one of the open-air restaurants overlooking the mountains.

One non-business stop we made was to go to the highest point in the city to overlook the sprawling metropolis below us. It was a metaphor for the trade mission where attendees were high on the prospects they had met with earlier. Although they won’t close quickly, there will be deals.

Mexico Trade Mission
Trade mission (l to r): Manuel Velazquez; Gus Miranda and Patricio Muldowney, Title Boxing; Mona Musa, Lesley Hawks,  EGS; Josh Merin, IFA; Tesla Martinez, Focus Brands; Al Davis, Boston’s; Jackie Coan, Xtreme Lashes; Dan Hannah, Smoothie King; Hair Parra, Wing Zone;  Erika Garza, Boston’s;  Belen Gallegos; Rob White and Chris Grandpre, Mosquito Squad; Anthony Padulo, BrightStar; and Donny Everts, World of Beer. Not pictured: Doug Wong and Dave Demers of Denny’s and Bill Gabbard and Michelle McClurg of EGS.

Franchise Time

By Nancy Weingartner

For more information click: Master Franchises.

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