Franchising in Panama and Central America
Franchising World March 2007
Ample opportunities for system expansion are appearing with increasing frequency.
By Robert Jones
Imagine a market of more than 39 million people, with a GDP of almost $100 billion. In addition to Panama, it includes Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. All of these countries are stable democracies that have concluded free trade agreements with the United States although ratification is still pending in the United States for the Panama FTA, and in Costa Rica for the Central American Free Trade Agreement.
Although, geographically speaking, Panama is part of Central America, it is often considered separate in terms of its economy and culture. Therefore, for the purposes of this article, it is not included as part of Central America.
Panama Due to its strategic location between the Pacific and Atlantic oceans, Panama has served as the crossroad for world trade flows since the time of the conquistadores. Today, not only is Panama a major shipping and air transport hub, but it is also an international trading, banking and finance services center. Its Colón Free Trade Zone is the world’s second largest free trade zone, with more than $13 billion per year in imports and re-exports to countries throughout Latin America.
Panama’s dollar-based economy eliminates any foreign exchange risk and keeps inflation low. The services sector makes up about 80 percent of Panama’s economy, mostly from the Panama Canal, banking, insurance, container ports, the Colón Free Trade Zone and the flagship registry.
Panama grew faster than any other economy in Latin America in 2006, at just more than 8 percent, and is expected to lead the list again in 2007. The $5.3 billion expansion of the Panama Canal began in 2007, and investment in several other areas will also contribute to Panama’s economic boom, including container ports, energy, telecom, residential construction, tourism facilities and other assets.
In December, the United States and Panama agreed to the terms of a free trade agreement, which will be sent to the U.S. Congress for ratification during the first half of 2007. The agreement is expected to stimulate greater bilateral trade and investment, and should further contribute to the expansion of the Panamanian economy.
Panamanians have always had a close relationship with U.S. culture over the years, due to the Panama Canal, as well as the popularity of visiting the United States for education, medical services and general tourism. Therefore, businesses associated with the United States are popular among the general population due to a preference for U.S. products and services.
Panama has a population of slightly more than three million people, with a GDP of $14 billion, and the highest per capita income in the region (more than $4,300 per person). The franchising sector consists of more than 50 franchise systems, with 500 point-of-sale units. Twenty franchise systems are Panamanian-owned, mostly small food concepts with only a limited national presence. U.S. franchise systems make up the largest percentage of franchise units, estimated at about 70 percent of the foreign-owned units, mostly in traditional sectors such as fast food, full-service restaurants, car rental companies, and others.
Franchise systems from Colombia, El Salvador and Guatemala have also been expanding in Panama, as well as several European concepts, mostly in the food business, with some businesses as well in clothing, printing, cosmetics and hotels.
More than $200 million was invested in building several major malls in the Panama City area over the last three years, providing a boost to the growth of franchise outlets. New malls have also been built in secondary cities such as David, in the western province of Chiriqui, which has a large North American retirement community that is rapidly expanding.
The franchising sector continues to expand at a rate of about 15 percent annually. There is currently no franchise regulation in Panama. Arbitration is allowed in the event of a commercial dispute, which is recommended instead of utilizing the country’s legal system.
Central America (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) The United States and the Central American countries concluded a free trade agreement that was ratified by all of the countries in 2006, except for Costa Rica, where it is still being discussed and considered.
CAFTA will improve the investment climate throughout the region, stimulating increased trade and investment. It will serve to improve the business and investment climate. The agreement will also provide improved trademark protection, lower the cost to import equipment, and eliminate the onerous “Dealer Acts” which created negative liabilities for U.S. firms working with local business partners.
Central Americans are very receptive to and have a preference for U.S. goods and services.
The franchising sector in Central America has been expanding at an annual rate of between 10 percent to 15 percent since 2000, and it is expected to grow even faster in the coming years due to CAFTA.
Costa Rica Costa Rica has a population of more than four million inhabitants, with a GDP of $20 billion and an annual growth rate in excess of 4 percent. Costa Rica has a highly- educated workforce and a literacy rate of more than 95 percent, with a relatively high per capita GDP and strong foreign direct investment.
There are about 100 franchise systems operating in Costa Rica, with about 75 of those being U.S. franchise concepts. More than 20 franchises are national concepts. The majority consists of food businesses, with other sectors as well that include hotels, fitness, clothing and shoes and others.
El Salvador| El Salvador has a population of almost seven million people, with a GDP of $17 billion and an annual growth rate of about 3 percent. The country’s “dollarized” economy eliminates any foreign exchange risk, and its aggressive trade development program resulted in a foreign trade growth of more than 500 percent between 1992 and 2006.
Fast-food concepts have been the fastest-growing segment of the franchising sector, with U.S. franchise systems also operating in the following segments: hotels, car rentals, accounting, mobile advertising, fitness, beauty salons, computer education, child care, video rentals and dry cleaning.
Guatemala Guatemala has the region’s largest population with more than 12 million inhabitants, and the largest economy with a GDP of more $31 billion. The annual growth rate is more than 3 percent, and the country has privatized the majority of its services.
There are more than 200 franchise systems in Guatemala, with close to 1,300 franchise units. There is no franchise legislation; businesses are subject to the general commercial laws. Ninety percent of franchises are foreign concepts, with the balance being Guatemalan businesses. The U.S. franchises have more than an 80 percent market share. Food concepts are the largest segment of the franchising sector, with growth in other areas such as convenience services, dry cleaning, lawn and garden, painting, shoe repair, pest control, fitness, computer training centers and children’s learning and daycare centers.
Honduras Honduras has a population of more than seven million inhabitants, a GDP of $8 billion, and an annual growth rate of more than 4 percent. The government has identified tourism development as a key cluster for economic growth, including large resort investments (tourism increased 80 percent from 2002 to 2005). In recent years there has been substantial investment in new shopping malls and retail areas in the country’s largest cities, Tegucigalpa and San Pedro Sula.
The popularity of franchises continues to grow, especially in the fast-food and casual- dining segments. There are approximately 60 franchise systems in Honduras, virtually all of them being foreign concepts. In addition to food, other growing areas of franchise activity are hotels and resorts, convenience stores, entertainment services, mailing/packaging, dry cleaning, real estate, pest control, day care and learning centers, real estate, security, clothing and video rentals. Honduras has no franchise-specific legislation or regulations.
Nicaragua Nicaragua has a population of close to six million people, with a GDP of about $5 billion, and a rate of growth of more than 4 percent. In recent years, it has had a strong privatization program and has phased out previous price controls. The country has the lowest labor costs in the region, as well as a relatively low level of crime.
Nicaragua currently has about 25 franchise systems. There is no franchise-specific legislation.
The U.S. Commercial Service–Helping American Franchisors The critical component for the successful expansion of U.S. franchise systems into Panama and Central America is the identification of an appropriate investor in each country to serve as the local business partner (master licensee, franchisee, joint-venture partner). Although it is possible to grant regional master license rights for a number of countries in this area, it is still critical for the master licensee to establish a relationship with a local business partner in each market in order to maximize the potential for success.
The U.S. Commercial Service, part of the U.S. Department of Commerce, has personnel in all of these countries that can assist U.S. franchise companies to identify the most appropriate potential business partners in these markets. These offices can arrange one-on-one appointments for franchise systems with potential franchise investors in-country (known as the “Gold Key” program). The e-mails for the USCS franchise contact in each of these countries is listed below.
Panama Enrique Tellez, e-mail: Enrique.email@example.com
Costa Rica Roy Fernández, e-mail: Roy.Fernandez@mail.doc.gov
El Salvador Lidia Sosa, e-mail: Lidia.firstname.lastname@example.org
Guatemala Ana Maria Solares, e-mail: Anamaria.email@example.com
Honduras Rossana Lobo, e-mail: Rossana.firstname.lastname@example.org
Nicaragua Marixell Garcia, e-mail: Marixell.Garcia@mail.doc.gov
In addition, the service also has more than 100 Export Assistance Centers around the United States to provide services to U.S. franchise companies interested in expanding their concepts throughout the world. The centers coordinate programs for American franchise systems with the foreign USCS offices in different markets. Refer to www.buyusa.gov to locate the nearest assistance center.
The service also has a Global Franchising Team which consists of staff both in the USCS foreign and domestic offices. Those team members work with the franchising sector and provide support services and programs to U.S. franchise firms to help them successfully expand into foreign markets.
“American Franchise Forum” May 10 and 11 The USCS office in Panama is co-sponsoring an “American Franchise Forum,” in conjunction with the American Chamber of Commerce there, to be conducted in Panama City on May 10 and 11. Investors from Panama and from throughout Central America may attend the forum to learn about franchising and meet with U.S. franchise companies to discuss business development opportunities in the region.
Robert O. Jones Jr. is the senior commercial officer of the U.S. Embassy, Panama City. He can be reached at Robert.O.Jones@mail.doc.gov.
For more details about participation in the “American Franchise Forum,” contact Nelly Goff at AmCham Panama, email@example.com.