An unlikely business opportunity in Latin America

June 7, 2011
Panama City, Panama

Several years ago, I was briefly involved in a deal here in Panama in which the local owner of several fast food restaurants was looking to sell. If memory serves, he had the Panamanian master franchise agreement agreement for a large North American burger chain with over a dozen locations across the country.

They were all profitable, and he wanted our help in finding a buyer.  I remember thinking later that the owner had perfectly timed the top of the market in private equity, and he was rewarded handsomely for his acumen to the tune of 8 figures.

Perhaps more impressive is the recent IPO of Argentine company Arcos Dorados, Spanish for “Golden Arches.” The company, founded by Colombian expat Woods Staton, operates nearly 2,000 McDonald’s franchises across Latin America and has the exclusive right to do so in 19 countries in the region, including here in Panama.

Their franchise empire is so vast that it single-handedly accounts for 5% of McDonald’s global sales. Arcos Dorados recently IPO’d on the New York Stock exchange with a market value of roughly $3 billion. Staton became a billionaire.

Franchises don’t seem like that big of a deal in the developed world, but in Latin America, they’re big business.

It can take quite a long time to build a strong international brand, and years ago, many companies in the region lacked the necessary capital to promote themselves across borders. Now that the entire region is growing so rapidly, companies have access to all the capital they need… and regional brands are taking off.

Chile’s Falabella (like Macy’s) is a great example, with roughly 40 stores in four countries.  Colombia-based Lenos y Carbon is another; it’s a popular grill with franchises in several countries, including here in Panama.

Its business and brand, however, are still dwarfed by a McDonalds, Burger King, Subway, etc. These North American and European chains effectively had a multi-decade head start on Latin America, and for the time being, they maintain the strongest appeal.

A big part of economic growth in Latin America means increased wealth… and having more disposable income typically increases consumptive behavior, especially in this part of the world where credit runs freely and responsible personal finance is a punch line.  As such, conditions are ripe for a long-term rise in demand for retail space.

According to the International Council of Shopping Centers, the United States has roughly 24 square feet of retail space per capita. The developed world, including much of Latin America, has less than 6. Even Brazil, with all of its economic might, has less than 1.

Clearly there needs to be a rebalancing. I expect the wealth shift from North America to the east and south will reduce demand for retail space there, and it would be completely feasible for retail space in Latin America to double over the next 10-15 years.

Because regional consumer products manufacturers are still developing their brands, it’s likely that much of the new retail space to be developed will be filled with established international brands.

Hotels will be branded Hyatt or Holiday Inn (of which a new one was just announced for Panama); rental car outlets will become Hertz or Dollar-Thrifty (which recently announced new locations in Colombia and Ecuador); and, yes, food courts will be filled with Pizza Huts and Taco Bells.

Whether you love or hate the brands (I tend toward the latter), the opportunity is very real. Countries in a high growth phase are looking to increase their capacity to consume… that means more retail space, increasing the demand for instantly recognizable brands.

It’s no surprise to see that the growth of franchises in the region is among the fastest in the world. According to the Association of Brazilian Franchises (ABF), franchise locations doubled from 2005 through 2009, and is still growing in excess of 20% per year. This makes Brazil one of the strongest growth markets in the region, along with Panama and Peru.

Peru is practically virgin territory compared to the rest of the region. With roughly 90% less retail space per capita than in neighboring Argentina according to Latin Trade magazine, there is tremendous opportunity for growth to coincide with Peru’s economic growth, assuming President-elect Humala doesn’t confirm the market’s worst fears.

Here in Panama, there is an established and growing middle class with access to relatively cheap credit. One side effect of this country being so Americanized is that US brands in particular do extremely well, and this is a great benefit to entrepreneurs.

If you’ve been thinking about a move overseas but have no earthly idea what you would do once you get there, you may want to consider this option where getting started often costs less than $100,000. Clearly the road to success is paved with preparation and a realistic appraisal of the situation, but the underlying fundamentals are definitely favorable.

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