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How To Succeed In Business... Maybe
New Entrepreneurs In Puerto Rico Are Flocking To Franchises To Get A Head Start In Business, But They Should Be Aware Of The Risks.
By TAINA ROSA
April 10, 2003
"Go into business for yourself, but not by yourself: Although franchises provide brand recognition, proven products, support, and access to financing, they arent foolproof. What are the magic ingredients for success?
Franchises, particularly fast-food and service franchises, have been growing in Puerto Rico ever since they first appeared in the 1950s. Today, they are among the largest employers on the island, with the top 18 food franchises and the top 10 service franchises alone estimated to employ almost 25,000 people.
"In 2002, there were 282 franchise systems operating in Puerto Rico. This includes all types of franchises concepts," said Maria Amador, professor of strategic management & international business leader in franchise research.
This growth promises to continue as stateside and foreign companies of all kinds eye Puerto Rico as fertile ground in which to open franchise stores. With franchising being touted as one of the safest ways to go into business, more locals are interested in becoming franchisees.
As with all business opportunities, however, franchising has its risks. Those waiting to become franchisers--meaning to expand their businesses through franchising--or to become self-employed by becoming a franchisee for a particular company, should examine the risks and rewards of this type of business. In Puerto Rico, for instance, 33% of all fast-food franchise systems (not individual stores, but the total number of stores under one brand) fail, according to research by Amador.
Advantages of owning a franchise
The International Franchise Association (IFA) says there are many advantages to owning a franchise. For example, owning a franchise allows you to go into business for yourself, but not by yourself. This means franchisees operate a business that already enjoys widespread brand-name recognition. This association with proven products and methods and the continuing support franchises offer increase the chances of business success, according to the IFA.
Edwin Rivera Martino, president of Global Marketing & Franchising, said that brand-name recognition also makes banks more willing to lend money to franchisees. "It is easier to obtain loans from banks when they already know a concept works," he said.
A picture of franchising in Puerto Rico
If you think theres already a franchise store in every corner in Puerto Rico, wait till you see whats coming.
Several franchise companies have recently announced expansion plans in Puerto Rico for 2003. Mail Boxes Etc. intends to open three more stores; Lady of America (womens gym) plans five to eight; Wendys has announced it will open nine restaurants; Yogen Fruz (frozen yogurt shop) will open six; Cold Stone Creamery (ice cream shop) will open three; Johnny Rockets (diner with live entertainment) will have three, and so will eMilios (Internet cafe). All except Yogen Fruz, a Canadian company, are based on the U.S. mainland.
Locals are also increasingly interested in becoming franchisees. From 1998 to 2000, the U.S. Small Business Administrations local office, covering Puerto Rico and the U.S. Virgin Islands, approved 114 loans specifically for franchises, which amounted to $14.5 million, according to Ivan Irizarry, executive director of the office. Of those 114 loans, 93 were for franchised units (single stores) to be operated by Puerto Ricans throughout the region. The number of Puerto Ricans approved for franchise loans in the region rose from 11 in 1998 to 20 in 2002.
The U.S. Hispanic Chamber of Commerce recently offered a series of seminars on franchising in Caguas. According to the organizers, approximately 300 people from all walks of life "graduated," which goes to show there is a lot of local interest in this type of business opportunity.
Food franchises dominate, but service franchises are catching up
There were 104 business-format food franchise systems in Puerto Rico in 2002, said Amador. The top 18 such systems employ almost 20,000 people on the island, according to the 2003 CARIBBEAN BUSINESS "Book of Lists."
Amador said that food franchises are followed in number by service franchises, of which there were 48 last year, retail with 37, business-to-business services with 26, automotive franchises with 25, health services & products with 21, maintenance & janitorial services with 19, and technology services with two. These data, said Amador, dont include hotel or motel franchises. They also dont include product or brand franchise systems, such as Coca-Cola Bottlers P.R., gasoline stations, or the Miss Universe Pageant.
"Food-related franchises are king, but there are other important sectors," said Amador. "There has been an increase in nonfood-related franchises such as dry cleaning, weight-loss programs, and credit counseling services, but food-related franchises still predominate, not only in the number of franchise systems but also in number of units." Puerto Ricos top 18 food franchises have 959 franchised units, according to the CB "Book of Lists."
Rivera Martino told CB, "In about 10 or 15 years, we could see service franchises growing even more aggressively, while the food franchise market becomes more and more saturated."
Trends in franchising: Puerto Rico examples
Amador divides the trends in franchising into four groups: more non-U.S. mainland systems, nonfood franchises, multibranding, and an increased use of multiple selling points. Cooperation agreements are another trend in Puerto Rico.
More non-U.S. mainland franchise systems have been arriving in Puerto Rico in recent years, and some of those expanding on the island are from countries such as Canada and Venezuela. Others, however, are homegrown, meaning they started on the island.
Canada-based Yogen Fruz announced it would open six stores in Puerto Rico this year. Churromania, from Venezuela, plans to open 10 to 15 stores in about three years. Examples of homegrown franchises are Auto-Lux, with nine offices and more to come, and Pizza Pasta, which took over many of the restaurants previously under the Antoninos Pizza franchise system.
Many franchises not related to food service have also been expanding locally in the past few years and will continue to do so, based on company announcements. Pearle Vision plans to open up to three more stores in 2003; Cartoon Cuts announced up to four stores this year; Internet cafe franchise eMilios will have three new stores.
Multibranding and cooperation agreements are similar trends that have been gaining popularity. A perfect example of multibranding is seen in the Tricon restaurants Kentucky Fried Chicken, Taco Bell, and Pizza Hut. To maximize sales while reducing overhead costs, Tricon has been rolling out a sort of three-in-one concept in which three brands are found on one site. Similarly, Dunkin Donuts shares some stores with sister company Baskin-Robbins.
Cooperation agreements are similar to multibranding in that they also have two or more brands sharing store space. The difference, according to franchise experts, is that in a cooperation agreement, the brands arent part of the same company. "For example, Subway has teamed up with Taco Time and Gelato to share space while offering more variety to customers," explained Jose Vazquez, co-developer of the Puerto Rico region for Subway.
Another trend in the past years has been to set up multiple selling points. "Franchises are using different ways to get to their customers," said Amador. "Fast foods and quick-service restaurants, for instance, are creating flexible and smaller structures for shopping-mall food courts, such as Ponderosa Express."
Pitfalls of franchising
Although franchising is presented as one of the most convenient ways to become an entrepreneur, not all is rosy in the world of franchising. Those interested in becoming franchisees or in expanding a company through franchising must pay close attention to their business.
A study conducted by Wayne State University Economics Prof. Timothy Bates showed that "38.1% of new franchised business [units on the U.S. mainland] had failed within four or five years of opening. The failure rate of new independent, nonfranchised businesses during the same period was 6.2% lower."
The figures in Puerto Rico are worse. "Food franchise systems, which account for 43% of all franchise systems on the island, have a 33% failure rate," said Amador. This number refers to entire franchise systems that have failed in Puerto Rico, not to individual franchise stores, she explained.
"Many franchises havent survived because they havent provided the services their franchisees needed," said Amador. This could mean the franchiser failed to deliver supplies or other services as promised, impairing the franchisees ability to do business, she explained.
The blame for failure neednt rely squarely on franchisers. Some franchisees expect to function only as investors, when they must also be operators and oversee the day-to-day operations of a franchise unit, Amador said.
One local, who is the president of a service company that has some franchised stores said, "It is important that a company that wants to expand through franchising realize that once a franchisee becomes part of the company, the parent company doesnt have absolute control over the operations of the franchised unit. In a corporate-owned store, I can just call the manager and tell him or her exactly what I want changed. In the case of a franchisee, well, the franchisee isnt the franchisers employee. The franchiser can suggest changes depending on what was in the contract signed by both."
"Companies interested in expanding through franchising should make sure their business concept and operating system can be cloned and adapted to different markets," said Ricardo Rivera, sales & marketing vice president of Auto-Lux and president of the newly formed Puerto Rico Franchise Association.
Tania Suarez, public relations director for Caribbean Restaurants LLC, the master franchisee of Burger King in Puerto Rico and the sole operator of Burger King restaurants on the island, said potential franchisees should conduct a background check on the companies in which they are interested. "They must make sure it is financially solid," she said. "It is also important that the concept they want to develop fits the market they want to do business in, because the fact that a concept works on the mainland doesnt necessarily mean it will here."
Read the fine print
Rivera recommended that those interested in becoming franchisees study state and federal legislation on franchising in order to avoid unpleasant surprises.
Carmen Marti, executive director of the Small Business Development Center, said, "Potential franchisees must realize that owning a franchise is like a 25-year marriage. Once youre in the relationship, it is difficult to make changes, although this varies with the franchise concept. For this reason it is important that those interested study and understand the franchise contract."
Marti also emphasized the importance of hiring a lawyer who specializes in franchising. "Dont go out and get just any lawyer," she said. "You must hire someone whos an expert in franchises."
One such expert, Raul Arias of law firm McConnell-Valdes, said laws and regulations vary from state to state and making modifications once a relationship has been established can be a lengthy, difficult, and expensive process for all parties.
"The reason for hiring an attorney with experience is that franchising contracts cut across many legal disciplines, such as alternate dispute resolution, contracts, intellectual property, and torts," said Arias. "Experience gives the attorney awareness of potential issues as well as of available solutions. When thinking about hiring an attorney to deal with a franchising matter, ask about the attorneys and the firms experience in negotiating, drafting, and litigating franchising, distribution, or sales representation contracts and about the results they have obtained."
Marti said potential franchisees must also ask franchisers for information about the financial performance of their other franchisees operations. "This is how you really know what youre getting in to," she said. One thing to check out, she said, is the number of franchises operating near one another. According to many in the franchise business, it usually spells trouble when a franchiser begins allowing franchised stores to open close to others, potentially cannibalizing sales.
Arias pointed out that although there are no franchise laws per se in Puerto Rico, the Puerto Rico Monopoly Act, which regulates unfair trade practices, might apply. "Moreover, there are federal laws and regulations regarding franchising that apply in Puerto Rico," said Arias.
"The Federal Trade Commission (FTC) has a franchise rule which, where applicable, requires the franchiser to disclose detailed information to potential franchisees so that they can make an informed decision before entering into a franchise relationship," said Arias. "The rule doesnt create a private cause of action and it is the FTC that is responsible for enforcement if there has been a violation of the rule."
In addition, Arias explained, "There are two federal franchise laws dealing with certain industries. These are the Automobile Dealer Franchise Act and the Petroleum Marketing Practices Act. The former supplements state law. The latter pertains to gasoline retailing relationships and supersedes incompatible state law."
The secret for success in franchising is common sense. Franchisers must make sure their business concept can be copied and adapted to each target market. Franchisees must be willing to do their homework on the company they want to partner with and to be hands-on managers once the business is up and running.
Finally, both parties should hire attorneys who are experienced in franchising to minimize the risks of failure.
Franchiser: A person who owns or has the right to the name and system of a franchise, and who grants to others the right to use that name and system in return for the payment of a fee or royalty.
Franchisee: A person to whom a franchise is granted. Franchisees should be:
Business format franchise: Under a business format franchise, the franchiser grants the franchisee a license to operate the franchise as an ongoing business enterprise. Examples of this type of franchise are Quiznos, Maaco, and Molly Maid.
Product or brand franchise: In this type of franchise, a franchiser grants the franchisee the right to operate a business under a certain brand name as long as the franchisee maintains a certain level of quality established by the franchiser. Examples of this type of franchise are Coca-Cola Bottlers Puerto Rico and the Miss Universe Pageant.
Expansion Plans for Puerto Rico in 2003
Franchise / Locations to open
Subway More than 20
Lady of America 5-8
Yogen Fruz 6
Cold Stone Creamery 3
Johnny Rockets 3
Mail Boxes Etc. 3
Puerto Ricos Largest Restaurant Franchises
Franchise P.R.* / Employees in P.R. / Locations in P.R.
Burger King / 4,875 / 162
McDonalds / 2,750 / 112
Subway / 1,565 / 139
KFC / 1,539 / 92
Churchs Chicken** / 1,344 / 84
Ponderosa / 1,127 / 26
Wendys / 1,023 / 44
Taco Bell / 932 / 32
Taco Maker, The / 917 / 80
Chilis Grill & Bar / 645 / 11
Pizza Hut / 454 / 57
Sizzler Puerto Rico / 411 / 8
Baskin-Robbins & Dunkin Donuts*** / 397 / 56
Pollo Tropical** / 288 / 18
Dennys Restaurants / 272 / 10
Uno Chicago Bar & Grill / 214 / 7
Fuddruckers / 150 / 4
Hot Potato, The / 146 / 17
Sbarro / 135 / 13
Outback Steakhouse / 125 / 3
Includes part-time employees where applicable (every two part-time employees = one full-time employee).
**CARIBBEAN BUSINESS estimate
***Wometco de Puerto Rico Inc. acquired exclusive rights to Dunkin Donuts franchises in July 2001 and has been incorporating them into Baskin-Robbins locations.
Source: The Book of Lists 2003
This Caribbean Business article appears courtesy of Casiano Communications.