Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
U.S. goods and services have a high level of penetration in the Costa Rican marketplace. Purchasing power is concentrated near the capital: 73 percent of the country’s 5 million consumers live in the San Jose Metropolitan Area, also known as the Central Valley. The retail distribution sector closely follows U.S. practices. Costa Ricans are accustomed to large shopping centers and malls that house retail stores, kiosks, food courts, theaters, and supermarkets.
Franchise outlets, smaller mixed-use commercial centers and hypermarket-type operations have proliferated, due in part to increased competition from large retail chains such as PriceSmart and Walmart. There are currently five large department store chains, six supermarket chains, and countless small and medium-sized family-owned businesses. U.S.-owned Walmart is the single largest chain, controlling all Mas X Menos, Hipermas, MaxiMercados, and Pali Stores in Costa Rica and the rest of Central America. Other well-known retailers are Automercados, Perimercados and Megasuper. Rural areas are generally served by “pulperias”, or family-owned general stores.
The concept of customer service is very important in Costa Rica. TV (both local and cable), radio, print and billboard advertising, and discounting are widely accepted commercial practices.
Distribution channels do not vary significantly among food and agricultural products. Some products (for example, fresh fruits and frozen foods) require technical knowledge regarding handling due to their shelf-life requirements and the need for refrigeration. Such facilities are readily available in Costa Rica, as the country exports fresh and frozen foods to other Central American and Caribbean countries. Private firms import processed consumer foods, while several wholesalers are dedicated to importing agricultural products. Many companies incur additional costs due to delays at Customs in clearing goods. The food product distribution chains to supermarkets and smaller stores is well developed. Some of the larger supermarket chains import directly. However, U.S. firms must consider the need to adapt packaging and labeling requirements to comply with local regulations and registration processes for most consumer goods.
Although it is possible to export directly to Costa Rican retailers, U.S. firms will find it beneficial to work with a local representative and possibly even establish a local sales office. A local representative is critical for those companies wishing to sell to private sector companies or to government institutions. Since Costa Rica is a small market, one representative/distributor is often enough to cover the entire country.
Establishing an Office
In the study, “Doing Business 2020,” although Costa Rica’s overall ranking was 74 out of 190 countries, the World Bank ranked Costa Rica in 144th place in the world (119th in 2016) for the ease of starting a business. The process of establishing an office still takes an average 23 days and 10 procedures, including the one mentioned below (https://www.world-bank.org/en/country/costarica/overview)
The first step in establishing a business in Costa Rica is to obtain the assistance of a Public Notary, the only professional authorized by law to register a company. In Costa Rica, almost all lawyers can act as a Public Notary. Companies must be listed in the Costa Rican Mercantile Registry in order to be a legal, authorized entity. Upon registration, all information related to the new company and the persons who will manage the company must be submitted. This information includes full name, nationality, occupation, marital status, country of origin, the legal name of the business, purpose of the company, amount of initial capital and the way this capital will be used, time limits for payments, domicile of the company, and any other agreements made by the founders.
An excerpt of the registration is then published digitally in “La Gaceta,” the official legal journal in Costa Rica. Payment on initial equity is usually nominal and must be paid in local currency and deposited with a local bank of the Costa Rican national banking system until registration is completed. Initial equity payment is generally from US $100 to US $1,000.
Depending on the type of business, the company may have to acquire a municipal license or permit. A foreign company that has or intends to open branches in Costa Rica must appoint and retain a legal representative with full Power of Attorney concerning the business or the branch. Similar to U.S. law, foreigners must become residents in order to work in Costa Rica.
Individuals interested in establishing a business in Costa Rica are encouraged to contact CINDE (the Costa Rican Coalition for Development Initiatives) and/or PROCOMER (Costa Rican Foreign Trade Corporation). Both organizations are involved in providing support and information for prospective investors in Costa Rica. Each organization maintains extensive information databases that are useful to potential investors in evaluating operating costs, taxation issues, availability of employees, and related investment questions. Please see the end of this chapter for links to these organizations, and Chapter 9 for full contact information for representatives of these organizations in Costa Rica and in the U.S.
The Ministry of Economy’s website https://www.crearempresa.go.cr/ has instructions specifically for companies interested in establishing a company in Costa Rica.
Franchising is a collaboration system between two different businesses, legally independent, united by a contract through which the franchisor gives the franchisee the right to exploit, under some pre-established conditions, a specific business (brand, commercial formula, production, and others). The franchisor is the owner of the brand and marketing rights. The franchisor adopts a franchise system to expand their activity in the market.
Franchising was spurred on by the rise of tourism in Costa Rica. Recently the market for new franchises has intensified, despite some market saturation in the fast-food sector. The first franchise to enter the market was McDonald’s in 1970, others such as Pizza Hut quickly followed. Carl’s Junior, Smashburguer and Starbucks are the most recent arrivals to the Central Valley, where most of the Costa Rican population lives. Certain franchises have been unsuccessful in Costa Rica, either because of the economic conditions at the time or due to poor copyright protection.
In 2019, There are 361 franchised brands distributed countrywide, this shows an increase of 0.6 percent from last year. Franchises provide approximately 30.469 jobs in Costa Rica. Roughly 22 percent of these franchise concepts are local, while the remaining 78 percent are foreign-owned (of foreign franchises, 42 percent are U.S. owned). Costa Rica stands out in Central America due to its strategically dominant geographic position in the region.
As of 2019, there are approximately 122 food franchises operating in Costa Rica, constituting nearly 34 percent of all franchises in the country. Specialized services represent another 27 percent of the franchise industry.
Local companies like Cosechas, Crepíssima, Florex, Get Nuts, Hamburguesía, Propiedades.net, Maridos de alquiler/Esposas de alquiler, Multivex, and others are starting to franchise their businesses in order to expand both nationally and internationally. This success is in part due to the support of the Costa Rican Chamber of Commerce, which promotes and organizes national and regional franchising trade fairs such as Expo Franquicia. The Chamber of Commerce, along with the Interamerican Bank of Development, the National Center of Franchising (CENAF), and the system Bank for Development, has helped finance enterprises to franchise their structure.
Price is a major competitive factor in this sector, as is delivery of food products. Costa Ricans are very price-conscious shoppers. They are generally aware of what items cost in the U.S. and how the same or similar items are priced in Costa Rica. While they are willing to pay slightly more for the perceived quality of an American product, they remain limited by their personal budgets.
Another key factor for success in franchising in Costa Rica is the careful selection of the potential franchisee and location of the outlet. The successful franchisee must have the financial resources to enter and develop the market, along with excellent local business contacts and an understanding of the idiosyncrasies of the local market. In Costa Rica, business contacts can greatly affect the success of a project. This factor becomes apparent, for example, in developing local sources of supply, expediting government approval and licensing, and in gaining access to prime locations for franchise sites.
Opportunities exist for the growth and expansion of franchising in Costa Rica outside of the fast-food sector. Entrepreneurs continue to appreciate the mature business systems and proven track records that many franchises offer. Effective franchise marketing normally entails sensitivity to the local culture, such as adding local foods to the menu or translating manuals and catalogs into Spanish. Given Costa Rica’s small size, an exclusive territorial contract is often preferred. Some successful franchise operations involve investor groups who have purchased master franchise rights for the entire Central American region. PriceSmart and Payless Shoe Source are prime examples of this strategy. In many cases, a local franchisee will own several different types of franchises in different industry sectors to diversify their investments.
For roughly 55 percent of international companies, it takes five years or more to reach a return on investment (ROI). In contrast, 61 percent of domestic franchises reach a ROI in only two years or less. Franchising allows foreign companies to partner with domestic franchisees, leading to a faster ROI. Additionally, the franchise model minimizes risk, optimizes sources, and maximizes benefits for those involved. Benefits will also be seen in advertising, as individual franchises will seek to promote their business locally, in addition to preexisting corporate advertising.
A new group of investors is emerging that includes young professionals who are familiar with U.S. business practices and who are seeking to break away from their family businesses and start their own companies. They view franchising to enter new markets. Franchisor support makes up for their lack of industry knowledge, which is critical for their success.
Potential franchisees do not always attend franchise shows. For this reason, the internet is the number one source of information for local potential franchisees seeking new franchises. Potential franchisees will usually analyze the local market and determine the franchise concepts that are most attractive for the local market by using their personal knowledge of popular and successful franchises in the U.S. market. They will then contact ten or so different franchisors in that market segment for comparison purposes.
The second most popular way for potential franchisees to find franchisors is when a particular franchisor comes to Costa Rica looking for potential investors/franchisees and contacts them directly. Although it is often difficult to identify businesspeople who have an interest in franchising, not to mention the necessary business experience and resources to develop and manage new franchise concepts, the Commercial Section of the U.S. Embassy can assist with introductions and information on strategies used to reach potential franchisees. Advertisements in major local media are also an important means of reaching potential franchisees.
Franchise royalties are subject to a 25 percent withholding tax. However, the U.S. provides a foreign tax credit for this expense. Import taxes vary, depending on the item; the trend is toward lower import taxes. The following are approximate:
Value Added (sales) Tax 13 percent
Ad Valorem (import duty) Tax 0-50 percent**
Special Import Tax 1 percent
*For additional information on Expo Franquicia, please contact Ms. Karol Fallas at email@example.com
**Availability to use CAFTA tax reductions for US-made products.
Direct marketing has enjoyed limited success in Costa Rica. The country does not have a developed postal system with defined street names and numbers, so it is difficult to obtain client lists or reliable addresses. Direct marketing via email, phone, and text messaging just began a few years ago but is gaining popularity. There are no Costa Rican laws that specifically regulate direct marketing. Instead, the general laws which apply to advertising and public relations agencies are used to regulate direct marketing. Companies use websites and Facebook pages (Facebook is widely used by Costa Ricans of many demographics). Recently there has been an increase in the use of email and mobile subscription to promote sales by sending e-coupons. Also, the use of other social media marketing networks like WhatsApp, Marketplace (Facebook), and custom-made apps are gaining popularity during pandemic. Currently, it is more common to receive coupons or advertising in cell phones with internet access. Local restaurants have increased offering of delivery options to carry products during the pandemic in addition to some department stores. Telemarketing is mainly used by financial institutions.
International e-commerce stores such as Amazon and Wish have become very popular among local consumers. This continues to generate business for companies that handle associated logistics and other e-commerce collateral services.
Licensing is not widespread in Costa Rica. Traditionally, foreign companies export to Costa Rica or set up manufacturing/assembly operations in the country. This can be accomplished independently or through joint venture arrangements. Foreigners may legally own Costa Rican companies or equity and may invest in all areas not expressly reserved for state or government sponsored entities. Foreign corporations may be organized legally in several ways: as branches (except for banks or insurers), joint ventures, wholly owned subsidiaries, or locally incorporated companies. Bona fide investments are encouraged and actively promoted by the Costa Rican Government.
Before finalizing any contract, whether for a sale or representation, U.S. companies should obtain information on the bona fides of the foreign firm, including reliable business and financial references. The Commercial Service at the U.S. Embassy offers a background report service called the International Company Profile (ICP). The profile can also link interested companies to well-known local private sector credit-reporting services that can provide background and credit reports on companies in Costa Rica, as noted in Chapter 3, under “Using an Agent or Distributor.”
- U.S. Commercial Service: https://www.trade.gov/costa-rica
- Business Service Providers: https://www.trade.gov/business-service-providers-americas
- U.S. Consular Section: https://cr.usembassy.gov/u-s-citizen-services/
- U.S. Foreign Agricultural Service: https://www.fas.usda.gov/
- U.S. Food and Drug Administration: https://www.fda.gov/
- U.S. Trade Representative: https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text
- U.S. Department of Commerce: https://www.trade.gov/free-trade-agreements-help-center
- U.S. Department of Agriculture: https://www.fas.usda.gov/data/cafta-dr-free-trade-agreement
- Investment Promotion Services
- Costa Rican-American Chamber of Commerce
- Promotora del Comercio Exterior-PROCOMER
- Costa Rican Chamber of Commerce
- Costa Rican Chamber of Industries
- International Chamber of Commerce