Discusses opportunities for U.S. franchisers and legal requirements in the market.
The number of franchises in Colombia has more than doubled over the past ten years. This boom has been driven by a better understanding and acceptance of the concept of franchising by many local firms, and by the improvement in international perception of the business environment due to the implementation of newly-signed free trade agreements.
After a pilot project of the Inter-American Development Bank (IDB) and ten Colombian Chambers of Commerce to foster the development of franchising from 2006 through 2009, an ever growing number of companies have adopted franchising as a safe and less complex way of expanding their business.
According to industry sources, during 2013 the franchise sector grew by 6 percent when compared with the previous year. This trend is estimated to have continued through 2014, although with a more moderate growth of 3.7 percent with 580 total franchising concepts by the end of 2015. International concepts have increased vis-a-vis national franchising concepts, with the former taking up 52 percent of the total share of businesses in 2014, with 48 percent of franchise concepts being Colombian. The breakdown by country of origin of international franchises in Colombia has the United States at the lead, with 23 percent of the total. Next come European countries such as Spain (8 percent), Italy (5 percent), England (3 percent) and France (3 percent); as well as a few Latin American countries such as Argentina (2 percent) and Brazil (2 percent).
By sector, the largest share of franchising concepts in 2014 was found in the clothing and fashion industry, with approximately 30 percent of the total, while fast food, restaurants and bars moved into second place with 20 percent. Specialty stores came in third place with 15 percent of total franchises, followed by retail (12 percent), and cosmetics and health (8 percent).
There is a high concentration of franchise retailers in Colombia’s three major population centers (Bogotá, Medellín and Cali), leaving a lot of potential for franchise development in other important cities with populations of or around 1 million people, such as Barranquilla, Cartagena, Bucaramanga and the three cities within what is called the coffee region (Armenia, Manizales, and Pereira).
In general terms, the concept of franchising in Colombia is yet to obtain the same degree of development as it has in developed countries such as the United States. However, Colombian is currently dealing with a significant change in the economy, the drop of the oil price has strongly influenced in the peso devaluation during 2015. Over the last decade, Colombia’s GDP per capita increased from just over $6,000 in 2000 to well over $10,000 by 2012. It is also estimated that the middle class grew from approximately 15 percent of the population in 2002 to 35 percent in 2015. This amounts to almost 17 million people out of Colombia’s total 48 million inhabitants. It is estimated that only 3 percent of the Colombian population is in the high income bracket, which explains why Colombia, like many other Latin American markets, is a very price sensitive market. Familiarity with international franchising concepts remains closely correlated with income bracket, with only the higher brackets being familiar with newer and more novel concepts. Still, while the group with stronger purchasing power is more likely to adopt foreign concepts, some franchising concepts have demonstrated how they can quickly gain market appeal in the lower demographics by offering good products with interesting discounts.
In terms of intellectual property, Colombia has in place adequate institutions to guarantee the rights of companies that have been diligent in the registry of their brands and other intellectual property. There are no specific regulations pertaining specifically to the enforcement of franchising activities and agreements, which are regulated by Commercial Law and treated as “mercantile contracts” (Contrato Mercantil).
As Colombia’s economy is expected to continue growing at a stable and dynamic rate, it is very likely that franchising will continue to develop, both in terms of national and foreign concepts. Furthermore, with the increase in the development of new shopping centers in intermediate cities, growth is likely to benefit both established and up and coming players.
In terms of outlook by franchising category, food and beverages will continue to benefit the most from current economic trends, followed by clothing retail concepts. Services franchises are just starting to gain traction and have yet to become an attractive business opportunity for most investors, with the largest share found in the specialized services health and education and training categories.