An Expert's View about Franchising in Colombia

Posted on: 25 May 2012

The number of franchises in Colombia has more than double over the past 10 years. By the end of 2011, the country had as many as 427 franchises, roughly half of which are foreign brands, a large increase from the estimated 100 back in 2002. This boom was driven by a better understanding and acceptance of the concept of franchising by many local firms, as they continued to recognize that this is a safe and less complex way of expanding their business. Another important driving force of this exponential growth was the pilot project of the Inter-American Development Bank (IDB) and 10 Colombian Chambers of Commerce (2006-2009), which provided funds and training to support small and medium sized enterprises in the implementation of this business expansion.

Economic Outlook
The outlook is promising for the country’s economy, which is forecast to grow by an average of 4.5% annually during the 2010-2020 decade. In 2010 the GDP grew 4.3% and in 2011 grew around 5.5%. According to the most recent statistics provided by DANE, in the second quarter of 2011 the Colombian economy grew by 5.2% in comparison with the same quarter of 2010. The economic growth has been spurred by sustained internal demand recovery, as a result of increased confidence, an expansive monetary policy, and improved terms of retail trade. Almost all sectors recorded positive growth rates. The sectors that led this growth have been mining with an increase of 10.3% (this behavior was supported by the increase in oil production, coal and metallic minerals, including gold, silver and platinum among others), followed by retail trade, restaurants and hotels with an increase of 7.2%; transport, storage and communications with 7.1% increase; finance, insurance, real estate and business services with an increase of 6.1%; social, community and personal services with an increase of 2.3%; agriculture, hunting, forestry and fishing with an increase of 2.2%; manufacturing with an increase of 2.1%; and electricity, gas and water with an increase of 1.5%. Most sectors and especially those suitable for franchise expansion have experienced growth offering key opportunities to investors.

On the demand side, total consumption grew 5.5 % and the Gross Capital Investment (21.1%) helped to boost the dynamic of civil works, machinery and transport equipment. Exports and imports increased by 7.6% and 28.4% respectively, compared with the second quarter of 2010. In conclusion, during 2011 the Colombian economy recorded a positive growth rate, maintaining the good performance experienced in 2010 and recovering from the downturn presented during 2009. Despite the slowdown in the world economy, the performance of the Colombian economy in 2011 was favorable, due to the growth of mining, industrial and domestic trade, which demonstrates a favorable environment for economic growth and greater foreign direct investment opportunities.

Market Demand
The Colombian market is experiencing a dynamic and promising environment for the expansion of the franchise model throughout the country, which is reflected in the desire expressed by foreign franchisees to enter the Colombian market. This is due to the favorable performance of the Colombian economy and promising prospects in many market segments.
The increasing entry of new franchise players translates into a more competitive market. Those franchisees who are considering entering the Colombian market should be aware that the aggressive market conditions will be reflected in competitive prices, high quality products, effective and customized advertising and compliance with contractual and training aspects.

There are a variety of factors that have significantly impacted the growth of the Colombian economy during the past four years, which in turn has had a positive impact on the market conditions for franchises. These factors include the policy of democratic security and the investor confidence, the low inflation, the exchange rate policy and the GDP growth, as well as the demographic situation and the boost of the venture and entrepreneurship spirit in Colombia.

The Politics of Democratic Security and investor confidence
Adopted by the Uribe government and implemented in his two presidential terms (2002 - 2006 and 2006 - 2010), now elevated to state policy, democratic security policy has yielded important results in terms of safety, making cities much safer and regaining confidence of average citizens and investors. Democratic Security also managed to dismantle other factors of violence such as the demobilization of thousands of paramilitaries, who were vying for territorial control and drug trafficking with the guerrillas.

The pacification of the country has been remarkable and has had a direct impact in reducing the levels of violence and crime, particularly the number of murders, extortion and kidnapping. The democratic security policy has triggered investors’ confidence and boosted investment in all economic activities. During the last decade, they key investments have come from U.S. (U.S. $ 11,919 million), Britain (U.S. $ 4,658 million), Spain (U.S. $ 2,820) and Mexico (U.S. $ 2,213 million).

Low inflation
The Colombian economy has for decades been recognized by international agencies as one of the best-managed economies in the region. Colombia has never declared a moratorium on external debt service and indeed during the late 80s, also known as the lost decade for Latin America, was the only economy in the region that experienced growth. Within the orthodox management given to the Colombian economy, the various governments have made efforts to maintain the inflation rate at the lowest possible. The entity responsible for implementing the monetary policy has been the Central Bank (Banco de la Republica), which like in other countries is an independent and autonomous decision and policy maker. In 2011, the inflation rate was 3.73%. A low and stable inflation improves the welfare of the population. This takes place in several ways: Low and stable inflation has allowed many Colombians to think seriously about the possibility of becoming entrepreneurs, since access to capital or credit through banking institutions can be more accessible and favorable with a lower inflation, which also makes financial projections more realistic within a reasonable time.

Foreign Exchange Policy and GDP Growth
The consequence of the strict application of the exchange rate policy has led the appreciation of the Colombian peso against the U.S. Dollar. The main reason of the appreciation of the Colombian peso against the U.S. Dollar is the increased flow of foreign currency in the Colombian economy due to the remarkable performance of the mining, oil and energy sectors. Between January and November 2011, exports reached approximately USD $ 51,179.3 million, 42.3% higher than that observed in the same period in 2010. Colombia's major exports are petroleum, coffee, coal, nickel, gold and nontraditional exports (e.g. cut flowers, semiprecious stones, sugar, and tropical fruits). Colombia still exports oil and coffee to the developed countries (United States, Japan, Germany, and Belgium), while most of its exports to countries such as Venezuela, Mexico, and Ecuador are manufactured products.

On the other hand and as mentioned previously, Colombia's growth has been positive for long periods of time, thanks to orthodox management of its economy. The Colombian economy is strong and is expected to achieve sustained growth of 4.5% annually for the next four years. In the last 8 years the GDP per capita rose from USD $2,274 to USD $6,225.

Demographic Situation
With about 45 million people, Colombia is the third most populous country in Latin America, after Brazil and Mexico. Over 75% of the population is urban, 70% are concentrated in 10 major cities. Approximately 75% of the population is settled in the Andean region, between 1,000 and 3,000 meters of altitude, along the axis of the Magdalena and Cauca rivers. This region has the best natural conditions, both climatic and agricultural, and it has been the most populated through the history. Based on the DANE census there are 56 cities in Colombia with more than 100,000 inhabitants that can be an attractive market targets for franchisors:

Bogotá: 6.840.116
Medellín: 2.214.494
Cali: 2.119.908
Barranquilla: 1.148 .506
Cartagena: 892.545
Cúcuta: 587.676
Bucaramanga: 516.512
Soledad: 461.851
Ibagué: 498.401
Pereira: 443.554

Colombia has a very young population. Approximately 33% of population is under 14 years, and 62% is between 15 and 65 years old. The annual rate of population growth reached 1.5% between 2000 and 2008. Life expectancy at birth is 73 years, as measured in 2008. One of the most notable features of the Colombian population is related to their migratory movements, which is associated to pursuing better economic opportunities and fleeing from violence in conflict areas. Since the 1950s there have been internal migrations from the countryside to the major urban areas such as Bogotá, Cali, Medellin, Barranquilla and Risaralda.

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Posted: 25 May 2012

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