U.S. franchises flood Mexico -- and discover high costs and complex rules 'Invasion' follows liberalizing of law


MEXICO CITY -- When they decided to open the world' largest Chili's Restaurant in Mexico City, Antonio Marquez and his associates were guided by one abiding belief: Mexicans love anything American.

In Chili's case, anything even included salsa and tortilla chips imported from the United States. And with Mexico's recently liberalized franchise laws, they thought it would be a cinch to get their new business started.

Ten months and $4.5 million later, Mr. Marquez chuckles in disbelief that he could have ever been so naive.

"For so many reasons, it's tough to do business in Mexico," laments Mr. Marquez, staring around his restaurant at the scant lunch crowd.

The liberalization of franchise laws -- including the rights of foreign companies to own real estate and the establishment of trademark protection laws -- has sparked a boom in the number of U.S. chains in Mexico, including Athlete's Foot, Domino's Pizza, Subway Sandwiches and 7-Eleven convenience stores.

In the first 10 months of 1990, 38 franchises gained approval to operate in Mexico, as many as had crossed the border in all the years before President Carlos Salinas de Gortari took office in December 1988.

And today, the Mexican Association of Franchises says 70 percent of its 130 members are foreign-owned chains, mostly American.

"That is a number you won't see published many places, because no one wants to admit that there is an invasion of American businesses," says Derek Stillwater, vice president of the association. "But that's what's happening."

However, he warns that while the buying power of Mexican consumers is increasing, it is not increasing fast enough to support the burgeoning retail market.

Economists and business consultants are watching nervously as several major U.S. retailers, such as Wal-Mart and Kmart, sign joint venture agreements with Mexican retailers.

Meanwhile, statistics show that the growth rate in the commercial sector dropped from 4.5 percent in 1991 to only 2.8 percent in 1992.

Sales in Mexico City dropped 17 percent last year. Only sales of basic necessities grew.

Except for salaries, the cost of running a franchise in Mexico is also considerably higher than in the United States.

Waiters at Mr. Marquez's restaurant, all of whom are college students, make a little more than $4 a day, plus tips. An average salary for a cook is 48 pesos per day, about $16.

In addition to the cost of an initial investment, Mr. Marquez says there are almost no good locations for new businesses in Mexico City -- the most heavily populated city in the world. Those that are available cost a fortune.

The land for his restaurant -- about half of a city block, near the new World Trade Center on one of Mexico City's busiest thoroughfares -- cost $2.5 million.

"Because of the competition for space and customers, franchise owners are looking at starting businesses in northern states, such as San Luis Potosi, Zacatecas and Aguascalientes," he said. "These areas are less developed. There are people there with money to spend, but with few available options."

Advertising, crucial to any new business, is also more expensive in Mexico City, says Mr. Marquez. A newspaper advertisement about the size of a 3-by-5-inch note card can cost more than $250 a day. A 20-second radio spot can cost $100 for each time it airs.

"Our total initial investment was something like $4.5 million," Mr. Marquez said. "But I am optimistic that we will recover that investment after a few years."

"Once people spread the word about this place, and when the World Trade Center opens, business will boom," he said with a confident smile.

Logistics are another source of headaches for those who run businesses that sell imported goods.

Mr. Marquez said that he has not widely advertised his Chili's Restaurant because with all the hassles of getting supplies across the border, he was not sure he would be able to keep enough food in his stockroom for large numbers of customers.

"The people at Chili's in Dallas were used to putting foods in a tractor-trailer and sending them on their way, knowing it would be delivered in a few days," says Mr. Marquez, who is Mexican. "But for foods to cross the border, I have to have a receipt that lists each product in the shipment. Sometimes I have to have the price of each product because some things are taxed and other things are not."

Almost everything on his menu is imported, including canned soups, hamburger patties, Cheddar cheese, salsa and tortilla chips.

"It may seem silly," Mr. Marquez says. "But customers notice when they come into the restaurant and eat a tortilla chip that is different than any they can find in other restaurants. They like the change."

To make the restaurant look like its counterparts in the United States, all the tables, light fixtures and rustic decorations were imported from north of the border, even though their components are produced in Mexico.

"The tile of this table was made in Guadalajara," Mr. Marquez said, running his fingers over the glossy blue and white tiles. "But when I asked a table maker in Mexico if he could make these tables for me, he said it would take him at least a year to finish them.

"Instead, I just called Chili's in the United States, and they said they could have the tables here within a couple of months, and they cost half the price the man in Mexico was asking."

High import costs are translated into higher costs for Mr. Marquez's customers. For example, a hamburger with cheese costs 20.5 pesos, or almost $7. In the United States, the same burger costs about $5.50.

"We are the largest Chili's in the world, and the most expensive," Mr. Marquez says.

Then there are the small bribes for licensing officials, police officers and health department inspectors, says Mr. Marquez.

"We have at least one inspector from the health department or the consumer protection agency come in here every week," he says.

"They tell us that we need to keep the floor in the kitchen cleaner or they see a couple pieces of paper on the floor.

"I tell them to write up the report," he adds.

"They tell me why don't I just invite them to eat or give them a little money like other restaurants.

"I tell them to go to other restaurants for food," he said. "But all I want is for them to give me my report and leave."

With the expenses and logistical problems of running a franchise in Mexico, Mr. Stillwater of the Mexican Franchise Association does not encourage prospective business owners to come here if they are only hoping to make fast money.

"You have to be willing to look at the long term," he says. "These franchises could take 10 to 15 years to really become important."

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