A Crash Course In The Risks Of Global Expansion

When Miguel Angel Sanchez Valdez and a partner bought a Dryclean USA Inc. franchise in 1992, they borrowed almost half the $300,000 startup cost. Wary of sudden interest-rate surges in unpredictable Mexico, Sanchez hurried to pay the loan back in a year and a half. "Some months, we preferred to pay the bank rather than pay [franchise] royalties," he says.

Better a few skipped royalty payments than none at all, Dryclean USA and its local licensee, Jose Shamosh, discovered. Sanchez was out of debt in time to escape the December, 1994, peso devaluation that sent the Mexican economy into a tailspin. Other Dryclean franchisees weren't so lucky. Since the peso crisis, they have been defaulting on both bank debts and royalties. The company and Shamosh have had to cut licensing fees and launch aggressive marketing programs to get some 100 stores back on track. "It has been an enlightening experience," admits Eddie Rodriguez, president of Dryclean USA International. "We learned that even though the economy may be good in a foreign country for a while, it may not last."

Mexico is a crash course in the risks of international expansion. During the early '90s, franchisors flocked in, lured by a growing middle class and new intellectual-property laws. Mexico became the world's eighth-largest franchising market, with 300 franchisors and more than 10,000 outlets.

Even before the peso collapse, though, many franchisors were running into trouble with Mexican franchisees. In the U.S., an ideal buyer is an employee who has risen through the ranks. But in Mexico, where credit is scarce, only those with cash need apply--and they may not be ideal. Often, only investors with other businesses or family wealth have the funds to buy franchises, and they are loath to put in the long hours required. "Whoever has $100,000 and wears a Gucci tie is not going to work behind the counter," says German Fernandez del Busto, president of the Mexican Franchise Assn. Busto is also the license holder for Gymboree, a Burlingame (Calif.) company that runs toddler programs in indoor playgrounds.

Subway Partners in Milford, Conn., granted its first franchise to an investor who "did not put one minute of his life into making sandwiches," says Amir Kremer, Subway's Mexico City development agent. Complaints of poor service eventually shut the store down. Now, Subway encourages groups of friends to invest together. Subway also plans to help finance equipment leases.

UNTHINKABLE. Many franchises stumble in adapting to Mexican ways and create friction with local partners. When Gymboree decided to expand services by introducing birthday parties at its indoor playgrounds, the U.S.-style rules limited attendance to children of the same age accompanied only by a parent. But in Mexico, it's unthinkable not to invite grandparents and cousins to children's birthday parties. Fernandez del Busto gave up offering the parties after California headquarters rejected his plea to relax the rigid formula.

Despite such trip-ups, some franchises are thriving. Domino's Pizza Inc. has grown to 120 stores since opening its first in '89--its fastest expansion anywhere outside the U.S. To hold down dollar costs since devaluation, license holder Alberto Torrado, 30, has cut imports from 80% to 20% by finding such supplies as cheese and cardboard boxes locally. By yearend, Torrado hopes to have 130 stores. That's because Michigan-based headquarters will finance about 60% of franchisees' $160,000 investment at U.S. interest rates during their first two years.

It will take franchisees willing to roll up their sleeves to consolidate Mexico's franchising success. When the home office steps in with financial support and leaves the marketing to those who know their customers best, franchising can be unbeatable.

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