Franchising in Mexico: History, Advantages, and Disadvantages

It seems that the opening and installation of businesses under the franchise model have increased in recent years. However, the truth is that this way of selling products or services is already several years old. Franchising is a business development model that has reached a high degree of maturity in the world.

To understand it, three concepts must be taken into account: the first one refers to the franchisor, who has the know-how of the business and allows the franchisee the use of the brand and the know-how itself through a franchise contract. The second is the franchisee, the individual or legal entity that contractually acquires from the franchisor the right to exploit a franchise, and the third element is the contract, which consists of an agreement of wills signed by both parties.

The background of franchising dates back to the Middle Ages in Europe, where the king or sovereign of a region granted a privilege to his subjects through documents called 'free letters', these authorizations were called franc. At that time there were people authorized to collect taxes and appropriate a percentage of it.

Similarly, at that time, power was in the hands of the Catholic church, which also authorized certain persons to collect tithes on its behalf with the payment of a corresponding percentage. However, there were no records of the use of franchises until the 19th century in the United States, after the Civil War, where the first antecedent is reported that established the granting of franchises to individuals for the exploitation of some public services such as railroads and banks.

In 1850, the first brand to use the franchising method was the Singer Sewing Machine Company, which changed the form of distribution to solve a delivery problem with its machines, thus establishing the basis for the current franchise system. Another company was General Motors, which tried other marketing options, but opted for franchising as the most successful way to sell its products.

Some historians argue that its development was due to German beers in the 1880s granting the first franchising rights by selling beer under the name Spaten. Other companies such as Coca-Cola, General Motors, and Hertz Rent a Car in the United States and La Lainiere de Roubaix in France used this method to replicate their business. The phenomenon was simultaneous, so in both countries, the year 1929 is taken as the birth of the franchise system.

This system aroused the interest of researchers starting in 1960 when its use became widespread in the United States. During the following decades, franchising experienced exponential growth and achieved notable success around 1990, such that more than a third of retail sales were made through franchises. Their importance today indicates that countries such as the United States - where retailing has a long history of stability - have a 40 percent rate of independent businesses surviving to the second year of opening.

Franchising in Mexico

In Mexico, the opening of franchises originated when the Patent and Trademark Law of 1985 was repealed and gave way to the Industrial Property Law, whose Article 142 defines this model, which came into effect on October 29 of that same year, when McDonald's began operations in Mexico City.

Another of the first franchises was Dormimundo, which started in 1989 and today has 213 branches. In 1990 Mexican entrepreneurs adopted this business model; the first was Adolph B. Horn, who managed the Helados Bing franchise with great success, and by 1991 the legal vacuum in which they were found was eliminated since in that year it was recognized as a legal figure and included in article 142 of the Industrial Property Law.

The internationalization of Mexican franchises took place in 1995 when some opened branches outside the country: brands such as Helados Bing and Holanda located franchises in Spain, Guatemala, and El Salvador, as did VIP'S from the United States.

In the second half of the 2000s, the National Franchise Program was formed and began operations during the six-year term of President Felipe Calderón. In 2006, the Ministry of Economy developed credit for franchises. Finally, by 2013 there were 1,370 franchise brands in Mexico. In this sense, franchising represents the most used and developed business expansion system in modern economies, especially in sectors such as retail or hospitality.

Franchising has expanded rapidly and successfully worldwide; in the Mexican context, it has become a strategy that allows companies to penetrate and expand in the market in an environment of growing global competitiveness.

This system provides numerous advantages to the franchisor and the franchisee, which is why it has become a very popular formula that is making unstoppable progress in countries with highly developed commerce. In this sense, franchisors are becoming one of the most dynamic elements in terms of business generation and job creation worldwide.

Franchises have the following advantages for the entrepreneur compared to other types of investments:

Fail-safe production process;
Adequate management system for the acquired model;
Process training;
Shared promotional expenses;
Brand promotion with greater coverage;
Prior knowledge of the market;
Exclusive use of the brand;
Reduction of investment risk;
Economies of scale;
Prior knowledge of capital requirements;
Guarantee of rapid growth.

Likewise, investing in a franchise also represents several disadvantages, among them are:

Slow reaction to financial or economic crises;
A rigid business model that does not accept changes in processes;
The dragging of bad promotional campaigns;
In some cases royalties are paid on sales and not on profits;
Management is imposed by the franchisor and, therefore, there is no decision making over the management of the business;
No ownership of the brand.

As can be seen, there are more advantages than disadvantages to the franchise model; however, not just anyone can own a company of this type, since the franchisee must have certain characteristics:

Prior knowledge of the market and the product;
An entrepreneurial attitude;
Preferably, experience in the field of franchising itself.
To have the necessary capital not only for the payment of the franchise itself but also to meet the expenses during the learning curve;
Professional knowledge in administration, finance, processes, and marketing.

Another point that must be taken into account when investing in franchises is the risk, since depending on the economic situation of the market, the franchise or any other business can emerge successfully or not; for this, three fundamental aspects must be taken into account in the markets:

With slow growth, where the return on investment is also very slow;
In a recession, where any business will not have the required returns;
Saturated, where there are too many suppliers and there are production surpluses that can lead to a drop in prices.

Finally, in a franchise system, the greatest beneficiary is the consumer, since he/she has access to products of proven quality and price, which otherwise he/she would not be able to acquire.

Sources: Universitarios Potosinos, by Oliver René Arroyo Leos