Franchising in Colombia

For decades, the Colombian economy has 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. During the late 1980s, a “lost decade” for much of Latin America, Colombia was the only economy in the region that experienced growth. The Central Bank (Banco de la Republica), which is independent and autonomous, was able to help keep inflation at 3.73% in 2011.

Social factors have had a positive impact on the market conditions for franchises and all businesses. These factors include the policy known as “democratic security,” low inflation, consistent exchange rate policy, and promising demographics. Improved security in the country in the last decade has had a direct impact on investment from the United States ($11.919 billion), Britain (US$4.658 billion), Spain (US$2.820 billion), and Mexico (US$2.213 billion).

Colombia is acknowledged by the Ibero American Federation of Franchises (“FIAF”) as an attractive market for franchising, due to a strong degree of internationalization of the economy, a skilled workforce, highly innovative entrepreneurs, and a legal framework that protects foreign investors and property rights. FIAF estimates that franchises in Colombia accounted for about US$400 million in sales in 2011, making it the fourth-largest Latin American franchise market, after Brazil, Argentina, and Venezuela.

In 2005, the Inter-American Development Bank (“IDB”) gave a major boost for franchising. Along with 10 chambers of commerce of Colombia's major urban cities, the IDB provided funds to streamline the franchising sector and create franchise concepts. It helped launch a surge in franchise brands that continued through the start of the worldwide recession in late-2008. Today, franchises from the United States,
Brazil, Spain, Mexico, the United Kingdom, and France, as well as others, have a presence in Colombia. The United States accounts for the largest share, at about 40% of non-Colombian brands.

Franchising Demographics

The number of franchises in Colombia has more than doubled over the past 10 years. By the end of 2011, the country had as many as 427 franchise brands (209 foreign franchises and 218 domestic), a large increase from the estimated 100 in 2002. (Data cited in this section have been compiled by Mas Franquicias, a Colombia-based franchise consulting and marketing firm.)

Of the 427 franchises, 60% have fewer than 10 retail stores, 31% have between 10 and 24 retail stores, and 9% have at least 25 retail sales points. There are about 10,900 franchised sales points nationwide. This fairly low number indicates the significant potential for expansion for new players willing to enter the market.

Fashion and clothing stores have been the largest franchise sector for a long time, and they accounted for about 19.2% of the franchise market at the end of 2010. They were followed by fast-food chains and specialty stores at 10.3% each. The hotel industry is rapidly on the rise, as it reached 5.4% of the franchise market share, and the impact of other food concepts (restaurants, coffee shops, bakeries) is rising.

The most popular domestic franchises include Juan Valdez (114 coffee shops in Colombia) and Servientrega and Aeromensajer'a, both of which provide shipping and logistics similar to Mail Boxes, Etc., as well as money transfers, bill payment, and similar services. Servientrega is the largest, with more than 1,200 outlets at the end of 2010. The shipping centers are popular in part because of the low cost of purchasing a franchise, at approximately US$4,000 to US$15,000 per outlet.

Non-domestic brands with a presence (by alphabetical order, not by number of outlets) include Calvin Klein, Century 21, Cinnabon, City Sightseeing, Domino's, Dunkin' Donuts, Esprit, Helados Woody's, Hooters, KFC, Kid Imprints, Kumon Learning Centers, Mail Boxes Etc., Mango, McDonald's, Mothercare, Papa John's, Pizza Hut, Publiplan, Swarovski, Subway, Taco Bell, and Yogen Fruz. In addition to growth of established brands and sectors, analysts say that prospects are strong in the health and beauty sector.

Tourism is on the rise, and this will have a beneficial impact on the franchise sector. Major hotel brands such as InterContinental, Holiday Inn, Meli', and Sheraton have announced projects in or near Cartagena. It is important to note that under Law 920 of 2009, Article 1, the revenues earned from hotel services provided in new hotels built between January 2003 and Dec. 31, 2017, will be exempt from income tax for a period of 30 years starting on the taxable year when the hotel started operations. At least one major car rental brand is expected to announce a franchise agreement this year.

Legal Structure

Colombia lacks a specific legal frame for franchise contracts, but it does have an efficient system of protection for intellectual and industrial property and trademarks. Contracting parties in a franchise arrangement agree to terms, which must clearly respect the general regulations of Colombian law, as well as the local Civil Code and Commercial Code. Additionally, various entities have set up a legal framework to regulate the parties' behavior so the prospective franchisees get the best possible protection. For example, there is a guild of franchises within FENALCO (National Federation of Traders), and a committee of FENALCO has adopted a Code of Ethics for franchises, which is similar in scope to those in place in other Latin American countries, and which complies with the European Code of Ethics for franchises. Also, several public and private entities helped to develop a technical guide for franchises, which is based on ICONTEC standards (Colombian Institute of Technical Standards). Likewise, the rules of conduct (5813) seek to regulate pre-contractual and contractual phases between the parties to facilitate the sale of franchises.

Colombia recently modified its intellectual property protection system, which makes it easier and less expensive to register a trademark or obtain a patent. Juan Carlos Cuesta, a partner of Cuesta & Associates, LLC and president of the Colombian Intellectual Property Association, cited the following changes as most relevant: 1) online applications, with foreign applicants represented by an attorney; 2) adoption of the multi-class system (one trademark application may cover products or services included in different classes); 3) one application can modify several trademark registrations held by the same owner (such as change of name, change of domicile, assignments); 4) acceptance of a simple power of attorney, with former requirements for notarization and apostille, in order for an applicant to go before the Colombian Patent and Trademark Office.

A reliable distributor or representative is crucial to entering the Colombian market. Colombian law does not require foreign firms to secure local representation for private-sector sales, but Colombians prefer to deal with companies that have a local representative to ensure access to after-sales services. U.S. companies entering into joint ventures or other long-term contractual arrangements are advised to seek local legal counsel.

The Industrial and Commerce Superintendence regulates all the activities of the industries and commerce in general. DIAN (Direccion de Impuestos y Aduanas Nacionales) is another governmental institution in charge of controlling imports and exports and enforcing regulations. Local chambers of Commerce identify daily business routines in each particular city and help to promote best business practices and economic development; in this regard, Confecamaras (The Colombian Confederation of Chambers of Commerce) offers complete detailed information and a directory for further inquiry.

Looking to the Future

It is very difficult to predict whether or when there will be specific governmental regulation of franchising. However, there is consensus among industry leaders that too much regulation would discourage growth. It seems likely that franchisors and investors will continue to prefer self-regulatory efforts.

Two recent laws indicate that the government is eager to support expansion, not inhibit it. On Dec. 29, 2010, the Law of Formalization and Employment Generation (Law 1429) was signed. It offers significant tax incentives and reduces companies' cost of registration, which will facilitate entrepreneurism of all types, including franchising. In January 2012, the government announced the elimination of about 1,000 unnecessary steps in business registration.

Clearly, at present, the country is moving toward greater opening of markets and simplification of procedures for businesses, including the U.S.-Colombia Free Trade Agreement (“FTA”). The FTA has the potential to make Colombia even more attractive for U.S. franchise brands. For example, equipment tariffs, which now are 8% to 15%, will be eliminated on almost 80% of imported products. Another important benefit will be that U.S. franchisors will have full market access, as defined in FTA Article 11.5, which states that there is ” ' no obligation on a Party with respect to a national of another Party seeking access to its employment market, or employed on a permanent basis in its territory ' .” In other words, the franchisor will not be obliged to establish a branch or a Colombian corporation with foreign investment, though individual franchise units will still need to comply with requirements regarding licenses, permits, etc.

Two more potential developments could have a positive impact. First, according to attorney Juan Carlos Cuesta, Colombia's Constitutional Court has ruled that adopting the Trademark Law Treaty (“TLT”) would be constitutional, so it is likely that the TLT will be adopted this year. Second, the Constitutional Court is expected this year to review the constitutionality of the Madrid Protocol, which would allow U.S. applicants to file for trademark registrations in Colombia from the United States directly.

As a final note, the U.S. Commercial Service will be hosting a franchising trade mission to Colombia, Panama and Chile in August. Some spaces are still available by contacting Nicole A. DeSilvis at [email protected].

Nicole A. DeSilvis is the U.S. Commercial Service Commercial Attache in Bogota, Colombia, and Juan Carlos Antia is a senior commercial specialist. DeSilvis can be contacted at [email protected].

In October 2011, President Obama signed free-trade agreements with Colombia, Panama, and South Korea. Although certain conditions must be met before each is enacted, the prospects are bright. To facilitate an understanding of the opportunities in Colombia, the U.S. Commercial Service of the U.S. Department of Commerce issued a report in February 2012 outlining the characteristics of Colombia's franchise market and the legal framework under which franchisors operate. Below is a summary of that report.

Country and Market Overview

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, and 70% is concentrated in 10 major cities. Colombia's economy is enjoying steady growth. In 2010, GDP grew by 4.3%, and preliminary estimates put growth in 2011 at about 5.5%. The strongest driver has been in the extractive industries such as oil and gas, and mining, which has fueled strong export growth. But next in line is retail trade, restaurants, and hotels; these typically popular franchising sectors grew by an estimated 7.2% in 2011. Finance, insurance, real estate, and business services also showed strong performance, with an increase of 6.1%.

For decades, the Colombian economy has 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. During the late 1980s, a “lost decade” for much of Latin America, Colombia was the only economy in the region that experienced growth. The Central Bank (Banco de la Republica), which is independent and autonomous, was able to help keep inflation at 3.73% in 2011.

Social factors have had a positive impact on the market conditions for franchises and all businesses. These factors include the policy known as “democratic security,” low inflation, consistent exchange rate policy, and promising demographics. Improved security in the country in the last decade has had a direct impact on investment from the United States ($11.919 billion), Britain (US$4.658 billion), Spain (US$2.820 billion), and Mexico (US$2.213 billion).

Colombia is acknowledged by the Ibero American Federation of Franchises (“FIAF”) as an attractive market for franchising, due to a strong degree of internationalization of the economy, a skilled workforce, highly innovative entrepreneurs, and a legal framework that protects foreign investors and property rights. FIAF estimates that franchises in Colombia accounted for about US$400 million in sales in 2011, making it the fourth-largest Latin American franchise market, after Brazil, Argentina, and Venezuela.

In 2005, the Inter-American Development Bank (“IDB”) gave a major boost for franchising. Along with 10 chambers of commerce of Colombia's major urban cities, the IDB provided funds to streamline the franchising sector and create franchise concepts. It helped launch a surge in franchise brands that continued through the start of the worldwide recession in late-2008. Today, franchises from the United States,
Brazil, Spain, Mexico, the United Kingdom, and France, as well as others, have a presence in Colombia. The United States accounts for the largest share, at about 40% of non-Colombian brands.

Franchising Demographics

The number of franchises in Colombia has more than doubled over the past 10 years. By the end of 2011, the country had as many as 427 franchise brands (209 foreign franchises and 218 domestic), a large increase from the estimated 100 in 2002. (Data cited in this section have been compiled by Mas Franquicias, a Colombia-based franchise consulting and marketing firm.)

Of the 427 franchises, 60% have fewer than 10 retail stores, 31% have between 10 and 24 retail stores, and 9% have at least 25 retail sales points. There are about 10,900 franchised sales points nationwide. This fairly low number indicates the significant potential for expansion for new players willing to enter the market.

Fashion and clothing stores have been the largest franchise sector for a long time, and they accounted for about 19.2% of the franchise market at the end of 2010. They were followed by fast-food chains and specialty stores at 10.3% each. The hotel industry is rapidly on the rise, as it reached 5.4% of the franchise market share, and the impact of other food concepts (restaurants, coffee shops, bakeries) is rising.

The most popular domestic franchises include Juan Valdez (114 coffee shops in Colombia) and Servientrega and Aeromensajer'a, both of which provide shipping and logistics similar to Mail Boxes, Etc., as well as money transfers, bill payment, and similar services. Servientrega is the largest, with more than 1,200 outlets at the end of 2010. The shipping centers are popular in part because of the low cost of purchasing a franchise, at approximately US$4,000 to US$15,000 per outlet.

Non-domestic brands with a presence (by alphabetical order, not by number of outlets) include Calvin Klein, Century 21, Cinnabon, City Sightseeing, Domino's, Dunkin' Donuts, Esprit, Helados Woody's, Hooters, KFC, Kid Imprints, Kumon Learning Centers, Mail Boxes Etc., Mango, McDonald's, Mothercare, Papa John's, Pizza Hut, Publiplan, Swarovski, Subway, Taco Bell, and Yogen Fruz. In addition to growth of established brands and sectors, analysts say that prospects are strong in the health and beauty sector.

Tourism is on the rise, and this will have a beneficial impact on the franchise sector. Major hotel brands such as InterContinental, Holiday Inn, Meli', and Sheraton have announced projects in or near Cartagena. It is important to note that under Law 920 of 2009, Article 1, the revenues earned from hotel services provided in new hotels built between January 2003 and Dec. 31, 2017, will be exempt from income tax for a period of 30 years starting on the taxable year when the hotel started operations. At least one major car rental brand is expected to announce a franchise agreement this year.

Legal Structure

Colombia lacks a specific legal frame for franchise contracts, but it does have an efficient system of protection for intellectual and industrial property and trademarks. Contracting parties in a franchise arrangement agree to terms, which must clearly respect the general regulations of Colombian law, as well as the local Civil Code and Commercial Code. Additionally, various entities have set up a legal framework to regulate the parties' behavior so the prospective franchisees get the best possible protection. For example, there is a guild of franchises within FENALCO (National Federation of Traders), and a committee of FENALCO has adopted a Code of Ethics for franchises, which is similar in scope to those in place in other Latin American countries, and which complies with the European Code of Ethics for franchises. Also, several public and private entities helped to develop a technical guide for franchises, which is based on ICONTEC standards (Colombian Institute of Technical Standards). Likewise, the rules of conduct (5813) seek to regulate pre-contractual and contractual phases between the parties to facilitate the sale of franchises.

Colombia recently modified its intellectual property protection system, which makes it easier and less expensive to register a trademark or obtain a patent. Juan Carlos Cuesta, a partner of Cuesta & Associates, LLC and president of the Colombian Intellectual Property Association, cited the following changes as most relevant: 1) online applications, with foreign applicants represented by an attorney; 2) adoption of the multi-class system (one trademark application may cover products or services included in different classes); 3) one application can modify several trademark registrations held by the same owner (such as change of name, change of domicile, assignments); 4) acceptance of a simple power of attorney, with former requirements for notarization and apostille, in order for an applicant to go before the Colombian Patent and Trademark Office.

A reliable distributor or representative is crucial to entering the Colombian market. Colombian law does not require foreign firms to secure local representation for private-sector sales, but Colombians prefer to deal with companies that have a local representative to ensure access to after-sales services. U.S. companies entering into joint ventures or other long-term contractual arrangements are advised to seek local legal counsel.

The Industrial and Commerce Superintendence regulates all the activities of the industries and commerce in general. DIAN (Direccion de Impuestos y Aduanas Nacionales) is another governmental institution in charge of controlling imports and exports and enforcing regulations. Local chambers of Commerce identify daily business routines in each particular city and help to promote best business practices and economic development; in this regard, Confecamaras (The Colombian Confederation of Chambers of Commerce) offers complete detailed information and a directory for further inquiry.

Looking to the Future

It is very difficult to predict whether or when there will be specific governmental regulation of franchising. However, there is consensus among industry leaders that too much regulation would discourage growth. It seems likely that franchisors and investors will continue to prefer self-regulatory efforts.

Two recent laws indicate that the government is eager to support expansion, not inhibit it. On Dec. 29, 2010, the Law of Formalization and Employment Generation (Law 1429) was signed. It offers significant tax incentives and reduces companies' cost of registration, which will facilitate entrepreneurism of all types, including franchising. In January 2012, the government announced the elimination of about 1,000 unnecessary steps in business registration.

Clearly, at present, the country is moving toward greater opening of markets and simplification of procedures for businesses, including the U.S.-Colombia Free Trade Agreement (“FTA”). The FTA has the potential to make Colombia even more attractive for U.S. franchise brands. For example, equipment tariffs, which now are 8% to 15%, will be eliminated on almost 80% of imported products. Another important benefit will be that U.S. franchisors will have full market access, as defined in FTA Article 11.5, which states that there is ” ' no obligation on a Party with respect to a national of another Party seeking access to its employment market, or employed on a permanent basis in its territory ' .” In other words, the franchisor will not be obliged to establish a branch or a Colombian corporation with foreign investment, though individual franchise units will still need to comply with requirements regarding licenses, permits, etc.

Two more potential developments could have a positive impact. First, according to attorney Juan Carlos Cuesta, Colombia's Constitutional Court has ruled that adopting the Trademark Law Treaty (“TLT”) would be constitutional, so it is likely that the TLT will be adopted this year. Second, the Constitutional Court is expected this year to review the constitutionality of the Madrid Protocol, which would allow U.S. applicants to file for trademark registrations in Colombia from the United States directly.

As a final note, the U.S. Commercial Service will be hosting a franchising trade mission to Colombia, Panama and Chile in August. Some spaces are still available by contacting Nicole A. DeSilvis at [email protected].

Nicole A. DeSilvis is the U.S. Commercial Service Commercial Attache in Bogota, Colombia, and Juan Carlos Antia is a senior commercial specialist. DeSilvis can be contacted at [email protected].