In Ecuador, the number of expositions and seminars that concern this type of business has multiplied and, in fact, there are now in existence two or three associations that claim for themselves the honor of being “the first” or “the only recognized”. As this concept becomes generalized, people appear that ensure that the potential franchisee success, and there are even various publications that highlight the virtues without looking into the matter deeper. All of this is part of a “new” model that is spreading and gaining support. In any case, there is good news among the franchises presently existing in Ecuador, but some markets have begun to be seen as saturated.
Only 35 % of the independent businesses experience success in going beyond 5 years while 95 % of franchises survive this time period. This simple statistic, referring to enterprises in the United States, would appear at first to indicate that the franchise carries with it much less risk than some other business models. Does that mean that success is insured? There are no risk free businesses, and franchises are no exception. There are several examples of big and well known multinational franchises that had to withdraw a few years (or months) after having started up their operations.
In Ecuador, the number of expositions and seminars that concern this type of business has multiplied and, in fact, there are now in existence two or three associations that claim for themselves the honor of being “the first” or “the only recognized”. As this concept becomes generalized, people appear that ensure that the potential franquiciante (or franchisee) success, and there are even various publications that highlight the virtues without looking into the matter deeper. All of this is part of a “new” model that is spreading and gaining support. In any case, there is good news among the franchises presently existing in Ecuador, but some markets have begun to be seen as saturated.
A profound look
The risks and benefits concerning franchises has been spoken about and written about abundantly. There are cases of success that have been exposed. Much is known about the types of existing franchises, but so far, little is known about their performance in Ecuador. Thus, the research department of IDE has created the first ranking of existing franchises in our country. In this first effort, 60 franchises have been taken as a basis for reference, of those that official information could be obtained from the Superentendencia de Compañias (see methodology).
On the aggregate level, franchising generated sales during the last year of USD 590 million dollars (financial reports of April 2006); this value is seen to be influenced by the sales of Disensa, which exceeded 300 million dollars. According to the census conducted by the Front Consulting Group (FCG), the billing value would be 800 million dollars throughout the entire country. The difference between our figures and those of the FCG could be due to the size of the sample (or to an over estimation, since IDE has used the official data from the Superentendencia de Compañias). The average annual sales is USD 4.5 million dollars, which puts the franchises within the category of SMEs (with some exceptions). Since the year 2001, the franchises have been growing at an average rate of 15 % annually, which has decreased slightly in 2005, although the tendency continues to be on the rise.
In the absence of a representative body there is a risk of generating bad practices, which can undue the good name of the others
And what about the profitability?
To endeavor to analyze this parameter, it was necessary to seek some point of reference or of comparison. Instead of a comparison with the franchises with the performance of a small group of companies, data from 3,000 companies throughout the entire country was taken as a reference, which is an approximation of the average national profit. The results are interesting:
The profitability (ROE) and efficiency in the use of assets (ROA), for the franchises present in Ecuador, has always been above the national average, during the last 10 years.
1) The volatility of profitability is lower in franchises. This can be appreciated by the fact that during the crisis of 1999, since the franchises fell just as did the rest of the economy but in a smaller proportion, and also had a recovery in the later stage.
2) The net profitability, on the other hand, is less in the franchises than it is in the rest of the businesses. This sounds quite logical, if we take into account that the franchises must pay royalties and other special fees. Here, the important thing is to appreciate that the levels of net profitability have been rising, until reaching, in the majority of franchises, financial situations more manageable.
There arises then a first explication for the present “franchising fever”: this business model is on the average more profitable and efficient than the common business (do not forget that averages are always of great service, but they must be used with care because they tend to be a form of simplification). The “know-how” of a franchise, especially when it is a business that has been tested in volatile and complicated markets as is the Ecuadorian market, is an undisputed advantage. In short, one could say that the margins of net gain that are delivered by a franchise are somewhat smaller than those that are found in other businesses, but due to the fact that they are more stable, they can become an option that is very attractive for the Ecuadorian market.
For those who are thinking of purchasing a foreign franchise, it is also essential to analyze the percentage of royalties, and to contrast it with the average profitability of each sector; this by the pure an simple fact that, the expected return for the franchisee, perhaps is impossible to achieve in our market. The risks of not doing an adequate sensitivity analysis are: bankruptcy, or to end up by just working to pay the royalties with levels of very low net profitability.
