The Torrado brothers went from delivering pizzas in Mexico City 15 years ago to developing a company that is now responsible for expanding 12 franchises of American origin. Their line-up includes such popular brands as Burger King, Starbucks Coffee, Domino’s Pizza, Chili’s Grill and Bar, and Popeye’s, among others.
Their company, known as ALSEA, is already the leader in Mexico. Now it is planning to grow stronger by expanding throughout Latin America. To do that, ALSEA has moved first into the Southern Cone countries – Brazil, Argentina and Chile. It has already bought every Burger King location in Argentina and Chile, and knows the terrain in Brazil, where it operates numerous Domino’s Pizzas.
Not everything about this business is a success, however. The three brothers — Cosme, Alberto and Armando Torrado — have already suffered the hardship of closing down Domino’s Pizza shops in Argentina. Their operation failed to work out because they were ignorant of the local public’s special characteristics. As Cosme Alberto explained things: “Argentina is a country that has a very strong tradition in pizza. Here, the mass [of customers] is more limited, and Domino’s, which was offering thick pizza, failed. We are going to study the Argentine market but it will be very hard for us to bring that brand back to the country.” Cosme made those comments last April during a visit to Buenos Aires where he closed a deal to purchase 27 Burger King locations. Burger King is the second most important hamburger chain in Argentina, with annual sales of $60 million. In Chile, the Mexicans also acquired 22 restaurants from the same hamburger chain.
Overall, ALSEA is a success story. The company has had a meteoric rise. Its annual sales are $400 million. By the end of 2006, its goal is to have more than 860 locations, up from 803 today. ALSEA’s solid entrepreneurial base has its roots in the family-owned business that the three brothers’ father created in the textile industry.
An Expansionary Phase
To expand the number of its locations in South America, some company sources leaked word that it may take over other chains in Argentina and Chile — for example, Starbucks Coffee. However, local specialists have their doubts about how well that brand can succeed in their domestic market. “In the future, foreign franchises that want to enter our country (Argentina) will have to do a very good job of analyzing whether their concept, product, and business model are adapted to our special characteristics. Pizza Hut, for example, failed [in Argentina]. McDonald’s, for its part, adapts its menus to each country. In Mexico, it uses more hot sauce than here, for example,” says Santiago Salcedo, director of Central Franchising and the representative of Cordoba province in the Argentina Association of Franchising.
As for Starbucks, according to Guillermo Mizraji, a partner at the Mizraji, Rivas and Dabah law firm, “They will have to take a very cautious, balanced approach because the Argentine coffee shop tradition is not exactly what this enterprise [ALSEA] is all about.” Mizraji, who is also a law professor at both the University of Buenos Aires and the University of Belgrano, adds, “What’s more, I believe that they will find that the coffee shop category has expanded too much with home-grown projects that are without doubt interesting. However, because of this over-expansion, many [coffee shops] run the risk of disappearing.” In the Argentine market, such coffee shops as Aroma, Café Martinez, and Café Havanna, among others, are all in vogue.
For his part, Heriberto Hocsman, director of the Hocsman law firm, cautions against forgetting that “competition is very severe, and there is no room for making a major mistake.” The author of several books, including Business on the Internet, Hocsman adds, “Beyond that, Argentine consumers are also very demanding and this has led franchisors to maximize the care they take when they try to satisfy customers. They realize that their efforts are subjected [by customers] to permanent scrutiny.”
Not long ago, the arrival of Starbucks Coffee in Brazil was announced. The first location will open in São Paulo within the next 12 months. “We manage 76 Starbucks locations in Mexico,” Cosme Alberto Torrado told InfoBae, the business newspaper. “Because of the relationship that we have with them, they asked us to make a study of the Argentine market.”
Crisis and Opportunity
Beginning in 2001, when a series of economic crises broke out in South America, especially in Argentina, Brazil and Brazil, there was a major shake-out in the franchise market [in those countries], especially in chains of foreign origin. When it was time to evaluate the business, the chains concluded that the money wasn’t high enough [to justify staying]. “They arrived in the 1990s, very tempted by the earnings from royalties, because the foreign exchange parity between the peso and the U.S. dollar was then one-to-one. When the exchange rate went to 1 [dollar] to 3 [pesos], many foreign franchises left the country because they had to divide their revenues in three. In addition, there was a low rate of consumption in the population because of the economic crisis,” says Salcedo.
The crisis generated an enormous opportunity for Argentina to strengthen its franchise system. “With economic recovery, increased consumption and the positive prospects for capital liquidity, and the proliferation of shops of this sort, Argentina is once again on the international map. Another interesting thing is that they have replicated the franchise model in several categories such as gastronomy shops, pharmacies, clothing stores, and so forth,” notes Salcedo.
Along the same lines, Mizraji believes that “the business of franchising in Argentina has matured. The entrepreneurs have a high degree of credibility, and there are investors who have no doubts about considering it [Argentina] an excellent alternative for developing some participants (franchisors) through the use of investments from other participants (franchisees). People are accepting the risks because they can get into a business that is a proven success. That way, they avoid paying for the right to get in on the ground floor, which always happens when an independent business pays for getting hooked up in a market.”
However, the Argentine market is still far from booming. There are about 400 franchises, although there is no official data about sales volume. Meanwhile, in the Mexican market, the leader in the region, the fast-food business alone generates annual sales of $2.5 billion, a figure that represents 0.34% of the country’s GDP, according to the Mexican Association of Franchises.
“The countries where franchising is most developed are the United States; Spain, in Europe; and Mexico, in Latin America,” says Salcedo. “Franchises have reached an 80% share of the retail market in the United States, while they are lower than 15% in Argentina.”
In that regard, Hocsman says that in Latin America, “Argentina is in third place, after Mexico and Brazil. It needs to be emphasized that Argentina has the conditions required for exporting its home-grown franchises. They can achieve that only if they have a market that is open to international reciprocity.”
Clearly, there is still a great deal of room for growth in Argentina. The arrival of ALSEA there means that it is the first foreign company to reassert its confidence in the country. Nevertheless, Mizraji says, “In this case, technically speaking, it is not an investment in Argentina because transferring money to the Burger King franchise does not have the same impact as bringing [fresh] capital into our country. The positive part of this deal is that Burger King will continue in our midst, and that will undoubtedly expand the working capital in our country in the next stage, as a result of the expansion of its franchise chain.” The local manager of the hamburger chain, Pablo de los Heros, said that six million pesos will be invested in 2006, and two new [Burger King] shops will be opened [in Argentina].
An Uncertain Future
For its part, ALSEA still has a great deal of room for growth. However, according to the Mexican media, the future of the company is clouded by one key consideration. Its weakness is that it is not the owner of any of the 12 franchises that it represents. In other words, the company’s skill has been to expand and develop business units that generally come with an “instruction manual.” However ALSEA does not have experience developing its own brands.
That is the principal difference between ALSEA and the Argentine franchises. According to Salcedo, “We have found that in the Argentine market, there has been growth in franchises that are run by local entrepreneurs, and they have even been able to set up shop in other countries. For example, such products as Café Havanna sweet biscuits and Cheeky brand clothes for children have crossed borders. In other words, Argentines also export their business concepts. Argentine creativity and entrepreneurial spirit are well recognized.”
Hocsman says that “one characteristic of the Argentine market is that approximately 70% of all franchise chains are local; they were born and created in Argentina.”
One factor that favors the Mexicans, Mizraji argues, is that few home-grown [Argentine] franchising firms have achieved ALSEA’s degree of strong, continued success. “That’s because Argentine entrepreneurs generally lack a vocation for the turnkey export business, which offers a high percentage of services and added value. In that sense, Argentina must mature, and its franchisors can play the role of pioneers.”
Salcedo says that it is important to realize that the franchising system is “a successful business, but not a miraculous one. Its continued success depends on managerial skill and market vision. That means investors will have to analyze not only each franchise but whether the market for that business is saturated.”
ALSEA’s contract with Domino’s, the company’s favorite brand, is valid until 2025. No one knows what could happen if an agreement that was once expired is renewed once again.
Not even Cosme Torrado, president of ALSEA, can guarantee anything about the future. In fact, Cosme is leaving his options open. In an interview on www.lideresmexicanos.com, Cosme said that “in the future, ALSEA will search for other alternatives… above all, brands that are a proven success. As an individual, I would like to embark in a new direction…I would like to take the recipe that I have used at ALSEA in recent years, and use it to set up another organization.”