Costa Rica - FranchisingCosta Rica - Franchising
Franchising is a collaboration system between two different businesses, legally independent, united by a contract through which the franchisor gives the franchisee the right to exploit, under some pre-established conditions, a specific business (brand, commercial formula, production, and others). The franchisor is the owner of the brand and marketing rights. The franchisor adopts a franchise system to expand their activity in the market.
Franchising was spurred on by the rise of tourism in Costa Rica. Recently the market for new franchises has intensified, despite some market saturation in the fast food sector. The first franchise to enter the market was McDonald's in 1970, others such as Pizza Hut quickly followed. Carls’ Junior, Smashburguer and Starbucks are the most recent arrivals to the Central Valley, where most of the Costa Rican population lives. Certain franchises have been unsuccessful in Costa Rica, either because of the economic conditions at the time or due to poor copyright protection.
In 2018, There are 349 franchised brands distributed countrywide, this shows an increase of 9% from last year. Franchises provide approximately 31,741 jobs in Costa Rica. Roughly 24 percent of these franchise concepts are local, while the remaining 76 percent are foreign-owned (of foreign franchises, 54 percent are U.S. owned). Costa Rica stands out in Central America. due to its strategically dominant geographic position in the region.
As of 2017, there are approximately 94 food franchises operating in Costa Rica, constituting nearly 27 percent of all franchises in the country. Specialized services represent another 20% of the franchise industry.
Local companies like GetNuts, Cosechas, Maridos de Alquiler and others are starting to franchise their businesses in order to expand both nationally and internationally. This success is in part due to the support of the Costa Rican Chamber of Commerce, which promotes and organizes national and regional franchising trade fairs such as Expo Franquicia. The Chamber of Commerce, along with the Interamerican Bank of Development, the National Center of Franchising (CENAF), and the system Bank for Development, has helped finance enterprises to franchise their structure.
Price is a major competitive factor in this sector, as is delivery of food products. Costa Ricans are very price-conscious shoppers. They are generally aware of what items cost in the U.S. and how the same or similar items are priced in Costa Rica. While they are willing to pay slightly more for the perceived quality of an American product, they remain limited by their personal budgets.
Another key factor for success in franchising in Costa Rica is the careful selection of the potential franchisee and location of the outlet. The successful franchisee must have the financial resources to enter and develop the market, along with excellent local business contacts and an understanding of the idiosyncrasies of the local market. In Costa Rica, business contacts can greatly affect the success of a project. This factor becomes apparent, for example, in developing local sources of supply, expediting government approval and licensing, and in gaining access to prime locations for franchise sites.
Opportunities exist for the growth and expansion of franchising in Costa Rica outside of the fast-food sector. Entrepreneurs continue to appreciate the mature business systems and proven track records that many franchises offer. Effective franchise marketing normally entails sensitivity to the local culture, such as adding local foods to the menu or translating manuals and catalogs into Spanish. Given Costa Rica's small size, an exclusive territorial contract is often preferred. Some successful franchise operations involve investor groups who have purchased master franchise rights for the entire Central American region. PriceSmart and Payless Shoe Source are prime examples of this strategy. In many cases, a local franchisee will own several different types of franchises in different industry sectors as a way to diversify their investments.
For roughly 70% of international companies, it takes four years to reach a return on investment (ROI). In contrast, 68% of domestic franchises reach a ROI in only two years. Franchising allows foreign companies to partner with domestic franchisees, leading to faster ROI. Additionally, the franchise model minimizes risk, optimizes sources, and maximizes benefits for those involved. Benefits will also be seen in advertising, as individual franchises will seek to promote their business locally, in addition to preexisting corporate advertising.
A new group of investors is emerging that includes young professionals who are familiar with U.S. business practices and who are seeking to break away from their family businesses and start their own companies. They view franchising as a way to enter into new markets. Franchisor support makes up for their lack of industry knowledge, which is critical for their success.
Potential franchisees do not always attend franchise shows. For this reason, the internet is the number one source of information for local potential franchisees seeking new franchises. Potential franchisees will usually analyze the local market and determine the franchise concepts that are most attractive for the local market by using their personal knowledge of popular and successful franchises in the U.S. market. They will then contact ten or so different franchisors in that market segment for comparison purposes.
The second most popular way for potential franchisees to find franchisors is when a particular franchisor comes to Costa Rica looking for potential investors/franchisees and contacts them directly. Although it is often difficult to identify business people who have an interest in franchising, not to mention the necessary business experience and resources to develop and manage new franchise concepts, the Commercial Section of the U.S. Embassy can assist with introductions and information on strategies used to reach potential franchisees. Advertisements in major local media are also an important means of reaching potential franchisees.
Franchise royalties are subject to a 25 percent withholding tax. However, the U.S. provides a foreign tax credit for this expense. Import taxes vary, depending on the item; the trend is toward lower import taxes.
The following are approximate:
Value Added (sales) Tax 13 percent
Ad valorem (import duty) Tax 0-50 percent**
Special import tax 1 percent
*For additional information on Expo Franquicia, please contact Ms. Karol Fallas at kfallas@camara-comercio.com
www.camara-comercio.com
**Availability to use CAFTA tax reductions for US-made products.
Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.
Franchising was spurred on by the rise of tourism in Costa Rica. Recently the market for new franchises has intensified, despite some market saturation in the fast food sector. The first franchise to enter the market was McDonald's in 1970, others such as Pizza Hut quickly followed. Carls’ Junior, Smashburguer and Starbucks are the most recent arrivals to the Central Valley, where most of the Costa Rican population lives. Certain franchises have been unsuccessful in Costa Rica, either because of the economic conditions at the time or due to poor copyright protection.
In 2018, There are 349 franchised brands distributed countrywide, this shows an increase of 9% from last year. Franchises provide approximately 31,741 jobs in Costa Rica. Roughly 24 percent of these franchise concepts are local, while the remaining 76 percent are foreign-owned (of foreign franchises, 54 percent are U.S. owned). Costa Rica stands out in Central America. due to its strategically dominant geographic position in the region.
As of 2017, there are approximately 94 food franchises operating in Costa Rica, constituting nearly 27 percent of all franchises in the country. Specialized services represent another 20% of the franchise industry.
Local companies like GetNuts, Cosechas, Maridos de Alquiler and others are starting to franchise their businesses in order to expand both nationally and internationally. This success is in part due to the support of the Costa Rican Chamber of Commerce, which promotes and organizes national and regional franchising trade fairs such as Expo Franquicia. The Chamber of Commerce, along with the Interamerican Bank of Development, the National Center of Franchising (CENAF), and the system Bank for Development, has helped finance enterprises to franchise their structure.
Price is a major competitive factor in this sector, as is delivery of food products. Costa Ricans are very price-conscious shoppers. They are generally aware of what items cost in the U.S. and how the same or similar items are priced in Costa Rica. While they are willing to pay slightly more for the perceived quality of an American product, they remain limited by their personal budgets.
Another key factor for success in franchising in Costa Rica is the careful selection of the potential franchisee and location of the outlet. The successful franchisee must have the financial resources to enter and develop the market, along with excellent local business contacts and an understanding of the idiosyncrasies of the local market. In Costa Rica, business contacts can greatly affect the success of a project. This factor becomes apparent, for example, in developing local sources of supply, expediting government approval and licensing, and in gaining access to prime locations for franchise sites.
Opportunities exist for the growth and expansion of franchising in Costa Rica outside of the fast-food sector. Entrepreneurs continue to appreciate the mature business systems and proven track records that many franchises offer. Effective franchise marketing normally entails sensitivity to the local culture, such as adding local foods to the menu or translating manuals and catalogs into Spanish. Given Costa Rica's small size, an exclusive territorial contract is often preferred. Some successful franchise operations involve investor groups who have purchased master franchise rights for the entire Central American region. PriceSmart and Payless Shoe Source are prime examples of this strategy. In many cases, a local franchisee will own several different types of franchises in different industry sectors as a way to diversify their investments.
For roughly 70% of international companies, it takes four years to reach a return on investment (ROI). In contrast, 68% of domestic franchises reach a ROI in only two years. Franchising allows foreign companies to partner with domestic franchisees, leading to faster ROI. Additionally, the franchise model minimizes risk, optimizes sources, and maximizes benefits for those involved. Benefits will also be seen in advertising, as individual franchises will seek to promote their business locally, in addition to preexisting corporate advertising.
A new group of investors is emerging that includes young professionals who are familiar with U.S. business practices and who are seeking to break away from their family businesses and start their own companies. They view franchising as a way to enter into new markets. Franchisor support makes up for their lack of industry knowledge, which is critical for their success.
Potential franchisees do not always attend franchise shows. For this reason, the internet is the number one source of information for local potential franchisees seeking new franchises. Potential franchisees will usually analyze the local market and determine the franchise concepts that are most attractive for the local market by using their personal knowledge of popular and successful franchises in the U.S. market. They will then contact ten or so different franchisors in that market segment for comparison purposes.
The second most popular way for potential franchisees to find franchisors is when a particular franchisor comes to Costa Rica looking for potential investors/franchisees and contacts them directly. Although it is often difficult to identify business people who have an interest in franchising, not to mention the necessary business experience and resources to develop and manage new franchise concepts, the Commercial Section of the U.S. Embassy can assist with introductions and information on strategies used to reach potential franchisees. Advertisements in major local media are also an important means of reaching potential franchisees.
Franchise royalties are subject to a 25 percent withholding tax. However, the U.S. provides a foreign tax credit for this expense. Import taxes vary, depending on the item; the trend is toward lower import taxes.
The following are approximate:
Value Added (sales) Tax 13 percent
Ad valorem (import duty) Tax 0-50 percent**
Special import tax 1 percent
*For additional information on Expo Franquicia, please contact Ms. Karol Fallas at kfallas@camara-comercio.com
www.camara-comercio.com
**Availability to use CAFTA tax reductions for US-made products.
Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.