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Brazil: Franchising

Paulo Rodrigues
February 11

Summary

The Brazilian franchise sector is among the world’s largest andsophisticated in its business practices and growth. The sector has consistently grown faster than the overall Brazilian economy and has become one of the main growth areas, used as an expansion strategy, even by themore traditional retail companies. The strength of local brands pose special challenges for foreign brands to enter the market, however, the current market size and future growth forecast of the Brazilian economy and especially its internal consumption, puts Brazil on almost everyone’s list of priorities when it comes to new emerging marketsand where to expand.

Market Demand

The Brazilian franchising system is an undisputable growing reality. It has proven to be a successful form of business management, in particular for growing small and medium-sized companies, and for contributing to the country’s overall capacity of generating investments, exports, imports, jobs, and income.

Franchises are particularly welcome in the Brazilian economy because of the proven business model that considerably reduces the risks of a new company going out of business within the first three years of operation. In conjunction with the improvement of the Brazil’s socioeconomic situation during the past few decades, the market saw a constant growth even during economic crises and showed growth rates above the Brazilian GDP.

Franchises account for approximately 25% of gross revenue in the retail sector. Local Brazilian franchises dominate the market (90%); however, foreign groups, particularly from the U.S., are making headway.

Market Data

In 2009, The Brazilian franchise sector grew by 14.7 percent while the country GDP growth for the year was close to zero. Total sector revenue was about US$ 36 billion. There are an estimated 1,643 franchising chains and 79,988 franchising units, ranking the Brazilian franchising market as the 6th largest in the world (in number of units) and the 4th largest (in number of franchise chains). The number of chains grew from 1,197 in 2006 to 1,643 (+37.2%). The ABF (Brazilian Association of Franchising) projects sector growth of 10 percent in 2010, once again outpacing the GDP.

Best Prospects

Personal Accessories and Shoes: This is the third year that the segment of personal accessories and shoes leads the growth of the franchising sector, revenue wise. With a 41.2% increase, this segment mostly benefited from the performance of some of Brazil’s best known brands such as Arezzo, Lupa Lupa, World Tennis, Havaianas, and Baloné.

Clothing and Fashion:The segment of clothing and fashion, which last year was the third best performing in the franchising industry, this year occupies the second position with as 37.5% increase in revenue. Growth was mainly due to the consolidation of brands that recently adopted franchising as growth and expansion strategy. Some of these brands are Tip Top, Mar Rio, and the O Poderoso Timão, which is a chain of stores selling soccer licensed items under Brazil’s team with the second largest crowd of followers, Corinthians. Other more traditional franchise brands deserving a highlight for this category are Caverna do Dino, Hering Store, Hope, PUC, Puket, and Scala.

Informatics and Electronics: The third place in best revenue performance is new to the top three ranking as in 2008 it occupied the 8th position. This segment had an incredible 28.9% growth. New entrant brands such as Oi Franquias and Amigo Computador accounted for most of growth.

Key Players

The ranking of the top ten franchise chains in Brazil, both by revenue and number of units show the dominance of local brands over foreign ones. Only two out of the top ten performing franchise brands taking revenue and number of units as reference are foreign.

Ranking by Revenue / Ranking by Number of Units
Brand / Segment / Brand / Segment / # Units
1 / O Boticário / Cosmetics / 1 / O Boticário / Cosmetics / 2,834
2 / McDonald's / Fast Food / 2 / Kumon / Education / 1,599
3 / Habib's / Fast Food / 3 / Colchões Ortobom / Matress/Furniture / 1,387
4 / Shell / Gas Station / 4 / McDonald's / Fast Food / 1,291
5 / Colchões Ortobom / Matress/Furniture / 5 / Wizard Idiomas / Language School / 1,246
6 / Bob's / Fast Food / 6 / L'acua di Fiori / Cosmetics / 1,166
7 / Localiza Rent a Car / Car Rental / 7 / Fisk / Language School / 1,001
8 / AM PM Mini Market / Convenience Store / 8 / AM PM Mini Market / Convenience Store / 963
9 / L'aqua di Fiori / Cosmetics / 9 / Hoken / Water Filtration / 898
10 / Drogarias Farmais / Drugstore / 10 / CCAA / Language School / 808

Prospective Buyers

Finding suitable master franchisees in Brazil is a very challenging job. The easiest way is to develop relationships with Brazilian franchisors and master franchisees of non-competing concepts. In general, Brazilian investors make decisions based on well structured business plans and the expectations of financial return. It is misleading to think that emotional factors will heavily influence decision in favor of a certain brand or business concept. It is important that American franchisors understand that and approach the market after having done the necessary home work and figured the true potential of the brand for this market and therefore be able to “sell”it in Brazil.

It is also increasingly common that a Brazilian investor will want to see the American franchisor taking part of the risk of introducing a new brand to the market. Taking the risk means making actual direct investmentin the form of a joint-venture partnership. Also, as many Brazilian concepts are now seeking to expand internationally, many of them will be open to discussing agreements that would encompass bringing a foreign brand into Brazil and have the foreign franchisor develop a Brazilian brand in its home country.

Market Entry

To take advantage of Brazil’s growing market, U.S. franchisers should localize their products or services, invest in market research, and test market receptivity through pilot programs.

It is also important for U.S. franchisors to have their brands registered with the Brazilian Institute of Intellectual Property (INPI) - Failure to do so may result in legal battles with people that intentional or unintentionally registered a brand name or trade mark prior to the actual owner or creator or a brand. The master franchise agreement, once signed, needs to be filed with the Brazilian Central Bank, which will allow the remittance or royalties to the United States with no problems.

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Market Issues & Obstacles

U.S. franchisors should pay special attention to the various legal aspects of franchising in Brazil to avoid, as much as possible, future disputes with local partners/franchisees. Serious problems and failures of franchise operations have occurred for various reasons, including a lack of knowledge of the market, lack of planning, poor choice of franchisee, and macroeconomic trends. These cases have resulted in financial loses for U.S. and Brazilian companies; a negative impact on brands, both in Brazil and internationally; as well as a negative image for U.S. franchisors entering this market.

An important aspect of Brazil that U.S. franchisors need to be aware of is Brazil’s judiciary system. Based on Roman law, this system naturally provides many options for appeal in all stages of the legal process. In addition, the slowness of the already overloaded Brazilian courts can cause significant delays in the decision on a case. Litigants can take advantage of the situation by not paying franchise fees while they keep the business running and the brand is degraded.

It is important to have a good understanding of Brazil’s Franchising Law. It states that franchisers or their master-franchisees should provide all potential franchisees with a Franchise Offering Circular (Circular de Oferta de Franquia). This must contain basic information about the financial health of the franchiser, as well as information about any pending legal disputes.

Franchise concepts that has the actual product sold by the franchisor and may need to supply those from the U.S., will face high import tariff barriers. The same is valid for those concepts that require the fixtures and equipment of a first store to be imported, except that it would be a onetime operation. Other than that, the Brazilian market is open and welcomes new concepts, the main barrier to entry is really natural fierce sector competition since about 90% all franchise concepts operating in Brazil are local ones.

Trade Events

ABF Franchising Expo 2011

June 8 – 11, 2011

Expo Center Norte – São Paulo, SP

Resources & Contacts

ABF – Associação Brasileira de Franchising (Brazilian Association of Franchising)

For More Information [NOTE: only use this format, do not change it.]

The U.S. Commercial Service in Sao Paulo, Brazil can be contacted via e-mail at: ; Phone: 5511-5186-7186; Fax: 5511-5186-7445; or visit our website:

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