Franchising in Argentina - How Adversity Produces Opportunity

Introduction

Despite recent economic turmoil, franchising in Argentina has rebounded at a surprising rate. In the 1990s, many foreign franchisors (particularly from the U.S.) expanded to Argentina. At the height of the economic turmoil in 2002, the sector shrunk by 4% and the expectations for 2003 were very low. However, contrary to expectations, in 2003, the sector grew by 70%, generating approximately US$1.9 billion in sales in 2003, and adding twenty-nine (29) new franchises. Today, franchising in Argentina represents 20% of the total retailer sector, accounts for more than 13,000 retail stores, and employs more than 100,000 employees. Furthermore, the national franchising association (Asociacion Argentina de Franchising), an organization affiliated with the International Franchise Association, estimates that the sector will continue to enjoy strong growth, projecting sales volume to reach US$2.35 billion in 2005 and for the sector to account for 30% of the retail sector in the next decade.

National Brands vs. Foreign Brands

In the 1990s, the majority of the franchises in Argentina were owned by foreign companies. The economic crisis reversed that trend and now 70% of the franchisors are domestic companies. The dramatic reversal suggests that franchising is an excellent store of value. During the economic chaos of 2002, many Argentines established new franchise businesses and others became franchisees. Some of these people had lost their jobs and had received large severance checks. Because confidence in the financial system was low, Argentines elected to invest in franchises despite the difficult business climate. In addition, many Argentines took their savings out of the financial system immediately before it collapsed and needed to find a way to invest those funds. Finally, some people decided to take national concepts to "safer" countries and franchised their business to a foreign country, such as Brazil or Chile.

However, as the Argentine economy recovers (the Argentine economy grew 10.7% in 2004 Q1), this tendency may once be reversed as foreign investors seek to identify new opportunities in Argentina. In June of this year, Argentina hosted its annual Franchising Expo in Buenos Aires with U.S. and Canadian companies 2 once again exploring franchising opportunities in the country. These companies are finding a changed landscape from prior years. Tourism has grown considerably since the economic crisis of 2002 and prices have dropped significantly due to the removal of the currency board known as "Convertibility," making the country more competitive in terms of costs.

Franchising Trends

The food business has historically been the largest segment of the franchising sector for both local and foreign franchise businesses. However, recently, other areas such as clothing, beauty products, silver, leather, and certain services have also started to play an important role.

Legal Framework

To date, Argentina has not adopted specific franchising legislation, enabling the parties to reach agreements own their own terms without material governmental intervention. Under Argentine law, those agreements that are not specifically regulated by the law are called "un-nominated agreements" and are governed by the free agreement of the parties. If there is a gap in the contract, it is filled with the statutes and regulations applicable to similar contracts by virtue of the principle of analogy. According to section 1197 of the Argentine Civil Code, agreements entered into by private parties enjoy the binding force of the law3. Although notary publics play an important role in Argentina, in the franchising sector there are no particular execution formalities or registration requirements. In recent years, there have been some legislative proposals to enact specific franchising legislation, although to date no such legislation has been enacted.

Although there is no registration requirement, there is a tax benefit for registering one's franchise agreement with the trade authorities in Argentina. Such a registration before the National Institute of Intellectual Property (Instituto Nacional de la Propiedad Industrial - "INPI") enables the local Argentine company to pay a lower withholding rate on royalties and other technical assistance fees.

Under Argentine law, the parties are free to establish their own terms for terminating a franchise agreement. However, this general provision is qualified by the restriction that any such termination by the franchisor may not be unreasonable. In practice, the best practice is to allow for some reasonable notice period (perhaps three to six months), depending on the length of the relationship.

Argentine has recently adopted positive steps toward economic recovery. It has modified the mandatory statutory severance of two times the normal amounts owed under the Federal Labor Law, thereby improving the local hiring conditions for employers.

Finally, Argentina is a founding member of Mercosur, the Southern Cone trading bloc. Although ambitious in scope, over the years Mercosur has contributed to increased trade with its neighboring trade partners including Brazil and Chile.

Conclusion

Argentina's economy, historically focused inward, is beginning to grow rapidly. The country offers a very centralized population base, with approximately 15 million residents living in the greater Buenos Aires area. Moreover, the recent economic difficulties may actually prove to be an excellent opportunity to leverage Latin America's best educated workforce and identify excellent franchisees for one's business model.


Patricia Mastropierro is an Argentine attorney in the International Practice Group of Haynes and Boone, LLP.

Participating companies included Papa John's, Mad Science (Canadian Educational System), Sundler Sales Institute for Business Training, CKI (owner of Harvey's and La Salsa), and Church's Fried Chicken.

However, similar to other civil law jurisdictions in the region, there are certain basic restrictions to the freedom of contracting, including public policy and/or abusive provisions.