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LATIN AMERICA’S TOP FRANCHISER IS HUNGRY STILL

By María Bird Picó

Grab a coffee or buy lunch at a fast-food restaurant in Latin America these days and the chances are increasing that you are a customer of Alsea, the region’s biggest fast-food franchise operator.

Founded 17 years ago by three brothers, Alberto, Cosme and Armando Torrado, Alsea has become a force to reckon with in Latin America’s growing franchise industry. It ended 2006 with sales of about $520 million, a 29.2 percent increase from the previous year.

In Mexico the company owns 400 Domino’s Pizza outlets. On top of this, as the holder of Domino’s Pizza’s master franchise for Mexico, it has licensed 150 other franchisees. Other Alsea holdings in Mexico include 87 Burger King units, 14 Chili’s Grill & Bar units and seven Popeyes Chicken and Seafood restaurants. (In October the company sold its two Spoleto restaurants in Mexico to concentrate on the other brands.)

These days the company is providing the region with a hefty jolt of caffeine, too, with Starbucks in Mexico and its investment in the partnership launching Starbucks in Brazil. Alsea holds 40 percent in Starbucks Brasil Comercio de Cafés. Brazil’s Cafés Sereia do Brasil Participacoes owns another 40 percent, while Starbucks Coffee International holds the remaining 20 percent. They opened the first two stores in Brazil in November in Shopping Morumbi, a São Paulo mall.

Alsea is no newcomer to Brazil — it owns 30 Domino’s Pizza restaurants there. And plenty of Brazilians are familiar with Starbucks. “Starbucks is a brand name that many middle-class Brazilians know from traveling abroad,” said Paul Weeks, a retail analyst at the São Paulo office of Cushman & Wakefield.

Brazil has one of the world’s highest rates of coffee consumption per capita — 4.7 kilograms (about 10.3 pounds) of coffee beans per person yearly, compared with 7.9 pounds per person in other developed countries, according to statistics supplied by the London-based International Coffee Organization. Still, Starbucks will have to work hard in Brazil. “Their success will probably depend on the model they bring to Brazil,” said Weeks. “There are several local competitors that should give Starbucks a strong competition.”

The company must keep in mind that the tastes of Brazilian and Mexican consumers differ markedly from one another, says Roberto Liaño, a retail analyst at Mexico City-based Grupo Financiero Interacciones. “Brazilians show a greater inclination toward domestic brands and products,” he said. “This could make it hard for Starbucks to replicate in Brazil the success the company has enjoyed in Mexico.”

Grupo Financiero resumed coverage of the Alsea stock last year, with a “buy” recommendation that is based mostly on Alsea’s aggressive expansion plans and a new brand image strategy for Domino’s Pizza in Mexico, Alsea’s most profitable unit, according to Liaño. A market test at two of the company’s Domino’s outlets showed that the introduction of new staff uniforms, a menu expansion and other changes had boosted sales and profitability. Alsea says it will implement these changes at all its Domino’s units. “Based in part on the success of this initiative, we feel our 3 percent annual projection for same-store sales growth is conservative,” said Liaño.

Alsea holds an 82 percent stake in Café Sirena, Starbucks’ operator in Mexico. In a joint venture with Starbucks, Alsea opened the first Starbucks unit in Mexico in 2002, amidst skepticism that an upscale coffee shop could do well. But last September the company opened its 100th Starbucks unit in Mexico and closed the year with 120. “We will be opening 100 more in 2007 and project to have 400 Starbucks by the end of 2008,” said Oscar Ocampo, Alsea’s real estate manager. “We believe Mexico has the capacity for between 1,000 and 1,800 Starbucks.”

Its main competitors in Mexico are Café, Caffe; The Coffee Factory; Italian Coffee Company; and Café Punta del Cielo. A high concentration of Starbucks in areas with a high population density makes sense, Ocampo says, because, as a consequence of security concerns, Mexicans do not generally walk long distances. The biggest challenge is finding locations that offer parking, and this is why malls have been ideal, Ocampo says.

Starbucks’ market penetration is no small achievement, considering that the menu and pricing have not been altered for the Mexican market, thus making a Starbucks cup of coffee a luxury for many Mexicans. The average sales ticket in Mexico is $5.50. “Starbucks’ success took us all by surprise,” said a Mexico City-based retail analyst who asked not to be identified. “But in hindsight it has made sense, since the brand was already well known and the concept has appealed to young consumers.”

Sales are so good in Mexico that the company is willing to pay a premium to get into highly coveted locations such as certain malls in Mexico City. Even with high key-money fees of $1 million plus, the investment is recovered in four years, Ocampo says. To retain its current majority ownership participation in Café Sirena, Alsea has little choice but to grow. The joint venture contract stipulates that Starbucks can increase its stake to 50 percent during 2007 and 2008 if Café Sirena fails to accomplish the expansion plan. And even if Café Sirena keeps up with the expansion, Starbucks retains the right to boost its stake up to 50 percent in 2009, according to Liaño. To fund the Latin American expansion, Alsea has sold 45 percent of its shares — the latest 30 percent (which raised $50 million) just last year.

Alsea recently acquired the franchise rights for Burger King in Argentina and Chile. “There is room for growth in Argentina and Chile with Burger King,” said Ocampo. In Argentina, Burger King operates 27 restaurants in eight cities. In Chile it runs 22 restaurants in three cities. The company is also looking at opening Domino’s franchises in Chile and Colombia, introducing Starbucks in those two countries plus Argentina, and bringing Burger King to Colombia and Brazil. Much as it has grown, Alsea clearly has yet to satisfy its own appetite.