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Mexican Franchises in Danger; “25 Percent Will Disappear”

By Daniel González | Fri, 05/29/2020 - 06:00

There are currently 25,000 franchise-owned stores in Mexico City, many of them located in shopping centers. According to consulting firm Gallástegui Armella, 25 percent of these stores will be forced to close their doors due to COVID-19 once Mexico enters the so-called “new normal.” “Of all those that can return to normal operations, 25 percent will have to close,” Juan Manuel Gallástegui, the firm’s Director General told El Financiero. According to Gallástegui, this situation will mean the loss of 225,000 jobs across the country.

On May 4, the Mexican government announced a credit program for SMEs, made up of MX$25,000 (US$1,130) loans that will be given to those companies that did not fire their employees despite the pandemic. The government’s goal is to give out two million loans, according to Zoé Robledo, Director of IMSS, “for payroll and rental spaces” to maintain these companies in operation. The measure, welcomed by most small business associations, is insufficient for a sector like franchising, according to Gallástegui. “A loan of MX25,000 (US$1,130) may be useful for a hairdresser's or a tamale stand, but not for a franchise with monthly operating costs ranging from MX$80,000 (US$3,600) to MX$100,000 (US$4,500),” he told El Financiero.

Eighty percent of Mexico’s franchises closed their doors at the request of the federal government, so they have not received income since March 20. Twenty percent of franchises that remain open belong to the food and beverage sector but according to Gallástegui, income has fallen by 85 percent despite efforts made by many of them in terms of digitalization.

According to McKinsey & Co., these companies will have to adjust their business model in the so-called “new normal.” Digitalization and e-commerce appear to be the fastest and easiest solutions, while the payment of rent for premises has emerged as the main concern for owners. In Mexico, over 200 commercial chains have been closed for almost eight weeks. This has led to the cancellation or renegotiation of rents. Accelerating the conversion to e-commerce is the main priority of Mexican franchisees. 

However, another consulting firm, Kearney, showed its optimism for the retail sector. “Despite the likelihood of an economic downturn, we expect to continue seeing an active M&A market. But the old rules no longer apply. 2020 will be a buyer’s market that will provide an unprecedented opportunity to acquire quality consumer and retail assets with corrected valuations,” Kearney Partner Bahige El-Rayes said in the report “Time to Reset.”

The data used in this article was sourced from:  
El Financiero, Business Review, America Retail, El País
Photo by:   Unsplash
Daniel González Daniel González Senior Writer