#38 – The Expat Files: First-World Franchises, Social Status, and Business Challenges in Latin America

Automatically transcribed from the original recording; names and wording may contain errors.

[00:11] Hi everybody, I'm Johnny Mueller, and you're listening to The Expat Files, living in Latin America, the one-of-a-kind show that tells you what it's like to live, work, play, and or retire in Latin America, so let's get started. Well, I'm sitting down reading the Sunday paper here in El Salvador, and inside the newspaper there's an insert from a real estate developer, a glossy brochure that looks just like it might have come from the first world, except of course, it's all in Spanish. And you see, that's what these big developers try to do, try to make everything look very first world, because like I said so many times before, Latin Americans are enamored with everything first world. And that's why for example, nearly all the franchises up in the first world that come

[01:00] down here are mostly unqualified successes, and right away too, even ones that by rights should never have a chance to make it down here. In other words, if you had an MBA, and these days, who doesn't? Even I have one. Anyway, if you made a list of 50 franchises that came down here and made great successes, at least 30 out of those 50 have a basic business plan that absolutely flies in the face of what I'd consider the rules of success down here in the third world, but yet they open up down here and the people line up and they just can't get enough of it. And it hardly matters if the product they're selling is mediocre or not, as long as it's come from the first world and has a basically recognizable brand name, and it's been advertised widely enough on cable TV that most Latins know what it is.

[01:48] And the reason why I mention first world cable TV is because in the last 5 years, all the major cable TV networks, like HBO and Warners and e-Entertainment and the History Channel and Nat Geo and Sony TV and CNN and FOX, you name it, they've all franchised themselves down in Latin America, and you can see all that first world programming, good or bad, mostly bad, including all those mind-numbing reality shows you've got up north, yuck. And nowadays, the people down here are bombarded with that junk, the very same programming we get up north, but in Spanish subtitles or translated in Spanish. In other words, the Latin Americans down here are watching how the first worlders live up north. That is, the way cable and satellite TV depicts the way first worlders are living.

[02:37] And that means the average Latin is familiar with brand names that haven't even made it down here yet. Now let me give you the most recent example, Starbucks. Now just last week, Guatemala got its very first Starbucks. And by the way, last week they got their first IHOP too. Whoopie ding, huh? But to the local Latins, it's first world, so it's a big deal. Anyway, about that Starbucks, it's located in the parking lot of the most wealthy, highest rent shopping mall in the whole country. And if you think the people of Guatemala are nothing but short, brown, indigenous sugarcane cutters, you got it all wrong. Because if they were, why would this shopping center I'm talking about have a Sears, a giant Ace Hardware, a Bass Shoes, a Gap, a Diesel, and at least 50 other high-end brand name

[03:28] franchise stores? Not to mention, a TGIF Fridays and an IMAX Theatre, yes, an IMAX Theatre. That's right. All right, but I want to get back to that Starbucks for a second. Now coffee is one of the top exports that Guatemala has. And in the past few years, in international competition, Guatemalan coffee has always been rated in the top five in the world, and sometimes it's been rated number one. And because different parts of Guatemala have completely different types of climates, they produce more than 30 different distinct types of coffee, all of them mostly terrific. And because in Guatemala, there's coffee everywhere you look. In fact, it's kind of a national symbol. So as you might imagine, practically everyone's a coffee addict.

[04:15] So on practically every street corner, and in every little mall, you can have yourself a cup of the finest coffee in the world, or an espresso, or a latte, or whatever, right out of one of those expensive thousand dollar espresso machines from Europe. Or, my personal choice, coffee from one of those Bodum French presses. And yes, they've got those machines all over the place down here. And why not? If you got the best coffee in the world, it pays to use one of those really high quality machines, doesn't it? So anyway, you can have one of the finest cups of coffee in the world, if not the finest, for about a buck. Even though right now, the world market price of coffee is the highest it's been in history. But now, courtesy of the American franchising system, you can go down to Starbucks in Guatemala

[05:02] and buy that very same cup of coffee for four, or five, or even six dollars a cup. Or you can walk across the parking lot into the mall, stop at any one of a half dozen little kiosks, and buy the very same cup of coffee with the very same coffee beans for a buck. Now, first world conventional marketing wisdom would say, Guatemala is no place for high price coffee, especially when you could get a world class cup of Cafe Mocha Java for a dollar all day long. So any first world marketing guy in his right mind would say, put a Starbucks in Guatemala, you gotta be nuts, especially in this crappy economic environment. You really gotta be nuts. But if you take a drive past Starbucks, you'll see it's balls to the wall in there, man.

[05:48] And it has nothing to do with the coffee. It's all about that upper class 5% of Guatemalans who can afford laptops and iPods and blackberries and who like nothing better than to prove to their friends that they're right in fashion with the real first world people by going to Starbucks. Yep, it's the same with all the higher classes in Latin America. It's all about being seen at the right places and acting or seeming like a first world person. And believe me, it's quite a show. So right now, down in Guatemala, it's the latest, greatest place to be seen. And I noticed another funny thing, people walk out of there with that green Starbucks coffee cup in their hand, holding it out proudly and well in view with that Starbucks logo facing out so everybody can see as they walk through the mall that they didn't pay a dollar

[06:36] for that cup of coffee at a kiosk, they bought it at Starbucks. In fact, one of the managers at that Starbucks told me, he has his own hypothesis as to why those status-conscious wealthy Latins walk around with the Starbucks cup even when it's empty. He says it's like wealthy Latins in their cigars. They smoke the regular cheaper local ones at home and the expensive Cuban ones when they're out with their friends. And even when they produced that $10 Cohiba or Monte Cristo, they don't light that thing up for a long time. But instead, they go through a ritual of waving it around subtly just enough so that everybody at the table knows by the obvious cigar band or the expensive metal tube that they all come in that it's really from Cuba. And that's the way society is down here.

[07:23] You are what you have and what you drive. That's the measuring stick down here, like it or not. But expats and expat wannabes, you should know this. You don't have to play that game at all. And even if at first, it's kind of fun to watch. After a while, it gets pretty old, believe me. It's kind of like an adult version of King of the Sandbox. But like I said, thankfully, expats never have to play that game. Because down here, you're automatically king or queen of that sandbox. Well, you're way up there anyway. So expats and expat wannabes out there, know this. By virtue of the fact that you come from the first world, in the minds of the Latins, you've already arrived. So you don't have to prove anything to anyone. And like one expat friend of mine says, if you're a first world guy or gal down here,

[08:12] you're a welcome guest in the houses of paupers, presidents and kings. And I'm living proof of that. Even your average middle class midwesterner like me, with no special pull or connections whatsoever. I can't tell you how many times I've been given the royal treatment just because I'm a first world gringo. Nothing more. I've been to dinners with ambassadors, been to house parties with cabinet members, vice presidents and presidents. I've been invited to private islands. I've scuba dived and fished with generals and ministers of defense. And I've been to lunch with billionaires and cabinet ministers. And all just because I was at the right hotel or the right swimming pool or the right beach party at the right time to run into these guys and get invited. But being a complete stranger to them, that never would have happened if I wasn't 100%

[09:00] first world. Somehow, we always get invited to the party. And that's one of those secret special advantages for expats living down here. That is, if you don't live in one of the high volume tourist areas, because then you're nothing special. You're just somebody with money that they need to keep happy for a few weeks so that you can pump up their economy. So as for me, once I got down here and traveled around a while, I soon found out. As long as I wasn't in a tourist area, I automatically got some perks. Now contrast that to before I lived down here when I lived in the United States. I was a nobody back then too. And naturally, I never met any of those kind of movers and shakers up there. But down here, I'm a nobody, but I'm a first world nobody.

[09:45] So the doors are all open to me. Because like I said in a past show, everybody wants a gringo at their party. In fact, a party is not a real party down here unless a few token first world guys or girls are thrown in for good measure. Because you see, it's a feather in the cap of a social climber down here to have a few first world friends. And I'm not saying that these parties are really any good. And most of the big wig people down here that you meet, especially the politicians, well they got nothing upstairs and they make me want to vomit sometimes. But even if those guys are totally superficial and low on brain power, well what would you do if one of those guys invited you to a private island retreat and they picked you up by helicopter? Are you going to say no to that? I can think of worse ways to spend a weekend, can't you?

[10:33] Okay, call me a hypocrite. So of course I went. And in my mind, I justified it, saying it was investigative reporting. Haha, I just kept my mouth shut, smiled a lot, admired my generous host's antique sword collection and drank his 40 year old whiskey. But I never kissed up to him. At least I don't think I did. But let me get back to that Starbucks thing. Now this should be a great example to you expats and expat wannabes out there. Especially those of you who really want to start a business down here and because you know little or no Spanish, you think it might be the impossible dream. Even though you have a good idea of what kind of business you want to get into, you think it just might fall on your face if you were to give it a try. Well let me reassure you right now that most expats that start businesses down here defy

[11:22] the odds that they talk about in the first world. The odds being that 9 out of 10 businesses fail within their first or second year. Now those are first world statistics. Down here it's a completely different thing. I'd say down here, statistically, it's more like this. More than half of the businesses started by expats within 2 to 3 years are booming. And the expats that fail, it seems to me, it's because they came into a tourist area and were competing against their own kind. Or they haven't hooked up with a good lawyer to grease the wheels and get all that paperwork done. And if you look at the archives of my past shows, you'll see that getting a lawyer is step number one. So check it out. The fact is, I've seen businesses down here opened up by expats that absolutely should

[12:11] have failed. They should not have made it. Not by the laws of sound first world economics anyway. But somehow they're booming. And that's because you've got 5 great advantages going for you right off the bat as soon as you start any business down here. Five advantages that you just don't have in the first world. But alas, up in your hometown, these things just don't exist for you and never will. First of all, wages. Now in the first world, it's often said that half or more of the cost of doing business is paying wages. Now down here, it's going to be between 10 and 20% of the cost of doing business. A huge savings. And then there's advantage number two. Up in the first world, you have those payroll deductions for employees that you too have to chip in for.

[12:57] Like FICA, Social Security, Medical Benefits, Health and Dental Insurance. Of course, depending on what you offer your employees. But any of those little perks that you do offer your employees, you're going to have to chip in for. But down here in the third world, well, you could practically write all of that off. It just doesn't exist. And then there's advantage number three. You have to remember that in the first world, you always have to pay those corporate and business taxes and the cost of your accountant to do those taxes. Whereas down here in Latin America, that's pretty much a non-issue. And down here, whatever business taxes you do have to pay have already been collected in the price of your goods and services as a value added tax or VAT over here they call it IVA, EVA. And that really doesn't come out of your pocket at all because you've already collected it.

[13:47] Your customers, in whatever kind of store or business you might have, pay that up front and you just remit it to the government every quarter. And as far as accounting fees go, I've had a number of businesses and I've never paid an accountant more than $25 a month to handle my corporate books and file my quarterly tax statements. $25 a month. That's what? $300 a year, right? Now, when I was back in the United States, I had a few businesses up there too. And the last full year I did business up there, I paid my accountant about $10,000. So there's your difference right there. And the fourth huge advantage to doing business down here is the very low cost of rent. Because unless you're in a really high volume tourist area, you're going to pay half or

[14:33] less than half for an equivalent rental or building up in the first world. And last, but definitely not least, is advantage number five, which I call the First World XPAD Advantage. Now, like I said, anything and everything First World, the Latin people just seem to be enamored with. The fact is you give a kid a New York, a Disneyland, or a Mount Rushmore t-shirt and that's going to be his number one favorite possession for the foreseeable future. Even if it was made in China, as long as it's connected somehow with the First World, and I'm talking mostly about the United States, Canada, or Europe, well, any gift with a First World logo on it never fails. The people down here just crave that stuff. Why do you think there's 13 million illegal aliens in the United States right now?

[15:21] Anyway, as soon as you open a business down here, it doesn't take long before the word gets out. And suddenly, more often than not, you're the newest flavor in town. And even if you've got some direct competition from a local business nearby, that doesn't really matter because the contrast of your First World-run business to their Third World same old thing is only going to work in your favor. Let's suppose you open up a restaurant or a bar. Well, the mental image that the Latins have when they first hear about your new business is always positive. For example, in the case of a restaurant, the immediate image that comes to their mind is that it's going to be cleaner, more organized, have high-quality fixtures, a better ambience, all those positive things that they attribute to First World businesses because they know

[16:07] damn well that the local businesses have much lower standards just based on what they've seen by watching cable TV and the First World franchises that have landed in their country already. And those instant mental images and the word of mouth that comes along with it is a huge advantage when you start a business. And it's all in their perception, and it doesn't cost you a cent. But do remember now that you have all those advantages going for you if you open up a business off the tourist track. But if you want to open up a business in one of those high-volume tourist areas, some of those advantages I mentioned are just going to melt away. Like for example, the rent. You're going to pay high First World style rents in a tourist area. That's inevitable. And you're going to lose some of that nice word of mouth I was talking about too because

[16:55] tourist areas are going to be loaded with Gringos and Europeans who are going to be your direct competition. And in a tourist area, you're going to have to spend a lot more money on advertising. Now the tourist areas I'm trying to steer you away from are the ones that I'm talking about that are loaded with Gringos and Europeans. But there are a lot of really cool tourist areas I do recommend that would be very, very good places for an expat to open a business. And I'm talking about cities, towns, and historic sites that are certainly on the tourist trail where you'll see almost no First World people at all. Or maybe just a small trickle. But instead, you'll see mostly upper middle class and wealthy Latin tourists. Now there's hundreds and hundreds of places like this all throughout Latin America.

[17:43] And if you asked me to name some, I could spend all day making a list. But if you want my short list of cities and towns like that, just email me the expatfiles at gmail.com. And speaking of expat and expat wannabes when it comes to businesses, I have to say that 90% of the tourists that I see down here, the ones that get hooked and decide that eventually this is the place they want to be. It seems like the vast majority of them have just one idea in mind. Someday they want to come back down and open one of these three things. A restaurant, a bar, or some kind of bed and breakfast, or a mom and pop hotel. And most of these tourists or expat wannabes are thinking about doing that in one of these high volume tourist towns down here.

[18:30] Because those are about the only Latin American places they've ever been to. With Costa Rica usually being tops on their list. And like I said before, for a lot of reasons I don't recommend Costa Rica. But anyway, they've got it in their heads and you can't persuade them otherwise. And 95% of these people have never even had a bar or a restaurant or a hotel up in the states. But they've got their minds made up and they're going to come down here and do it. They're thinking it's a good way to wind down, semi-retire, owning and operating a business like that in what to them is a virtual paradise. And what could be easier or more fun than spending your declining years running a bar or a restaurant or a mom and pop hotel? And I can see why. Because when they first come down to a tourist area and they see these laid back first world

[19:17] people that own these little bars and restaurants and hotels, they say, man, now that's the life. I can do that. But what they don't know is that most of these successful businesses down here in the tourist areas, they were started by first world people, Gringos or Europeans, that not only had that kind of experience up in the first world, whether they worked for a hotel or they worked at a restaurant or wherever, what these newbies don't know is that these old timers came down a long time ago and made these connections and went through all the paces, including a lot of backsliding before they ever got ahead. The first world people that are successful down here in the tourist areas, they just didn't have that good luck. To come down on vacation once or twice, fall in love with the place, go back home, pack

[20:06] up everything, come down, open up a business, and all of a sudden their new restaurants booming and they're living a life of Riley too. Well that rarely happens in the tourist areas, let me tell you. Now let's just take Costa Rica as an example, since living down there and opening up a business seems to be every expat wannabe's wet dream. Now you might have been able to pull something like that off back in the 1970s or 80s. I mean come down on a shoestring budget when things were really cheap there and when the gringo dollar had not yet contaminated everything in its path. But now if you look around, all the first world people that are making a go of it with little bars, hotels, and restaurants, well the land that they're sitting on that they paid 10 or 20 thousand dollars for back in the 80s, well now it's 10 times that price

[20:55] and no one can get in on the ground floor anymore because there is no ground floor. Not to mention, the government of Costa Rica has been running a huge deficit and the taxes on businesses are triple or quadruple what they were in the 80s and 90s. In fact, in some cases, nearly at US levels and on top of that there's so much competition in the hotel, bar, and restaurant business that you better bring a sack of money down because unless you're really lucky you're going to have a few lean years at least. Because there is a very true saying among expats in Costa Rica and it goes like this, in order for an expat to make a million dollars in Costa Rica he has to bring two million dollars down, which isn't very encouraging, is it? And for any of you out there who don't believe that, how do you think that rumor got started?

[21:45] But by all means, if you want to open a bar, a restaurant, or a bed and breakfast, do it. But stay away from the high volume tourist areas where first worlders love to go. But for my money, if you really want to start a business that you know is going to be a success, all you have to do is come down for a month or two or three and pick a Latin American city that's off the tourist track and just wander around and keep your eyes open and carry a little notebook with you. Because I guarantee you, after the first week or two, you're going to see businesses that are doing gangbusters, or at least by all appearances seem to be going concerns. And you're going to say to yourself, you know what, there's something wrong here. They're doing a lot of things ass backwards, the place is disorganized, it's dirty, it's

[22:33] badly lit, the employees are either sitting on their hands or walking all over each other, the merchandise is all in disorder and badly displayed, the window displays are crappy, the signage is bad, well, you get the idea. What I'm really saying is that a huge majority of the going concerns down here, businesses that are making money, they not only look like they're straight out of the 1950s, but most of them have been handed down from father to son and there's usually not a person in the store that has the benefit of any formal business training whatsoever. The vast majority of the owners are without a single course in economics or marketing or accounting under their belts. And because these businesses are making money and supporting families, they don't want to change a thing.

[23:19] And why should they? In fact, I dare you to take a walk into any mom and pop grocery or hardware store and you'll see exactly what I mean. If for example, you pick a city like Managua Nicaragua, or let's say La Paz, Bolivia, and you visit a hundred little mom and pop hardware stores, you'll notice that they're all pretty much clones of each other. The same thing with mom and pop grocery stores, dry cleaners, shoe stores, beauty parlors, barbershops, pet shops, you name it. We're talking time machine here, total resistance to change, zero creativity and zero progress. And that's why expats come down here, open businesses and clean up. And it's really a no brainer because if you were brought up in the first world, whether you know it or not, you've already got some minimum standards burnt into your brain, especially

[24:07] about how you expect the store to look and how you like to see things arranged and displayed. Not to mention you have your own personal standards for cleanliness and how things should be organized for convenience. And I'm just talking about retail sales here because if you look at the service industries down here, like for example, a travel agency or a copy center or a cafe internet, you'll see more of the same, smudged walls, bad paint jobs, dirty bathrooms, piles of boxes, broken equipment, cracked windows, you name it. And it doesn't take a brainstorm for a first world person to see that if he was to open that very same kind of business, his way, the first world way, right across the street, he would really clean up.

[24:52] So expats and expat wannabes out there don't always think that the road to riches and the good life in the third world is with a bar or a restaurant or a little hotel, the conventional thinking. There are a million other ways to success down in Latin America. All you have to do is walk around for a while and keep your eyes open. And a lot of other expats down here that I know have this misconception that in order to have a big success down here, they have to bring something that's already in the first world, some kind of product, high tech or not, that's new or novel enough that it hasn't made it down here yet. And that all they have to do is be one of the first ones to bring it down and sell it and they'll clean up. Well, you know, in theory, that sounds great. But the truth is, if it's not down here already, then when you do bring it down, let's say

[25:40] you're talking about hydroponic gardening or solar panels or wind generators, well, you're not only going to have to market that product, but you're going to have to educate and train the people so they know exactly what it is, the advantages of it and what it does. And still, that might not be enough because the people down here are very resistant to change. And you can tell that by walking into any mom and pop hardware or grocery store. Because if you're out of the tourist area, you'll notice that most of these places not only don't have a computer yet, but they're still using a typewriter, a manual typewriter. Have you seen one of those lately, except in a black and white movie? And if you really want to talk about resistance to change down here, just walk into a government office. They may have computers all right, but most of them still have manual typewriters somewhere.

[26:30] And they're using white out and carbon paper. And I'll bet some of you people out there don't even know what carbon paper is. So the bottom line is expats. If you want to bring some new idea or product down here and get the jump on the market and be the first one in, you might be banging your head against the wall for a long time before you start making some sales. And my advice is just look around at the existing businesses. Most of them have never had to compete against first world competition. And for expats that want to start a business down here, it doesn't have to be glamorous and high tech to make money. In fact, low tech and basic might just be the way to go. And remember, it's a schizophrenic society. On the one hand, they'll pay five bucks for locally grown coffee, as long as it's served

[27:15] in a green cup with a first world logo. And on the other hand, that same guy will go back to the office, pull out the carbon paper and the white out and pound out a report on his manual typewriter while he's talking on his blackberry. Go figure. You've been listening to The Expat Files, living in Latin America. And don't forget you can email me on anything at all about Latin America. The Expat Files at gmail.com. That's theexpatfiles at gmail.com.