US embassy cable - 04TEGUCIGALPA2223

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002223 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN 
TREASURY FOR DDOUGLAS 
STATE PASS AID FOR LAC/CAM 
COMMERCE FOR MSIEGELMAN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, PGOV, HO 
SUBJECT: HONDURAS: FAST-FOOD BOOM CONTINUES AS FIRST 
QUIZNOS OPENS 
 
 
1.     (SBU) Summary:  Honduras, fast-food sector continues 
to flourish and, with new entrant &Quiznos Sub,8 remains 
dominated by U.S. franchises.  Quiznos sees strong growth 
potential in Honduras, based on the strong market acceptance 
of U.S. brands and continuing economic growth.  Quiznos did 
not, however, benefit from an extremely generous tax 
exemption scheme under which many of the early entrants to 
the sector (based on the questionable justification that 
fast-food franchises boost tourism) received a ten-year tax 
holiday on income taxes, and a perpetual exemption from 
import duties on capital equipment and process inputs.  Those 
laws have been tightened to offer benefits only to true 
participants in the tourism sector, but it appears the early 
entrants ) overwhelmingly composed of a small group of 
economic elites ) will continue to receive those benefits 
and continue to earn windfall profits.  End Summary. 
 
2.    (SBU)  On September 23, EconChief and Ambassador 
participated in the ribbon-cutting ceremony for the first 
Quiznos franchise in Honduras.  In the works for over a year, 
the new outlet cost $350,000 to construct and has the largest 
footprint of any franchise outside the United States. 
Quiznos representatives would not divulge the cost of the 
national rights to the chain in Honduras, but indicated it 
was &substantially more8 than the construction fees spent 
to date.  The outlet was the brainchild of Luis Rock, 23-year 
old scion of Antonio Rock, the largest authorized distributor 
of major motion pictures for over 40 years in Honduras, a 
partner in the Multiplaza chain of movie theatres, and now 
the new franchise holder for Quiznos operations in Honduras. 
The younger Rock, a recent U.S. college graduate in Marketing 
and Finance, serves as the Manager of the flagship store. 
 
3.    (SBU) The franchise agreement calls for the 
construction of seven outlets countrywide, at a pace of at 
least two new outlets per year (and a franchise fee of over 
$20,000 per store).  The aggressive expansion plan by Quiznos 
Honduras is mirrored in other countries in the region, 
according to Richard Eisenberg, Latin American Regional 
President for Quiznos.  Eisenberg told EconChief that Quiznos 
is rapidly expanding beyond its regional base in Costa Rica, 
where they already have nine franchises.  Honduras is the 
first to open, but will be followed in quick succession by 
two stores in El Salvador later this year, and one in 
Guatemala early next year.  In all three countries, Quiznos 
is following a similar business model, according to Pablo 
Fernandez, Franchise Expansion Manager for Quiznos. 
Fernandez told EconChief that Quiznos prefers to identify a 
strong group or company in-country with whom they can sign 
multi-unit deals for continued strong growth.  Both the 
Salvadoran and Guatemalan contracts include multi-year, 
multi-unit deals, Fernandez said. 
 
4.    (SBU)  At first the Honduran fast-food market might 
appear saturated, yet receptivity to new chains remains high. 
 According to Eisenberg, the economic returns per outlet in 
Honduras are projected to be among the best in Latin America. 
 Quiznos views this as a significant opportunity to capture 
market share and remains enthusiastic about future prospects. 
 In the U.S., Quiznos reports it has risen to become the 
number one provider of sub sandwiches, and expects to do the 
same in Honduras. The entry of Quiznos should therefore 
introduce some additional competition into the fast-food 
market in Honduras, particularly for Jorge Siwady,s Subway 
franchises. 
 
5.    (SBU)  Though there are myriad U.S. franchised 
fast-food operations in Honduras already, most are owned by 
only a handful of firms or families.  Eduardo Kafati, for 
example, holds franchise rights to Burger King, Church,s 
Chicken, Popeye,s Chicken and Biscuits, Little Ceasars 
Pizza, Baskin-Robbins, and Dunkin Donuts.  Similarly, Roberto 
Larach (publisher of two major newspapers and a cousin of the 
Canahuati family) holds the rights to Pizza Hut, Kentucky 
Fried Chicken, and the Pepsi distributorship in San Pedro. 
Wendy,s Hamburgers and casual dining restaurant Applebees 
are owned by shopping-mall magnate Raymond Malouf.  The price 
impacts of this apparent market concentration vary with the 
degree of competition:  Little Ceasars, Dominos, and Pizza 
Hut -- fierce competitors -- have reasonable prices and 
frequently offer package deals and other specials.  The same 
rivalry can be seen between Burger King and McDonalds. 
Wendy,s, inexplicably, is nearly as expensive as in the 
U.S., and Dunkin Donuts, at nearly one dollar per donut, is 
even more expensive in Honduras than in the U.S.  Quiznos, 
operator, the Rock family, is a new entry to this sector, but 
is not without other connections:  Antonio Rock is 
brother-in-law to the powerful Canahuati clan, the family of 
Ambassador to the U.S. Mario Canahuati and owners of a 
multi-million dollar maquila operation. 
 
6.    (SBU) Most fast-food franchises arrived in Honduras 
within the last decade.  Two factors seem primarily 
responsible for this rapid growth:  First, the market, fed by 
a growing economy and strong remittances growth, remains a 
voracious consumer of fast food.  The popularity of U.S. 
chains in particular could be the result of the estimated one 
million Hondurans currently resident in the U.S. and the 
large numbers of Hondurans who have studied in the U.S. or 
who visit there regularly and who are therefore familiar with 
these brands.  Second, until recently the tax law encouraged 
this expansion of fast food chains by granting them 10 year 
tax holidays on income taxes and near blanket waivers on 
duties and taxes (using the dubious rationale that they boost 
tourism and therefore should get the same tax breaks as 
hotels.) 
 
7.    (SBU)  On October 1, EconChief met with Vice Minister 
of Commerce Salvador Melgar Ascencio, one of the drafters of 
the tax exemption, to discuss its origins and current status. 
 Melgar said that one of the first tax exemptions was granted 
to an early Burger King franchise.  To qualify, a business 
had to demonstrate that it was in a site of archeological, 
historical, or architectural interest -- Burger King failed 
that test on all counts.  Nevertheless, Melgar said, the 
exemption was granted.  This &acquired right8 quickly 
caught on and was granted to other similar franchises.  In 
its original form, the tax benefit was justified as promoting 
tourism and promoting the import of capital goods that would 
encourage growth of the sector. 
 
8.    (SBU) The benefits were subsequently memorialized in 
the Tourism Incentive Law of December 18, 1998, which granted 
ten-year tax holidays for tourism-related businesses, and 
near-blanket waivers on customs and import duties.  Melgar 
lamented the way the implementation had spun out of control, 
noting that the law was not intended to allow, for example, 
duty-free importation of foodstuffs.  When that law was 
revised on June 5, 2002, the revision tightened the classes 
of businesses that could benefit from the exemptions, 
limiting it to hotels, resorts, tourist transport, 
handicrafts, tourism promotion, and other clearly related 
pursuits.  Notable by its absence was the fast-food or 
restaurant sector.  While new businesses will not benefit 
from the old law, Melgar said it was his understanding that 
those fast-food franchises established under the old law 
would retain those tax benefits, and, in essence, continue to 
make windfall profits.  Quiznos reportedly did not benefit 
from the exemptions. 
 
9.    (SBU) Comment:  Post is pleased to see a new U.S. 
operation enter the market, not only to offer more selection 
to the consumer, but also to diversify (slightly) the 
ownership base of the sector.  The franchise sector is 
clearly a very successful U.S. export to Honduras, and Post 
will continue to support its growth.  Post will watch with 
interest any developments in the tax code regarding fast-food 
restaurants. Post suspects that as new entrants are forced to 
compete without benefit of the old tax exemptions, pressure 
will mount for closing that loophole to existing businesses 
as well.  End Comment. 
 
PIERCE 
 
Pierce