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Executive Report on Strategies in Spain
ICON Group International, June 2007, Pages: 393
How to Strategically Evaluate Spain
Perhaps the most efficient way of evaluating Spain is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in Spain
This report provides an extremely detailed overview of factors driving latent demand and accessibility in Spain. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Spain:
Openness to Trade in Spain
Openness to Direct Investment in Spain
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering Spain. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for Spain over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by Spain when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for Spain as an area of dominant influence in Europe and, potentially, the world.
The report concludes with trade indicators for Spain. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in Spain.
As a whole, this report presents a strategic assessment of Spain by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN SPAIN
Economic Fundamentals and Dynamics
Spain is a member of the European Union (EU) and remains the fastest growing of the EUs larger economies. Spain qualified for the European Monetary Union (EMU) on May 2, 1998. Spains fiscal and macroeconomic guidelines are determined by its commitment to this stability pact.
Government Intervention Risks
The Spanish government influences the economy primarily through regulation rather than through direct ownership, though the government does own part or all of a few of Spains largest companies. Over the last decade, Spain has moved rapidly toward privatization, both out of conviction and because of the limited options available for curbing the budget deficit. Successful privatizations to date include Telefonica, Gas Natural, Iberia Airlines and the petrochemical company Repsol.
Political Relationship to the United States
Spain and the United States enjoy excellent bilateral relations. The two governments share common views on a broad range of issues and are allies in the North Atlantic Treaty Organization (NATO).
Political System
Spain has been a parliamentary democracy since its modern constitution came into effect in 1978, after the death of dictator General Francisco Franco in 1975. The bicameral legislature, or 'Cortes,' consists of the lower chamber or 'Congress of Deputies'--popularly elected at the provincial level--and the upper chamber or Senate, which combines both directly elected seats and seats filled by voting in regional parliaments. In addition to the central government, Spain is divided into seventeen regional units or 'comunidades autonomas' which have their own governing bodies including a chief executive or president and legislatures. Some of these regions, such as the Basque Country and Catalonia, have more power than others. Note that the Basque Country and Navarre have their own personal and corporate tax systems. Provincial and municipal levels of government with elected assemblies exist as well.
Marketing Strategies
Distribution Channel Options
As a result of the growth of the Spanish economy, distribution has become a key factor in supplying the consumer market. Different sales channels to consumers have developed significantly in the last few years, ranging from traditional distribution methods, in which wholesalers sell to traditional shops and those shops sell to the public, to more sophisticated methods, characterized by an increased presence of large multinational supermarkets, retail-stores and central purchasing units.
The major competitors to U.S. exporters and investors in Spain are Western European firms, although Japanese companies have emerged as formidable competitors as well. Cost, financing terms, and after-sales service play important roles in a firms market success. Since Spain joined the EU, member states exports to Spain have benefited from lower tariffs than U.S. goods. Beginning January 1, 1993, import duties for all EU goods entering Spain were zero while U.S. goods remain subject to theEUs Common External Tariff.
Nonetheless, American products are still competitive with EU exports, often due to lower production costs in the U.S. derived from economies of scale. European exporters provide generous financing and extensive cooperative advertising and most of their governments support their exporting efforts with trade promotion events. Although U.S. products are well respected for their high level of technology and quality, U.S. firms often fall short of their competitors in terms of flexibility on financing, adaptation of product design to local market needs and assistance with marketing and after-sales service. Spanish procedures follow the rest of Western Europe, where price remains paramount. However, credit terms, marketing assistance and after-sales service are key factors in local purchase decisions.
The use of credit to purchase consumer goods is widely accepted in Spain, particularly in the cities, and banks compete aggressively to offer coverage. All major U.S. credit cards are used, including Visa, Master Card, American Express, and Diners Club. Department stores and some upscale retailers sometimes offer their own credit, particularly for purchases of large ticket items. Consumer credit is commonly used for the purchase of cars and homes. Housing developers, automobile dealers and some manufacturers offer direct consumer financing.
The Spanish market is made up of a number of regional markets joined by two major hubs; Madrid and Barcelona. The vast majority of agents, distributors, foreign subsidiaries and government-controlled entities that make up the economic power block of the country, operate in these two hubs. Dealers, branch offices, and government offices found outside these two hubs will almost invariably obtain their supplies from their Madrid and Barcelona contacts rather than engage in direct importation. The key to a foreign firms sales success is either to appoint a competent agent or distributor, or to establish an effective subsidiary in the Madrid or Barcelona areas. However, in recent yearsinvestment incentives designed to reward investors for establishing manufacturing operations in less developed areas have dispersed some investment from the major hubs with some success.
Regional characteristics influence buying patterns. A competent agent or distributor considers regional variation when marketing his or her products. The Basque Country, part of Spains north coast, and Catalonia, which includes Barcelona, are autonomies with ancient traditions and their own languages and cultures. There are 15 other autonomous communities in Spain (similar to U.S. states) with varying, but lesser degrees of autonomy and cultural identity.
Madrid is Spains center for banking, administration, telecommunications and transportation and it serves as the headquarters of many large international companies. Barcelona is the capital of Catalonia and the countrys second business hub. It boasts a strong industrial tradition, with primary industries in textiles, paints, chemicals, printing, plastics, electrical engineering, and machinery manufacturing. Along with Madrid, it is one of the leading centers for the IT sector. Algeciras (Cadiz), Barcelona, Valencia, and Bilbao (the Basque Countrys industrial center) are Spains leading ports.
As an important container port, the Bilbao area has extensive shipyards, steel-works, iron-ore mines, chemical and cement works, pulp and paper mills, and oil refineries. In eastern Spain, Valencia is the center of the Spanish furniture and ceramic industries, as well as a major center for citrus fruits and vegetables. Fords ultra-modern plant in Valencia along with the supporting parts and components suppliers represent a substantial percentage of the regions economy.
Seville, located on the Guadalquivir River, is the commercial center of Andalusia and is a major source of olive oil, cork, wine and other agricultural products. The free port city of Vigo, in the far northwest, is one of Europes most important fishing and fish-canning centers.
Agents and Distributors
There are various forms of representation agreements available in Spain that may be used to penetrate the market. The EUs antitrust regulations on exclusive distribution, exclusive purchase, franchising and licensing agreements are fully applicable in Spain even if the scope of the trade is purely domestic and conceivably below the European threshold.
Distribution Agreements
Distribution Agreements have traditionally been unregulated agreements that allowed the parties broad discretion to decide on the form of contract. Spanish law did not specifically regulate distribution contracts. However, on April 16, 2003, Spanish legislation incorporated a new regulation (378/2003) to enact the EU regulation (2790/1999) that derogates previous EU regulations such as 4087/1988 on franchising, and 1983/83 and 1984/84 on distribution agreements and exclusive purchases. The purpose of the EU regulation is to guarantee competition practices in agency and distribution contracts. Some of the areas covered include term of contract, market share considerations, exclusivity rights, mandatory volume of products, etc. Given the scope of the regulation and the supporting directives, companies are advised to have all new contracts drawn up in compliance with this new legislation and, if viable, to have current contracts reviewed.
Common practice has identified the following basic categories of distribution agreements. However, the new legislation will require adjustments in same.
Commercial Concessions or Exclusive Distribution Agreements: The supplier not only agrees not to provide its products to more than one distributor within a specific territory but also not to sell those products within the territory of the exclusive distributor.
Sole Distribution Agreement: Includes the provisions in the above-mentioned Exclusive Distributor Agreement, but the supplier reserves the right to supply certain products to users in the territory of concession.
Authorized distribution agreements under the selective distribution system: In this case the distributors are carefully selected according to their ability to handle technically complex products and to retain a certain image or brand name.
In general, distribution contracts establish a commercial relationship between the supplier and the distributor, who then resells the products to retailers. The distribution contract should contain conditions regarding the sale of goods, licensing of industrial property, markets or territory, advertising, financing and servicing, among others. The main features of distribution contracts may be summarized as follows:
The distributor obtains the merchandise from the supplier 'in its own name and interest' and assumes the risk of the transaction for later re-sale at a profit.
The relationship between the supplier and the distributor is a legal relationship within a specific time period.
The distribution contract may obligate the parties to future purchases and sales.
Ordinary clauses of a distribution contract may cover any subject to which the parties agree provided that the clauses are not contrary to the laws of Spain, morality or public order. The standard clauses of a distribution contract often include:
The territory covered by the distribution contract and the indication of any exclusive character of this territory.
Limits to Third Party Purchases:
Minimum volume of sales and subsequent modifications.
A pricing system and modifications: Periods, pricing, percentage basis, promotions, notifications and the effective dates of new prices.
The Party Responsible for Executing Advertising and Financing:
The duration and extension of the contract and conditions for its rejection and termination.
Conditions for the repurchase of products.
Notification of the parties.
Commercial arbitration may be subject to any legislation agreed by both parties, as long as they have reasonable ties to it. Commercial arbitration is usually subject to the country of one of the parties involved. The contract may also contain a damages clause governing the amount of compensation paid to the parties in the case of annulment or cancellation.
Regarding termination, the courts distinguish between two types of contracts:
Those for a specific period
Those that are indefinite
Contracts for a specified period will terminate with the expiration of the agreed period, while contracts for an indefinite term may be terminated at any time unilaterally. No express provision establishes the length of the notice period in cases of unilateral termination. However, Law 12/92 on agency contracts (discussed below) provides the period for notification, which is one month per year of the term of the contract, up to a maximum of six months.
Spains courts recognize the right of the distributor to indemnity after the party terminates the contract if the following conditions are met:
The distributor has increased the customer base, either in the number of clients or in the volume of sales.
The supplier or a new distributor has taken advantage of the opportunities obtained by the dismissed distributor.
After meeting both conditions, the courts sustain the right of the distributor to claim compensation for goodwill without distinguishing between definite and indefinite duration contracts.
Agency Agreements
Law 12/92 of May 27, 1992, regulates Agency Agreements, implementing the principles of the European Union Directive 86/653. This law establishes that a commercial agency contract is an agreement in which a person or company is bound with another (the principal). The purpose of this union is to advance the principals business, or to advance and conclude transactions on the principals behalf, without assuming the risk of such transactions.
This law establishes:
The independence of the agent.
The agents payment.
The relationship between the parties.
One main feature of the law establishes a contract in which mutual confidence is essential. The duties of loyalty and good faith govern the agreement and violation may cause the termination of the contract.
Law 12/92 requires that the rights and obligations derived from the agency contract must be upheld by the agent or agents assistants. The law prohibits the assignment of obligation to a third party (sub-agent) without the consent of the principal. Similarly, the law requires prior consent by the principal if the agent wants to represent goods or services, which are similar or identical from other companies. Except in the case of conflict, or an agreement to the contrary, the agent may act freely on behalf of other suppliers.
Beyond the basic obligations to act loyally and in good faith, the agent must:
Promote the products and, if empowered to do so, conclude the transactions;
Inform the principal supplier of all matters relating to the agency, especially the financial aspects of all parties with whom there are pending transactions;
Obey the principals instructions and company policies (for example: prices, delivery dates, and procedure for claims);
Receive any claims by third parties regarding defective merchandise in the merchants name; and
Maintain independent accounting for each principal represented.
Beyond the same basic obligations of loyalty and good faith, the principal supplier must:
Provide books, catalogues, price lists and other needed literature;
Make payments on time and as agreed;
Give the agent the information required for the performance of the agency contract;
Inform the agent with reasonable notice of the acceptance, refusal, or the lack of performance of each deal obtained by the agent. The agent has the power to judicially request the accounting books of the principal.
An agents compensation may consist of a fixed amount, a commission, or a combination of both. This law recognizes the right of the agent to receive a commission for transactions concluded through him or her. Additionally, it also recognizes the right of the agent for any other transaction taking place during the term of the contract with any of its clients, even if the agent has not intervened in the operation. Moreover, the agent has the right to receive a commission for all the transactions concluded within three months after the termination of the contract.
The Agency Law establishes that commissions are generated the moment the transaction takes place. The seller must pay the commissions by the end of each quarter of the fiscal year. The seller is not responsible for paying commissions on unfinished operations, which have resulted from actions beyond the agents control. The agents compensation does not include reimbursement for expenses, unless expressly agreed otherwise.
The agency law distinguishes between contracts for a specific period and those that are indefinite. Contracts for a specified period terminate with the expiration of the agreed period, while contracts for an indefinite term may be terminated at any time unilaterally, with prior written notice. Notice of the termination is one month per year of the term of the contract, up to a maximum of six months.
The law also establishes the following as cases that do not require prior notification:
Non-performance of contract duties;
Bankruptcy or receivership of any of the parties;
Death of the agent
The law establishes that an agent can claim indemnity under the following conditions:
If the agent has increased the customer base, either in the number of clients or in the volume of sales.
The supplier continues to benefit from the opportunities obtained by the dismissed agent.
The agent is not entitled to any indemnity or compensation when:
The principal terminates the contract because of the agents breach;
The agent disclaims the contract, unless he or she can prove that the cause is due to the principal;
The principal disclaims the contract based on old age, incapacity or illness of the agent; and
With the consent of the principal, the agent has assigned the rights and obligations of the agency to a third party.
Finally, the law establishes that jurisdiction for all legal actions derived from the agency contract are the legal responsibility of the agent.
Commission Agency Agreements
Commission Agency Agreements are mandates under which an authorized agent (commission agent) undertakes to perform or participate in a commercial act or agreement for the account of another (the principal). Commission agents may act in two capacities:
In their own name: I.e., they are not direct representatives and they acquire rights against the contracting third parties and vice versa.
On behalf of their principal: This gives rise to the effects of direct representation and, accordingly, the principal acquires rights against third parties and vice versa.
The obligations of commission agents are as follows:
To defend the interests of their principals as if such interests were their own and to perform their engagement personally. Commission agents may delegate their duties if they have authority to do so and may use employees under their responsibility.
To account for amounts that they have received as commission and to reimburse any excess amount. They are required to return any unsold merchandise.
In general, commission agents are not liable to their principal for the performance by third parties of related agreements. In specific instances, a commission agent can be liable for the performance of a third party. Competent legal counsel should be consulted regarding the instances in which such liability exists.
Unless their principal consents, commission agents are barred from buying for their own account or for the account of another the goods that they have been instructed to sell, and from selling the goods that they have been instructed to buy.
The main similarity between an Agency Agreement and a Commission Agency Agreement is that, in both cases, an individual or legal entity undertakes to pay another compensation for arranging an opportunity for the former to conclude a legal transaction with a third party or for acting as the formers intermediary in concluding that transaction.
The main differences are that Agency Agreements involve an ongoing engagement, whereas Commission Agency Agreements involve occasional engagements. In addition, a commission agent seeks to facilitate the conclusion of an agreement but does not ultimately represent either party. The commission agent brings the parties together so that they can conclude an agreement but, in fact, is not party to that agreement, whereas an agent represents one of the parties.
In all cases, U.S. firms should take into consideration that Spain is a participating country in the European currency zone and that, in general, companies will benefit from greater transparency in agent/distributor commissions throughout Europe, simplification of compensation plans and greater transparency in reporting revenues to national tax authorities. Contracts signed prior to 1999 will still be valid (no contract can be broken by either party due to the introduction of the euro). After January 1, 2001, old contracts are also valid, but the peseta value is converted into euros, at the corresponding conversion rate. This will not affect other details on contracts, such as interest rates, duration, etc.
Franchising Activities
While there is no specific Franchise Law in Spain, Article 62 of Law 7/1996 on Retail Trade does provide a definition as well as the conditions for the legal regime of franchising in Spain. This Law regulates, in general terms, the activity of retail trade providing what are understood to be 'good commercial practices' and establishes a framework for the relationship between the franchisor and the franchisee. Under the Law, franchising companies - whether Spanish, foreign, or master franchisee - must be registered in a special administrative Franchisors Registry. They must also deliver in writing to the intended franchisee at least 20 days prior to the signing of a franchising contract or pre-contract or prior to any payment to the franchisor, all information necessary to enable the franchisee to freely and knowingly decide whether to incorporate into the franchise network. Regulation 2485/1998 dated November 26, 1998, developed Article 62 and established additional basic conditions for franchising, including:
Disclosure of Pre-Contractual Information
Franchisor identification information: Registration in the Franchisors Registry and Trade Registry; as well as information on share capital on the last balance sheet, if totally paid out, and in what proportion.
Certificate of ownership or license: Allowing the use of the trademarks and other Intellectual Property rights in Spain, including the duration of the license.
The Franchising System
Franchisor experience.
Contents and characteristics of the franchise including a description of the business, the know-how, the continuing commercial or technical assistance, and an estimate of the investment, costs and expenses necessary to start the business.
In the event the franchisor delivers financial projections or an estimate of sales and/or profits, these must be based on supported experience or studies.
Structure and Extension of the Franchisor Network
Essential elements of the franchise contract:
Rights or obligations of the parties,
Duration of the contract,
Conditions of renewal and termination,
Financial or economic clauses,
Exclusive territory clauses and limitations on the franchise business.
Spain recently enacted an EU regulation on distribution agreements and exclusive purchases that will have an impact on franchise contracts. As franchising agreements may differ according to their subject matter: industrial franchising agreements (for the manufacture of goods), distribution franchising agreements (for the sale of goods) and service franchising agreements (relating to the provision of services, it is strongly recommended that all new contracts be drawn up for compliance with the new regulation. It is also recommended that current contracts be reviewed by competent counsel.
Other general requirements under EU regulations to avoid violating antitrust law are:
The use of a common mark or other distinctive sign and the uniform presentation of premises, in order to preserve the unity of the network.
The communication by the franchisor to the franchisee of secret, substantial and identified know-how.
Ongoing Provision of Assistance by the Franchisor
When drawing up the contracts, the franchisor also should bear in mind the following:
Submission of disputes to foreign arbitration or courts. It is worth noting that although a contract may indicate that any dispute will be subject to U.S. law, depending on the nature of the dispute, certain relevant EU regulations may have precedence and make the dispute subject to EU legislation.
Regarding tax treatment of franchising agreements, the nature of the payments by the franchisee to the franchisor should be analyzed since they could be considered as royalties and business income, or only as royalties, depending on the different services rendered and rights granted.
Direct Marketing Options
Direct marketing is a favored distribution tool in Spain. Several factors are fueling direct marketings dramatic growth in Spain. These factors include technological advances in printing and distribution, a steady development of credit card use and changing lifestyles. The Spanish urban population is moving out of the cities to residential areas, which are often located a distance from main commercial centers. Therefore, they are using mail order to fulfill their consumer needs. Also, more women are entering the job market and they are seeking ways to save time in making household purchases. As a consequence, mail order and television direct marketing have become increasingly popular and profitable in Spain. Internet B2C is starting to present strong competition to mail and television direct marketing but it is still under development in Spain and does not seem to be negatively affecting the sales of these other more traditional direct marketing channels. On the contrary, B2C appears to complement the direct marketing channels, as is proven by the profitable Internet versions of the largest catalog companies in Spain and the huge increase of telemarketing to promote Internet financial and insurance services.
Mail order houses lead the direct marketing sector in Spain. This sub-sector makes up over 40 percent of total direct marketing sales at present. Approximately 90 percent of total mail order sales were made to individuals and households. The remaining 10 percent, USD 63.5 million, were to businesses, government offices and other institutions.
Television direct marketing companies started to operate in Spain in 1990, when television was opened to private broadcasters. Since that time, television direct marketing has become increasingly popular and profitable. The Spanish Direct Marketing Association has adopted a strict marketing code currently being used by all its members, thereby underscoring the degree of trust between customer and service provider.
Joint Ventures and Licensing Options
Another way for a U.S. company to penetrate the Spanish market is through a joint venture. There are different types of joint ventures which companies may pursue. For example, it is common for companies to invest as minority shareholders in existing companies, or to set up jointly controlled companies. Other joint ventures consist of U.S. companies purchasing majority stakes that fall short of full ownership or join temporary arrangements with other companies. A description of temporary joint ventures under Spanish law follows.
A group of companies can form temporary business associations (Uniones Temporales de Empresas - UTE) to undertake specific projects for a limited time. This type of association does not have a separate legal identity. Therefore, companies maintain their legal status while allowing common operations under a pre-established set of rules. Foreign companies can enter this type of arrangement.
An Economic Interest Group (Agrupacion de Interes Economico - AIE) is also a type of joint venture between Spanish participants (please note that U.S. companies established in Spain are considered Spanish companies). It is similar in concept to a partnership because its participants have joint and separate liability for their debts. To form an AIE, the participants must execute a public deed, incorporating bylaws, and record it at the commercial register. The internal operation of an AIE is similar to that of a corporation and one can transform an AIE at any time into any other type of commercial entity.
There is also a European version of the AIE, the European Economic Interest Group (Agrupación E
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