V. MARKETING U.S. PRODUCTS AND SERVICES DISTRIBUTION AND SALES CHANNELS Due to the opening of the economy to foreign competition, the majority of capital goods, raw materials, and consumer goods can be freely imported into the country (after paying the corresponding import duties). This is slowly changing the channels for distribution and sales of imported products in Colombia. The marketing of most imported items is still conducted through agents and distributors. A few large companies, however, import directly a good percentage of the equipment and materials which they need. This is also applicable to many consumer products which very often are being imported directly by large chain stores and wholesalers. Consumer products from countries around the world are now found on the shelves of many stores in Colombia. Although an increasing percentage of these products are legally imported due to the liberalization of trade and the reduction of import duties, a significant amount is still coming through contraband. A great majority of consumer products and consumer electronics are covered by a 20 percent import duty. The 14 percent value added tax (VAT) is assessed on the CIF value of the products plus import duties. This margin of about 40 percent over the basic FOB price of the merchandize stimulates the high contraband which still exists for many products. Colombia's manufacturing industry generates about a quarter of the gross national product. Its sectorial composition includes 41 percent non-durable consumer goods, 45 percent intermediate goods and 14 percent capital goods. As of December of 1993 there were more than 40,000 manufacturing companies registered with Colombia's Chambers of Commerce. There are a vast array of retail outlets ranging from large department stores, specialty shops, general merchandise stores, public markets, supermarkets, chain stores, state stores, and cooperatives to street vendors and truckers who engage in door-to-door peddling. Of the 150,000 firms registered in this sub-sector, the largest groups by number of enterprises are retail and wholesale establishments of food, beverage and tobacco (28.5 percent); restaurants, cafeterias and hotels (15.2 percent); textile and garments (10.6 percent); vehicles and accessories (5 percent) and; pharmaceutical, medicine, cosmetics and chemical products (4.7 percent). USE OF AGENTS/DISTRIBUTORS Foreign enterprises who wish to export only to the Colombian private sector are not required by the Colombian government to secure a local agent/representative and may deal directly with customers. However, as a general rule, is better to secure a local agent/representative to help with the import procedures and actual sales promotion and it is a requirement in international bids and when contracting with the government. Agent/representation and distribution agreements are regulated by the Colombian commercial code. The basic difference between an agent/representative and a distributor is that while the former is legally associated with the principal and may enter into legal agreements on the principal's behalf, the latter acts totally independent of the principal. A distributor purchases products from a foreign seller and then resells them at his own discretion, controlling his level of profits and style of marketing. In order to secure an agent/representative in Colombia, a required contract, as outlined in the Colombian Commerce Code, must be registered with the chamber of commerce where the agent/representative is located. These exporter-agent/representative agreements do not require governmental approval. In order to terminate an agency/representation agreement, either party must provide a written notice 90 days prior to the scheduled termination. Unless the agreement states otherwise, upon termination the agent- distributor is entitled to receive from the contracting firm a amount equal to one-twelfth of the average annual commission, royalty of profit earned by the agent during the past three years multiplied by the number of years the agreement has been in effect. In addition, the agent/representative may unilaterally terminate the agreement for cause and must be entitled to indemnification, which is decided by a board of public officials and non-governmental representatives. Article 1325 of the Colombian Commercial Code has a "for cause" concept as: 1. Lack of fulfillment by either party of its contractual obligations. 2. Any act of omission by either party which may have seriously affected the interest of the other party. 3. Bankruptcy or termination of activities of the company or agent/representative. FRANCHISING Commercial franchising is acquiring importance in Colombia as a marketing system. Some of the firms which are operating in this country through that system are: Nor Walk, Sir Speedy, Office Depot, Jeno's Pizza, Pizza Hut, Kentucky Fried Chicken, Domino's, Howard Johnson, World Trade Center, Yogen Fruits. A list of firm which are currently negotiating franchising agreements in Colombia includes names such as: Precision Tune, Speed Oil, and McDonalds. Meanwhile Colombian Companies such as Klipi (home decoration products), Telepizza (fast food), and Salsamentaria el Bohemio (frozen food and fast food) are attempting to establish franchises abroad. The terms of a franchising agreement may be freely negotiated by the interested parties but they have to be drafted under the legal framework established by the following legislation: a) Decision 291 (March 20, 1991) of the Cartagena Agreement (Andean Common Market - ANCOM) which established a Common Treatment of Foreign Capital, Trademarks, Patents, Licenses, and Royalties for the member countries of the ANCOM Agreement. b) Resolution 51 (October 22, 1991) of the Colombian Council for Economic and Social Policy (CONPES). This Resolution is known as the Colombian Foreign Investments Statute. c) Decision 334 (October 21, 1993) of the Cartagena Agreement which established a Common Legislation for Intellectual Property in the ANCOM countries. d) Decree 117 of January 14, 1994 which regulated the application of Decision 334 in Colombia. Once the franchising agreement is approved by the interested parties, it has to be registered with the Colombian Institute of Foreign Trade (Instituto Colombiano de Comercio Exterior). Legal advice is essential in all steps of a franchising negotiation. DIRECT MARKETING Some firms, mainly large companies with good maintenance departments and their own foreign trade department, import part of their equipment and raw materials directly and continue to do this if the supplier is capable of providing continuous after sales service and on-time deliveries. Business and tourism travelers account for a good proportion of the purchases in foreign countries. At the national level, direct marketing is becoming popular in Colombia. Many stores and distributors are starting to publish their catalogs and the general public may order items by phone or mail and charge them to their credits cards. International direct marketing, however, does not seem feasible. The number of Colombians with international credit cards is increasing and they are using this system to order small quantities of consumer goods. Colombian foreign trade regulations, however, do not allow this on regular basis. A few "informal" companies offer to deliver products that Colombians select from catalogs of well known chain stores or wholesalers in the United States. However, this procedure is illegal and is only another form of smuggling products into Colombia that some analysts believe is a process for washing money of doubtful origin. Direct marketing of imported products is being conducted through a few local companies that specialize in this field. Cable and satellite T.V. transmissions are being used to promote some items in many countries throughout the Americas. The delivery of the products in Colombia is, however, conducted through a legally established local company which imports the goods and handles the order originated in the local market. JOINT VENTURES\LICENSING Joint ventures and licensing agreements have been used in Colombia for many years as an important way for transferring technology. Many companies in Colombia started by importing equipment and materials. After a few years they began assembling part of the equipment and producing some components. The next step was to negotiate licenses that allowed many of these firms to produce the majority of the products locally and improve the quality throughout the years. Following economic and commercial integration and the opening of the economy to foreign competition, the tendency for Colombian companies will be to import some products of higher technology that these countries are not able to produce now and negotiate joint venture and licensing agreements for many others. To facilitate this trend, Colombia has modified its legislation to encourage and promote foreign investment and to improve the protection of property rights. STEPS TO ESTABLISH AN OFFICE There are basically three ways of organizing a business in Colombia: Local Corporation: It is very similar to a U.S. corporation. Share holders must not be less than five and they are liable for the corporation's debts up to the amount of their respective capital contributions. The company issues nominative share certificates which are negotiable. At least fifty percent of authorized capital must be subscribed, at least 33 per cent paid up, at the time of incorporation. Limited Liability Company: It is a limited company by two to 25 partnerships, who are liable up to the amount of their contributions. Capital must be fully paid in at the time of incorporation and must be divided into equal quotas or value units, assignable on terms specified in the by-laws and in legislation. Branch of a Foreign Corporation: It operates for most purposes under the rules applicable to Colombian corporations. Its liability is limited to assigned capital. It must be registered at a notary public in the place of domicile, notarized copies of its incorporation document, its bylaws, the resolution or act agreeing to the establishment of the branch and documents evidencing its existence and legal representation must be registered. The establishment of each one of these type of business has different steps that have to be followed. The establishment of a company in Colombia is legally intricate. The U.S. Embassy always advises U.S. firms planning to establish an office in Colombia to get legal advice from a lawyer and from an accounting office. A list of attorneys and accountants that can provide these services is available in the Commercial Section of the Embassy for interested firms. All companies and branches of Foreign Companies with offices in Colombia must register with the Mercantile Register, kept by the Chamber of Commerce in their principal place of domicile in Colombia, and must also register such acts, books and documents as the law requires. A knowledgeable lawyer is a necessity. The Colombian Foreign Trade Institute INCOMEX is the agency responsible for the authorization of import licenses, which must be obtained for every import transaction. Most licenses are granted without question, but some require GOC permission. The following general procedures have to be followed for setting up a branch of a foreign corporation. They are listed as an example of the complexity that establishing a firm in Colombia implies and reinforces the need for legal advice. For a foreign corporation to be registered in Colombia, prior authorization for the investment of foreign capital must be obtained (in certain cases) and the following documents must be made available: 1. Documents of incorporation and the bylaws of the foreign corporation. 2. Resolution of the board of directors of the home office to open a branch in Colombia, with details of capital assigned to the branch and the initial appointment of officers and statutory auditors. 3. Certificate from the chamber of commerce at the intended domicile of the branch to the effect that extracts of the documents mentioned under item one above have been registered. 4. Statement from the chamber of commerce that the official books have been registered and identified. 5. Certificate from the manager and the statutory auditor that the capital assigned to Colombian operations has been paid in according with legal requirements. The above documents may require authentication by the nearest Colombian consulate, the Ministry of Foreign Affairs, and the local Chambers of Commerce. If the documents are found to be in order, the Superintendency of Companies, the banking Superintendency or the Superintendency of Securities, as the case may be, will issue a permit to do business. SELLING FACTORS\TECHNIQUES The United States has been Colombia's main trading partner. Some analysts define Colombia as a "natural market" for U.S. products because: the dollar is the leading currency in this part of the world and its realignments vis-a-vis other currencies has made many U.S. products cheaper than those coming from other major competitors like Europe and Japan; the geographical proximity of the two countries; many Colombians go to study in the United States; the large number of U.S. firms that operate in Colombia; and the technical leadership that the United States has maintained in many key sectors which are important for a developing country, like Colombia. Considerations such as quality, profitability, function, financing, and price, are important in the buying decision. Significant, not only in the original buying decision but in maintenance of the sales relation, is the service arrangement for the product. This includes stock of spare parts and actual service assistance. In this regard, the U.S. suppliers must either have their own representative with necessary operations, or make sure that a Colombian representative is secured who can offer sufficient service arrangements. Sales in Colombia depend, to a large extent, upon personal relationships. In this regard, it is advisable to have local representation that can be successful in establishing the personal contact that tend to foster confidence in a firm's ability to supply the needed parts/components. The earliest possible involvement by U.S. firms in the country's future major infrastructure programs is of the utmost importance. U.S. manufacturers and engineering companies should immediately initiate contacts with government and private firms that most likely will be developing these projects. ADVERTISING AND TRADE PROMOTION The introduction of new consumer products to the Colombian market usually requires, and justifies, a massive promotion campaign. A media study conducted in 1993 revealed that an average Colombian family in the upper levels of the middle class and above has two or more T.V. sets. Such study confirmed that watching T.V. is the main entertainment of Colombians and that even most low income families living in urban centers have a T.V. set in their homes. Following are the results published in the same survey about the effectiveness of media in the Colombian families during any regular day: 82.0 percent of the people interviewed had watched T.V. 75.1 percent had listened to radio programs 37.2 had read newspapers 14.5 percent had read magazines Massive promotional campaigns in Colombia have been conducted through a combination of adds in all media. Lately, firms are using a very effective way of promoting consumer products, which consist of giving the consumer a ticket for each label or wrapping of a given product. These tickets give the purchaser the right to participate in attractive raffles. PRICING PRODUCTS FOB prices for imported products may increase from 60 up to 120 percent in the several steps of the sales network in Colombia. Local manufacturers may work with mark-ups varying from 15 to 35 percent, while wholesalers are in the 15-to-25 percent range, a supermarket or department store may request margins of 30-to-40 percent, which fluctuates if the product is supported by a good advertising campaign. If a product is not known in the market, the department stores/supermarkets may place it in the stores on a demonstration basis for a given period of time and will accept new orders if the product has a good acceptance among the public and sells relatively quickly. SALES SERVICE/CUSTOMER SUPPORT After-sales service and customer support is a decisive purchasing factor in Colombia. Government and private firms very often requests their potential suppliers to provide statements that show the satisfaction of other clients with the equipment and after sales services rendered. A common practice among Colombians is to ask their friends or relatives about their experience with a given product before deciding on a purchase. SELLING TO THE GOVERNMENT Government entities and government firms are subject to the norms established in Law 80 of October 31, 1993 that governs the purchase and contracts of official state enterprises and dependencies. This Law replaced Decree 222 of 1983. As a general rule, all individuals and legal entities that wish to execute contracts with State entities have to register at the Chamber of Commerce of their jurisdiction to be classified and rated in accordance with the provisions of Law 80. When foreign individuals not domiciled in Colombia or foreign private legal entities without a branch established in Colombia seek to present bids or execute contracts, they have to provide copy of their registration at the corresponding registry at the country in which their main office is located. They also must present documents that prove their existence and incumbency, when such is the case. In addition, they must appoint an agent or legal representative, domiciled in Colombia, duly empowered to bid and execute the contract as well as to represent them in or out of Court. Under Law 80, Colombian bidders have preferential consideration. Under equal conditions for contracting, the offer of goods and services of domestic origin will be preferred. When the foreign firms are under equal conditions, the one that will be preferred is that which incorporates the greater amount of domestic work-force, the greater national component, and the better conditions for transferring of technology. PROTECTING YOUR PRODUCT FROM IPR INFRINGEMENT All trademarks should be properly registered in Colombia and a local attorney for this procedure is strongly recommended. NEED FOR A LOCAL ATTORNEY Use of a local attorney is recommended for most business activities. A list of bilingual local law firms is available from the U.S. Embassy Bogota, Foreign Commercial Service.