STARBUCKS: SELLING COFFEE THROUGH FRANCHISE BUSINESS?

Entrepreneurs, these days often look for opportunities which yield profits in a short span of time and do not require them to work from starch, i.e., from formulating an idea to placing the finished product in the market and everything in between, then what better than a franchise. Right? But before getting into the technicalities of a franchise, it is important to understand what it actually denotes. “A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.”

Business Sep 11, 2021 0 Add to Reading List

STARBUCKS: SELLING COFFEE THROUGH FRANCHISE BUSINESS?

Introduction

Entrepreneurs, these days often look for opportunities which yield profits in a short span of time and do not require them to work from starch, i.e., from formulating an idea to placing the finished product in the market and everything in between, then what better than a franchise. Right? But before getting into the technicalities of a franchise, it is important to understand what it actually denotes. “A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.”

What is a Franchise Agreement?

A Franchise Agreement is an agreement wherein “the Parent company wants to operate its business through various individual branches in different cities or countries.” The Parent company imposes its business model, i.e., its standard and specification of its product/services with the third-party individual. The Parent Company i.e., the franchisor through this franchise agreement with the third-party individual i.e., the franchisee, shares his product/service specification including the available intellectual assets including trademarks, copyrights, patents, etc and in exchange collects a fixed amount in the form of royalty from the franchisee for the use of its brand name.

Starbuck’s Franchise Model

Headquartered in Seattle, Washington, Starbucks Corporation is an American multinational chain of coffeehouses and roastery reserves. As the world's largest coffeehouse chain, Starbucks is seen to be the major representation of the United States' second wave of coffee culture. As of September 2020, the company had 32,660 stores in 83 countries, including 16,637 company operated stores and 16,023 licensed stores. The company got its name from the classic book- Moby Dick. Its original name was going to be either Cargo House or Pequod after Captain Ahab’s ship in Moby Dick. But when the brand consultant, who also designed the chain’s logo, produced an old 1800’s map, the name of a mining town, Starbos, which features in the book, stood out which led the brand consultant to think of the first mate on the Pequod - Starbuck.

Contrary to the popular belief, Starbucks does not engage in the franchise business. Every single Starbucks in the world is owned, operated, managed, and barista’d by the Starbucks corporation and the company had legitimate reasons for keeping the business within the family. It is very particular about its corporate identity and it honours its values in every location they have by giving their customers the full ‘Starbucks’ experience. Beyond its innovative frappes and lattes, it’s this completely personalized customer service that has made Starbucks what it is today.

Consistent Company Culture: Starbucks wants to maintain a consistent company culture across all its stores and thus does not believe in the concept of franchising. It became well-known for catering to every coffee-related issue the customer might have. Even with international partners, Starbucks retains the majority share just so they can be hands-on with every single customer relations issue that might pop up in that country. The company has focused on retaining their values and keeping consistent rather than just expanding as much as possible.

Instead, Starbucks prefers licensing stores. Yes, that’s right. Since licensing is more efficient, the company often licenses its stores. In the food-and-beverage industry, the higher the Earnings before Income Tax, Depreciation, and Amortization, the better the profits will be. Starbucks has done the same thing by rejecting the franchise model and adopting the licensing model.

By retaining corporate control, Starbucks is able to keep operations lean and efficient, thereby maximizing gross profit and minimizing waste purchases. Because all Starbucks locations follow the same exact rules, regulations, and best practices, the corporation is able to monitor closely how much money is coming out and can expect a regular amount of money coming in.

In general, franchises generate most of their revenue from the royalties and franchising fees that they receive from their franchisees: the more franchisees a company has, the more income it can make. However, Starbucks doesn’t franchise, and yet it generates more revenue than most of its competitors. A key factor in Starbuck’s profitability is the price of the raw materials of its products. Starbuck’s overall profit margins are greatly affected by fluctuations in raw coffee bean prices, not to mention the cost of acquiring and managing human resources. This of course is risky, because if prices for raw materials go up, Starbucks’ cost go up, and their Earnings before Income Tax, Depreciation, and Amortization goes down. Which is why Starbucks prefers to keep its entire supply chain ethically sourced, meaning, ethically sourced coffee is slightly more expensive, but the prices remain more stable. When talking about India in particular, Starbucks doesn’t even provide the licensing model to operate its stores. TATA Starbucks Private Ltd. owns all the stores located in India. Therefore, if one wants to open a Starbucks store in India, they will have to wait.

Starbucks ventured into the Indian market in the year 2012, in a joint venture agreement with TATA Global Beverages. There are more than 200 stores across 15 cities in India.

As TATA Starbucks Private Ltd., doesn’t allow the Starbucks franchise or License model to operate the store, still, there is a way to associate with Starbucks and that is by giving the property on rent at a prime location in the city to open the store. For instance, “one owns a property measuring an area of more than 3,000 sq. ft., they can directly contact the company and allow them to open a store by providing a long-term lease. If the company has any plan to start their business in that city and they find that the location will be more suitable for them, they will contact the property owner for the deal. As per reports, a single Starbucks store individually makes a profit of over Rs. 93,000/- per day, so the monthly earnings shall be around 30 lakhs. But, at the same time, the Starbucks store paid almost Rs. 6 Lakhs as rent and the value of the rent is going up regularly. According to reports published by Tata Starbucks Private Ltd., the rental expenses have now been increased to 35%.”

But even if we talk about licensing, how does it work?

Starbucks US provides the Franchise Application Form for, who are interested to associate with the company. This form includes all the personal and business information of the licensee for granting the license. It will also ask you to mention the financial statement for the last full financial year including the salary amount, commission, interests/dividends, and any other income during that period. It will also ask to fill in the complete details of Assets and liabilities and how much capital he has to invest in the business (the minimum amount required by the company is £500k of liquid assets). You will also need to specify what variety of Starbucks products you are going to offer.

Once you have filled in all the details of the Application form and applied it, they will let you know the status of the Application after verifying all the details. If they select you to become a licensed store owner, you will be provided with support for many aspects as per the company’s criteria. They will help you in the business operation, including the design of the store, staff training and the installation of all equipment. But you need to have sufficient funds available to make the business a success. Starbucks expects the Licensee shall have a certain amount of funding available and the estimated fund as earlier mentioned at least $700,000 in liquid assets. So, the Licensee must have a great location with the combination of mentioned liquid assets to open a Starbucks licensed store.

The company has efficaciously managed to accomplish its goals and objectives through dedication, application and belief towards licensing. Starbucks has been successful in distinguishing itself from its competitors by avoiding franchising, unlike other well-known companies.

SALONI SANCHETI

References