Food Franchise

Posts Tagged ‘Starbucks’

Starbucks opened its first shop in 1971, with a total investment of $20,000 (approximately the price of a nice house), and today it is a multi million dollar company.  So, should you start your own coffee shop franchise operation?

 

Well, before I answer that, let me ask you a question.  When you spend a day shopping, whether it be willingly with your best friend, or reluctantly, being dragged around the shops by your partner, where do you always spend at least half an hour of your time and at least 10 dollars of your hard earned cash?

 

I’m willing to bet it’s in a coffee shop.

 

In times of recession, when the designer shops are empty and people switch to the cheapest supermarkets around, you will find the nearest coffee shop full of paying customers on any day of the week.

 

So it is no wonder that coffee shops are one of the few retail sectors in the UK to have grown consistently in excess of 15% year on year, over the last 8 years.  And forecasts show that the number of branded coffee shops will double over the next decade, according to market research by the Allegra Consultancy company.

 

Therefore budding coffee shop entrepreneurs may wish to consider expanding from a single coffee shop into a fully franchised operation.  Here are 7 simple tips to point you in the right direction:

 

1.       Once you have opened your first coffee shop and have traded profitably over a sustained period, you will have a successful blue print to open more shops.  You will be able to bring all the personal touches that have attracted your customers to a second shop and third shop.  With your third shop you will know exactly what works and be in a position to pass that knowledge on to others.

 

2.      With this third shop you are approaching the point when you should start planning your own franchise operation.  This would allow you to expand much more quickly and your company would be run by management who are under your direction, abiding by strict guidelines that you have set down.

 

Take advantage of all the knowledge you have gained to focus on this third shop as setting the parameters for your future franchised shops.

 

3.      Switching from one shop to a franchise operation means you will need to widen your knowledge base consult experts in their various fields.  You will need the help of more specialised professionals and you may have to change your bankers, accountants, estate agents and suppliers in order to move your business on.  You will have to look at your business on a national rather than local basis.

 

4.      Contact various franchise companies, not solely those involved in the coffee shop business, and request their information packs.  The principles of franchising are similar whatever the product, and you can learn from this information how to put your own franchise package together and ensure that you protect yourself with legally watertight contracts. 

 

5.      With a proven track record of running successful shops, you are more likely to be offered better sites by landlords looking to lease their commercial properties.

 

A landlord will always prefer to lease property to a business which is already successful rather than to a new franchisee, so you would have to take on the lease and sub-let to your franchisee.  Therefore you should ensure that the right to sub-let is always written into any lease you sign.

 

6.      When your business can afford it, consider hiring a consultant to liaise with all the affiliate bodies, including bankers and estate agents, on behalf of your franchise company and the franchisees. 

 

Whilst your franchise operation is quite new, you would need to take on the role of property consultant yourself, until you can afford to employ a specialist.  Although this adds to your workload, it can be a benefit as you will then know every detail of your business and this will help you to judge whether any full time consultant you eventually hire is of the standard and quality you require.

 

7.      Once you have a number of franchises up and running you may wish to consider offering territories to the best operators.

 

 

 

 

So you are starting a coffee shop and working on your coffee shop business plan. You are thinking: ‘maybe buying a coffee shop franchise would work better because I am not sure how to go about this coffee shop start up.’ Or maybe you are thinking ‘I can get operational support after I open that I would not have without the franchise.’ Or, “if I buy a nationally known franchise, will that make potential customers more comfortable about coming into my store because they recognize my company name?” All are very good thoughts.

Franchises can give you an edge because they have some name recognition and support but think it through before getting the sales pitch and going the franchise route. Of course, make your own decision but as a franchisee, you are pretty much land-locked into the franchisor’s way of operating.

You are looking for name recognition and branding. In the coffee industry, franchising is still in its infancy. I say this because there aren’t many specialty coffee franchises even though there is plenty of interest in the concept. Well, at least not as many as there are food franchises but surely not many recognizable ones at that. Most coffee franchises are regional but you may recognize names like Seeker’s, PJ’s, Beaner’s, It’s A Grind Unwind, Arabica, Cuppy’s and Scooter’s. Contrary to popular belief, Starbucks is not a franchise.

Name recognition will not tremendously help a franchisee succeed however, with such limited recognizable names, but that can be debated and best left for another day! What you most likely have here is the potential to succeed more so from an operational and experience standpoint. Hopefully your prospective franchisor’s management has a lot of practical experience to assist you.

You will usually get better pricing on supply products because of the franchisor’s buying volume. You also will normally get better pricing on equipment because of the franchisor’s volume and usage of such.

The commitment of the franchisor’s support in planning stages like site selection, lease negotiation and build out is a plus to franchisees. Also, the ongoing support in marketing and operations after you open. Of course, this is usually not free! (see below)

As a franchisee, you will most likely be mandated to use proprietary supplies and ingredients, coffee, equipment, etc. You have less leeway for freedom to use products that you want to use, and maybe even something you feel is better tasting. If your franchisor uses bad or cheap coffee, you are not going to do well in the long run. I know of three franchises that have absolutely awful tasting coffee, of course names withheld! This is not a good thing though.

You will also have an upfront franchise fee, sometimes as high as $100,000 before you actually start anything. This is just to use the name! You will also have ongoing royalties that have to be paid monthly, usually 3-7% of your GROSS sales. Suppose you do $30,000 per month; that is $900-2100 per month just to use someone else’s name! That is a lot of YOUR salary! Before when I said that ongoing support is not free, this is what I meant.

Also, the franchise agreement is usually for a set period of time, like from 5-10 years. When it is over, it is usually renewable or you can go your own way but you normally have to drop the use of their name so now you would have to start marketing your name change.

You also will most likely have ongoing marketing fees of about 3-7% per month. That is taken from your monthly GROSS as well! That is a lot more of YOUR salary! Though this is comforting to know someone has your back for marketing, marketing is not this expensive for a specialty coffee retailer. In fact, if you are spending 3-7% or your gross sales per month for marketing you are spending too much! But that’s a whole other article.

After you add up all the ongoing fees every month, that is somewhere between $1800-4200. EVERY MONTH just to use someone else’s name! Your volume has to be very high to support this. Can you achieve it without using someone else’s name? With the right location you bet you can!

Another thing to consider is the fairly high personal net worth that is usually needed of all owners. Again, this is not something that is a bad thing to have when going into business. However, the franchisor usually looks for a personal net worth in the neighborhood of $100,000-500,000, with anywhere between $50,000 -300,000 of that to be liquid assets, depending on the franchisor.

Those are high numbers to achieve for the average new entrepreneur. However, just because you have money or a high ‘paper’ net worth does not mean you know how to or have what it takes to run a business. You definitely need passion, commitment and will.

Quite honestly, I do not know of one specialty coffee franchise that I can justify making the initial investment in for the name and branding that you’d be paying for. In other words, if you were looking for a food franchise you are virtually guaranteed success with McDonald’s or Subway provided you follow the franchisor’s lead because of the name and image. That I would recommend. But it IS the name and the company’s image you are essentially paying a lot of money for so keep that in mind.

One last thing to be sure of is your right and ability to sell or close your business for whatever reason. It is actually a multi faceted question: Can you sell your remaining time on the franchise? Can you break your agreement at all? If so, is there a penalty and how much is it? Does the buyer have to buy the franchise? Does selling or closing nullify your agreement? You will need answers to all of these questions before you sign anything and write out any checks!

So if you can stomach the large outlay of cash and justify the ongoing fees for buying a franchise maybe that method will work for you. There is nothing wrong with that. However if you take the time to network, do great research on this industry, learn how to run a business and craft an awesome coffee shop business plan you will be on the road to success as an independent specialty coffee shop, on your own for a lot less money and may be better off for it. Whatever you choose to do, good luck to you!