This article is written by Nihar Ranjan Das pursuing a Diploma program in Advanced Contract Drafting and Negotiation and Dispute Resolution from Lawsikho.
Before jumping into the topic, let’s understand the meaning and the use of a Franchise Agreement. A Franchise Agreement has come into existence only when a Parent company wants to operate its business through various individual branches in different cities/countries. The Parent company strictly imposes its standard and specification of its product/services with the third-party individual, which is also commonly known as the Business Model. The Parent Company (also called as Franchisor) through this franchise agreement with the third-party individual (called as Franchisee) shares his product/service specification including the available Intellectual properties (Trademark, copyright if any, etc.) and in exchange for the same collects the royalty from the Franchisee for the use of its brand name. Nowadays there are multiple companies operating and even prefer to enter into a new market through their franchise business model. Let’s discuss the franchise options available for the café business.
The Author’s aim to write this article is to showcase the details involved in the Café franchise business, especially the Starbucks café franchise business, and also the detailed terms and conditions involved in the Starbucks franchise agreement. As far as the café business is concerned, we have generally two options: create our own brand or take the franchise of an existing popular brand. If we are planning to start our own café brand, we need to be aware of the risk and rewards involved therein. Whereas, the franchise route is something straightforward and rewarding too. There are multiple café franchise options available in India and the cost will be in the range of a few lakhs and go up to few crores. So, we need to choose the most suitable café franchise as per our budget. Now it is not a surprise at all that people who have a good amount of money, prefer to take the franchise of a popular international café brand. We can take an example of the most popular, desirable, and expensive global café brand, which is the Starbucks franchise.
Starbucks is a very premium café brand of the world by having its headquarter in Seattle, Washington (USA). It was primarily started in the year of 1971 by Jerry Baldwin, Gordon Bowker, and Zev Siegal. However, at the beginning of 1980, they sold their brand to Howard Schultz. Since then, this brand got its recognition all across the USA and went worldwide in the last quarter of 1990. As per the company’s data, by the end of 2019, Starbucks has made its presence over 31,000 locations worldwide with a revenue of USD38 billion. As far as the Starbucks franchise is concerned, in the initial years, the expansion of Starbucks happened through the franchise process only. But, after the ownership transferred to Howard Schultz, Starbucks stopped providing franchises and started expanding through the licensing route only.
But why Starbucks doesn’t provide franchises for its stores?
For any brand, franchising is always a preferred model of expansion to grow in the market, especially in the food and beverage industries. There are very popular international brands available in the market which are operating their businesses through franchise stores, which helps the companies to get a prime location with a very minimum investment. Also, they don’t have to invest their time, money, and resources to manage the stores, as it is done by the franchisee. If we will take an example, KFC, McDonald’s, Burger King, Domino’s, Pizza Hut, and many other international brands are operating their businesses through franchising routes only.
Then, the question arises, if these popular companies are operating through the franchise model, why not Starbucks. Howard Schultz, in his book “Pour your heart into It” answered this question, in which he mentioned that:
A Franchise is a middleman, who would stand between them and their customer. If he had opted for the franchise model, Starbucks would have lost the common culture, which made it strong.
It is however true that most of the food and beverage companies while franchising, leave the entire store with the franchisees including the product quality and delivery, and customer interaction. But Howard Schultz’s intention was to exactly avoid these things while expanding his business in other territories.
Then what is the Starbucks Expansion Model?
Most of the companies generally prefer to use company-owned stores or franchise-owned stores for the expansion of their brand in the market. But Starbucks instead of going with these options prefers the other route of expansion, which is by way of licensing. Starbucks (Licensor) by way of Licensing Agreement, provides the license to the desired person (Licensee) who is interested to invest in Starbucks. As a Licensor, Starbucks manages the overall product and customer experience, which is its main focus. Whereas, the Licensee manages the all-other aspects of the business. This licensing model in the franchising term is very much similar to the Franchise Owned and Company Operated (FOCO) model. The advantages of such a model are, food quality always remains with the Licensor and the customer experience shall be taken care of by the franchisor or Licensor. But Starbucks no franchise police has some exceptions in the US. Starbucks in the US airports lounge, hospitals, department stores, colleges, and universities are mostly franchise stores. In America itself, almost 40% of Starbucks stores are operating on a franchise model. The other exception is Starbucks entering a few countries through a partnership or joint venture with local business companies.
How to get a Starbucks Franchise in India?
As we have already discussed, Starbucks doesn’t provide a franchise to open its store in any country. But for India, Starbucks doesn’t even provide the licensing model to operate its store. TATA Starbucks Private Ltd. Owns all the stores available in India. They have even planned to continue this model in the future also. So, anyone who is interested in opening a Starbucks store will have to wait till they change their business model to licensing route. Starbucks entered the Indian market in the year of 2012 with a joint venture with TATA Global Beverages (a company of TATA group). This joint venture is then called TATA Starbucks Private Ltd. As of now, Mumbai has the maximum number of Starbucks stores in India, and overall, more. Starbucks entered the Indian market in the year of 2012 with a joint venture with TATA Global Beverages (a company of TATA group). This joint venture is then called TATA Starbucks Private Ltd. As of now, Mumbai has the maximum number of Starbucks stores in India and overall, more than 200 stores across 15 cities of India.
So, how to associate with Starbucks?
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 of the city to open the store. If someone owns a property measuring an area of more than 2500 Square feet, 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 the report published by Kotak Institutional Equities, 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. As per the report published by Tata Starbucks Private Ltd., the rental expenses have now been increased to 35%.
How does a Starbucks license work?
Starbucks US provides the Franchise Application Form for, who are interested to associate with the company. This form shall include 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.
Starbucks is one of America’s great success stories. The company also successfully managed to achieve this growth rate through a dedicated focus and belief towards licensing routes. Yet one of the ways that Starbucks has distinguished itself from its competitors has been by avoiding franchising, unlike other popular companies. As we have discussed in detail regarding their approach towards the franchise and licensing model in different countries. But in India, they don’t even provide the licensing route to start this international premium café brand in your town. There is also no such form to apply for the Starbucks franchise in India. The only way to reach them out is by contacting them as per the details mentioned on their website. Also, one can send them an email by mentioning your interest and the location of your owned property. If they found it useful, then they may contact you.
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