Franchising: Starbucks (NASDAQ:SBUX) didn’t want to go there, but it finally did — in Europe. After struggling for many years across the pond, Starbucks announced recently that it is ready to expand a strategy it has long resisted. Franchising, or letting others run its cafes, has been a system avoided by Starbucks because it requires the world’s largest coffee chain to relinquish control of its brand and allow other companies to manage it in a handful of areas.
Starbucks still does not manage any franchise-owned stores in the U.S., but after being pressured by struggling sales, it opened its first in the British village of Liphook in February, and now has 45 franchise-owned stores in the UK. The Wall Street Journal reports that the chain plans to soon open its first outlet in France, and expand the strategy elsewhere in the region. Starbucks is continuing to struggle in Europe, even after launching loyalty programs and setting up shop in wealthy areas, possibly because it has been criticized by consumers and politicians in the UK for not paying corporate taxes on account of its business in Britain not being profitable.
The other problem with Starbucks’s European locations is that they only populate ritzy areas where the Seattle chain’s executives are familiar. These high-rent shopping areas in big cities aren’t reeling in the profits that Starbucks needs, and now it has no choice but to populate the more unfamiliar locations, and that’s where franchisees come in to play. Franchise operators will help Starbucks make inroads in more remote areas where executives have little familiarity, and that way, both parties win.
Kris Engskov, the head of the EMEA region for Starbucks, explains via the Journal that franchisees “have allowed us to go into many geographies that we hadn’t considered before. It’s given us a new opportunity in retail in the UK and we will continue to look across the continent to see if that makes sense for other countries.”
Franchised cafes still make up only a small portion of the nearly 2,000 cafes Starbucks runs in Europe, the Middle East, and Africa, and are only in the UK for now. But if the venture proves lucrative, the Seattle, Washington-based coffee house might have no choice but to continue expanding its efforts, and allow more franchisees to run its business from afar.
Despite Starbucks loosening its grip on its brand, however, the company maintains that it is not only increasing franchising, it is also increasing the education its franchisees receive to ensure the new operators manage the stores exactly the way Starbucks executives see fit. Starbucks has been known to aggressively guard its brand, and has been vocal about the risk of terminating agreements with franchisees prematurely who don’t live up to company standards.
According to the Journal, Starbucks only enters into a contract with partners after getting to known its prospective franchisees by taking their families to dinner and inviting some of them to its headquarters in Seattle to help teach them the company’s ways. The owner of the first franchised store in Liphook said the process to become a Starbucks franchisee involved attending a three-day workshop at the regional headquarters in Amsterdam, where he learned exactly how the company procures and roasts its coffee.
Thus far, Starbucks maintains that it will limit its number of franchise partners in the UK to fewer than 25, and those franchisees who sign 10-year contracts with the company will be expected to open 10 or more stores and must have experience in real-estate development or with operating branded retailers.