Food Franchise Industry Reports:
Coffee has become part of the routine of life for many. Facts and figures from an infographic published by National Geographic in early 2012 show1:
- Over 80 percent of Americans drink coffee with 52 percent drinking coffee every morning
- Coffee drinkers that get a cup to go will wait in line for nearly 45 hours each year
- The average drinker will spend an estimated $165 per year on coffee
Outside of water, there is no more popular beverage than coffee in the United States—and coffee consumption is on the rise. According to the 2012 National Coffee Drinking Trends study published by the National Coffee Association of USA, among respondents aged 18-24, daily consumption of coffee went up from 40% in the previous year to 50%; and for those aged 25-39, the increase was from 54% to 63%.2
Many coffee franchises have several sources of revenue in addition to coffee. These sources include beverages such as tea, espresso drinks, blended beverages (e.g. smoothies), bottled drinks, juices and soft drinks. Food items carried by many coffee franchises include pastries, baked goods and sandwiches. Some franchises also sell whole or ground coffee beans for home consumption. There is considerable overlap between coffee franchises and other franchise industries, most notably bakery franchises.
The general coffee industry is well developed and very competitive. A coffee franchisee will face competition not only from other coffee franchises, but also independent coffeehouses, non-franchised chains, gas stations, quick service restaurants, convenience stores, and more. Franchises in the coffee industry allow franchisees to take advantage of a recognized name and an efficient, tested system.
Starbucks: Is it a franchise?
Starbucks began in the early 1970s when it was a single store in Seattle’s historic Pike Place Market run by Jerry Baldwin, Zev Siegl and Gordon Bowker. The breakthrough in expanding Starbucks coffee into a world phenomenon began with Howard Schultz, who joined the company as director of retail operations and marketing in 1982.
His relentless desire to grow the Starbucks business concept afforded Schultz the means to purchase Starbucks from its original owners in 1987. Since then, Schultz has created a multi-billion dollar business that is regarded by many as the greatest business success since the emergence of Walmart Inc. Stores in 1962.
Starbucks is not a coffee franchise. It has multiplied its network through unique business partnership alliances from its earliest beginnings. Starbucks Corporation does however maintain a franchise under its umbrella called Seattle’s Best Coffee, which was acquired in 2003.
Although Starbucks may not be a coffee franchise, its underlying principles lend themselves very well to the principles of franchising. Potential franchisors and franchisees may be inspired by small seedling beginnings growing into large fruitful networks. Great products, effective marketing and PR, along with hard work and the desire to succeed make this possible.
EDITOR NOTE: This report was published in October 2012. In November 2013, the Wall Street Journal reported that Starbucks was ending its long-standing resistance to franchising. Currently, Starbucks' franchising efforts are concentrated to Europe. As of the end of November 2013, Starbucks has 45 franchise-owned locations in the United Kingdom with plans to open one in France in the near future.
Growing Acceptance of Coffee
In recent years, a substantial amount of research has been performed surrounding the effects of coffee on the body and some studies highlight not just the physical benefits but also the mental benefits of drinking coffee. Although studies are ongoing, researchers at Harvard Medical School revealed findings that coffee drinking is associated with:
- A lower risk of depression among women
- A lower risk of lethal prostate cancer among men
- A lower risk of stroke among both women and men
Study findings suggest even more potential health benefits such as:
- A small decrease in heart attack risk with moderate consumption
- A moderate decrease in Parkinson’s disease risk
- A small degree of protection from the plaque that is linked to Alzheimer’s disease
For now, researchers are confident that a daily (or twice or thrice daily) cup of coffee is not posing any health risks to long-term well-being.3
Increased Competition from QSRs
As mentioned above the coffee industry is already very competitive for franchisees, and the competition is only increasing due to recent changes made by some quick service restaurants (QSRs).
McDonald’s recently filed paperwork for its brand to cover the sale of ground and whole-bean coffee. The significance of this trademark registration filing means that McDonald’s may move beyond selling pre-made coffee to also adding coffee retailing to its business—a move that would put the fast food chain in further competition with coffee franchises such as Dunkin’ Donuts and Tim Hortons, among others.
According to a report in the Wall Street Journal, one key reason for McDonald’s to consider the move is the strong brand loyalty for its coffee versus that of main competitors Starbucks or Dunkin’ Donuts. Though 53% of Starbucks and Dunkin’ Donuts coffee drinkers admitted to using another coffee provider on occasion, just 29% of McDonald’s coffee drinkers admitted to occasionally visiting either Starbucks or Dunkin’ Donuts.4
Since entering the coffee business in 2006, coffee sales have grown to represent more than six percent of McDonald’s overall U.S. sales, which equates to over $2 billion. Industry blog Burger Business estimates that if McDonald's begins to package coffee, the potential rise in average unit sales would be roughly four percent.5
Other QSRs that have moved into the coffee business include Burger King, Taco Bell and Subway, which have partnership deals with Starbucks Corporation’s Seattle Best Coffee.
Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all of the provisions and fees related to investing in a specific franchise.
When many prospective franchisees first consider opening a franchise, their main concern is the financial aspect. A brief look at a couple of main financial considerations is below. However, please keep in mind there are several factors that must be considered thoroughly before beginning the franchise opening process in addition to finances.
|FDD Profiles for Sample Coffee Franchises
Bad Ass Coffee Company of Hawaii
Dunn Brothers Coffee
Great Lakes Chocolate & Coffee Company
Seattle's Best Coffee
The range of investment between franchises can be large due to variations in business systems and execution requirements. The following charts demonstrate this by comparing initial costs associated with opening one of the 10 sample franchises presented.
Initial costs associated with opening a franchise include the franchise fee, training expenses (such as travel and living expenses, not the actual training courses), grand opening marketing costs, and more. One major variable in the initial investment into a franchise is the cost of real estate. Some franchisors may not include land or real estate costs in estimates because of the price variation between locations and whether their franchise system requires a new rather than leased building.
Estimated Initial Investment Ranges for Sample Coffee Franchises
A significant item within the initial investment is the franchise fee. This part of the overall initial investment grants the franchisee the right to use the franchisor’s trademarks, service marks and other branding. It also gives the franchisee access to the franchisor’s business system, including training opportunities. Coffee franchise fees can vary depending on the type of location a franchisee chooses to open.
The length of the initial franchise agreement term for the 10 franchises samples range up to 20 years with 10 years being most common. Franchise term length is dependent upon not only the franchise system, but whether a franchisee is seeking a traditional or non-traditional location. Some franchise term lengths also are dependent on the franchisee’s lease terms.
Throughout the length of the agreement there will be costs for being a part of the franchisor’s business system. These costs include items such as royalty fees, charges for technical support and marketing costs. The most common is the royalty fee and below is a look at royalty rates for each of the sample franchises.
Royalties for Sample Coffee Franchises
In addition to the regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. All prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs involved before investing.
2 NCA Study Finds Daily Coffee Consumption Outpacing Soft Drinks, http://www.vendingtimes.com/ME2/dirmod.asp?nm=Vending+Features&type=Publishing&mod=Publications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=A592A2D025C3453A9BC8ECD7E511372B