The Coffee Franchise Industry
Not so long ago coffee consumption faced scrutiny based on suspicions that its use could result in negative health effects. These suspicions set forth research efforts to better understand the effects of regular coffee consumption.
The American Medical Association now states that moderate coffee drinking has no negative effect on health for otherwise healthy individuals, with moderate consumption stated as three eight-ounce cups of coffee. Thus as the stigma once present with coffee drinking fades, an increased opportunity for coffee franchises exists alongside the general increase in coffee consumption and demand.
Coffee is extremely popular in the United States with an ongoing increase in popularity, perhaps because of encouraging research results. According to the National Coffee Association’s National Coffee Drinking Trends 2013 study, coffee consumption has risen five percent in 2012, with 83 percent of Americans drinking coffee and 63 percent of respondents doing so daily.
The coffee industry is well developed and continues to be extremely competitive for business operators. Leading coffee franchises include Coffee Beanery, Tim Hortons, Dunkin’ Donuts, Maui Wowi, and Seattle’s Best Coffee. Coffee franchisees face competition not only from other coffee franchises, but also independent coffeehouses, non-franchised chains, gas stations, fast food restaurants, convenience stores, and more. Franchises in the coffee industry allow franchise partners to take advantage of a recognized name and an efficient, tested system.
Many coffee franchises have several sources of revenue beyond coffee. These sources include beverages such as tea, smoothies, bottled drinks and soft drinks. Food items carried by many coffee franchises include pastries, baked goods and sandwiches. There is considerable overlap between coffee franchises and other franchise industries, most notably bakery franchises.
Creating a Culture
Due to the competitive nature of the coffee franchise industry, it is important for franchises to develop an identity to keep customers coming back—while also establishing a winning concept for potential franchise operator investment. Several examples of how franchises create their own coffee culture beyond simply serving their best cup of java:
- For Maui Wowi, coffee culture is native to its roots in Hawaii. As the franchise’s website states, it’s all about the “Aloha Spirit.” Customers are welcome to enroll in the company’s loyalty program called “Surf Club”. Membership in the club means coupons, discounts, custom apparel and other benefits. Prospective franchisees are offered the opportunity to “Live a Flip-Flop Lifestyle with Island Attitude.”
- The Biggby Coffee culture revolves around fun. When you arrive on the home page of their website you are immediately greeted by bright colors, random trivia questions, and a prompt to choose your “flava.” Prospective franchisees are offered a “unique culture” opportunity where marketing creativity is encouraged. As its franchising materials say, “no idea is too crazy or out-of-the-box.”
- Bold—the culture cue for Dunn Brothers Coffee. The company motto is “The Bold Standard” and it permeates every aspect of the franchise message, including product quality, sustainability goals, and community efforts. Prospective franchisees are offered a straightforward and detailed look at their role in the company.
- Coffee Beanery takes a slightly more buttoned up approach to its coffee culture with a focus on product quality. The franchise’s motto is “Coffee People Who Care” and details of the coffee production process are detailed in its online footprint.
Where is the Next Big Market for Coffee Franchisors to Cultivate?
Franchisors are always looking for where their product or service could possibly be welcomed. For coffee franchisors, a look to the Far East reveals that a land known for tea is warming up to coffee. According to Jing Daily, coffee consumption in China is growing at an estimated 30-40 percent annually. That percentage is well over the global average of two to three percent.
The fact that coffee consumption in China is able to grow by leaps and bounds isn’t a surprise when you look at population figures. For instance, it was estimated in October 2012 that the number of coffee drinkers in China is similar to Portugal. Portugal has well over 1.3 billion fewer residents than China. Certainly, China still has a ways to go to catch the coffee drinking level of other countries, but not only those in the west. Chinese coffee consumption also lags far behind close neighbor Japan—four cups per year per capita in China vs. 400 cups per year per capita in Japan.
Based on these statistics, the potential for coffee industry growth in China—both franchised and non-franchised—is obvious. Coffee will probably never usurp tea in popularity in China, but the sheer number of people residing in China makes it a potentially lucrative place for coffee franchise expansion. Plus, there is room for tea and coffee to co-exist in the marketplace. “Contrary to what you might expect, the biggest instant coffee cultures in the world are all tea cultures,” says Roland Decorvet, head of Nestlé China.
As the experiences of other Western franchise brands have shown, entering the Chinese market is challenging but can be done. The key to success is adapting to local consumer preferences, such as not relying on take-out orders, which are the prevalent mode of service in the U.S., and instead developing a strategy that revolves around dine in service.
The coffee market in China does bear at least one large similarity to America. As in the U.S., the fragmentation of the coffee industry is on display in the world’s most populous nation. Along with local, independent coffee shops, Starbucks leads the way for coffee chains originating in the U.S and McDonald's and Dunkin’ Donuts lead the way for franchises. There is also competition from chains based in other countries such as Great Britain, South Korea and Hong Kong.
Commonly Asked Question: Can I buy a Starbucks franchise?
Unfortunately, the answer is not yet. Starbucks is not a coffee franchise. It has expanded through unique business partnership alliances from its earliest beginnings, though Starbucks Corporation does maintain a franchise under its umbrella called Seattle’s Best Coffee, which was acquired in 2003.
Just because Starbucks isn’t a coffee franchise doesn’t mean that Starbucks can’t be used as a framework for a successful franchise. Potential franchisors and franchisees may be inspired by seeing a small company grow into a large, successful network. Great products, effective marketing and PR, along with hard work and the desire to succeed make this possible. Additionally, there are many great coffee franchises available such as the ones featured below.
EDITOR NOTE: This report was published in August 2013. 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.
Coffee Franchising Information
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 concerns are finances. The investment can be separated into two parts, both summarized below: initial investment and ongoing fees. Keep in mind that there are several factors to consider before investing in a franchise, such as the location and market saturation of your area.
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
|FDD Profiles for Sample Coffee Franchises
Bad Ass Coffee Company of Hawaii
Dunn Brothers Coffee
Great Lakes Chocolate & Coffee Company
Seattle's Best Coffee
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 franchise 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 are also dependent on the franchisee’s lease terms.
Throughout the length of the franchise agreement there are 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.
In addition to regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. Prior to investing, prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs.