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Coffee Franchise Industry Research - Business Report I

Coffee Franchise Report-1


This study gives a brief review of the U.S. coffee franchise industry based on data from Franchise Disclosure Documents (FDD), formerly known as UFOCs, of a representative sample of 28 coffee franchises and from published industry sources.

General Overview of Coffee Industry:

Industry Size

The coffee industry includes 20,000 stores with combined revenue of $11 billion. Approximately 20 million people work in the coffee industry worldwide. The coffee industry is very concentrated at the top and fragmented at the bottom with the top 50 companies taking up to 70% of the sales. Starbucks lead the way with over 16,680 stores worldwide; and Caribou Coffee a distant second, with nearly 500 corporate owned stores and over 100 franchised outlets.

Coffee Franchise Report-1Competition

The general coffee industry is well developed and very competitive. A coffee store operator will face competition not only from other coffee shops but also gas stations, quick service and fast food restaurants, convenience stores, donut shops and gourmet food stores. Franchises in the coffee shop industry allow the franchisee to take advantage of a recognized name, a tried and tested system and benefit from the efficiencies of the franchisor.

Coffee Consumption

Even in the recent economic climates, the coffee industry has proved to be very resilient. This is seen in the National Coffee Association of U.S.A.’s 2009 National Coffee Drinking Trends market-research survey. While many business are noting a downturn in consumers, daily consumption of coffee beverages among consumers remained consistent in 2009 with 54% of the overall American adult population partaking. This information tells us that even through difficult economic times; people of all ages are still consuming coffee.

Data from the Coffee Research Organization and the National Small Business Development Support Center Clearinghouse show that coffee is the most popular beverage in the world, with more than 400 billion cups consumed per year. Americans alone, consume 400 million cups of coffee per day making the United States the leading consumer of coffee in the world. That is translated into four and a half thousand cups of coffee per second.
Below is a graph for the consumption of coffee in America for the years 2006, 2007 and 2008:

 Coffee Franchise Report-1

Age ‘06 ‘07 ‘08
18 – 24    31% 37% 26%
25 – 39 47% 44% 47%
40 – 59    59% 61% 61%
60 + 73% 74% 71%

Production and Industry

Coffee is one of the world's more important primary commodities. The coffee producing belt includes approximately 70 countries worldwide and employs approximately 20 million people. Information from the United States Department of Agriculture shows us that the world coffee production in 2008/2009 is forecast at a record 138.4 million bags or 132.276 pounds.

The Brasil Coffee House, for example, imports only select naturally processed green coffee exclusively from growers in the Cerrado and South Minas region of Brasil. The Brasil Coffee House franchises the option of owning and operating one of these unique plantation style coffee stores.

Popularity of Fair-Trade and Organic

Current buzz words in the coffee industry are ‘organic’, ‘shade grown’, ‘sustainable and fair-trade certified’. More and more Americans care about the conditions of the people who produce the products that they buy and the dangers to the environment. According to the Organic Trade association, the organic coffee market is now a billion dollar industry.

Coffee Franchise Report-1To accommodate this trend, more coffee franchises have licensing agreements with Transfair to offer Fair Trade Certified coffee. Kelly’s Coffee and Fudge Factory Franchises offer a range of organic and fair-trade coffees and specialty espresso based drinks. Seattle's Best Coffee offers a premium assortment of Fair Trade Certified and certified organic coffees. They support Fair Trade, organic and responsible practices. Dazbog Coffee Franchising LLC also offers a line Certified Organic Dazbog Coffee. Dazbog Coffee Franchising LLC is ranked at 256 in the top 500 franchises for 2008 in the USA by entrepreneur magazine. That is up from a ranking of 349 for the year before.  

“Twenty years ago I never would have thought the industry would get this big” says Rick Kowalski, vice president of operations for “It’s a Grind Coffee House” (IAG Coffee Franchise, LLC). “The direction we’re going in now is [toward] more organic coffees as well as coffees where we develop a direct relationship with the growers. We get involved with their ability to improve their quality of life. We’re helping them develop clean water sources. That obviously helps everybody and the environment included”

IAG Coffee Franchise, LLC was recently ranked in the top 500 franchises in the USA by Entrepreneur magazine for 2008. They offer franchises for the low initial investment fee of $25,000 - $36,000.

Starbucks, the world’s biggest chain of coffee stores, is one of the largest buyers of Fair Trade Certified coffee.  In 2009, they plan to double their purchases of Fair Trade Certified coffee to 40 million pounds, making the company the largest purchaser of Fair Trade Certified coffee in the world. All of the espresso-based coffee used in its European stores is Fair trade certified.

Key terms for Fair-trade and Organic Coffee Market

  • Organic coffee is grown without pesticides, herbicides or chemical fertilizers. For coffee to be sold as certified organic in the United States, it must be produced in accordance with U.S. standards for organic production and certified by an agency accredited by the U.S.
  • Sustainability addresses the environment as well as social and economic responsibilities.
  • Shade grown coffee is grown on certain plantations where bushes can be integrated into the rainforest. This preserves bio-diversity as the coffee is not grown in rows in cleared plots.
  • Fair-trade certified coffee means that small scale farmers are getting a fair price for their produce and are not being under cut by bigger corporations.

 

Coffee Franchise Report-1Starbucks and Seattle’s Best Coffee, Franchise:

 
Starbucks does not offer franchises. In North America, the majority of stores are Company-operated. As an exception, Starbucks may enter into licensing arrangements with companies who provide access to real estate which would otherwise be unavailable such as airport locations, national grocery chains, college and university campuses and hospitals. Seattle's Best Coffee is a subsidiary of Starbucks and offers franchises to operate a Seattle’s Best Coffee Café and/or Kiosk. The estimated initial investment for a single unit franchise is between $164,500 and $317,000. As of May 2008 Seattle’s Best Coffee has more than 540 cafes in the U.S. and 86 Seattle’s Best Coffee Express espresso bars. In addition, Seattle’s Best Coffee is available across the U.S. in supermarkets and at more than 3,900 foodservice locations, such as college campuses, restaurants, hotels and cruise lines.
 

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