Here's an investor who thinks Starbucks should start franchising

"Why not franchise?" asks Todd Sullivan. "It may be a bizarre control thing in Seattle but it works just fantastically for every other multi-location food retailer (yes, that is what you are). Franchise fees alone would add to the bottom line while reducing costs, freeing up money (not for expansion) but for buying back shares or actually giving shareholders a dividend. They deserve something after the last 18 months. Hell, put 10% to 20% of the US stores up for sale to 'master franchisees' and watch the offers come pouring in." I suspect some of you can tell him why franchising will hurt Starbucks.  (Read the istockanalyst.com article)

Comments

[APPL]

I say franchise, but consider allowing single unit franchises, to allow mom & pop Starbucks'. Limit to the "big boys."

My family tree has the means to purchase a couple of Starbucks, and since I am an SM and have an absolute passion for driving the transformation agenda and coffee culture, then I would be a much better experience than the typical "licensed store experience."

I'd also put it in the franchise agreement to allow Starbucks to have more control as far as operational excellence. I have a friend who works for the SSC and tells me he can never call up the SM of a license store to hold them accountable to anything.

[Eric Prince]

Here's why. Go into a Starbucks, then go into A Dunkin Donuts. In my all of my visits (and there have been thousands) the teams at Starbucks have always provided a better experience than any other chain.

If you are trying to create that "3rd Place", you can't do it with partners, you have to own it because YOU have to sell it to the people that have to produce that experience everyday. I for one cringe when I have to go into a place other than Starbucks.

Couple other why they don't do the master franchise thing:

1. Control
2. Revenue splits
3. Krispy Kreme & Boston Market already showed us how to eff it up! :)

[Laurie Ruettimann]

They already participate in franchising (of sorts) at airports, grocery stores, Target, etc., and I firmly believe that the quality is drastically reduced.

Part of the benefit of buying Starbucks coffee is that they're better paid and have better benefits than your average barista. Why dilute the brand even further by removing the cost of labor (which is really what this investor advocates)?

[APPL]

Maybe Howard should personally interview each franchisee candidate. I think it's worth his time

[Dan]

why are people always hating on licensed stores? The one i work for provides just as good an experience, if not better, than company operated stores. Customers even tell me that they drive by company operated stores to come to my licensed store.

[Baristundra]

Dan:

because 99% of the time the licensed stores don't properly train the staff, don't upkeep equipment, and don't follow quality standards ( how old is your coffee? ) .

They're terrible places to go as a general rule and they typically don't even know it

[z]

baristatundra, if you only understood the irony of your comment...

[APPL]

Z - I completely felt the irony as well in that statement ;)

[a non]

This is a fabulous idea, especially for investors who are completely salivating for ANY return right now.

I think that they should do this with a core group of underperforming stores. It would add profit to the balance sheet and mitigate some of the costs assumed currently.

[yep]

Honestly at this point, any indi shop will be far more successful then any Sbux.

[truth]

Yep has a point.

The used espresso machine market is gonna be flooded with equipment as the Mastrena hits stores.

Everyone and their brother will be able to cheaply start their own coffee stand.

And they'll do it with drive-thru's which is what most areas need anyway.

[StLouieDrip]

Typically Peltz pressures the companies to focus on the core of their businesses and divest sell off less-profitable endeavors.

Based on that alone one can expect the "Entertainment" division of Starbucks to be first on the chopping block. Rather than producing albums and books, let just get the coffee thing going in the right direction.

Is this real? And wouldn't that be another very ironic thing, if a hostile shark takeover is what finally gets sbux back to its core product?

[Barista Joe]

I think that franchising would be just fine. Why not? So what if it hurt the third place feel? At the stores I worked at, 95% of our customers are drive through or in-and-out customers. They don't care if they can sit down and listen to music or if the barista made small talk. Customers aren't idiots. Unless the barista is really good at faking it, the customers know it's just small talk, and fake conversation doesn't make them genuinely feel like they're in a third place. Especially when they're in a hurry and just want coffee. There are some people that really enjoy this, but not most of my customers. They only notice when it's terrible service. Anyway, it's not like franchised stores would automatically have terrible service. What's that matter? Only the manager hiring and training them would have a say in that (much like licensed stores!) So franchise. Our stock sucks and our company is in deep trouble right now (you can see it in Howie's eyes on every Starbucks Broadcast News video)!

[coffee master]

Barista Joe, you need to think that yes 95% of your customers are "quick" customers but some of them you must know their name. That is what is creating that genuine experience with those customers. If we do decide to franchise more stores, green apron behaviors are lost due to the lack of training. Also if we do franchise, a lot of operational positions like district manager and regional manager will be abolished. I know that Starbucks is a large company, but keeping it company makes us feel small.

[P.R.I.D.E.]

I would have to say that rather than franchising even a small portion of stores, I'd prefer to close more and keep the rest in house. Franchising locations, some of which have 10+ location in one city alone, would force them to cut corners in order to compete against each other. Take our store count down to 10,000 from 15,000 and keep them in house. This would be the way I think it should go...

[Inquiring Mind]

Coffee Master, why do you think District Manager and Regional Manager positions would be lost? You really don't have a clue as to what you're talking about, do you?

[Jake]

BARISTUNDRA:

I would say more like MAYBE 75% of the time that occurs at Licensed Stores. My city has 5 Licensed Stores and 1 Corporate-Owned store. I can tell you that the Licensed Stores are just as good as the Corporate store, with the exception of possibly one, which I have not been to.

If a Licensed Store isn't following the new standards for coffee brewing (30 min) or anything else that you mention...don't blame all Licensed Stores...blame their DM for not checking in on things.

[GC]

Franchising SB would be a sad day for SB's customers but a great one for shareholders. Customers know the difference between a greedy franchise owner (they're the moms and pops rushing around the store with barely a minute to look up while tallyng up last hour's sales)who toils at his store and one that is corporately managed. Franchise owners cut costs, do things efficiently, and say to hell with other things like turning on the heat in the winter time or the air conditioner in the summer time.(Just try a Tim Hortons in the winter) But, that is why people go to a Tim Hortons because it is a cheaper experience. SB customers do not mind paying more because they get alot more than a great cup of coffee.

[Downer]

Wow. I'm surprised that so many people are worried about losing the "Sbux Experience". It's good that everybody feels that way, but we're all watching our company die in front of our eyes. I feel like the band on the Titanic, playing as it goes down. Seriously, that experience they get isn't worth it if the company is continuously losing money and customers. Our stock and profits say we are. Those customers who love the experience so much may not have a Starbucks to go to in 10 years at this rate.

Even franchised stores could learn people's name, people. It's not like they would hire people from the local jail. Are we that proud to think that Starbucks only hires the best? Ok, they do. But franchised stores could still hire good people. Maybe a sort of franchised store idea with a percentage of corporate power would work. I don't know.

We need to stop clinging to that old "if we treat our customers good and know their name but overcharge them for drinks, we'll be OK" attitude. Starbucks isn't OK right now. I hope we'll be fine in the long run, but there's no guarantee. I just know that new drinks and new espresso isn't going to save our butts. We need some dramatic changes, according to me and Howard. And we need them fast.

[thatgirl]

re: licensed stores. i worked for six months at a licensed target sbux. we were awesome. I for one was really proud of my lattes and cappuccinos, and i never let the coffee get too old. we had a lot of people tell us that we were loads better than the corporate store a mile up the road. the only reason i'm not still there is because i have a college degree and copy editing experience and was meant to move on to better-paying, full-time things :)

of course, some people got pissy at us for not having as big a selection, but i'm telling you, we were really good at what we did.

[jacob b]

Truth-- the Verisimos are proprietary (just like the Mastrena) and will probably just go into storage in Seattle, same place the old La Marzocco Lineas are right now.

[Finders Keepers]

Jacob, if you're gonna be spouting "truths" about the machines, please at least spell the name right. It might help add credibility - which in my opinion, you desperately need.

[newcastle]

There's no such thing as a "Starbucks Experience" anymore. If anything, it means typically waiting in long lines, frequently receiving mediocre to poor quality beverages and more often than not, not even receiving a "thank you".

It's true mom and pop owners have a tendency to be penny pinchers and cut costs in every way possible, but that's nothing different from what sbux is doing now. Sbux has cut so much on labor, product and maintenance it's ridiculous and affecting business. In addition, store owners won't be sitting in the back all day like many store managers do.

[experienced]

Starbucks experience = lemon packets

[JMW]

Franchising? Why?

It's clear Starbucks's main problem is they don't know how to make money off _space_ anymore. I say, make it someone else's problem.

But not a franchiser -- he'll just inherit the same problems. The overall business will shrink; franchises are just a way of spreading risk, not eliminating it.

Starbucks should probably close most of their locations except for the really, really profitable ones. And then sell their brand through re-sellers or other chains. In fact, as I've said before, I think this is exactly what Peltz would do -- seeing as how he owns other chains already.

The model for Starbucks retail space should be more like an Apple store. In fact I think the Apple store is an ideal model for most "high end" brands. When you start scrambling to make money off square footage, it becomes really easy to lose sight of your company's overall goals.

Imagine, as a corollary, if Apple had decided to saturate the world with "cluster bombed" Apple stores on every corner. Then the market sags and the volume of iPod sales drops off but their retail costs remain the same. Could you imagine what they'd have to do? Release a new "low-cost" iPod to sell there to get volume moving?

Soiling a brand to justify paying fixed costs is not, not, not a good idea. Make Starbucks stores rare and people will appreciate the experience again. And resell the merchandise through exclusive but profitable channels.

Works for Apple in this economy; it'll work for Starbucks if they have the guts to try.

Also, on a final note, I noticed someone said on another thread that Peltz is like a shark taking advantage of Starbucks's misfortune. A holistically bad business strategy is not an arbitrary misfortune. Their management failed to execute and Peltz is a turnaround guy who excels at making people execute. His methods are drastic but I'm not sure I'd call him a shark or a vulture or whatever. On the contrary, the real shark is the marketplace which is far more unforgiving than the boardroom.

[gc]

The "SB Experience". It's not for a warm fuzzy feeling everyday - it's almost always to meet and discuss. The experience is the social interaction.

I cannot recall the last time I met anyone at a Tim Hortons, Macdonalds, or Wendy's to do likewise. In fact I have never had an intelligent conversation with anyone at these places.

Starbucks will prosper because it is in areas where the social interaction of the SB kind will be a cultural complement to a way of living (the numbers will prove this up with 10% revenue growth in the USA and 32% growth overall predicted).

In Canada and USA, where the lone occupant gets his coffee at the drive thru, where the office worker dashes off with cup in hand - I agree the SB experience is long gone. But, there still are those who have the time to invest in other areas of life.

[Darleen]

I wouldn't say the experience is gone, it is different for each person. It may have changed along the years but it is still alive and well in the customers who still find their comfort.

[SBUXnJERSEY]

Franchising a BAAAAD idea. I worked for TGIFriday's for 11 years before working for Starbucks. Franchise stores were ALWAYS the worst for quality, consistency, and overall standards adherence. Franchising is opening a whole new can of worms. Very typical of an investor...lets look at the bottom line and forget about the quality and experience.

[almondlatte]

Franchising a BAAAAD idea. I worked for TGIFriday's for 11 years before working for Starbucks. Franchise stores were ALWAYS the worst for quality, consistency, and overall standards adherence. Franchising is opening a whole new can of worms. Very typical of an investor...lets look at the bottom line and forget about the quality and experience.

Posted by: SBUXnJERSEY | May 19, 2008 9:01:13 PM

And, what exactly is wrong with that? Frankly, as an investor, profit is great. Profit also indicates, especially for the average Starbucks customer, that quality and "experience" are at least happening fairly consistently.

I think you're pretty shortsighted to dismiss an investor's wishes. As it sits now, Starbucks has slews of them... you might even be one. Starbucks has a duty to them and the customer mutually and concurrently, first and foremost. Without the cash paid in by a customer or an investor, the company certainly wouldn't exist.

Also, you may want to remember that a new investor (Peltz) might be joining the ranks... if he does, things will certainly change. It just goes to show you what an activist investor can do.

All in all, franchising would be an awesome thing for profitability, and with that, investors.

[SBUXnJERSEY]

Yes, I am an investor but I will be damed if I will sit back and watch the company destroy themselves with franchising. Case in point, in my area, I have 5 Starbucks...

1. Barnes and Noble - Great Store and staff, always consist ant, whole bean always near expiration.

2. Barnes and Noble #2 - Staff always rude, haven't met a barista there I like yet.

3. Target, the bigest bunch of bumbling idiots I have EVER seen, never make a drink correctly, never properly staffed. I have spoken to the Licensee DM and he is aware of the problem, he is trying to fix it with no cooperation from the Target management staff.

4. Stop and Shop, another disaster, I won't even go near it.

5. Corporate Store (the store I work at) I will make no opinions because I do not want to be biased (you always think your store is great) what I can say is I hear horror stories about all the other stores in the area.

Licensing/Franchising stupid move, and how dare the company sell off existing stores and SCREW employees out of their rightful benefits.

[truth]

sbuxnj-- So what you are saying essentially is that the sbux brand is dead. Or at least so diluted that when you see the mermaid, you have no reasonable expectation of what you might get when you walk up to the counter.

You can't 'unbreak' that kind of thing. You just can't. Therefore, they need to sell it off.

When the dairy farmer's best producing cow stops giving milk, he sends it to the butcher to be ground into hamburger.

Business is not pretty.

And you never had 'rightful benefits' anyway. It's not a co-op. It's a corporation.

[almondlatte]

Licensing/Franchising stupid move, and how dare the company sell off existing stores and SCREW employees out of their rightful benefits.

Really? "Rightful?" Honestly? I don't think so. The benefits you currently enjoy are privileges, and are only offered under the current corporate structure. Those are benefits that can be altered or revoked at any time. You're an at-will employee... if you don't like something, leave. Find another job where things are more to your liking otherwise.

If (and as it sits now -- when) the company is taken over or forced under pressure to change its tactics due to activist investors, every benefit and privilege will change. Undoubtedly, the company will do all it can, after such a transition, to cut costs to the bare bone. That might just include employee stock purchase programs, health benefits, social benefits, and free/ discounted coffee and products.

It's really Starbucks' own fault at this point ... it's been a spiraling mess forever now.

[carol]

Nice attitude almondlatte. Are you a prophet? Who are you to predict the future? Go piss in someone else's corn flakes would you????

[almondlatte]

Carol,

The attitude is one of reality. I'm very sorry if you can't handle that. I'd recommend you at least try.

I am not a prophet, no. I will tell you that I am someone that can read the "Wall Street Journal" and comprehend how events and news surrounding the company have an everyday effect.

This isn't just me "predicting the future" as you crassly put it. It's me deciphering news reports like "McDonald's Coffee Poses Material Threat to Starbucks -Deutsche Bank..." and "Starbucks Warns Q2 Earnings Miss" and "Peltz/Starbucks" (which, by the way details how Peltz will totally dominate this company and its future direction). Those are all tellings of how this company's direction will change -- HAS to change. I'd also like to point out that tons of people are doing the same as I am... people who short Starbucks, fund managers who won't hold Starbucks (or have decreased the total held value), people who sold the stock... lots of people.

Changes are never easy. I'm very sorry if you cannot handle that. I'm also sorry that you feel like me, "The Wall Street Journal," "The Financial Times" and "The New York Times" are all pissing in your cornflakes. It's bad when sucky things happen to you, but, regardless of what you want, they'll still continue to happen.

Welcome to the real world. Thanks!

[Anthony]

Truth. The La Marzocco Lineas are NOT proprietary. However the Verisimos and the Mastrenas are. http://www.lamarzocco.com/linea.html

[truth]

Almond-- You forgot the mass layoffs at SSC. Bound to happen. This would be why the top-tier leaders are leaving.

Just Google "wendy's layoffs" and you'll see.

Wendy's stock price has plummeted over the year and billionaire Nelson Peltz, who is the largest shareholder of Triarc, has made it his goal to takeover the weakened company. Following a poor quarter he finally won over the board who agreed to $26.78 for the company who had traded over $40 a share just a year ago.

"Layoffs are expected at Wendy's headquarters but, for now, the chain will be based out central Ohio. Peltz is said to want to combine some restaurants to dual Wendy's/Arby's where real estate prices are too high for competing restaurants."

[Cali ASM]

"It's really Starbucks' own fault at this point ... "

Almondlatte:
I agree with this statement.

[Budda]

Because of the various places I've been at in the last few years (or else traveled through) I've had many interactions with franchise stores - probably more than 95% of the people on this board.

I know my experience isn't fully representative, but, personally, I typically have great experiences with the franchise stores. In fact, I think they add an element of vitality to the overall starbucks brand in that they take an element of the comforting and familiar, but are able to integrate it with novel products / settings / experiences. I feel like franchises inject a bit of verve into the massive (and decaying) corpus of Starbucks writ large.

And I like the delicious pastries that you can get at Barnes & Noble cafes. That too.

[barista]

I personally went into a Barnes and Noble Cafe and saw the time on the brewed coffee ticking down from 1 hour and 17 minutes.....who knows what it started at. And it wasn't kept in the same heated equipment used at corporate stores. Sure, franchising might to lead some profits because of less labor or product wastage, but you dear customer tell me if you still want to pay the same amount for a cup of 2 hour old coffee so the shareholders can profit?

[a non]

but you dear customer tell me if you still want to pay the same amount for a cup of 2 hour old coffee so the shareholders can profit?

Yes.

[An Awesome Homosexual Partner in Washington]

Ew.

[Darleen]

so much for quality....

[An awesome homoflexible partner in New England]

Does anyone else believe we need to create a site called Banish A NON: The most annoying poster on starbucksgossip.com?

[chestyl]

I work at a franchised store that is part of a group that was just bought up by corporate.

Honestly, I think the franchised Starbucks are way worse. Just in my experience as a customer in other Starbucks, and talking to other baristas. Huge problems (inventory mainly) in the daily operation of the store, and we were always ridiculously behind on promotions and stuff. People would hear about stuff at corporate stores that we hadn't gotten yet, etc. We're still not doing the extra Starbucks card stuff.