Starbucks CEO Howard Schultz has long resisted franchising to maintain control over the Starbucks brand and culture—and it’s served him, Starbucks' employees, and investors well. Shares of Starbucks’ stock have outperformed the S&P 500 index by nearly seven-fold since Howard Schultz returned as CEO in 2008, up 664% since then, compared to 108% for the S&P 500.
How Starbucks Grew Without Franchising
Many large corporations today rely on franchising to quickly grow business without significant capital investments. In a typical franchise arrangement, one party (franchisee) invests a certain sum of money in exchange for access to a business's (franchisor) proprietary knowledge, processes, and trademarks. The relationship also allows the franchisee to sell products or provide a service under the business name.
- A franchise is a business arrangement that allows the franchisee to sell products or services in the name of the franchisor.
- McDonalds, Ace Hardware, and Dunkin Donuts have large franchise operations.
- Starbucks has seen rapid growth without using a franchise model.
- Starbucks has maintained continuity across its stores, in terms of products and customer service, by remaining company-owned rather than franchising.
- Starbucks does have some franchises in Europe and allows for licensing of its stores inside of larger business like hotels, malls, and department stores.
Ranked by global sales, McDonald's is the largest franchise in the world. KFC, Ace Hardware, and Burger King are other examples of large companies that use the franchise model to grow store counts.
Starbucks has achieved rapid growth without franchising. The company had 14,600 stores in the U.S. at the end of 2018, compared to Dunkin Donuts’ 8,500 stores. Keeping Starbucks a company-owned chain in the U.S. has allowed it to offer a high degree of continuity across America stores.
In Schultz’s book, Pour Your Heart Into It, published in 1997, he wrote that franchisees only get in the way of the connection between a company and its customers. Culture is a big selling point for customers, where baristas “understand the vision and value system of the company, which is seldom the case when someone else's employees are serving Starbucks coffee," he wrote.
Franchising, which allows for quick expansion with little amounts of capital, isn’t always a good thing. That is, rampant growth can sometimes work against a company. This happened to Starbucks in the early 2000s after Schultz left. He returned as CEO in 2008 as that the coffee purveyor was struggling due to over expansion. The company tried to expand too fast and so Schultz curbed store growth and returned greater focus to customer service.
Schultz made several decisions over the years that would keep the company growing without relying on the advantages of franchising. This includes a relentless focus on controlling the coffee quality and process, as well as a desire to inspire employees.
Schultz's Ability to Innovate and Inspire
Schultz constantly re-invested and expanded Starbucks products and employee standards. He also ensured that the company offered customers innovative loyalty incentives, such as rewards cards and mobile payment options. Schultz’s focus was on providing quality coffee done quickly, but consistently.
Schultz was able to maintain control of coffee quality by avoiding franchising. That is, having premium coffee beans and maintaining a specific roasting process was the focus for attaining profitability. The roasting process includes specific training for the roaster, long-term relationships with coffee bean farmers, and control over its entire supply chain.
Starbucks has also been able to cluster its stores, which would be a concern if it franchised in the U.S. Putting many of its stores in high-traffic areas allows it to increase brand awareness, while also maintaining the speed-of-service. This is generally not possible with a franchise, as each franchise is guaranteed rights to an exclusive territory or geographic area.
Employees—The Sustainable Competitive Advantage
The biggest competitive advantage that Starbucks has developed—thanks in large part to a decision not to franchise—is the company’s employees. Its baristas are trained specifically to have a meaningful conversation with customers while also focusing on the speed of product delivery. Employees also develop expert knowledge about coffee.
From a 2003 interview with Entrepreneur magazine, Schultz noted, “We believed very early on that people's interaction with the Starbucks experience was going to determine the success of the brand ... And we thought the best way to have those kinds of universal values was to build around company-owned stores and then to provide stock options to every employee.” Schultz added, “It would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if we franchised.”
The number of Starbucks in the United States at the end of 2018, which is greater than the number of McDonald's locations in America.
Schultz places a high value on employees, offering stock options and grants. The company also provides health benefits, even to part-time employees. All this helps keep turnover low at the company, allowing Schultz and Starbucks to save money on training and recruiting.
While companies can copy Starbucks by selling premium coffee, it’s impossible to replicate the employee’s input and cohesion. Meanwhile, Schultz has maintained transparency with employees, sharing expansion efforts and financial details—something that wouldn’t be possible with franchised stores.
But Starbucks Does Have Franchised Stores
Starbucks has franchised in the past but on a very limited basis. The company started franchising in Europe in February 2013, opening a select number of franchisee-owned stores in a continent its executives had little experience with. As of April 2019, Starbucks wasn’t looking to open additional franchises, noting, “We have a number of excellent Franchise Partners onboard and are therefore not currently recruiting any further franchisees.” When Starbucks was franchising European stores, the requirement was 500,000 British pounds in liquid assets and an ability to open upwards of 20 stores in five years, among others.
The company will likely use the franchise model to expand further in Europe and Asia, but it remains unlikely that Starbucks will open up franchising in the United States, which is where the majority of its stores are.
Now, although there are no U.S. franchised stores, there are licensed stores, which started popping up in 1991. These are the stores you’ll mostly find in hotels, airports, grocery stores, and hospitals.
Roughly 40% of Starbucks’ U.S. stores are licensed. These stores, unlike franchises, are still heavily controlled by Starbucks. The company requires that the location be a place of high traffic and is usually run by a larger company, such as Target or Kroger. The employees that run the licensed stores are employees of the store or owner of the licensed location. Still, for the most part, licensed stores are required to be operated much like company-owned stores.
Coffee Competitors That Franchise
Starbucks' main competitor, Dunkin Donuts, does franchise. It started franchising in 1955 and more than 12,400 franchised stores now exist. To open a Dunkin Donuts, the franchisee must have a net worth of at least $500,000 and $250,000 in liquid assets. For a cheaper option, there’s Gloria Jean’s Coffees, which has 900 locations worldwide. The franchise requires $150,000 in liquid assets and at least $350,000 in net worth.