Franchising Starbucks

We have been required to do a research on franchising of Starbucks Coffee in Malaysia. Below is our report on it.

The term franchise originated from a French word, meaning “free from servitude.” A franchise can be defined as a legal agreement in which an owner (franchisor), agree to grant rights or privileges (license) to someone else (franchisee) to sell the products or services under set specific conditions.

Speaking of franchises, it is usually referring to business format franchises. Such a franchise is essentially a business clone. But there are many varieties of business arrangements within a franchise system. According to a publication by IFA (International Franchise Association) Educational Foundation, all of those arrangements can be divided into two major groups which are product distribution & business format.

Product distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. The dealer (franchisee) identifies with the supplier (franchisor) through the product line and to some extend with its trademark. Franchisees are granted the rights to distribute a franchisor’s products within a specified territory or location. This type of franchising dominates the franchise field, accounting for an estimated 70.2% of all franchise sales during 1990 (A. Khan, 1992).

Starbucks Coffee falls under category of business format franchises. Business format franchises involve a complete business format rather than a single product or a trademark, it is a relatively new concept of franchising and is characterized by an ongoing business relationship between franchisor and franchisee. Not only includes product, service, and trademark but business format franchises include the entire business concept. From marketing strategy and plan, operating manuals and standards, quality control, group purchasing power, research and development, and a continuous process of training, assistance, and guidance, the franchisee is required to comply with the franchisor’s guidelines pertaining to all aspects of the business. As we can see from every Starbucks outlet in Malaysia, they have the same trademark, they sell all the same product in each outlet and the taste of the coffee is the same everywhere, the physical appearance of the business facility also alike as you can see from the decorations and layout of each Starbucks outlets are familiar.

Starbucks Coffee Company was founded in 1971 and Starbucks was named after the first mate in Herman Melville’s Moby Dick. The first Starbucks store was open in Seattle’s Pike Place Market at United State. Starbucks development strategy adapts to different markets addressing local need and requirements. Starbucks use three business strategies: joint ventures, licenses, and company-owned operations. Many believe that Starbucks is not a franchise company. In fact, Starbucks has made an official announcement state that Starbucks does not franchise operations and has no plan to franchise in the foreseeable future. Most people will assume that the Starbucks Corporation actually owns every Starbucks Coffee outlets around the whole world. In North America, majority of the Starbucks outlets 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, major food services corporations, college and university campuses and hospitals.

Although Starbucks experienced slow growth in the initial years the company expanded rapidly after its Initial Public Offer (IPO) in 1992 as shown in table 1.1 p4. The lifestyle of people is changing and evolves in the market make Starbucks decide to goes international. In 1996 Starbucks Coffee International opens its first oversea store in Tokyo, Japan and in the same year in Singapore. They come to Malaysia in 1998.

Starbucks keeps on expand And 37 years later which is today, Starbucks has 7081 company-operated stores and 4081 licensed stores in United State, outside United States Starbucks has 1796 company-operated stores and 2792 joint venture and licensed stores throughout 43 countries around the world. A total of 15756 outlets throughout the world and still continue to grow. The expansion of Starbucks outlet is shown in Table 1.1 p4.

Starbucks Coffee Company use joint venture method as a way to expand their business. In joint venture the franchisor joints with a local investor thereby forming a joint venture company. For joint venture the franchisor has more control than in the case of a master franchise. This is also what Starbucks want as they wan to pick their business partner their own and keep a close track to the quality control of their outlets. This is to protect the brand name that Starbucks has built up all these years won’t go in vain.

Joint ventures are becoming a popular method for doing business in foreign countries. By cooperate with reputable individual and corporations who possess the necessary experience, many advantages can be found. The advantages include reducing business risk, overcoming entry barriers and better local acceptance. Because local political and economic situation can be best understood and handled by local businesses. This method has been proven by the successful of Starbucks.

Starbucks Coffee outlets located in Malaysia was operated by Berjaya Starbucks Company Sdn Bhd. Berjaya Starbucks Company Sdn Bhd is jointly owned by Starbucks Coffee International and Berjaya Group Bhd. Berjaya group has help Starbucks to grown 25% - 30% on year to year in sales in Malayisa in the past three years. To date, the company has 88 outlets in Malaysia (58 in Klang Valley, 11 in Penang, 4 in Johor Bahru, 1 in Pahang, 2 in Malacca, 2 in Negeri Sembilan, 1 in Perak, 2 in Kedah, 3 in Sabah, 1 in Sarawak and 3 in Genting Highlands).

Table 1.1 Growth of Starbucks Coffee worldwide

Year Starbucks Store Total

at Fiscal Year End Growth

(%)

1971 1 -

1987 17 94.1

1988 33 48.5