Seattle's Best Coffee Stirs Up Coffee Wars by Franchising
SEATTLE (Blue MauMau) - Seattle's Best Coffee announced Tuesday that it will begin selling franchise opportunities in the United States. As the Starbucks system shrinks by hundreds of units in the recession, having franchisees buy coffee cafés for subsidiary Seattle's Best Coffee is a way to hold onto market share for both brands.
The decision comes after almost four years of building the Seattle's Best Coffee brand to 550 shops through an in-store licensing program at such places as Borders bookstores. While Seattle's Best took on Borders licensed cafés, Starbucks focused on competitor Barnes & Nobles.
Few have felt the pain of the coffee wars more than Seattle's Best Coffee's parent Starbucks. The premium coffee chain has announced the closing of roughly a thousand stores and the laying off of thousands of employees in the past few months as it struggles with profitability.
Consumer spending has changed from $4 latte drinks. The breakfast market is now focusing more on value items to grab a shrinking customer base. On top of that, the largest franchise chain in the world, McDonald's, has been stirring up the coffee wars by offering lower priced specialty coffees in half of its 14,000 U.S. stores. It plans to roll out new premium-coffee items to all of its restaurants. Dunkin' Donuts and others have not only joined in but also discussed the coffee war against Starbucks and McDonald's with franchisees. And value seems the new focus. Even Starbucks announced two days ago that it will offer breakfast value meals.
Franchising to Grab Back Premium Coffee Customers
Now in the midst of all of this, Seattle's Best Coffee announces it will begin selling franchises.
“The world of premium coffee has expanded, and customers now expect a great cup of coffee wherever they are,” reasons Tom Ehlers, vice president and general manager, Seattle’s Best Coffee. “We’re excited that by offering a comprehensive franchise program we’re able to grow the Seattle’s Best Coffee brand, allowing us to fulfill the needs of more specialty coffee customers.”
Executive vice president Darren Tristano of Technomic, a consulting and researching firm for the food industry, understands Mr. Ehler's assessment. “It looks like Seattle's Best is looking for other options to grow domestically,” he observes. But regarding why the chain would choose this weak economic environment and the credit crunch to begin selling franchises, Tristano has a different take. He postulates, “The firm could be looking for a way to build the brand and then sell it.”
The coffee chain has been through a number of hands. Most notable is that in 2003 the owner of Seattle's Best Coffee, AFC Enterprises, sold the chain under duress to rival Starbucks Corp. AFC lost its listing on Nasdaq and was forced to relinquish the proceeds to creditors. Best known as the holding company for Popeye's fas food chain, AFC Enterprises was subsequently investigated by the Securities and Exchange Commission for accounting irregularities. AFC then sued now defunct accounting firm Arthur Andersen, saying that its auditor was partly to blame.
Seattle’s Best Coffee, a brand that is recognizable by many consumers, says that it wants to sell franchises to buyers who focus on multi-unit development. And it wants owners with a proven track record of success. The franchisor will initially focus its franchising efforts on western states and Texas. However, it will consider buyers wanting locations anywhere nationwide.
Nick Bibby of the Bibby Group, who has been consulting and developing franchise chains for some three decades, gives buyers of this brand a word of caution: “If a company is having internal profitability issues ─and I think that Starbucks sank last year from $19 to $7 (see chart above for stock price)─then the last thing it should be doing is foisting a ‘perhaps’ questionable model on prospective entrepreneurs. In addition, I don’t believe there is an earnings claim offered, and for me, that is ‘always’ a red flag."
An earnings claim is a declaration in a Franchises Disclosure Document that a franchisor gives out to inform potential franchise buyers on the profitability of its franchise units in the aggregate. Many franchise consultants feel it is extremely difficult to make an informed purchasing decision on a business without knowing profitability. It is estimated that just a few hundred franchise systems are willing to declare such claims.
Mr. Bibby continues, “Clearly, the coffee wars, combined with a rough economic picture, would make me think very hard about laying out $200K to enter the java jungle.”
One of the chain's 12 franchisees, Atlanta-based Wassim Hojeij, who has six cafés, speaks well of his franchisor's name recognition and business support. “Quality and a strong brand are important to any franchise operation and Seattle’s Best Coffee offers both with the right operational support and approachable brand,” he says.
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