A few months ago, I wrote about Starbucks' vertically integrated strategy. This morning, i wanted to link to it, so I did a Google Blog-search. Usually a search for Starbucks and "vertical integration" would yield my blogpost first, but now it's the no. 2 result.
Somehow, the net has started discussing why Starbucks had a corporate strategy that involved owning all of its subsidiaries and Subway's strategy went a different way.
There seem to be a number of theories on the market. Namely that Starbucks
- … cares less about cross-store cannibalization
- … has a higher need for monitoring
- … relies more on “impulse sales”
- … has higher profit-margins
Some good posts about this are written here and here (both by Josh Wright), here (Stephen Bainbridge), here (Keith Sharfman), and here (Paul Jaminet)
All excellent theories in their own right, and all very rational. However, in my experience, people, and we are talking about people here, often don't behave rationally (at least not as rationally as economic theory dictates). Instead they behave in ways that they are able—either through innate capability or through their environment.
Starbucks did not start as retailer, it did not even start as a store owned by Howard Schultz. It was a coffee-bean roaster and vendor. Its aim was to educate the US-population, which was—according to Schultz—a wide open market in terms of high-quality coffee. Schultz, who first worked there as an employee, started an independant coffee-chain, and only a few years later took over the Starbucks-business (incl. the roasting factory) and the brand-name. But the core-idea remained that it had to deliver quality-products and quality-education to its customers. Along with this, Schultz was highly educated, had plenty of work-experience, and venture capital behind him.
Subway started as a retailer. According to the history, published on their site, Fred DeLuca started Subway's as a 17 year-old and $1,000 starting-capital. Subway had, as far as I know, no world-changing mission. It was a sandwich-store, one of many, and one of it's key assets was to be more efficient and qualitatively better than its competition.
I still think that the stories of these two men, their business-idea, and the environment they started it in, is the key-deciding factor of why one decided to expand wholly-owned and the other through franchising. I haven't studied Subway, but I have McDonald's, and the same dynamic can be witnessed there.
Now, you can go all "economic theory" on this, and focus on points like that coffee is a product that requires much more monitoring than sandwich-ingredients. And I think that's completely correct. Not to mention that Starbucks has a very different employee-based strategy than Subway—they like theirs to be smart and pay them well. And I also think that due to Starbucks's high real-estate presence, franchising for them has become an unfeasible solution. But I think the first two factors are the cause and the latter is the consequence of Starbucks's wholly-owned strategy.
When you start out, whether to franchise or not is a completely personal decision. It comes down to how comfortable you feel about whether you can offer your customers the highest quality possible, while maintaining healthy economic growth.
And your initial decisions will clearly have some kind of lock-in effect later on, which is something I only realised after reading the linked-to blogposts and writing my own.
I just picked up the German magazine "Starting UP" (initial impression, so-so), which featured a number of stories interesting to me. One was the 30 top-franchisers in Germany. I'm a little confused by how they rank these things (English translation: annual growth-rate of franchise and nominal growth-rate), which resulted in some kind of numbering system, where the number 1 got over 3000 points, and the number 2 939 points. Actually, I'm more than a little confused, but it's probably too early in the morning to me.
In any case, the number 1 was Subway, which grew from 190 German partners in 2004 to 600 in 2007 (and got 3113 points). And number 2 is DATAC, which provides accounting-support and proprietary software. It grew from 312 partners in 2004 to 522 in 2007 (and got 939 points.. ah I see, nominal = probably company growth rate). I'll list some more in a second.
Unfortunately the article was very sparing with its analysis regarding what makes a good franchise, which I would've found useful. The advantages listed for Subway are however:
- Low initial investment (ca. USD 10k entry-fee; charges around 8% of profit + 3.5% advertising fee)
- Strong international brand (28343 partners in 86 countries)
- flexible venue-size (doesn't take up much space / can be take-away or seated)
- simple operation (no frying, etc.)
- large health-factor / range of ingredients
- A 2 week training
- Help with site selection
- Help with restaurant design (though I think personal taste is very limited)
- Help with equipment ordering
Back to the list. I segmented the list of franchises into what I considered their primary focus to be.
- Consumer-services: 4 (PC-Feuerwehr; Schulerhilfe; Agentur Mary Poppins; Stage-coach)
- Logistics: 1 (Fastway Couriers)
- Business services: 4 (Datac; Mail Boxes etc.; Im-Press Promotions; Ultimo)
- Food: 4 (Subway; Joey's Pizza; Blizzeria; Haagen-Dazs)
- Health: 5 (CC Calorycoach; Bellissima; Ruck Zuck; Curves; Alkromat-Patrouille)
- Retail: 9 (Engel & Volkers; Videotaxi; Town & Country; Harper & Fields; Mobilcom; Re/Max; Das Futterhaus; Tiroler Bauernstandl; Babyone)
- Installation-services: 3 (Twintop; ; Isotec; Scheibenglass)
There are other underlying factors in running a good franchise, which I will write about at another point. Important to realise is that just because a company grows fast, doesn't mean that it's actually a good company. Many franchises, in my experience, suffer from a lack of shared standards of quality, which can be overcome through a number of methods, but often suffers because of the lack of a centralised control over who works for the company and how they interact with customers.
I still think my last post on how to shift tacit knowledge into the explicit kind is relevant here (also the one on the knowledge-spiral), as what we are speaking of here is really similar. A company is not just the product it sells, but the values of the people, and how to communicate that down the chain is a vital skill for successful companies and franchises alike.
The picture is, if you're wondering, meant to display a room in which you have a choice of (food-)products to sell. Eh, yeah… I'll improve someday, I promise! ;-)
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