They have built two of the best-known and most successful businesses in the food and beverage industry. Their brands have become household names in America, rivaling longer-established companies. They've delivered large profit margins in an industry where margins are historically tight and competition is extremely fierce. They've brought their companies overseas, and now there are new words for their products in Japanese, Hindi and even more exotic languages.
But Fred DeLuca, founder of sandwich supremo Subway, and Howard Schultz, founder of coffee conglomerate Starbucks, each did it his way. Indeed, their roads to profit diverged on one key point: Schultz has kept his chain company-owned, while DeLuca has built his corporation through franchising. (In fact, Subway retains only one company-owned store.) In both cases, the decision to franchise or to remain company-owned was perhaps the critical element in building the business. And in both cases, the decision paid off. Earlier this year, Subway, which DeLuca founded in 1965 with a $1,000 loan, opened store No. 18,000. The sub chain now has more outlets in the United States than McDonald's, yet it has continued to post growth rates higher than most other food and beverage chains. It has also opened outlets in more than 70 countries. For its part, since its founding in 1971, Starbucks has grown into a company with over 7,000 outlets worldwide and sales topping $2 billion per year. In an exclusive interview with Entrepreneur, DeLuca and Schultz explain why they chose the roads they did, examine the advantages and disadvantages of their strategies, and consider whether other entrepreneurs should emulate their paths.
How and why did you first decide to franchise or not?
Fred DeLuca: When we first started the company, I didn't have any thoughts of franchising. We just had company-owned stores. But we quickly saw that company-owned stores that were not close to company headquarters didn't run as well-management of these stores seemed less dedicated and less entrepreneurial. So we figured we had to create a system in which all the stores would be like the ones close to company headquarters, where managers had the feeling of being very invested in the company's performance, of really caring about the company's success. We thought that the best way to make store managers really care about Subway's success, and have that kind of unique entrepreneurial spirit, was to franchise.
Howard Schultz: We believed very early on that people's interaction with the Starbucks experience was going to determine the success of the brand. The culture and values of how we related to our customers, which is reflected in how the company relates to our [employees], would determine our success. 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, to give them a financial and psychological stake in the company. We thought the best way to get to those values would be to have all the employees working for us. [As a result,] Starbucks has the lowest employee turnover of any food and beverage company.
I always viewed franchising as a way to get access to capital, because you're using other people's money to grow, essentially. And we were dealing with a premium product-something that can be hard to learn, that you have to explain to the customer, that requires an educated staff. 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. You can be just as entrepreneurial and experimental in a company-owned model.