Growing Your Business Your Way

Company-Owned Growth Vs. Franchising

What do you see as the advantages and the disadvantages of the model that you chose?
Schultz: There are a lot of advantages to the company-owned model. You can create universal company values. You can read the marketplace and turn on a dime. As a company-owned business, we can do that. But if you're a franchised company, it's hard to make quick adjustments because there's an extra level of people in the business [the franchisees] that you have to basically pass all the decisions through. And that can make these kinds of transitions harder.

Being company-owned also allows you to find significant new revenue sources without having to worry whether they might compete with your franchisees' businesses. We've created a major new revenue source recently by selling bags of Starbucks coffee, bottled Starbucks coffee drinks and Starbucks ice cream in supermarkets. But imagine if we were a franchise. It would be difficult to sell products in supermarkets because most franchisees probably would see that as competition and not like it. In a franchise situation, there are a lot of prohibitions on territoriality and exclusivity. We don't have those problems, so we can open up many stores in an area quickly and even sometimes cannibalize our own business.

DeLuca: When you're invested in your own business, you're going to run it better. When people are financially responsible for whether their store succeeds, they're going to have that kind of entrepreneurial spirit that's harder to get if headquarters is running things. If you have company-owned stores, you make 100 percent of the profit from each one, but you have less entrepreneurial spirit.

Franchising also lets you expand to more places more rapidly. It's true that, with company-owned stores, you can more easily saturate a large city or make quick changes, because you don't have to worry about territoriality or going through the process of finding hundreds of franchisees in one city, which can be hard-you just open as many stores as you can in the city. So when we enter a new big-city market like Chicago or someplace equivalent, it's hard at first for us to get famous and build the reputation and build the business because we can't just open so many outlets so easily. But franchising makes it easier to open in a lot of markets simultaneously, because the investment that you need as a company to expand geographically isn't as great and because we're a relatively cheap company to get a franchise in. People in a wide range of areas can afford a Subway franchise.

How do you keep your company entrepreneurial and keep people in the company experimenting, given your different models?
DeLuca: There may be a perception that, with franchises, they're all the same, so that limits the ability to experiment. But that's not true. We've always kept two slots open on the menu of each Subway franchise-slots that franchisees can use to come up with their own sandwich ideas. And actually, franchising is the best way to keep things entrepreneurial, to keep people experimenting, if you can tap into franchisees' ideas.

We do this by allowing a lot of franchisee influence over marketing and other company decisions. Subway's marketing is totally franchisee-driven. A national board of franchisees makes decisions on our national advertising, and local boards make decisions on local advertising. So these local boards are out there finding interesting local ideas, and then they can send those on to the national board. It allows ideas to bubble to the surface locally and then be implemented nationally. The "Jared" campaign [Subway's national advertising campaign featuring Jared, a man who lost a considerable amount of weight eating Subway sandwiches] didn't come from company headquarters. Some franchisees in the Chicago area saw a story in an Indiana paper about a guy named Jared, who'd lost a ton of weight eating Subway subs, and they contacted him. He became part of their campaign and then part of our national campaign.

Schultz: In a company-owned business, you might not have the kind of local owners that you have in franchising, but as a manager, you have to come up with ways to encourage entrepreneurship. We do that with [stock] options, which works. Frappuccino was invented by one of our store managers. We've gotten big, but we've stayed small-keeping our intimacy with our staff and customers.

Coffee Talk
As of August 2003, Starbucks had more than 7,000 retail locations worldwide.
Starbucks plans to open approximately 1,300 new stores worldwide in fiscal year 2004.
Nearly 25 million customers worldwide visit Starbucks each week.
Starbucks is named after the first mate in Herman Melville's Moby Dick.
The first Starbucks store was founded in 1971 in Seattle's Pike Place Market.
The Starbucks Foundation has awarded more than 650 grants totaling $6.5 million to literacy, schools and community-based organizations across North America since 1997.


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This article was originally published in the November 2003 print edition of Entrepreneur with the headline: Serving Up Success.

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