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Franchising is still a relatively new concept in Germany. But Cup & Cino's unconventional approach has helped the coffeehouse franchise steadily increase profit.

A little over a year ago 34-year-old Stephan Zeitz was in search of a business opportunity. After a few years working in bars and coffee houses in the small industrial city of Dessau two and a half hours east of Berlin, he decided the time was right to venture out on his own and start his own business.

"For once I wanted to be my own boss and run my own café," says Mr. Zeitz.

Despite his enthusiasm, he knew there would be challenges. New businesses often fail within the first few years of existence and, unlike in the U.S., German banks and financial institutions have little infrastructure in place to support new business owners, particularly those without ownership experience. Worsening his prospects perhaps was his insistence on setting up shop in his hometown of Dessau, a city known more for Bauhaus than business.

Mr. Zeitz pinned his hopes on Cup & Cino GmbH, a small German franchise operation with eight Starbucks-like coffee shops scattered across Germany. Company owners were looking to expand and liked his ideas for a café in Dessau. In contrast to larger coffee chains, the company's strategy from the start has been to concentrate on opening stores in smaller towns and cities with fewer competitors and cheaper rents. Cup & Cino representatives met with Mr. Zeitz's bank to help secure the ?150,000 needed to get started and within several months a new franchise was up and running in Dessau's rebuilt city center.

"Dessau was exactly in line with our strategy," says Cup & Cino Managing Director Jens Thomas. "Smaller cities keep overhead low and give us a much better chance to be successful." Mr. Thomas says avoiding competition with coffeehouse behemoths such as Starbucks, which opened its first stores in Berlin last year, and German coffee-chain giant Einstein has paid off. "There's no question that this has been good for our company and for our franchise owners," he says.

Think Small

Since its inception in 1995, Cup & Cino has rapidly expanded. Originally a coffee distributor, the company branched out into franchising in 2001, opening its first location in the small German city of Paderborn. The company has posted double-digit profits in each of the last three years and Mr. Thomas credits much of that success to sticking with a small-market strategy. A new Cup & Cino franchise is set to open next month in Bonn, the former German capital. Locations in Qatar and Jakarta are also in the works, according to a company official.

Franchising is still a relatively new concept in Germany. The first franchise operations began emerging in Germany in the late 1970s and didn't begin taking off until the early 1980s. Many of the first operations were American retail and fast-food companies. Today there are more than 760 franchise operations in Germany with more than 41,000 outlets, according to the German Franchise Association. Restaurants and fast-food stores account for the bulk of all franchise locations, while American franchise operations have 12% of the overall market with more than 50 American franchisors and 2,100 stores in Germany.

While the overall number of new business starts in Germany has steadily decreased the past few years, the number of new franchise operations has grown by almost 10% since 2000, according to the German Franchise Association. "Germans are beginning to understand the benefits of opening a franchise location," says Torben Brodersen, the German Franchise Association's director. "Because the infrastructure is already in place new owners find it much easier to get started." Mr. Brodersen says sales at franchise operations rose about 7% to ?22 billion in 2002 from the previous year.

Despite growth in the franchise market, the German economy has not been kind to start-ups. The nationwide unemployment rate stands at more than 10%, well above the euro-zone average of 7%. It's even worse in the former East Germany, where it stands at more than 17%. Personal bankruptcy filings have hit record levels and figures released by the German Association of Industry and Commerce show that more than 389,000 companies went bust last year, a record.

Tough Times in East Berlin

"It's been a really tough business market without a doubt," says 41-year-old Manfred Burkart, who was forced to close his three Waycup coffeeshops late last year. All three stores were located in the former East Berlin, where hoards of businesses, large and small, have been setting up shop since German reunification in 1990. Low rents and government subsidies turned the area into an attractive location for business.

The influx of new investment, however, quickly turned once-desolate areas of Berlin into neighborhoods crammed with retail stores, fast-food chains and restaurants, sparking fierce competition and skyrocketing rents. "In the end the bad economy forced us to close," adds Mr. Burkart, who says he and his business partner had hoped to expand the Waycup operation beyond Berlin. "With all of the competition and everyone losing their jobs it just became very hard to keep customers coming through the door."

Overcrowded shopping districts and increased competition have forced many franchise owners in Germany to find creative ways to stay afloat. Recent visits to Torsten Napral's two Häagen Dazs franchises in Berlin saw customers getting much more than ice cream.

"You have to be creative to survive here," says the 34-year-old Mr. Napral, who recently launched an "Ice Clubbing" night at his busy Hacker Markt location. Each Wednesday night customers are invited to sip ice cream-flavored cocktails as a DJ spins hip, lounge music. The gimmick has been a hit with younger Germans who permeate the area after dark.

An "After Work Party" is another concept taking flight later this year at Mr. Napral's Potsdamer Platz location. Both events keep the cafés open until 3 a.m. He says German Häagen Dazs owners may use his ideas at other franchise locations if they prove successful.

Back in Dessau, Mr. Zeitz is gearing up for the evening rush at Cup & Cino. Only now, instead of coffee and croissants, he has expanded his menu to include sandwiches and pastas to go along with beer and cocktails.

Unlike most coffeeshops in town, Cup & Cino has found success in catering to an evening crowd. When night falls, the lights are dimmed and the background music is turned up a notch. A waitress is added to handle the spill-over crowd of university students and out-of-town visitors who stumble in from a hotel across the street.

"We know not everyone wants to drink just coffee," says Mr. Zeitz. "For us, it's very important to give the customers what they want." Plans are now afoot to add a Salsa night, allowing customers to enjoy live Latin music while they sip their lattes.

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved

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