San Francisco Coffee House - Case Analysis

SAN FRANCISCO COFFEE HOUSE AMERICAN STYLE FRANCHISE IN (Case Study Analysis)

SUBM IT Prof Pish

SUBM I TEAM Sect ADIT (08P GAU (08P CHO SU (08P KAU

VI

INTRODUCTION

COMPANY PROFILE: San Francisco Coffee House (SFCH) is the first American-style coffee house in Croatia. This unique place where one can enjoy the authentic ambience of this American city got excellent reviews and unusually large media attention. “Elite Décor”categorized it among 6 best designed restaurants-bars-coffee shops in Croatia. The local media in Osijek, where the first one was opened, proudly goes into detail describing the rich choices of American Mocha and Latte coffees one can enjoy- including an unique environment with soft jazz music, foreign newspapers and magazines, free unlimited wireless internet access or “coffee to go” cups to take the coffee with you to the office, school or when going for a walk. This cozy coffee shop, housed in Hrvatska, Croatia is decorated in soothing earth tones. Authentic photos of old San Francisco adorn the coffee color stained walls and can be admired from the cushioned banquettes inside the shop. Stylish, multicolored, poured concrete countertops add to the contemporary feel of this inviting space.

HISTORY: On the return to their homeland of Croatia following a six-year visit to the United States, a couple decided to open their own coffee house, one that is unique to the Croatian environment - a California-style coffee house that offers the quality, service, product assortment, ambiance and efficiency found in sophisticated coffee shops in developed markets, and all for a locally affordable price. The major challenge faced by the couple is how to grow. Specifically, should they consider franchising over organic growth? If so, how should they go about franchising in a country where the market is developing and where franchising is under-regulated, underdeveloped and misunderstood? Jasmina Pacek (MFA) and Denis Tensek (MBA) after their return from the USA decided to enrich the offer in Osijek with a completely new concept: They opened San Francisco Coffee House – An unique place in Croatia where you can enjoy the original atmosphere of this American city and choose one of 17 kinds of special coffees or take them with you when going for a walk, to work or school...A year after their opening they are ready to expand. Due to a numerous requests of the visitors from other parts of the country and their wish to be able to enjoy this environment and the coffee in other cities too, with the Franchise Center of the Center for Entrepreneurship from Osijek they developed their franchise offer. They are already negotiating with entrepreneurs from different cities around the country, where the speed of the implementation of the idea will be important because SFCH is giving territorial exclusivity.

SFCH website described the coffee house as-

“"On vacation and wondering where to get that perfect cup of gourmet coffee or tea? Try the San Francisco Coffee House’’. This charming shop with friendly bilingual staff is situated on the spectacular Osijek Marina and offers a comfortable outdoor place where you can relax with friends, listen to music and

enjoy

a

full

menu

of

espresso

drinks,

smoothies

and

frappes...complemented, of course, by a variety of yummy pastries and bagels! You might even want to take a bag of rich coffee beans home with you to remind you of your leisurely mornings in Osijek.”

1. QUESTIONS

QUESTION 1: SHOULD

TENSEK

AND

PACEK

CONSIDER

FRANCHISING

OVER ORGANIC GROWTH? Yes , franchising will prove to be a better option for Tensek and Pacek over Organic Growth. Franchising will help them grow faster and thus lead in competetion from other coffee houses. The option of franchising can lead them to dominate faster and to reach far-off customers without any delay. The franchising decision can also help them to cater the large population who are already aware of San Francisco Coffee House (SFCH) and are waiting it to open branches at different parts of Croatia. As the franchisor we usually have the company that due to the years of successful business experience managed to built its brand and developed the successfull business model that can be applied to another location with the knowledge transfer. For company that is looking into expansion, the reasons to use the franchise model rather than to open more company owned units very often are financial (common but not the only or exclusive reason). The financial reason is definitely important since when opening a new franchise unit the largest portion of the expanses is covered by the franchisee (the franchise buyer). Even when the financial resources

are not limited , it is always better not to engage your own assets if you can engage somebody elses. Other reasons to sell the franchise instead of opening the company owned unit are the motivation of the person running the unit (the feeling of increased responsibility when running own company and working for himself), the shared risk, not have to worry about the employees, utility expenses and control the daily business that are all responsibility of the franchise buyer. Hence we can say that in this case “FRANCHISE IS THE BUSINESS MODEL

WHERE THE INTERESTS OF BOTH SIDES (San Francisco Coffee House and Franchisee) ARE MET.”

QUESTION 2: WHAT ADJUSTMENTS WOULD THEY NEED TO MAKE FOR FRANCHISING IN THE CROATIAN CONTEXT?

Franchise is a business model in which a company sells the right to use their trade mark and the business model to another company that in return pays the franchise fee and the percentage of the monthly sale of goods and services. It is suitable for almost all business segments: restaurants, hotels, bakeries, car services, real estate agents, beauty saloons, house cleaning , etc. Even if in Croatia we think of franchise as something we buy from abroad, however ther are Croatian companies that are strong enough, experienced and have a good reputation

to

become

franchisors.

It

does

not

necceseraly

requires

large

investmenets but well thought out business model, that can be replicated in another location. Although franchise as a business model undoubtedly shows an exceptional potential and the adaptability to different industries and business environments – even four decades after the first franchise appeared in Croatian business environment – it still hasn't been fully developed as a business model. Even though franchise business model is present in Croatia for over four decades, the real development of this business model still lies ahead. The first franchise

came to Croatia in 1969 with Diners Club International. Franchise agreement enabled the franchisee based in Zagreb to operate in the whole former Yugoslavia and other Balkan countries. Croatian Diners Club franchisee was awarded twice by the franchisor for exceptional business results achieved in the Eastern European market. The first more significant discussions on the advantages and disadvantages of franchise business model came together with McDonald's which entered Croatian market in the early 1990s. McDonald’s established a company McDonald's Hrvatska Ltd., signed business agreements with key suppliers – strategic partners in Croatia with some of them investing additionally in their production capacities to meet the needs and quality requirements of this multinational company. McDonald's expanded throughout Croatia by opening its own, "company" restaurants or by subfranchising to other locations. McDonald’s presentations in cities where the franchisor sought partners/franchisees generated great interest of potential franchisees with many questions referring to the nature of the franchise agreement offered by McDonald's, i.e. to the rights and obligations of both sides in a franchise relationship. Couple of years after McDonald's, several other franchisors appeared on Croatian market with Hungarian bakery franchise Fornetti and an US restaurant franchise Subway standing out as the most recognizable ones.

Institutional Support for Franchising in Croatia: Croatian Franchise Association was established in 2002 with main objectives to promote and advertise franchise licensing in Croatia, to group the franchisor companies comparing their feedback and to establish policies and standards for franchise licensing in Croatia. Even though the mission and objectives of this Association are of great significance for franchisors in Croatia, especially taking into consideration low level of awareness on basic franchise concepts among entrepreneurs, the Association today has only a few members. Main activities of the Association have been based around promoting and advertising franchise opportunities in various media and the co-organization of an international forum Franchise and Partnership Expo in Zagreb. Over the past few years (2003-2006), this event comprised of regular franchise conferences with a number of domestic and international

experts in different aspects of franchising (bank representatives, lawyers, university professors and the representatives of major franchisors) as guest speakers and participants. Franchising has been present in Croatia since late 1970s, but first real promotion of this business model brought McDonald's in 1990s. However, franchising in Croatia has somewhat stagnated on a rather low level which was interconnected with general economic situation, weak entrepreneurial climate and low level of innovation and competitiveness of Croatian companies. At the same time, there are only two franchise support institutions operating in Croatia – Croatian Franchise Association and The Franchise Center – part of Center for Entrepreneurship Osijek, both with the mission of promoting franchise as a business model.

PEST analysis of the major environmental factors influencing franchise development in Croatia:

Source: Research results - “Franchising development perspectives in Croatia”

QUESTION 3: HOW COULD THEY PROTECT THEIR INTELLECTUAL PROPERTY AND BUSINESS FORMAT KNOW-HOW?

This can be done with the help of a FRANCHISEE AGREEMENT. SFCC need to consider the protection of their intellectual property early in the formation of the business. It is heartbreaking to find that the idea they’ve worked so hard to conceptualize and develop is stolen by other people and companies, where they can end up losing their business format, and most importantly, their profits as well!

Plus, failure to protect their proprietary

information could lead to complex and expensive legal actions later on. The best course of action is to visit your country’s patent and trademark office. In the U.S., patent grant provides "the right to exclude others from making, using, offering for sale, or selling" the invention in the United States or "importing" the invention into the United States. It is important that SFCC put in place relevant protections to prevent their intellectual property being infringed (for example by registering their trade marks and company name). Once you have adequate protections in place they can then benefit from their intellectual property through licensing. It is also easier to protect their intellectual property if it is registered and you can prove ownership.

A Franchise Agreement is a sophisticated form of Licence Agreement. Intellectual property rights which can be licensed include statutory or nonstatutory intellectual property rights. Here we consider non-statutory intellectual property rights that include know-how, trade secrets, customer lists, formulas, business methods, personnel training and manuals. Franchise Agreement is a key factor to promote and enhance a win/win situation and to protect the respective rights of the parties and the entire franchise operation. It is therefore

certainly advisable, particularly as

franchise agreements are extremely complex, that legal assistance from an expert skilled in intellectual property and franchising be obtained. It needs to be reiterated that it is essential that the Agreement properly identifies all aspects of the franchisor’s intellectual property and other proprietary rights and that these are properly protected and licensed to the franchisee. The contract should also focus on and accommodate the specific needs and requirements of the franchise operation and control the relationship between the parties in a positive and constructive manner.