San Francisco Coffee House Case Analysis

1. Should Tensek and Pacek consider franchising over organic growth? Do a qualitative cost-benefit Analysis. (4 Points)

In regards to whether Tensek and Pacek should consider franchising over growing additional business locations organically, there are many factors that the couple must take into account. Whether they choose to expand using a franchising or organic approach, there are major costs and benefits that will dramatically affect San Fransisco Coffee House.

First, the company must take into account the costs associated with expanding the company organically.

Opening and starting virtually any business requires an individual to risk a substantial amount of capital. Although the first location was a success and gained regional notoriety, the couple would have to risk their own money to fund the venture. This particular investment includes financing the purchases of equipment, initial supplies, and furnishing the location. The couple spent an initial 40,000 euros as their start up capital, and would be unable to spend less on additional locations, as the interior and ambience it provides are perhaps the most important characteristics of the business.

The benefits of expanding the business organically include several major items. If SFCH chooses to expand organically, the company will have a much easier time controlling the image and publicity of the business. The couple will have the ability to handpick and train employees using the effective techniques they used at their precious location. Pacek and Tensek will also be able to decorate the vital interiors of additional locations. These techniques will ensure that additional locations will provide the excellent customer service and the casual American ambience that the initial location provided.

Opening their own additional locations would also allow the couple to retain all of the earnings, as opposed to sharing the profits with a franchisee. The Croatian economy is more geared towards entrepreneurs opening their own businesses. If the couple is able to avoid franchising and expand organically, local banks would be more inclined to potentially provide SFCH with financing.

Croatian franchising has many potential barriers to entry. The country’s economic and political landscapes have continued to evolve over the past few decades; however, the country is still developing. Due to the developing state of the country, no true franchising legal system has been put into place. If SFCH chooses to begin franchising, the company might be subject to legislative changes which could potentially negatively impact the financial situation of the company. SFCH must also take into account the public view of franchising in Croatia.

Due to the smaller population and limited number of franchises in the country, franchising is not a well known practice in Croatia. Not only is the general public misinformed about franchising, local banks have virtually no understanding of the practice. This situation limits the number of people who might be interested in potentially purchasing a franchise of SFCH and also decreases the likelihood of a Croatian bank providing a franchisee with a loan.

There are a number of benefits SFCH would receive if the company elected to begin franchising. SFCH would be able to utilize the Croatian Franchising Association as a resource to access potential franchisees. Franchising would require much less of a financial investment and would not require as much of a time commitment from the couple as organically growing the company one store at a time. This strategy would also allow the company to collect royalties while only having to provide advertising, the use of the company name, use of the company infrastructure and perhaps assistance with training and interior design strategies. Increasing the number of locations will additionally build brand awareness, as well as establish a stronghold on the untapped Croatian coffee market. SFCH will also benefit from the first mover advantages.

Once Croatia enters the European Union, major coffee companies will undoubtedly try to enter the market. SFCH’s stronghold on the American-Style coffeehouse market will prove itself to be extremely valuable. Additionally, Tensek and Pacek would have a lot less risk if they were to franchise their business rather than open an additional store themselves. Typically with a franchise the risk is on the part of the franchisee and not the owners of the whole company. It is up to the owner of the specific franchise to take the major risk to get the location going.

After reviewing the costs and benefits associated with both organically growing the company, as well as franchising, it is apparent that SFCH would be wise to begin franchising. The startup costs associated with opening one additional store at a time, as well as the time it would cost the company clearly indicates that organically growing the company is an unwise decision. Though it seems Croatians don’t quite grasp the concept of franchising, the positive numbers in exhibit 4 and 5 indicate that franchising will most likely take off in the near future. The potential growth and revenues franchising would provide clearly outweigh the potential barriers to entry SFCH would have to overcome.

2. What adjustments would they need to make for franchising in the Croatian context? (1.5 Points)

Croatia’s eventual entry into the European Union allows SFCH to prepare for the legal changes and repercussions that will occur once Croatia is admitted. It would be wise for the couple to consider the potential competitors this change might bring to the country, as well as the EU’s policy regarding franchises. There is the potential that once SFCH begins their franchising that other top competitors such as Starbucks will take notice and enter the Croatian market as well.

Another item SFCH must address is the lack of individuals interested in franchises. Although there is little the company can do to change the public understanding of franchising, SFCH can utilize the Croatian Franchising Association as a resource for finding potential franchisees. The Association offers several tools that help expanding companies connect with potential franchisees. SFCH has the potential to run campaigns through their business to educate potential entrepreneurs on the benefits of franchising. According to exhibit 6 they already have a decent budget for marketing activities. Tensek and Pacek could use some of this money, or additional funds to create marketing campaigns around educating people on franchising, specifically with SFCH.

SFCH should also partner with an international entity to receive all of the tax benefits the Croatian government offers to international businesses operating within Croatia. Since there is no minimum percentage of ownership required to receive the benefits, SFCH could offer a minimal percentage of ownership to an international partner with a competitive advantage the business could use.

3. How could they protect their intellectual property and business format know-how? (1.5 Points)

In order to ensure franchisees are operating in a manner that the company requires, SFCH should seek legal advice and draw up contracts. These documents should include how the image, logo and slogan of SFCH should be used, what royalties are to be paid to the business and how the business should operate in general. In addition to this agreement, the company should trademark the logos, slogans and name of the company in Croatia, and after they partner with an international entity, register their business devices through the World Intellectual Property Organization.

SFCH can also turn to various other business organizations including the EU. These organizations often offer guidelines or resources for entrepreneurs. By using internet resources Tensek and Pacek have access to many informational formats that can give them information on how to outline their practices.

4. How could they fight of local imitators? What would happen if Starbucks or other major coffee chains entered the market? (1.5 Points)

If the company elects to begin franchising, the company will expand much more quickly than if it had chosen to expand organically. This expansion will provide SFCH with the first mover advantage. Even if local companies, or large coffee chains attempt to enter the Croatian market, SFCH will have already absorbed most of the Croatian consumers. If large coffee chains enter the market and begin to take away from SFCH’s market share, the couple must determine what marketing, menu, and overall changes should be made in order to mitigate the chain’s Croatian success. It is also important to remember that small businesses can work amongst large corporations. A great example of this is all the local coffee shops in Salt Lake City that are profiting alongside the many Starbucks locations that are in the city as well.

In addition to having the first mover advantage, the company will have already established national and world trademarks. These trademarks protect SFCH from blatant imitators and local coffee shop rivals.

5. How could they become the biggest and most successful coffee house nationally? (1.5 Points)

In addition to the previously discussed changes SFCH should integrate into their business model, the company should also begin serving adult beverages. This change will enable the company to challenge local coffee shops while gaining a percentage of the nightlife market. Croatian coffee shops are known to serve alcohol, however, SFCH has not attempted to enter this market. This change will provide the company with additional revenues while taking advantage of an alcohol-friendly market. Exposure to nightlife locals could also potentially expose the SFCH to coffee consumers that did not previously know of the shop’s existence. The only potential pitfall of incorporating alcohol into the menu, is if the company alters its ambient atmosphere. The shop should not alter its calm, relaxing identity, rather provide a tranquil location where individuals can socialize and enjoy alcoholic beverages.

Many of the large corporate coffee shops are so popular because they advertise a lifestyle. Starbucks may offer similar coffee and pastries at similar prices to other local coffee shops, but what sets them apart is that they are part of a collective idea. When someone has a starbucks cup and sees another person with the same thing, they may feel as though they are in a group. Starbucks had done a great job at making their customers feel connected and like they belong to the Starbucks family. SFCH would benefit by additional marketing to make their customers feel like they are part of the San Francisco Coffee House family, much like Starbucks has done. This is something that can be achieved through marketing and will only get stronger through continued growth.