FRANCHISING

Master of Commerce
(M.Com-I)
Semester II
(2012-13)

Submitted by
VARSHA CHAWLA

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50

FRANCHISING

Master of Commerce
(M.Com-I)
Semester II
(2012-13)

Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of Master of
Commerce (Part-I)

By
VARSHA CHAWLA

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50
CERTIFICATE
(2012 2013)
This is to certify that VARSHA CHAWLA of M.com (I) Semester I (2012-13) has
successfully completed the project on FRANCHISING under the guidance of Mr.
VISHAL TOMAR.
Date:Place:-

(Prof. Mrs. Megha Somani)

Course Co-ordinator

(Dr. Ashok Vanjani)

Principal

(Prof. Mr. Vishal R Tomar)

Project Guide

External Examiner

DECLARATION
Date:-

I, Miss. VARSHA CHAWLA, the student of M.Com (I) Semester II (2012-13)

hereby declare that I have completed the project on FRANCHISING successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

VARSHA CHAWLA

ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of blessing.
The desire of completing this dissertation was given a way by my guide Mr. Vishal
R Tomar. I am very much thankful to him for the guidance, support and for sparing
his precious time from a busy and hectic schedule.

I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College. My

sincere thanks to Prof. MEGHA SOMANI who always motivated and provided a
helping hand for conceiving higher education.

I would fail in my duty if I dont thank my parents who are pillars of my life.
Finally, I would express my gratitude to all those persons who directly and
indirectly helped me in completing dissertation.

VARSHA CHAWLA

DECLARATION

Date:-

I the undersigned Mr. Vishal R Tomar, have guided VARSHA CHAWLA for her
project, she has completed the project FRANCHISING successfully.

I hereby, declared that information provided in this project is true as per the best of
my knowledge.

Thank you,

Yours faithfully,

Mr. Vishal R Tomar.

What is a Franchise?
Franchise
A form of business organization in which a firm which already has a successful
product or service (the franchisor) enters into a continuing contractual relationship
with other businesses (franchisees) operating under the franchisor's trade name and
usually with the franchisor's guidance, in exchange for a fee. Some of the most
popular franchises in the United States include Subway, McDonalds, and 7-Eleven.
Franchisee:
Definition: A franchisee is an individual who purchases the rights to use a
companys trademarked name and business model to do business. The franchisee
purchases a franchise from the franchisor. The franchisee must follow certain rules
and guidelines already established by the franchisor, and in most cases the
franchisee must pay an ongoing franchise royalty fee to the franchisor.

Franchisee is the one who purchases a franchise. The franchisee then runs that
location of the purchased business. He or she is responsible for certain decisions,
but many other decisions (such as the look, name, and products) are already
determined by the franchisor and must be kept the same by the franchisee. The
franchisee will pay the franchisor under the terms of the agreement, usually either a
flat fee or a percentage of the revenues or profits, from the sales transacted at that
location.
Franchisor:
Definition: The franchisor owns the overall rights and trademarks of the company
and allows its franchisees to use these rights and trademarks to do business. The
franchisor usually charges the franchisee an upfront franchise fee for the rights to do
business under the franchise name. In addition, the franchisor usually collects an
ongoing franchise royalty fee from the franchisee.
The company that allows an individual (known as the franchisee) to run a location
of their business.
The franchisor owns the overarching company, trademarks, and products, but gives
the right to the franchisee to run the franchise location, in return for an agreed-upon
fee. Fast-food companies are often franchised.
Franchisors are available in every industry / sector to work with entrepreneurs (the
Franchisee) to help them develop successful business opportunities (franchises).
The franchisor typically provides marketing, sales assistance and lends corporate
credibility.
Franchising:
Introduction:
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Franchising is a business model in which many different owners share a single

brand name. A parent company allows entrepreneurs to use the company's strategies
and trademarks; in exchange, the franchisee pays an initial fee and royalties based
on revenues. The parent company also provides the franchisee with support,
including advertising and training, as part of the franchising agreement.
Franchising is a faster, cheaper form of expansion than adding company-owned
stores, because it costs the parent company much less when new stores are owned
and operated by a third party. On the flip side, potential for revenue growth is more
limited because the parent company will only earn a percentage of the earnings
from each new store. 70 different industries use the franchising business model, and
according to the International Franchising Association the sector earns more than
$1.5 trillion in revenues each year.
Franchising is the practice of using another firm's successful business model. The
word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is
used both as a noun and as a (transitive) verb. For the franchisor, the franchise is an
alternative to building 'chain stores' to distribute goods that avoids the investments
and liability of a chain. The franchisor's success depends on the success of the
franchisees. The franchisee is said to have a greater incentive than a direct employee
because he or she has a direct stake in the business.
Essentially, and in terms of distribution, the franchisor is a supplier who allows an
operator, or a franchisee, to use the supplier's trademark and distribute the supplier's
goods. In return, the operator pays the supplier a fee.
Thirty three countries, including the United States, and Australia, have laws that
explicitly regulate franchising, with the majority of all other countries having laws
which have a direct or indirect impact on franchising.

What is Franchising?
A continuing relationship in which a franchisor provides a licensed privilege to the
franchisee to do business and offers assistance in organizing, training,
merchandising, marketing and managing in return for a monetary consideration.
Franchising is a form of business by which the owner (franchisor) of a product,
service or method obtains distribution through affiliated dealers (franchisees).
Arrangement where one party (the franchiser) grants another party (the franchisee)
the right to use its trademark or trade-name as well as certain business systems and
processes, to produce and market a good or service according to certain
specifications. The franchisee usually pays a one-time franchise fee plus a
percentage of sales revenue as royalty, and gains (1) immediate name recognition,
(2) tried and tested products, (3) standard building design and dcor, (4) detailed
techniques in running and promoting the business, (5) training of employees, and
(6) on going help in promoting and upgrading of the products. The franchiser gains
rapid expansion of business and earnings at minimum capital outlay.
An individual who purchases and runs a franchise is called a "franchisee." The
franchisee purchases a franchise from the "franchisor." The franchisee must follow
certain rules and guidelines already established by the franchisor, and in most cases
the franchisee must pay an ongoing franchise royalty fee, as well as an up-front,
one-time franchise fee to the franchisor. Franchising has become one of the most
popular ways of doing business in today's marketplace. In most states you cannot
drive three blocks without seeing a nationally recognized franchise company.
History of franchising
Earliest Franchising:
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Many believe that Albert Singer, founder of the Singer sewing machine, was the
initiator of franchising. He was actually the earliest person recognized by most as
being associated with franchising. However, the concept of franchising really began
long before.
The term 'franchising' derived from ancient French, is defined as holding a
particular privilege or right.
Back in the middles ages, local leaders would designate privileges to citizens. Some
of these rights included conducting fairs, running markets, and operating ferries.
The franchising idea then carried forward to the practice of Kings yielding rights to
conduct activities such as beer brewing and road building. In addition, the
expansion of the church is known as a form of franchising.

The Evolution of Franchising

During the 1840's, several German ale brewers granted rights to particular taverns to
market their ale. This was the beginning of the type of franchising that became
familiar to most of us in the twentieth century.
Franchising then travelled from European brewers into the United States. Before
franchising there was not much in the way of chain operations, which would
eventually form the basis of franchising in the U.S.
Peddlers in early American history, selling items from town to town, were also
considered a form of franchising. Licenses were provided to general stores at
military outposts as well. These exclusive territorial rights are described in written
literature, however specific names are not.

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Albert Singer came on the scene in 1851 with the Singer Sewing Machine
Company. Singer made use of franchising to distribute his machines over a
widespread geographic area. He is the first actual name recognized as an early
franchisor. Additionally, Singer was the first to prepare franchise contracts. These
documents then became the basis for the modern version of franchise agreements.
Franchising has had a long history, but the concept is widely believed to have
started from sewing manufacturer, Albert Singer. The idea came about to address
one common problem in business: funding.
In the 1850s, the Singer Company produced sewing machines, but could not pay its
salesmen their salaries. As an alternative, the company created a network of dealers
who paid Singer a fee to sell the machines. These first franchise owners made
money for each sewing machine they bought from Singer and eventually resold
within their particular territories.
In 1851, Isaac Singer accepted fees from independent salesmen to acquire territorial
rights to sell his recently invented sewing Machine. The Singer Company began
granting distribution franchises and was the first Company to write franchise
contracts. In the late 1880s Cities began giving franchises to newly established
electricity companies. Around the turn of the Century oil companies and automobile
manufacturer began to grant rights to sell their new inventions. White Castle was
the first fast food hamburger franchise chain in America, opening 1921 and sold
since then over 12 billion hamburgers. A&W started franchising their root beer
stands in 1921.
In the late 1800's and early 1900's many other forms of franchising took place.
Some examples included monopolized franchises for several utilities as well as
street car companies. Then as oil refineries and auto manufacturers found that they
could sell their products over a larger geographical area, they began to franchise.

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Transportation and increasingly mobile Americans were the basis for the
establishment of retail and restaurant chains/franchises. As time went on a large
number of establishments began to franchise. Some of the well-known franchises
include Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950, Burger King in
1954, and McDonald's in 1955.
Other prominent examples abound in history. Coca-Cola, for example, was
originally created as a fountain drink until Benjamin Thomas and Joseph Whitehead
obtained permission in 1899 to bottle the soda. Upon realizing that they alone could
not afford to create a bottling company, the two created a franchise company that
sold the right to bottle the cola to individual plants.
In the Philippines, franchising also traces its roots to the Singer Sewing Machine. In
that period franchising was limited only to foreign businesses and public utilities
services until the Philippine Franchising Association was created in 1995. During
that time, there were only 111 franchise concepts which eventually grew to 967
concepts in 2007.
Over the years, franchising has become a lucrative enterprise.
In the Philippines, the number of franchise concepts has grown by 19.8% in a span
of 12 years to 2007.
In the same year, of the total number of franchise concepts, 43% are in the food
sector, 28% and 21% involve retail and services, respectively, and 3% are engaged
in specialized services such as hotel services and memorial services.
According to Philippine Chamber of Commerce and Industry President Samie Lim,
franchising is a promising venture given the countrys growing consumer market
and rising per capita incomes and rate of urbanization.

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The emergence of the business-process outsourcing industry also gives

opportunities for establishments to extend their operating hours to cater to different
workers throughout the day, especially to those working in graveyard shifts.
According to Philippine Franchise Association (PFA) President Robert F. Trota,
franchising remains a good business option amid the economic slowdown.
The continued inflow of OFW remittances also provides adequate support from
both the supply and demand side. Remittances enable some households or persons
to venture into franchising; at the same time, remittances also boost the
consumption of goods and the patronage of various services that franchised
establishments offer.
The overall effects on the economy have been substantial. In the latest PFA study
presented by the chairman emeritus Samie Lim, income from franchising represents
some five percent of the countrys gross domestic product from 2005 to 2007, which
translates to approximately P106.75 billion for the economy. It is also an important
means to create enterprise and generate employment, creating an estimated 200,000
franchise outlets and employing almost a million of Filipinos nationwide.
Department of Trade and Industry Undersecretary Zenaida Maglaya has noted that
franchising is a sure and secure way to a successful business due to the availability
of technology, formula, and the process, giving the entrepreneur an advantage since
he or she will not necessarily start from scratch
Modern Franchising
The modern leading form of franchising, known as business format franchising,
became popular post World War II. At that time, those serving in the war returned
home and had huge desires for many products and services. Subsequently, the baby

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boomers became the leaders of the economy and are expected to continue as the
driving force for quite some time.
As franchising expanded rapidly in the 1960's and 1970's, also came a large amount
of oppressive activity to contend with. There were several companies that were
under-funded and poorly managed, therefore going bankrupt leaving many
franchisees in a lurch. More upsetting were the fraudulent companies who literally
took peoples' money for nothing.
These unfortunate events led to the formation of the International Franchise
Association (IFA) in order to regulate the franchising industry. The IFA
continuously works in conjunction with the US Congress and Federal Trade
Commission (FTC) on improving the industry's relations with franchisees. In 1978,
the FTC created the Uniform Offering Circular (UFOC) requiring franchise
companies to provide detailed information to potential franchisees. This document
was updated in 2007 and renamed the Franchise Disclosure Document (FDD).
Franchising continues to be a highly regulated industry in an effort to promote the
healthy growth of the economy. Franchising has become an easy and convenient
way to deliver goods and services to consumers. Aside from usual food and
beverage establishments, other services such as salons, hotels, and many others are
now also open for franchising.
Clearly, consumers are not the only ones benefiting from the welcome convenience
offered by quick services or from the wider range of products and services made
available to them.
Franchisers, in turn, also reap the benefits through profit.
How Franchising Works:

15

The franchising business model consists of two operating partners: the franchisor, or
parent company, and the franchisee, the proprietor that operates one or multiple
store locations. Franchising agreements usually require the franchisee to pay an
initial fee plus royalties equal to a certain percentage of the store's monthly or
yearly sales. Initial fees vary significantly across each industry, ranging from
$35,000 for an Applebee's restaurant to over $85,000 to open a Hilton
hotel. Royalty fees are also variable - for example, Intercontinental Hotels Group
(IHG) franchisees are required to pay the company 5% of their yearly sales, while
Applebee's franchisees pay 4% of monthly sales and IHOP franchisees pay a 4.5%
royalty fee of weekly sales. The franchisee also covers the costs of actually starting
and operating the store, including legal fees, occupancy or construction costs,
inventory costs, and labour. Franchise agreements usually have a term of between
10 and 20 years, depending on the company.
The parent company authorizes the franchisee's use of the company's trademarks
(for example, selling Big Mac's at McDonald's) as part of the franchising
agreement. Additionally, the franchisor provides training and support as well as
regional and/or national advertising.
Types of Franchising:
The main distinguishing feature of a franchise is its structure--in other words, the
rights that the franchisor allows a franchisee to have regarding the franchisor's
products or services. However, a secondary classification of franchise types does
exist; it's based on the type of franchise ownership. The following is an overview of
the types of franchise structures and ownership classifications.
Manufacturer Franchise Structure

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One of the lesser-known franchise structures is called a manufacturer franchise. The

focus of this type of franchise, as the name suggests, is on the manufacturing phase
of a product's lifecycle. Owners of a manufacturer franchise have the right to
manufacture a franchisor's product. In some cases, he also may have the right to sell
and distribute the products as well.
Product Franchise Structure
Those who buy into a business structured as a product franchise are purchasing the
right to sell and/or distribute a particular product from a manufacturer. For example,
an auto repair shop owner may decide that he wants to sell tires in order to add a
revenue stream for the business. In order to have inventory on hand, selected tire
manufacturers may require that the auto shop become a product franchisee before it
allows the shop to carry its tires.
Business Format Franchise Structure
The most common type of franchise structure is the business format franchise. In
this type of franchise, the franchisee is buying the right to more than just producing
and distributing a franchisor's product as in the manufacturer type of franchise, and
more than simply selling a franchisor's product as in the product type of franchise.
Instead, entrepreneurs who choose the franchise business format are really
purchasing the franchisor's strategic business operation model, which has proven to
be effective; and the right to produce, distribute and/or sell the franchisor's goods
and/or services comes along with that purchase.
Single-Unit Franchise Ownership
As stated earlier, types of franchises are categorized not only by the structure but
also by ownership. The most common type of franchise ownership is one that is
offered as a single-unit franchise. This type of franchisee purchases the right to own
17

and operate one franchise location. Most entrepreneurs who invest in a franchise--whether as a business format franchisee, a product franchisee or a manufacturer
franchisee---buy into the franchise as this type of franchise owner.

A single-unit

franchise is the most common type of franchise available. It is a franchise that the
franchisee purchases directly from the franchiser or an appointed agent of the
franchiser, and is for a single business unit in one physical location. The franchisee
is sometimes assigned a territory by the franchiser, or the franchisee may already
have a location in mind that will require approval from the franchiser. In many
cases, the franchiser will protect a territory for a franchisee within a certain radius to
avoid inter-company competition.
To become a single-unit franchisee, it is recommended that you have a basic
understanding of how business works or that you have strong team in place to
advise you. A franchisee is expected to be very hands-on with running his or her
business unit.
Multi-Unit & Area Development Franchise Ownership
Aggressive or experienced franchisees may opt for a more involved type of
franchise ownership such as multi-unit franchise ownership or area development
franchise ownership. The two types of franchise ownership types are similar in that
the franchise owner has more to manage than a single-unit franchise owner and they
differ only in how and what is managed. The multi-unit franchise owner manages
multiple franchise locations while the area development franchise owner typically
owns a single franchise that has the right to do business across a vast area---multiple
cities or states, for instance.
A multi-unit franchise occurs when the same franchisee is granted multiple units by
the same franchiser. These units can be within a specific geographic region
negotiated between the two parties, or it can be multiple units with random
18

geographic locations. In many cases, a franchiser will offer multiple units to a

successful single-unit franchisee, and then offer discounts in licensing fees to start
more locations. In some cases, franchisers may award multi-unit franchises to new
franchisees who have displayed a competence for running multiple business units
with other franchise opportunities.

An area development franchise agreement is typically offered to companies

or individuals that have already set up successful franchises for other franchisers. A
franchisee is given a geographic territory and must begin to develop units within
that territory. Normally there is a established schedule between the franchiser and
franchisee as to how many units must be set up within a predetermined time period.
The geographic area can vary depending on the business and the agreement. It can
be a region the size of a county, or it could be an entire state. If the franchisee does
not live up to the unit development schedule, his or her license could be revoked
and he or she may be subject to fines. Normally the franchiser offers special
licensing pricing and ongoing royalty pricing to area development franchisees.
Master Agreement
The master franchise agreement is rare, but it is something that many franchisees
look to have. A master franchise owner is similar to an area development franchiser
in that he or she is given a geographic region and cost breaks for the agreement, but
the master franchisee can also sell franchises on behalf of the franchiser and collect
part of the regular royalty for the franchise as well. The master franchise owner
speaks as the appointed representative of the franchisee for their region, and the
region is normally larger than one given to an area development franchisee.
Absentee Franchisee

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There is one other kind of franchise agreement, which allows someone to

start a franchise but not have to be the hands-on manager. In this case of the
absentee franchisee, the agreement is made in advance that the franchisee will not
be the day-to-day operator of the franchise, but that he or she will be responsible for
reporting royalties and income to the franchiser. This allows people to have a
franchise without leaving their regular employment.
Companies Involved:
The franchising business model is used across many industries, but it is most
popular in the fast food restaurants, hotel, and casual & upscale restaurants
industries. According to an International Franchise Association study, franchiseeowned locations accounted for 56.3%, 18.2%, and 13.1% of each respective
industry's total locations in 2001.
Fast Food Restaurants
McDonald's (MCD) operates the world's largest fast food chain, and earns 37% of
its revenue from franchising across its approximate 31,400 restaurant locations.
Franchisees operate 65% of McDonald's restaurants worldwide.
Yum! Brands (YUM) runs over 35,000 locations of its A&W, KFC, Pizza Hut, Taco
Bell, and Long John Silvers restaurant chains worldwide. The company franchises
72% of its restaurants which accounted for 12.6% of the company's revenue in
2007.
Burger King Holdings (BKC) operates 11,000 restaurants of its fast food Burger
King chain worldwide and earned $2.3 billion in revenue in 2007. Franchisees
operate 88.5% of Burger King locations, which account for 22% of the company's
revenue.

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Hotel
Intercontinental Hotels Group (IHG) operates hotels and resorts under the
InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express,
Candlewood Suites, and Staybridge Suites brand names. The company franchises
76% of its hotels, which accounted for 33% of the company's revenue in 2007.
Starwood Hotels & Resorts Worldwide (HOT) operates luxury hotels under the St.
Regis, Luxury Collection, W, Westin, Le Meridien, Sheraton, Four Points, Aloft,
and Element brand names. Approximately 44% of the company's hotels are operated
by franchisees. Approximately 44% of the company's 2007 revenue was earned
through franchising operations.
Casual & Upscale Restaurants
Denny's (DENN) operates 1,546 restaurants nationwide, 75% of which are
franchisee-owned. The company's franchise operations accounted for 10.1% of
Denny's revenue in 2007.
DineEquity, Inc. (DIN) runs 1,344 IHOP restaurants and 1,976 Applebee's
restaurants, two casual dining chains. Franchisees operate about 84% of DIN's
restaurants, which together accounted for 42.5% of the company's revenue in 2007.
Retail
Blockbuster (BBI) is a leading provider of in-home movie and game entertainment
that focuses on movie and video game rentals. Franchisees operate 22.4% of the
company's stores, which account for 12.3% of Blockbuster's revenue in 2007.
Rental & Leasing Services
Avis Budget Group (CAR) operates two car rental companies, Avis, and Budget and
is the largest publicly-traded car rental company in the United States. The company
21

franchised 39% of its Avis locations and 57% of its Budget locations nationwide,
which together contributed to 9% of company's 2007 revenue.
Dollar Thrifty Automotive Group (DTG) operates in the rental car industry,
specializing in airport car rentals. Franchisees operate 44% of the company's
locations, but only account for 3.8% of DTG's 2007 revenue.

Beverage Bottling Groups

Coca-Cola Enterprises (CCE) serves as the largest bottler of beverages for the CocaCola Company (KO), producing 20% of KO's beverages worldwide. As a separate
company, CCE operates as a franchisee- CCE agrees to buy all its concentrates from
KO, while KO grants CCE the rights to produce, market, and sell its products.
Pepsi Bottling Group (PBG) operates under the same terms as CCE and KO in
relation with Pepsico (PEP). PBG earned almost $14 billion in revenue in 2007.
Franchisee Groups
Carrols Restaurant Group (TAST) is a franchisee conglomerate that operates over
560 restaurants under the Burger King, Pollo Tropical, and Taco Cabana brand
names. In 2007, the company earned $645 million in revenue.
Lodgian (LGN) operates 46 hotels nationwide as a franchisee, operating hotels like
Hilton and Holiday Inn. The company earned approximately $278 million in
revenues in 2007.

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Prospects

In addition to the emergence of the business process outsourcing units, the

franchising industry also sees tourism as a road to market expansion for local
businesses.

According to Franchising in the Philippines in 2008: Country Report, tourist inflows

afford franchisers an opportunity to acquire concepts from the country where these
foreigners come from to cater their needs and preferences.

In addition, the franchising industry can capture more investment in the forward and
backward linkages in the tourism industry; in this case, they can venture into travel
and transport services, hotel and other accommodation services, food and beverage,
and others.

The franchising industry also boasts a competitive stance in franchising operations

abroad. In fact, the Philippines ranked 4th in the world when it comes to franchising
concepts (and 1st among ASEAN nations). With its success in the local market,
some brands such as Jolibee, Bench, Maxs Restaurant, etc. have penetrated and
established their grounds in the foreign market.

Indeed, the franchising industry has proven to be a successful business in the

country, surviving even in tough economic times. Further, this business has indeed
23

provided starting entrepreneurs a good head start in the world of business, given the
readily available technology and process of running the franchise. With its growth
in the local market and penetration in the international market, this venture is indeed
a good business prospect.
20 years of franchising in the Philippines
(Source: The Philippine Star News Online - 07/29/12)
Manila, Philippines - Some 20 years back, the then infant franchising industry in the
Philippines only had less than 50 players, with 80 percent of them foreign brands.

Now, under the stewardship of the founders of the Philippine Franchise Association
(PFA), franchising in the country exploded into an $11 billion industry that consists
of over 1,300 franchise concepts, more than 124,000 franchisees and employee base
of 1.1 million.

In the past 20 years, the Philippine franchising industry is likened to an hourglass,

wherein entrepreneurs and retail concepts squeeze through the small ring of
purification to become a franchise, which can now go forth and multiply and create
thousands of SMEs and millions of jobs, Samie Lim, the acknowledged father of
Philippine franchising, emphasized.

The success story of the industry dates back to the early 90s when Lim toured the
United States and Europe as head of the Federation of Asian retailers. In the
conferences that he attended, Lim learned that franchising is the fastest growing
industry.
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So in 1993, realizing the potential of franchising as a major economic growth

catalyst for the Philippines, Lim and industry pioneers such as Jose T. Pardo and
Vicente T. Paterno joined hands and held the countrys first franchise expo. The
event grew bigger the following year, giving the then industry bigwigs the reason to
create an industry association.

That time, the Top 10 franchisers in the country were only meeting among
themselves regularly where they talk about best practices. This small group was
convinced by Lim, Pardo and Paterno to spearhead the establishment of the
Philippine Franchise Association in 1995. Lim, although he was not a franchiser
then, served as the founding father, which is a testament to the efforts he put in to
bring together the industry players.

PFA then approached the USAID, through the Private Investment and Trade
Opportunities headed by Sergio Ortiz-Luis, and obtained a $10,000-funding support
for the creation of an industry master plan using the American example.

The gist of that study is we identified the 10 different sectors that are best suited
for franchising, and we focused on them. With that came the development of local
and foreign franchises like Jolibee, Lim explained.

With homegrown business concepts sprouting, PFA included an incubation pavilion

at the annual franchise expo to support the high potential business ideas. Those who
25

got the nod of the PFA screening committee got free booths, thus, giving them free
exposure to prospective buyers, investors and partners.

The PFA also talked to the colleges and universities like the University of Asia &
the Pacific and Ateneo School Management to dedicate areas for food stalls that
were conceptualized by students. And through the Philippine Chamber of
Commerce and Industry (PCCI), PFA also launched the Business Ideas
Development Award (BIDA). It awarded the best business ideas that were sent by
students and gave them free space again at the expo.

Then came the next big thing financing. Out of 100 who come forward to say
they want to franchise, only five are really qualified because the rest do not have
enough money. So we brought in the banks and now we have BPI Family Savings
Bank, Banco de Oro, Philippine National, Planters Bank, SB Corp., Development
Bank of the Philippines, and PS Bank as the top lenders to the industry, Lim said.
With funding no longer a problem, Lim said franchisers and franchisees are now
also able to acquire multi-brands.

And now, the Philippines is being used as staging point of foreign franchises that
are establishing presence in Asia. And more importantly, Filipino brands such as
Maxs, Jolibee and Potato Corner are now doing good in the international arena.

The strong growth of the industry was mainly private sector-led as in contrast to the
other countries that provide numerous support schemes to their franchisers, the PFA
toiled on its own, and even turned it into an advantage. Since we are basically
26

private sector-led, we are more consistent, unlike the others where policies change
when there is a change of government, Lim further explained.

The Philippines also benefited a lot from PFAs membership in the World Franchise
Congress as the country is able to get experts that give valuable pointers to the
industry players during the annual Franchise conference.

As of this year, we have the largest franchise exhibit in the world the Franchise
Asia Philippines (FAP) 2012. We are able to do this because we are consistently
growing. With last years World Franchise Conference hosted by the Philippines,
the word is now out that if you want to go to Asia, you should go to the Philippines.

We are building from last year and I hope we can sustain that, Lim stressed. This
years International Franchise Expo, which is one of the four major components of
FAP 2012, will have about 500 firms exhibiting at the 10,000- square meter SMX
Convention Center exhibition halls, with over 50,000 visitors expected. Visitors and
exhibitors are expected from US, Canada, Guam, Africa, Pakistan, Bangladesh,
Middle East, Thailand, Malaysia, Taiwan, China, Japan and Korea.

Lim said he is now seeking to harness the programs of Tesda director general Joel
Villanueva to further boost the potential of Philippine franchising.

Lim noted he agrees with Villanueva that Filipinos should change their notion that
college diploma is important to be able to land a good job. Lim hopes to partner
27

with Villanueva in launching nationwide several short courses that will serve the
employment requirements of the franchising industry. These include short courses
for baristas, waitering, and even basic housekeeping.

With Tesdas help, we can improve the competitiveness of Philippine franchise

concepts because we will have workers that have standardized knowledge and
skills. That is what franchising is all about, having professionalized and
standardized operations, Lim added.
Franchise Agreement:
A Franchise Agreement is a legal, binding contract between a franchisor and
franchisee, enforced in the United States at the State level. Prior to a franchisee
signing a contract, the US Federal Trade Commission regulates information
disclosures under the authority of The Franchise Rule.
Once the Federal ten day waiting period has passed, the Franchise Agreement
becomes a State level jurisdiction document. Each state has unique laws regarding
franchise agreements. A franchise agreement contents can vary in content depending
upon the franchise system, the state jurisdiction of the franchisor, franchisee, and
arbitrator.
A typical franchise agreement contains:
Uniform Franchise Offering Circular (UFOC)or FDD Franchise Disclosure
Document (FDD)
Disclosures required by state laws
Parties defined in the agreement
28

 Recitals, such as Ownership of System, and Objectives of Parties

Definitions, such as:
Agreement, Territory Area, Area Licensee, Authorized deductions, Gross
Receipts, License Network, The System Manual, Trademarks, Start Date,
Trade name, Termination, Transfer of license.
Licensed Rights, such as
Territory, Rights Reserved, Term and Renewal, Minimum Performance
Standard
Franchisors Services, such as:
Administration, Collections and Billing, Consultation, Marketing, Manual,
Training
Franchisee Payments, such as
Initial License Fee, Training Fees, Marketing Fund, Royalties, Renewal fee,
and Transfer fee
Franchisee Obligations, such as:
Use of Trademarks, Financial Information, Insurance, Financial and Legal
responsibility
Relationship of Parties, such as:
Confidentiality, Indemnification, Non-Compete
Transfer of License, such as

29

 Consent of franchisor, Termination of license, Termination by licensee

Other provisions
Governing law
Amendments
Waivers
Arbitration
Severability
Franchise Disclosure Document:
A franchise disclosure document (FDD) is a legal document which is presented to
prospective buyers of franchises in the pre-sale disclosure process in the United
States. It was originally known as the Uniform Franchise Offering Circular (UFOC)
(or uniform franchise disclosure document), prior to revisions made by the Federal
Trade Commission in July 2007. Franchisors were given until July 1, 2008 to
comply with the changes.
The Federal Trade Commission Rule of 1979 which governs disclosure of essential
information in the sale of franchises to the public underlies the state FDD's and
prohibits any private right of action for the violation of the mandated disclosure
provisions of the FDDs. Therefore, the FDD implies that only the federal
government or the state governments have the right to sue and negotiate consent
decrees and rescissions with those franchisors who violate the provisions of the FTC
Franchise Rule and the Franchise Disclosure Document (FDD).

30

The Franchise Rule specifies FDD disclosure compliance obligations as to who

must be the one to prepare the disclosures, who must furnish them to prospective
franchisees, how franchisees receive the disclosures, and how long franchisees must
have to review the disclosures and any revisions to the standard franchise
agreement.
The FDD underlies the franchise agreement (the formal sales contract) between the
parties at the time the contract is formally signed. This franchise sales contract
governs the long-term relationship and contains the ONLY promises and obligations
of the parties to each other that will remain in effect over the stated time term of the
contracts the terms of which generally range from five to twenty years. The
contracts cannot be changed unless there is agreement of both parties.
Under the Franchise Rule, which is enforced by the Federal Trade Commission
(FTC), a prospective franchisee must receive the franchisors FDD franchise
disclosure document at least 14 days before they are asked to sign any contract or
pay any money to the franchisor or an affiliate of the franchisor. The prospective
franchisee has the right to ask for (and get) a copy of the sample franchise
disclosure document once the franchisor has received the prospective franchisees
application and agreed to consider it. The franchisor may provide a copy of its
franchise disclosure documents on paper, via email, through a web page, or on a
disc.
Franchise disclosure document requirements:
According to the Federal Trade Commission, there are 15 states that require
franchisors to give a FDD to franchisees before any franchise agreement is signed.
Thirteen of those states require that they be filed by a state agency for public record.
The document discloses extensive information about the franchisor and the
franchise organization which is intended to give the potential franchisee enough
31

information to make educated decisions about their investments. The information is

divided into a cover page, table of contents and 23 categories called "Items":
Twenty one of the items contain information primarily pertaining to the franchisor
but, unfortunately, only two of the items contain information pertaining to the
performance of the franchise, itself, that is being offered for sale. One of these
items, Item 19, "Earnings Claims" is an optional disclosure under the FTC Rule and
State FDDs even though the performance of the franchise in terms of unit
"earnings" are material facts that should be disclosed to new buyers by the seller of
the franchise, who profits from the sale.
The other, Item 20, provides a current accounting of the number of units that
comprise the systems and reports the terminations and sale-transfers which have
been applied to report the total number of units that comprise the system. Item 20
also provides the names and contact information of franchisees, current and exfranchisees, who may be contacted for information in the due diligence process to
be conducted by prospective buyers of the franchises offered for sale. Unfortunately,
due diligence conducted with Item 20 references is not always reliable because, of
course, these references have no legal duty to disclose the performance statistics of
their independent businesses to new buyers of franchises.
The Franchisor and Any Parents, Predecessors, and Affiliates:
This section tells how long the franchisor has been in business, likely competition,
and any special laws that pertain to the industry, like any license or permit
requirements. This will help the prospective franchisee understand the costs and
risks they are likely to take on if they purchase and operate the franchise.
Identity and Business Experience of Key Persons:

32

This section identifies the executives of the franchise system and describes their
experience.
Litigation History:
This section discusses prior litigation, whether the franchisor or any of its executive
officers have been convicted of felonies involving fraud, violations of franchise
law, or unfair or deceptive practices law, or are subject to any state or federal
injunctions involving similar misconduct. It also says whether the franchisor or any
of its executives have been held liable foror settled civil actions involvingthe
franchise relationship. A number of claims against the franchisor may indicate that it
has not performed according to its agreements, or, at the very least, that franchisees
have been dissatisfied with its performance.
This section also should say whether the franchisor has sued any of its franchisees
during the last year, a disclosure that may indicate common types of problems in the
franchise system. For example, a franchisor may sue franchisees for failing to pay
royalties, which could indicate that franchisees are unsuccessful, and therefore,
unable or unwilling to make their royalty payments.
Bankruptcy:
This section discloses whether the franchisor or any of its executives have been
involved in a recent bankruptcy, information that can help potential franchisees
assess the franchisors financial stability and whether the company is capable of
delivering the support services it promises.
Initial Franchise Fee:
This section describes the costs involved in starting and operating a franchise,
including deposits or franchise fees that may be non-refundable, and costs for initial

33

inventory, signs, equipment, leases, or rentals. It also explains on-going costs, like
royalties and advertising fees.
Other Fees and Expenses:
Training:
This section explains the franchisors training and assistance program.
Advertising:
This section has information on advertising costs. Franchisees often are required to
contribute a percentage of their income to an advertising fund.
Franchisee's Estimated Initial Investment:
Restrictions on Sources of Products and Services:
This section tells whether the franchisor limits:
Suppliers from whom a franchisee may purchase goods

Obligations of the Franchisee:

Financing Arrangements.
Obligations of the Franchisor.
Territory.
Trademarks.
Patents, Copyrights, and Proprietary Information.

34

 Obligation of the Franchisee to Participate in the Actual Operation of the

Franchise Business.
Restrictions on Goods and Services Offered by the Franchisee.
Renewal, Termination, Repurchase, Modification and/or Transfer of the
Franchise Agreement, and Dispute Resolution.
This section spells out the conditions under which the franchisor may end a
franchisees franchise and a franchisees obligations to the franchisor after
termination. It also defines the conditions under which a franchisee can renew,
sell, or assign the franchise to others.
Public Figures
Financial Performance Representations.
Earnings information can be misleading:
Franchisors are not required to disclose information about potential income or sales,
but if they do, the law requires that they have a reasonable basis for their claims and
that they make the substantiation for their claims.
Franchisors practicing Franchise fraud may have a high number of former
franchisees under a Gag order, preventing a potential new franchisee from obtaining
a clear picture of financial performance.
Sample Size
The disclosure document should tell the sample size and the number and percentage
of franchisees who reported earnings at the level claimed.
Average Incomes
35

Average figures tell very little about how individual franchisees perform. An
average figure may make the overall franchise system look more successful than it
is because just a few very successful franchisees can inflate the average.
Gross Sales
These figures dont really tell about the franchisees actual costs or profits. An outlet
with high gross sales revenue on paper may be losing money because of high
overhead, rent, and other expenses.
Net Profits
Franchisors often do not have data on net profits of their franchisees.
Geographic Relevance
Earnings may vary with geography. The disclosure document should note
geographic or other differences among the group of franchisees whose earnings are
reported and a franchisees likely location.
Franchisees Backgrounds
Franchisees have different skill sets and educational backgrounds. The success of
some franchisees doesnt guarantee success for all.
Reliance on Earnings Claims
Franchisors may ask a franchisee to sign a statement sometimes presented as a
written interview or questionnairethat asks whether a franchisee received any
earnings or financial performance representations during the course of buying a
franchise.
List of Franchise Outlets
36

This section has very important information about current and former franchisees.
Many franchisees in an area may mean more competition for customers. The
number of terminated, cancelled, or non-renewed franchises may indicate problems.
The sale-transfer columns can obscure churning of units through fire sales to third
parties by failed or failing franchisees. Some companies may repurchase failed
outlets and list them as company-owned outlets.
Some of the former franchisees may have signed confidentiality agreements that
prevent them from speaking. Franchisors practicing Franchise fraud may have a
high number of former franchisees under a Gag order.
If a franchisee buys an existing outlet that was reacquired by the franchisor, the
franchisor must tell the franchisee who owned and operated the outlet for the last
five years. Several owners in a short time may indicate that the location isnt
profitable or that the franchisor hasnt supported that outlet as promised.
Financial Statements:
The disclosure document gives important information about the companys financial
status, including audited financial statements.
A franchisee can find explanatory information about the franchisors financial status
in notes to the financial statements.
Investing in a financially unstable franchisor is a significant risk; the company may
go out of business or into bankruptcy after a franchisee has invested their money.
A lawyer or an accountant can review the franchisors financial statements, audit
report, and notes. They can help a franchisee understand whether the franchisor:
has steady growth

37

 has a growth plan

makes most of its income from the sale of franchises (Franchise fraud), or
from continuing royalties.
devotes sufficient funds to support its franchise system
Contracts
Acknowledgment of Receipt.

STARBUCKS

38

The STARBUCKS Story:

Starbucks Corporation is an American global coffee company and coffeehouse
chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in
the world, with 20,366 stores in 61 countries, including 13,123 in the United States,
1,299 in Canada, 977 in Japan, 793 in the United Kingdom, 732 in China, 473 in
South Korea, 363 in Mexico, 282 in Taiwan, 204 in the Philippines, and 164 in
Thailand.
Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground
instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell packaged
food items, hot and cold sandwiches, and items such as mugs and tumblers.
Starbucks Evenings locations also offer a variety of beers, wines, and small bites
after 4pm. Through the Starbucks Entertainment division and Hear Music brand, the
company also markets books, music, and film. Many of the company's products are
seasonal or specific to the locality of the store. Starbucks-brand ice cream and
coffee are also offered at grocery stores.
From Starbucks' founding in 1971 in Seattle as a local coffee bean roaster and
retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a
new store every workday, a pace that continued into the 2000s. The first store
outside the United States or Canada opened in the mid-1990s, and overseas stores
now constitute almost one third of Starbucks' stores. The company planned to open
a net of 900 new stores outside of the United States in 2009, but has announced 300
store closures in the United States since 2008.
39

Founding
The first Starbucks opened in Seattle, Washington, on March 30, 1971 by three
partners: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer
Gordon Bowker. The three were inspired by coffee roasting entrepreneur Alfred
Peet, whom they knew personally, to sell high-quality coffee beans and equipment.
Originally the company was to be called Pequod, after a whaling ship from MobyDick, but this name was rejected by some of the co-founders. The company was
instead named after the chief mate on the Pequod, Starbuck.
From 19711976, the first Starbucks was at 1912 Pike Place Market; it then was
never relocated. The company only sold roasted coffee and did not yet brew coffee
to sell. During their first year of operation, they purchased green coffee beans from
Peet's, and then began buying directly from growers.
The Starbucks Centre, Seattle. The company HQ, in the old Sears, Roebuck and Co.
catalogue distribution centre building
Sale and expansion
In 1984, the original owners of Starbucks, led by Jerry Baldwin, took the
opportunity to purchase Peet's. During the 1980s total sales of coffee in the USA
were falling, but sales of specialty coffee increased, forming 10% of the market in
1989, compared to 3% in 1983. By 1986 the company had 6 stores in Seattle and
had only just begun to sell espresso coffee. In 1987, the original owners sold the
Starbucks chain to former employee Howard Schultz, who rebranded his Il Giornale
coffee outlets as Starbucks and quickly began to expand. In the same year,
Starbucks opened its first locations outside Seattle at Waterfront Station in
Vancouver, British Columbia, and Chicago, Illinois. By 1989 there were 46 stores
across the Northwest and Midwest in 1989 and Starbucks was roasting over
2,000,000 pounds (910,000 kg) of coffee a year. At the time of its initial public
40

offering on the stock market in June 1992, Starbucks had grown to 140 outlets and
had a revenue of $73.5m, up from $1.3m in 1987. Its market value was $271m. The
12% portion of the company sold raised the company around $25m which would
help it double the number of stores over the next two years. By September 1992,
the share price had risen 70% to over 100 times the earnings per share of the
previous year.
Expansion to new markets and products
The first Starbucks location outside North America opened in Tokyo, Japan, in
1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of
the then 60-outlet, UK-based Seattle Coffee Company, re-branding all the stores as
Starbucks. In September 2002, Starbucks opened its first store in Latin America, at
Mexico City.
In 1999, Starbucks experimented with eateries in the San Francisco Bay area
through a restaurant chain called Circadia. These restaurants were soon "outed" as
Starbucks establishments and converted to Starbucks cafes.
In October 2002, Starbucks established a coffee trading company in Lausanne,
Switzerland to handle purchases of green coffee. All other coffee-related business
continued to be managed from Seattle.
In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and
Torrefazione Italia from AFC Enterprises for $72m. The deal only gained 150 stores
for Starbucks, but according to the Seattle Post-Intelligencer the wholesale business
was more significant. In September 2006, rival Diedrich Coffee announced that it
would sell most of its company-owned retail stores to Starbucks. This sale includes
the company-owned locations of the Oregon-based Coffee People chain. Starbucks
converted the Diedrich Coffee and Coffee People locations to Starbucks, although
the Portland airport Coffee People locations were excluded from the sale.
41

In August 2003, Starbucks opened its first store in South America in Lima, Peru.
In 2007, the company opened its first store in Russia, ten years after first registering
a trademark there.
In March 2008 they purchased the manufacturer of the Clover Brewing System.
They began testing the "fresh-pressed" coffee system at several Starbucks locations
in Seattle, California, New York and Boston.
In early 2008, Starbucks started a community website, My Starbucks Idea, designed
to collect suggestions and feedback from customers. Other users comment and vote
on suggestions. Journalist Jack Schofield noted that "My Starbucks seems to be all
sweetness and light at the moment, which I don't think is possible without quite a lot
of censorship". The website is powered by the Salesforce software.
In May 2008, a loyalty program was introduced for registered users of the Starbucks
Card (previously simply a gift card) offering perks such as free Wi-Fi Internet
access, no charge for soy milk & flavoured syrups, and free refills on brewed drip
coffee or tea. A store in Seattle known for its use of the corporation's new ideas
reopened in the fall 2010 with a modified interior design in which the espresso
machines were placed in the middle of the store.
On November 14, 2012, Starbucks announced it will purchase Teavana for $620
million dollars in cash.
On January 3, 2013, Starbucks announced it will open a store in Ho Chi Minh City,
Vietnam in February 2013.

42

Locations:
Transcontinental

Africa

Europe and Asia

South

Oceania

Asia

Europe

America

Turkey

Egypt

Russia

Morocco

North
America

Argentina Australia

Bahrain

Austria

Aruba

Brazil

New

China

Belgium

Canada

Chile

Zealand

India

Bulgaria

Curaao

Peru

Hong Kong Cyprus

El Salvador

Indonesia

Czech

Guatemala

India

Republic

Costa Rica

Japan

Denmark

Mexico

Jordan

Finland

Puerto Rico

Kuwait

France

The Bahamas

Lebanon

Germany

United States

Macau

Greece

Malaysia

Hungary

Oman

Ireland

43

Philippines Netherlands
Qatar

Norway

Saudi

Poland

Arabia

Portugal

Singapore

Romania

South

Spain

Korea

Sweden

Sri Lanka

Switzerland

Taiwan

United

Thailand

Kingdom

Vietnam
UnitedArab
Emirates

As of November 16, 2012, Starbucks is present in 61 countries.

44

Facilities
Free Wi-Fi Internet access varies in different regions. In Germany customers can get
2-hours of free Wi-Fi through BT Openzone, and in Switzerland and Austria
customers can get 30 minutes with a voucher card (through T-Mobile).
In September 2009, Starbucks in the UK rolled out free Wi-Fi at most of its outlets.
Customers with a Starbucks Card are able to log-on to the Wi-Fi in-store for free
with their card details, thereby bringing the benefits of the loyalty program in-line
with the United States. Beginning in July 2010, Starbucks offers free Wi-Fi in all of
its US stores via AT&T and information through a partnership with Yahoo!. This is
an effort to be more competitive against local chains, which have long offered free
Wi-Fi, and against McDonald's, which began offering free wireless internet access
in 2010. On June 30, 2010, Starbucks announced it would begin to offer unlimited
and free Internet access via Wi-Fi to customers in all company-owned locations
across Canada starting on July 1, 2010.
In October, 2012, Starbucks and Duracell Powermat announced a pilot program to
install Powermat charging surfaces in the tabletops in selected Starbucks stores in
the Boston area. Furthermore, Starbucks announced its support in the PMA (Power
Matters Alliance) and its membership in the PMA board, along with Google and
AT&T, in order to create a real-world ecosystem of wireless power, by creating a
universal standard for wireless charging, and to help the customers to recharge their
smart phones.
Recycling

45

Starbucks began using 10% recycled paper in their cups in 2004, which they
claimed was the first time that recycled material had been used in a product that
came into direct contact with a food or beverage. In 2005 Starbucks received the
National Recycling Coalition Recycling Works Award. Allen Hershkowitz of the
Natural Resources Defense Council called the 10% content 'miniscule' but Starbucks
claimed they only used 10% recycled material because it is more expensive.
Starbucks bought 2.5 billion cups for stores in North America in 2007. The 10%
recycled paper cups used by Starbucks are not recyclable, because the plastic
coating that prevents the cup from leaking also prevents it from being recycled. The
plastic cups used for cold drinks are also non-recyclable in most regions. Starbucks
cups were originally made using plastic No.1 (polyethylene terephthalate, PETE)
but were changed to plastic No.5 (polypropylene, PP). The former type of plastic
can be recycled in most regions of the U.S. whereas the latter cannot. Starbucks is
considering using biodegradable material instead of plastic to line the cups, and is
testing composting of the existing cups. The exception to this is stores in Winnipeg,
Manitoba, Canada, where paper cups are recycled to a local company called
"Wriggler's Wranch", where they are composted. The majority of Starbucks stores
do not have recycling bins; only 1/3 of company-owned stores recycled any
materials in 2007; however, improvements have since been made and recycling bins
are popping up in more stores (the only thing hindering Starbucks' ability to have
bins in every store is the lack of facilities for storage and collection of recycling in
certain areas.)
Starbucks gives customers a 10-cent discount when they bring their own reusable
cup, and it now uses corrugated cup sleeves made from 85 percent post-consumer
recycled fibre, which is 34 percent less paper than the original.

46

Type: Public
Traded as:

NASDAQ: SBUX

NASDAQ-100 Component
S&P 500 Component
Industry:

Restaurants

Genre :

Coffee house

Founded:

Pike Place Market in Seattle, Washington (March 30, 1971)

Founder(s):

Jerry Baldwin
Gordon Bowker
Zev Siegl

Headquarters: Seattle, Washington, U.S.

Number of locations: 20,366 in 61 countries (November 16, 2012)[1]
Area served

Worldwide:

Key people:

Howard Schultz (Chairman, President and CEO)

Products:

Whole bean coffee

Boxed tea
Made-to-order beverages
Bottled beverages
Baked goods
Merchandise
Frappuccino beverages
Smoothies

Services:

Coffee

Revenue:

US$ 13.29 billion (2012)

Operating income

US$ 1.99 billion (2012)

Net income

US$ 1.38 billion (2012)

Total assets

US$ 8.21 billion (2012)

47

Total equity

US$ 5.10 billion (2012)

Employees

149,000 (2011)

Subsidiaries: Starbucks Coffee Company

Ethos Water
Evolution Fresh
Hear Music
La Boulange Bakery
Seattle's Best Coffee
Tazo Tea Company
Teavana
Torrefazione Italia
Website:

www.starbucks.com

STARBUCKS INDIA:

48

In January 2011, Starbucks and Tata Coffee, Asia's largest coffee plantation
company, announced plans for a strategic alliance to bring Starbucks to India and
also to source and roast coffee beans at Tata Coffee's Kodagu facility. Despite a false
start in 2007, in January 2012, Starbucks announced a 50:50 joint venture with Tata
Global Beverages called Tata Starbucks. Tata Starbucks will own and operate
Starbucks outlets in India as Starbucks Coffee "A Tata Alliance". Starbucks had
previously attempted to enter the Indian market, in 2007, with a joint venture
involving its Indonesian franchise and Kishore Biyani of the Future Group.
However, the joint venture withdrew its foreign investment proposal with the Indian
government. Starbucks did not cite any reason for the withdrawal. Starbucks opened
its first store in India in Mumbai on 19 October 2012. As of February 2013,
Starbucks operates 7 outlets in 2 cities of India. (Mumbai- 4, Delhi- 3).
Agreement includes opening cafes, bean sourcing and roasting.
Starbucks is finally coming to India. The world's largest premium coffee retail chain
today announced that it has entered into an agreement with Tata Coffee for a
strategic alliance.
Under a non-binding memorandum of understanding (MoU), Starbucks will explore
setting up stores in the Tata group's retail outlets and hotels, besides sourcing and
roasting coffee beans at Tata Coffee's Kodagu facility.
Tata Coffee, one of the biggest suppliers of Arabica coffee beans, has shipped coffee
beans to Starbucks in the past and is now building a structure for a long-term
relationship, a joint release from the Tata group and Starbucks.
Starbucks, which runs over 16,000 stores worldwide, has been in talks with the
Future Group, Reliance and Jubilant for an entry into India, but none of those
discussions fructified.

49

Retail growth outside the US is now central to the company's strategy. In an investor
presentation, Starbucks International President John Culver said the company hopes
to operate at least 1,500 stores in mainland China by 2015. He also said that the
company sees exciting growth prospects in other emerging countries such as India
and Brazil.
According to the MoU, the two companies will collaborate on providing training to
local farmers, technicians and agronomists to improve coffee-growing and milling
skills. The two companies will also explore social projects in the coffee-growing
regions Tata Coffee operates.
R K Krishna Kumar, Chairman of Tata Coffee, told Business Standard that the first
Starbucks outlet could open in the next six to seven months. He said there is no
exclusive arrangement with Starbucks at the moment.
One of the hurdles that the two companies have to sort out is Starbucks franchiseeled business model something Tata is uncomfortable with. Its up to Starbucks
to decide what kind of a sustainable partner they are looking at and what will be the
shared values, Krishna Kumar said.
This MoU is the first step in our entry to India. We are focused on exploring local
sourcing and roasting opportunities with the thousands of coffee farmers within the
Tata ecosystem. We believe India can be an important source for coffee in the
domestic market, as well as across the many regions globally where Starbucks has
operations, said Howard Schultz, chairman, president & CEO, Starbucks Coffee
Company.
In the areas of sourcing and roasting, Starbucks will explore procuring green coffee
from Tata Coffee estates and roasting at the Indian companys existing facilities. At
a later phase, Tata Coffee and Starbucks will consider jointly investing in additional
facilities and roasting green coffee for export, the release said.
50

Headquartered in Seattle, Washington, Starbucks operates in more than 50 countries.

It has been sourcing coffee beans from India for the last seven years.
Tata Coffee is Asias largest coffee plantation company and the third-largest
exporter of instant coffee in the country. It produces more than 10,000 million tonne
of shade grown Arabica and Robusta coffees at its 19 estates in south India. Its two
instant coffee manufacturing facilities have a combined installed capacity of 6,000
tonne.
Devangshu Dutta, chief executive at retail consultant Third Eyesight, said Tata
offers a good platform for Starbucks. The Indian group has deep experience in
running food supplies, so it can handle that part of the outlets. But in terms of
running cafes, Tata has no specific advantage.
He said Starbucks need to address pricing issues for India, since demand is highly
elastic. It is a challenge the US Company has faced in its home market, with other
chains competing on price. Though there are several competitors in the segment
Barista (200 outlets), Cafe Coffee Day (1,040 outlets) and Costa Coffee and others
(100) analysts said the market is far from saturated.
Harish Bijoor, chief executive officer, Harish Bijoor Consults, says the agreement
provides a win-win situation for both partners. Tata can leverage the Starbucks
name, and vice versa. The entry of more players means the market will grow. India
can absorb up to an estimated 5,400 outlets; at the moment, the number is over
1,300.

51

52

Conclusion:
Franchising today has become a fast growing global business technique and is
preferable amongst investors due to the freedom of carrying out the business on
their own. The experience, training, skills that these franchisees learn from the
franchisors help them understand the business and how to successfully run it. Not
only have the global brands proven to be successful in India, but Indian franchises
too are expanding globally.

Bibliography:
Franchising- How to Franchise by Gregory Smith
Starbucks in India- Business Standard
Wikipedia

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Franchising Agreements- The franchise agreement book by Samuel Worchester

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