Profitability of a Coffee Shop Franchise

There has been a spike recently in the number of people asking the VCSFA whether they can make money with a Blenz or a Waves coffee shop franchise, or any other coffee shop franchise.  The former two brand names have the largest presence in the ‘speciality coffee’ market in Vancouver – hence more people asking about them.   This article will apply to any coffee shop franchise, not just the big ones.  This topic has always been the elephant in the room but it’s time to drag that beast into the spotlight and talk about it.

The short answer to the question is: ask the franchisee’s accountant

First, let’s clear up the business basics.  This article about the profitability of a Quiznos franchise is very similar to a coffee shop franchise in regards to the breakdown of numbers  – so much so that we don’t have much to add or alter. Take a minute to read the shocking truth

So we’ve established that it’s tough on a good day to make money as a coffee shop franchisee.  Just to be balanced we will present this interesting article about how a franchisor is not necessarily making money, even though they may have over 50 locations.  There is one Vancouver coffee shop franchise with well over 50 locations and it’s next competitor approaching 30.  Many of their franchisees just assume head office is making money while they are suffering, but that may not be the case.  The big problem is that no matter what, the franchisor in their precarious position cannot be expected to open their books to anyone. If the books show heavy profit, the suffering franchisees will revolt.  If they open the books and show bad numbers, the confidence level in the brand will be eroded inside but especially outside the chain.  Perfect secrecy seems to be the name of the game for all non-public coffee shop companies – especially when discussing the allocation of the marketing/advertising pool.  Although we will soon dedicate an entire article to properly assessing the health of a franchise, let’s just say that some warning signs of non-health to look out for are as follows:

  • the head office moves from a high rent but convenient location to a far more inconvenient low rent location,
  • the sudden disappearance of head office employees (especially the talented ones),
  • abnormally high use of part time and intern (free) staff with an increasing trend,
  • the reduction of money towards the support of the franchisees,
  • marketing that involves almost exclusively contra (ie. you find the newspaper rack in all the locations and an advertisement in the same newspaper) or sponsorship relationships with media – in essence very little actual money spent promoting the brand.

One coffee shop franchisor told its franchisees ‘bus ads don’t work for our brand’ yet just a few months later they proudly announced to the same franchisees how they had received bus stop ads for free in a co-branding initiative with Visa.

Profitability should be properly examined – independently of what the franchisor claims to the potential buyer – before purchasing a franchise of any kind.  Poor Quiznos (they have some tasty stuff) has been the poster child of some bad deals, so for convenience we’ll continue using them.  This article clearly shows that profitability is not the primary concern of the franchisor. Sometimes they just want to open locations (or keep unprofitable ones going) just for the sake of showcasing their many logos around town and collecting some beefy fees when they start and turn over locations.  We are gathering conclusive evidence that Vancouver is not exempt from such practices in the coffee shop franchise world, unfortunately.

It’s important for the potential buyer to understand that the Franchisor is a salesperson – and they are very good at their job. They sell cookie cutter ‘turn-key’ businesses.  In sales, it is rare that a big focus will be put on the incredible risk involved with such a purchase – that is unless the Franchisor doesn’t want that person to buy that store for some reason.  Many franchises are far more than $100,000 to start and many of those buyers will lose most or all of that investment.  We have never heard of those stories told to any potential buyers.  This article involving our poster child shows that Franchisors can be downright abusive with their hand-crafted franchisee agreements.  Does this affect your profitability?  Yes.  If you lose your initial investment because of a crafty legal document, what did that just do to any profits you may have eked out?

Profitability is directly related to something called ‘capture rates’.  If you don’t know what that is, take a moment to read this article.  The last paragraph doesn’t use the term ‘capture rate’ but very well explains the concept.  One of our members asked their Franchisor repeatedly for the capture rates of their chain and his prospective location and these numbers were never provided him.  Unfortunately, he learned the hard way why. Thankfully, he has contributed that loss towards learning why it happened and helping educate others so they don’t make the same mistake he did.

Another practice by some Franchisors is ‘churning’.  We wrote a dedicated article a while back.  This topic should be of high importance to the potential buyer when considering profitability.  If you simply follow the history of ownership of certain locations and you find this happening, you will have to consider what kind of people you will be partnering with and whether you are alright with that.  Here is a story about churning and it happens all around the world, unfortunately.

We hope this article helped address many of the questions related to profitability in a general way.  We hope to publish more articles in the near future that focus on very targeted areas of profitability of a coffee shop business model.

As always, we look forward to your comments by emailing info@vcsfa.ca

Business in Vancouver’s Biggest BC Franchise List – A Coffee Perspective

This list was published by Business in Vancouver not that long ago and deserves some attention.  First of all, we commend Business in Vancouver for putting together lists like these and for gathering data as it’s very useful for the public, especially the potential buyer of a coffee shop franchise.

Here are some pieces of information that we pulled out of this related to coffee, but first, please familiarize yourself with the VCSFA’s exhaustive Francouver. (Franchises in Vancouver) page.

1. Out of 80 franchises, only 6 are coffee.  That’s only 7.5% of all franchises in the list – pretty low numbers, I thought, actually.  And is Tim Horton’s really a ‘coffee franchise’ or is it a ‘food franchise’?  That discussion is up for debate.  We will give them the benefit of the doubt as well as add McDonalds to our Francouver list since it’s not there at the time of writing this article.

Here is the list with our running commentary:

#2 Tim Horton’s: Not much to say here except I’d be carefully watching the golden arches if I were them

#3 McDonalds: They are definitely into coffee now and much better in fact, than many of their competitors – they are in a new game now and I would not be surprised to see them start to seriously eat away at #2’s coffee share.

#13 Blenz: Sheer numbers.  They were cranking out new locations until about two years ago when everything seemed to come to a grinding halt.  Economy?  Other?

#39 Waves Coffee: Very similar situation to Blenz the way they were cranking out new stores. In fact, they may have out-cranked Blenz this year… I’d like to see those stats. Waves may be heading into other provinces to crank further whereas Blenz doesn’t seem to be doing much with North America.  Let’s see where these numbers sit between Blenz and Waves next year.  They are, if you didn’t know, rivals to say the least.  We will hopefully publish that story one day but feel free to dig in yourself. It’s very interesting!  We’ll leave that for a rainy day which will likely be soon. And, apparently another Vancouver coffee franchise will be joining this story in based on some new announcements from one of these chains.

#62 Esquires: They are huge elsewhere but I was actually impressed with their footprint here (respectable numbers!)

#65 Second Cup: Still hanging in there with their Ontario fanclub.  Not much expansion in BC but apparently heading quickly into the states.

Notes for Potential Buyers

From our experience in the coffee shop franchise arena, there is a small guage that is worth looking at on this list that would likely go unnoticed. You’ll note that there is a column for ‘number of locations’ and then ‘number of franchises’.  Typically speaking you would be looking for the number to be the same and that would indicate a better health.  You should not see the gap between the number growing and if you do, you would want to ask why.  Typcially what is happening is the owner of the store is going bankrupt, or, they have been forced out by the head office and they are running it.  We would very much welcome our readers to email us your comments as I think this would make a good discussion.  For now, however, we would recommend considering a fluctuating number here to be an indication that you should ask more questions about the health of the chain. Here is how those numbers look:

#2 Tim Horton’s: 289/289

#3 McDonalds: 166/207

#13 Blenz: 62/64

#39 Waves Coffee: 24/24

#62 Esquires: NP (Not Provided!)/12

#65 Second Cup: NP (Not Provided!) / 9

We would be concerned about a ‘not provided’ answer.

We would recommend monitoring the number of locations from one year the next and especially keep an eye on that gap mentioned above from one year to the next.  If you see an increase in the gap you know that head office has taken over another store and you would want to investigate why from both sides.

We hope this coffee shop franchise perspective on this famous list was useful and don’t forget that we always welcome you to email us with your feedback.

Waves Coffee Location Introduces Two-buck-per-hour Minimum Seat Charge

That’s a buck per cheek per hour – not bad!

We apologize for the low image quality but it was taken by someone in the public who thought we’d be interested in covering it.  Here is what the text on the sign reads:

————————–

DEAR VALUED CUSTOMERS

In recent weeks we have received many “Customer Comments” regarding “Waves” never having seats available and some customers staying for long periods of time without purchasing anything.

To ensure more customers have a chance to enjoy our facility, there is now a $2.50 per hour, per seat minimum charge

Thank you for your continuous support!

Waves Coffee

—————-

No one understands this Waves Coffee location franchisee (owner) more than the members of the VCSFA do.  It’s the message behind the sign that most people out there will never understand.  Within the lines of the text of this sign is found the foundation of the VCSFA.

If this sign were found at an independent cafe, it would be understandable.  The customer would think “Mario is having a hard time with cheap, abusive college students in his cafe so he’s going to get rid of these freeloaders with a butt-cheek penalty – ingenious!”  In fact, he’d probably get a lot of positive press for that.

But this isn’t an independent.  It’s a franchise – And a big one in Vancouver.

Customers of this location will look at the sign and say to themselves “That’s weird.  I’ve been to many other Waves and I haven’t seen this rule before.” Or, “McDonalds is a franchise and they don’t do this.”  And they will leave thinking somewhat less about the brand because of this inconsistency, even if it’s subconscious.  They will start thinking of this location more of an independent than a chain.

But what drives this inconsistency?  Why would this franchisee feel strongly enough to put this kind of sign up?  You can be sure the franchisor does not know about this yet.  It would not be there if they did.

Profit.  They aren’t making enough.  It’s that simple.

This franchisee of this location isn’t making as much money as he or she feels they ought. If the money was flowing in, they wouldn’t be too worried about the freeloaders. If you don’t believe us, go and test us it for yourself and ask.

So, from the street the cafe looks full – so full that there aren’t enough seats.  Yet the franchisee had to put this sign up?

Waves Coffee has a particularly punishing business model which you will soon see more and more franchisees rebelling against.  They would like all their stores to be open 24/7 and have unlimited and free WIFI for their ‘customers’.  Does anyone see the flaw in this business model yet?  Maybe the sign above in the photo might shine some light on it.  At least with Blenz they ask their franchisees to use a non-free but fairly innovative system of marketing that’s attached to the WIFI system which gives the franchisee some control over the length of connection.

But Blenz has its own questionable ‘programs’ for their franchisees.  One such example is their ‘Free Birthday Drink’ that they desperately try to get their new franchisees to adopt. It sounds great from the customers side but… oops!  They forgot to force a minimum order with this free drink (and this ain’t just a regular drip coffee – it’s ANY drink!) so the franchisee soon learns that if they participate they are buying free drinks for every Tom, Dick and Harry around town.  You read that right!  Just walk in, say ‘it’s my birthday’ and walk out with a drink paid for by the owner of that Blenz because head office doesn’t offer any compensation to the franchisee when they do this for the sake of the brand – straight loss of goods out the door. Needless to say that participation in this program has not had great success across the chain.  If you want to try this out for yourself, we recommend the Library Square location – the operators of this location always give it away for free with a smile.

So then what can a franchisee do?  The franchisor should have been there to help this franchisee address their issues and support them to come up with a system to overcome these challenges so that it doesn’t appear to the customer as a brand inconsistency.  Since this franchisee is not a member of the VCSFA, they wouldn’t have access to our vast resources and may not even know that a WIFI system exists out there that could help them overcome this.  WIFI and freeloaders is a commonly discussed topic amongst our members and innovative idea sharing has lead to improvement in this area.

Where is the franchisor?  Why is the franchisee forced to seek outside of their chain to stop the bleeding?  Where are the ears to hear and the hands to help? Why are they spending over 7% of their revenue on royalties only to end up running their shop like an independent and having the public look at it that way? Franchisees expect a certain amount of support for this royalty yet in many cases they are left to figure it out on their own.

We hope that this Waves owner has great success with their butt-cheek-penalty program. I’m sure every VCSFA member would love to institute it themselves! We hope the freeloaders go abuse someone else, as well. But more importantly, we hope that this franchisee will join the VCSFA and dozens of others who also had nowhere else to turn and need that edge of support to better their future.

Until then, I think I just used $5 worth of butt-space writing this so I better sign off.

Five Signs of Excellence in Franchising – a Must Read

This article is an absolute must read for all prospective franchisees (franchise operators) and current franchise owners.

The VCSFA completely agrees with these 5 measurements of excellence and we are excited that a reputable organization has published this.  It is backed with actual research as well, which is a great bonus.

After hearing horror stories in coffee shop franchising in Vancouver, we ran a quick check amongst our members and the ones who are suffering agree that their franchisor failed at least half of these measurements.  In fact, one chain has failed all of them.  Here is the list of five points from the article with some concrete examples of how some of our members were failed by their franchisor:

Five behaviours of credible franchisor leadership

  1. The franchisor demonstrates a clear strategy and direction for the brand (including awareness of competitive threats with a plan to deal with them).

One Vancouver franchisor has not acknowledged the sudden emergence of a competing brand, nor attempted to match their radio advertising on a local news channel.  Customers are asking the franchisees why the competing chain is advertising and they are not.  The same brand has completely different standards of ‘branding’ applied to different stores.  This is interpreted as ‘favouritism’ by the franchisees creating a poor business environment.

  2. The franchisor is fair and consistent in dealings with all franchisees (this means having clear policies and sticking to them).

This same local Vancouver coffee chain has also failed this.  Some stores are making their own sandwiches while other stores were told they would be ‘in violation’ if they did and that the stores making them are ‘special cases’.  Some stores were told they must do certain things while others were not.

  3. The franchisor shows respect by listening to franchisee ideas and concerns before making important decisions. However listening does not mean agreeing.

In the case of this same failing chain, several franchisees requested urgent meetings with the directors to discuss very important issues that affect the whole brand.  One franchisee was told to wait 3-4 weeks because ‘it was summertime’. The franchisor never got back to them and when the franchisee pointed this out, they immediately tried to remedy it but needless to say putting off an urgent meeting for 1.5 months make this person feel loved. Many of the franchisees have asked the same franchisor to address issues related to their business and the franchisor has remained silent – completely ignoring the questions.  Needless to say this entire chain is quickly approaching a crisis.

  4. The franchisor embodies the values of the brand in their own behaviour. Hypocrisy kills brand passion like nothing else.

When confronted by franchisees about expensive vendors that they were forced to use, the franchisor replied “The vendors must make money, too.”  However, when the franchisees themselves were going bankrupt, there was no support or help was given.  The chain continues to force on their franchisees the same vendors.  This chain talked endlessly about ‘the importance of brand’ yet in the same city they opened a location in a hotel lobby in prominent location with a ‘similar’ but not ‘same’ name.  The sleeves are from the chain but the cups are branded to the hotel.  Some of the drinks are the same but the entire concept is muddy and unclear.  Customers around the city have asked the franchisees ‘what is this thing?” to which they have no reply.  Hypocrisy kills the brand.  A franchisor must practice what they preach or risk losing the trust of their entire front line.

  5. The franchisor reminds franchisees that he/she and the entire support team care about franchisee profitability as much as their own.

As mentioned in some of the examples above, this same offending chain has demonstrated to their franchisees that they don’t care about their profitability as much as their own.  No offer of reduced royalty payments to struggling stores.  No offer of reduced marketing fund payments for the obvious absence of advertising.

Thankfully for the franchisees, times have changed quite a bit recently.  If you read this article we published about the Dunkin’ Donuts situation you will learn that a franchisor cannot simply continue to fail.

In addition to this 5  point health check you can now perform on your franchise or your prospective franchise, we strongly recommend you also read this article we published about Five Things You Should Know Before You Buy a Coffee Shop Franchise as well as our Checklist to Evaluate a Prospective Coffee Shop Franchise (with bonus commentary)

Don’t forget that the VCSFA is always here to help.  You are not alone and your questions are important.

In case you have not see our most up-to-date list of coffee shop franchises in Vancouver, here is a list in alphabetical order.  Let us know if we’ve missed any:

 

Bean Around the World, Blenz, BG Urban Cafe (formerly Bread Garden), Cultured Coffee and Tea, Esquires, Moka House Coffee, My Cup, Second Cup, Serious Coffee (Vancouver Island), Take Five Cafe, Tim Horton’s, Wave’s Coffee, Wired Monk

 

 

Before you Sell a Coffee Shop Franchise in Vancouver – Commercial Agents

Sellers Beware

“COFFEE SHOP FRANCHISE OWNER HELD HOSTAGE FOR ONE YEAR BY HIS AGENT

Imagine reading that headline in your local paper.  You’d probably want to read every word in the article to see how something like this could happen in a free country! Well, it does.  Right here in Vancouver.  However, it’s not the kind of hostage situation with guns and bombs,  but no less psychologically damaging and abusive.

What we’re talking about here is the fact that an agent can, by law, hold you hostage to the listing agreement you sign for a year (or whatever you happened to sign for).

Let us first state that this legal commitment is not necessarily a bad thing – in fact, it’s a good thing because sometimes sellers will abuse and use their agents and make them lose their justly deserved commission.  In that case, of course, the contract is a good thing to have enforceable.

Let’s allow one of our members tell you a true story of what happened to him this week when working with an agent that his head office strongly encouraged him to work with.  For anonymity, let’s call the head office company B and let’s call the agent M and the store owner A:

“I was approached by the leasing guy at B.  He said that M has a buyer.  B strongly recommended that I work with M because this buyer will help me get out of the business sooner. Also, B said they would drop the 7.5% transfer fee [that’s the money the owner has to pay to the franchise when he/she sells his/her store] AND M would not charge me a sales commission because he said this ‘was a favour to B’.  Since B has more experience in the sale of franchises, I took their advice and decided to work with M even though I had my own agent. Another owner had even warned me that this guy held him hostage before but I didn’t believe it.

Next, M shows up at my shop with what looked to be a basically blank document that I’ve never seen [see image above].  I’ve never listed a business for sale before.  He didn’t even explain it but just said “Sign here and this will be enough and then I’ll bring the offer.”  There was no explanation of what was on the document, what the document meant, nor what an ‘exclusive listing’ meant to the person signing.  I was about to learn the hard way.

A few days later , M shows up with an ‘offer’.  I couldn’t believe my eyes.  The ‘offer’ was for 25% of (or 75% less than) my asking price!!  What?  Are you joking, man?  So I threw the offer back at him and told him I don’t want to sell it.

During this time, my friend was selling his coffee shop franchisee, too, in almost the same situation.  In his situation, M brought an offer for 30% of what he wanted.  He contacted M and said “I’d like to end this relationship” and to him, like to me, M said ‘we don’t have a relationship because there is no commission.”  My friend still demanded the unconditional release documents and M replied “I’m a man of my word so I’ll send them if you want them.”  My friend told me that he thought it was strange that he is sending release documents for a relationship that M said didn’t exist.  When I called and ask for the documents he told me the same thing – there is no relationship.

I was happy now.  I immediately approached my agent (M2) and asked him to list my store for sale.  M2 happens to work in the same brokerage as M.  As soon as M2 listed the store for sale, M approached his broker and asked him to pull the listing because he had a one year exclusive listing with me! What?  No way.  Is this happening?  Yes.  Apparently it was something I signed for that I didn’t read.  M then called and left a voice mail for me saying “You have an exclusive listing agreement with me for one year and if you have any problems with that you can contact my broker.”  At this point it got very interesting.  I contacted M’s broker to complain.  He replied “M has the only rights to sell B franchises in Vancouver.”  I was shocked.  What was he talking about?  Did M convince his broker that he was the only one who could sell B franchises?

Immediately I contacted B and told them what was happening by email.  I asked if they would prefer to deal with my lawyer or with this agent.  They replied back shortly later that “We do not have any such exclusive relationship with M”.  At that point M’s broker was contacted and educated about the truth and asked M to send the release documents. Finally!  I’m free to list with whom I want.

That night I decided that I was going to work with M2 and started again to list with him.  This time M’s broker asked him not to list through their brokerage.  Now he’s trying to tell me which brokerage I can and cannot list with even though I do not have a valid listing agreement with anyone! Crazy.  To this day I am still arguing back and forth about this.  My friend had listed with six or seven different agents over the years and only one agent would not send the release documents – the B agent of choice: M

An exclusive listing is a cause of concern for the following reasons, we learned the hard way:

  1. You cannot reach out to the real estate board to get help so the agent operates to some extent ‘outside of the law’
  2. Your store does not get posted on the ICX.com (MLS for commercial) therefore loses lots of exposure
  3. You can’t work with another agent until this agent releases you

Here are some red flag comments that you should be aware of. They may be true but consider them a red flag until you see action:

  • “I have buyers looking to buy a coffee shop franchise right now.  Just sign.”
  • “I market the store privately.”  If you ask for details on this you may find out what that really means is “I only put your store on my personal web page and pray to the stars that a buyer finds it.”
  • They do not go over in detail with you the initial listing agreement or give you sufficient time to read the details

Here are some red flag comments that may indicate you are about to get sucked into some kind of secret game:

  • I’m not getting paid.  I’m doing this as a favour
  • The buyer that I had got sick, but don’t worry, we’ll find another one
  • I’m a man of my word

Why would someone volunteer to put themselves at risk as an agent for free?  Why did your ‘sure thing’ buyer disappear?  Why are you telling me you are a man of your word? By doing a transaction together with integrity I will see that.

We hope this article will save many people many hassles.

As usual, don’t hesitate to contact the VCSFA as we are always ready and willing to help anyone.

Second Cup Expands into USA

This article is interesting as it shows that Second Cup is still growing in other markets.  It’s no secret that they have not been doing so in the Vancouver area, though.  I remember when I was growing up there were many more Second Cup locations around the lower mainland.  Now Blenz (and even more recently Waves) have all but taken that market away.

I would like to reach out for some authors to do a bit of research into this topic to find out some answers to the following questions:

  • If Second Cup has such a big following (which it still does) why did they decrease in market presence here in Vancouver
  • Why did Second Cup choose to expand in the USA instead of, say, attempt to battle it out in BC again?

 

 

 

Waves Searches for Young Owners to Run Their New Alberta Ventures

This is an interesting article about Waves moving into Alberta.

“I don’t need franchisees,” Husin says. “I need partners. I don’t need money; I need energy and passion – and it pays off.” He rejects the idea of the franchisor-franchisee relationship and instead considers the owners of Waves locations as his partners in a shared business. Husin says he wants his partners to be as successful as he is and can’t imagine treating them like hirelings. It’s not only poor personal practice, he says, but bad business, too. – Abrahim Husin

This is a very idealistic and wonderful quote from the article.  Should Mr. Husin follow this methodology and philosophy, he will indeed have success.  I hope that these new franchisees will be able to give us here at VCSFA an update on how that’s going.

Some might be reluctant to put their faith in young and untested owners like Hong, but for Husin, it’s an integral part of his approach to doing business. He recalls his time in Chicago, when no one would take a chance on him or his partner: that sense of frustration – and maybe a desire to prove certain people wrong – seems to inform his choices when it comes to finding new franchise partners. “I believe you have to give people chances,” he says. “I love giving people chances.”

Again, this sounds idealistic and could work out very well for Waves.  That said, we’ve all been ‘young and dumb’ and we hope that Waves is providing sufficient hand-holding for their newbies, especially if they are without any business experience whatsoever.

The great news is that the VCSFA would happily welcome these Alberta folk should they ever need a little extra support from other coffee shop franchise owners.