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

2012/11/21Permalink 1 Comment

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  1. Pingback: The Dangers of Buying a Franchise Business (in British Columbia)

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