Francorp - Franchise Business Planning

Franchise Business Plans

Franchising a company is a big decision and a major change in direction for most companies. The good franchise systems are ones that plan appropriately and put together the pieces before they get into this game. As the saying goes, you either “when you fail to plan you are planning to fail”. The same holds true for franchising. Good franchise endeavors have great franchise business plans. So what constitutes a good franchise business plan?
The key ingredients include several pieces, like any good recipe, if some of the ingredients are left out the final product just won’t taste right, which in franchise business planning that means big problems. The franchise business plan sets the stage for a franchise expansion program. It literally acts as the foundation upon which the house will be built. Everything in the franchise program should have uniformity and continuity with what is defined and determined in the franchise business plan.
The franchise business plan should begin with goals and objectives. What is the purpose of franchising? What is the goal for the company and where do you plan on being in five years? These goals will set the standards for the plan and identify how you intend to get there. You then should establish the buyer profile, who will be purchasing these franchises and opening up locations of your operation? The better franchise plans have more specific descriptions. Bad example: “middle aged person with income around $100k”. Good example: Female, ages 35-45, experience with children preferable age ranges between 5-12 years old, married, existing capital of $100k, sales ability, work ethic, married at least 5 years….etc.”. Get specific in the franchise business plan, that means you are honing in on your targets.
We then need to define the business issues of the franchise model. What will a territory look like for the franchisees? We don’t want to overcrowd markets and we also don’t want to give away business. Franchising is about saturation, take advantage of all market opportunities. After the franchisees have been established it will be extremely critical to have an ongoing support program for the people who have committed their futures to this franchise organization. Good franchise business plans clearly identify the training programs, processes and materials that will be used to get franchisees up and running and then to keep them happy and successful once in the system. With this comes hiring management and support staff. The franchise business plan should clearly identify who, when and what role they will fill in the franchise organization. The type of business will dictate how many people and at what times in the franchise expansion they should be brought on board.
The franchise business plan should also go into specifics regarding the franchise fee structure. What will the franchise fee be for this model? What will the royalty percentage be……and why? Will there be an advertising budget set to build the brand and if so what is the buy in for the franchisee to be a part of that co-op ad fund? If there are products included in the franchise system that the franchisor would like to sell through franchisees what is the distribution structure for delivering and supporting that part of the franchise system? All of this should be clearly outlined in the franchise business plan.
In the end, a complete set of pro-formas and financials should be established to define the ROI for both the franchisee and the franchisor. This can be used as an investment tool, to raise capital and most importantly as a road map for running and operating the franchise operation as the system grows.

How to Franchise

Often times we are asked at Francorp about how franchising works and how a company can franchise their business. We provide valuable insight to our clients and to the businesses we meet with at our seminars and our office on how franchising works. Franchising a company can, on the surface, appear to be relatively simple and easy to get into.

However, as you continue to investigate the subject of franchising more, you will soon discover the complexities of it. There are a few steps that I always recommend a business looking to franchise take:

1. Attend a Franchise Seminar
2. Meet for a Franchise Consultation
3. Read "Franchising Your Business," by Don Boroian and Patrick Callaway
4. Take the Franchise Quiz to see if you are franchiseable
5. Call 800-FRANCHISE and ask to speak with a franchise analyst for a free initial phone consultation.

Mama Fu's: Election Night Promotion Registered a Win for new Media Advertising, Online Ordering

Mama Fu’s: Election Night promotion registered a win for new-media advertising, online ordering
By ALAN J. LIDDLE
AUSTIN, Texas (Dec. 22, 2008 ) —While much of the nation was glued to TVs and websites the evening of Nov. 4 watching the historic presidential election play out, Mama Fu’s Asian House chain executives were interested in a vote of another kind: the kind consumers cast with their wallets.
Expecting election fever to drag down business, management at Murphy Adams Restaurant Group of Austin, operator of six Mama Fu’s units and franchisor of the Pan Asian concept, decided to test the chain’s new eClub e-mail loyalty program, online-ordering system and delivery capabilities. Those digital resources and that service option only recently had been added in the aftermath of Murphy Adams’ March acquisition of Mama Fu’s trade dress and franchising rights from Raving Brands Inc.

An e-mail offer for Mama Fu’s Election Night Special advertised a $5 discount on takeout and delivery orders and included a link to the chain’s online-ordering portal.
Anchoring the Election Night trial was an e-mail blast through online-services provider Fishbowl Marketing Inc. of Alexandria, Va., to the approximately 7,700 eClub members affiliated with three restaurants in the Austin market and single units in Bentonville, Ark., and Hollywood, Fla.
The “call to action” was an “Election Night Special” of a $5 discount on takeout or delivery orders of $20 or more, said Randy Murphy, president and chief executive of Murphy Adams.
Featured in the promotional e-mail was a clickable link to online-ordering pages developed by Dallas-based OrderTalk, which has a strategic partnership with Fishbowl.
“The net result was that instead of having 10 percent less sales than a typical Tuesday [on Election Night], we had 10 percent to 15 percent more sales,” Murphy said.
Of campaign metrics, Murphy said: “We had over a 25-percent open rate. Typically, a high benchmark is [a rate of] 20 [percent] to 21 percent.”
In all, he continued, 73 people redeemed the e-mail coupon, or nearly 1 percent of the mailing list.
“That’s a direct-mail type of redemption [rate],” the operator added, “and we did that with e-mail that didn’t cost us anything” beyond the service provider’s monthly fee.
Murphy said that while the test was “on a small scale,” it proved “tremendously effective,” given that it was the first attempt to drive business with a time-sensitive offer. Income from the e-mail effort, about 30 percent of which came through the online ordering channel versus phone calls, contributed to the “biggest one-day [sales] totals for online ordering and delivery” yet, Murphy said.
Using publishing tools and company-specific materials provided by the marketing services provider, Murphy Adams spent “less than an hour” preparing the Election Night e-mail blast, Murphy said.
Likely up next, Murphy said, is a New Year’s Eve e-mail blast leveraging the eClub database that currently contains about 10,000 names collected, in large part, using paper sign-up pads in the restaurants.
Beyond its six restaurants, Murphy Adams franchises seven Mama Fu’s restaurants to others.
Murphy said a dual-service format—fast-casual-style counter service at lunch and table service at night—tested at the three Austin-area restaurants for three years would be rolled out to all future franchised branches.
“A unit in our system can do about $1 million in revenue a year,” he said.
New-media marketing, promotions and advertising are part of the plan for growing sales along with unit counts in 2009, Murphy said.
He reported that, among other related developments, his company already has tested opt-in text-message marketing with “decent feedback.”
“Including social-networking [initiatives] and search engine marketing, it will be at least 25 percent, but maybe as much as 35 percent, of our total [advertising and marketing] budget,” Murphy said of 2009 new-media spending.
That 10-percent cushion represents potential additional spending for search engine marketing, of which he says, “I am a big proponent.”

Seven Ways to Fail Big - Harvard Business Review

Seven Ways to Fail Big
Lessons from the most inexcusable business failures of the past 25 years.
by Paul B. Carroll and Chunka Mui
♦ Download an audio slideshow about how to avoid failure.
Businesses rack up losses for lots of reasons—reasons not always under their control. The U.S. airlines can’t be faulted for their grounding following the 9/11 attacks, to be sure. But in our recent study of 750 of the most significant U.S. business failures of the past quarter century, we found that nearly half could have been avoided. In most instances, the avoidable fiascoes resulted from flawed strategies—not inept execution, which is where most business literature plants the blame. These flameouts—involving significant investment write-offs, the shuttering of unprofitable lines of business, or bankruptcies—accounted for many hundreds of billions of dollars in losses. Moreover, had the executives in charge taken a look at history, they could have saved themselves and their investors a great deal of trouble. Again and again in our study, seven strategies accounted for failure, and evidence of their inadvisability was there for the asking.
About the Research
Take adjacency moves. Frequently what appears to be an adjacent market turns out to be a different business altogether. Laidlaw, the largest school-bus operator in North America, bought heavily into the ambulance business in the 1990s, figuring its logistics expertise would carry over to that kind of enterprise. It turned out that operating ambulances isn’t really a transportation business—it’s part of the intricate and highly regulated medical business. Laidlaw struggled with negotiating contracts and collecting payments for its services, before selling off its ambulance units at a considerable loss.
The underlying business moves we discuss here aren’t always bad ideas; they’ve generated a tremendous amount of wealth for some companies. But they are alluring in ways that can tempt executives to disregard danger signals. In this article we’ll describe the seven risky strategies and offer advice on how to resist their charms.
The Synergy Mirage
Often a company seeks growth by joining forces with another firm that has complementary strengths. The whole isn’t always greater than the sum of its parts, however. Look at the 1999 merger of disability insurers Unum and Provident, which operated in the group and individual markets, respectively. Executives thought that each company’s salespeople would be able to sell the other’s products, but the two businesses served entirely different customers through different models. Unum’s sales reps called on corporations to sell group policies; Provident’s crafted sales pitches for individuals. They had different skills and no particular desire to collaborate on cross-selling. Joining the two companies proved costly and complicated. The merger just ended up producing higher prices for everyone and an aggressive posture toward denying claims, which provoked a series of lawsuits that imperiled UnumProvident’s reputation and finances. Unum eventually undid the merger, dropping the Provident name and exiting the individual market in 2007. Its stock price plummeted and is still less than half what it was in 1999, and the company continues to cope with class action suits from claimants.
Even when synergies do exist, excitement over them can lead a company astray. Quaker Oats overpaid horribly for Snapple, which it acquired to freshen up a dowdy brand and gain access to Snapple’s direct-store-delivery system and network of independent distributors. At the time, analysts warned that the $1.7 billion price might be as much as $1 billion too high. Quaker never dug deep enough to understand Snapple’s distributors, who fought efforts to push Gatorade and other Quaker products. Just three years after the acquisition, Quaker sold Snapple for $300 million. Synergies can prove problematic in more subtle ways, too, as when executives focus so much management time and energy on capturing them that they lose out on other, more fruitful opportunities. And clashes of culture, skills, or systems can make it impossible to achieve even synergies that seem easy and obvious.
Faulty Financial Engineering
Aggressive financial practices don’t necessarily lead to fraud, but they can be dicey. The stakes are high—brands and reputations and even entire businesses can crumble as a consequence, and corporate officers may be exposed to massive fines and even prison.
If subprime mortgage lenders and the banks that supported them had paid attention to the story of Green Tree Financial, they might have realized how dangerous lending to unqualified buyers was. A darling of both Main Street and Wall Street in the 1990s, Green Tree made its fortunes by offering 30-year mortgages on trailer homes—which depreciate rapidly and can have a life span as short as 10 years. Three years after a $50,000 purchase, a home owner might be stuck with an asset worth $25,000 while owing more than $49,000 in principal. At that point, defaulting starts to look pretty attractive. All the while, Green Tree followed aggressive “gain on sale” accounting methods to record profits, basing its calculations on unrealistic assumptions about defaults and prepayments. With profits based on loan origination, there was also little incentive to qualify buyers.


Attracted by Green Tree’s rapid growth, Conseco, an Indiana-based life and health insurer, bought the firm for $6.5 billion in 1998 in the hope of creating a broader financial services company, only to find itself stuck with a house of cards. Conseco ultimately took almost $3 billion in write-offs and special charges related to Green Tree, essentially erasing all profits earned by the unit between 1994 and 2001. CEO Steve Hilbert resigned in April 2000, and Conseco filed for Chapter 11 bankruptcy protection in 2002—reportedly the third-largest bankruptcy in U.S. history at the time.
Avoiding Disasters: The Devil’s Advocate
The rise and fall of Green Tree and its ensnarling of Conseco illuminate two problems with financial engineering strategies: First, they can produce flawed products, such as easy-credit mortgages, that attract customers in the short term but expose both buyer and seller to excessive risk over time. Second, they encourage further hopelessly optimistic borrowing to finance more investment. Green Tree’s model was elegant in that the firm could borrow short-term funds at low rates and lend at much higher rates—but at the same time preposterous, because the machine seized up as soon as the flaws in the underlying mortgage product became apparent.
Questions Every Company Should Ask
Overly clever financial reporting is also risky, especially when it involves cutting corners to increase profits and deliver better bonuses. Such techniques tend to veer toward fraud, even when outside auditors have blessed them. Like other aggressive practices, they’re powerfully addictive: Investors reward increased profits, which leads the company to scramble for even greater creativity.
Stubbornly Staying the Course
Redoubling your investment in your current strategy in response to market signals is a strategy in itself, and it can lead to disaster. Executives too often kid themselves into thinking that a problem isn’t so severe or delay any reaction until it is too late. Eastman Kodak stuck to its core in the face of a blatant danger: digital photography. Company executives had made a detailed analysis of the threats posed by digital technology as far back as 1981 (when Sony introduced the first commercial electronic camera, the Mavica) but couldn’t shake their attachment to prints and traditional processing. The margins were hard to pass up as well—60% on film, chemicals, and processing, versus 15% on digital products. Digital technology also eliminated the huge recurring revenue stream that came from film and reprints (though some companies—HP and Epson—now profit from recurring revenues from ink cartridges for printers).
This is a common reason companies don’t change course: The economics of the new model don’t measure up to the economics of the old. Companies also falter because they don’t consider all the options. Kodak’s executives couldn’t fathom a world in which images were evanescent and never printed. The company fought only a rear-guard action against digital cameras and didn’t make a big move into the space until the early 2000s. It now has a share of the online photo-posting market, but its hesitation was costly: Over the past decade, Kodak has lost 75% of its stock market value. As of 2007, the company had fewer than a third of the number of employees it had 10 years earlier.
Pager company Mobile Media had even less of an excuse to stand by its strategy, because pagers were essentially a fad that lasted only several years. They were a status symbol in the mid-1990s, when cell phones were still bulky and calls expensive. But even as cellular technology followed Moore’s law, Mobile Media acquired other pager companies and focused on designing new-generation technologies that nobody wanted. Following a purge of senior executives, Mobile Media filed for bankruptcy in January 1997. But the brunt of the decline in paging was borne by Arch Communications, which bought Mobile Media in 1999.
It isn’t just fast-moving technology companies that fatally ignore new threats. Pillowtex was an old-line company that manufactured pillows, comforters, and towels. It grew steadily for decades—largely through acquisition—and by 1995 reached annual sales of almost half a billion dollars. In 1994, however, the United States began to phase out quotas on imports. Other companies immediately began outsourcing production to developing countries so they could compete with low-price imports, but Pillowtex redoubled its acquisition efforts, hoping that efficiencies from scale would give it an edge. The company’s SEC filings from the late 1990s barely mention outsourcing as an option, instead highlighting the $240 million that Pillowtex spent on new, efficient machinery for its U.S. plants in 1998 alone. Two bankruptcies later, the company shut down in 2003 and was liquidated. Although part of the company’s rationale for keeping manufacturing in the United States was to protect American workers, 6,450 lost their jobs. The layoff was the largest in the history of the U.S. textile industry.
Pseudo-Adjacencies
Adjacent-market strategies attempt to build on core organizational strengths to expand into a related business—by, say, selling new products to existing customers, or existing products to new customers or through new channels. Such strategies are often sensible; they fueled much of General Electric’s growth under Jack Welch. But in our research we found many cases where ill-conceived adjacencies brought down even storied firms. Oglebay Norton, a regional steel provider, is just one example. After 143 years the Cleveland-based company was looking to diversify because steel was in decline. Limestone seemed like a logical choice because Oglebay’s shipping business was already hauling it for its steel mills. Limestone is used in steel production to separate impurities, which are removed before molten iron is turned into steel. It has many other industrial uses, especially in production.


Oglebay began buying up limestone quarries, but it lacked a fundamental understanding of the limestone business. For one thing, iron ore was shipped on the Great Lakes, mostly on 1,000-footers, but limestone often needed to be transported on rivers to get closer to customers. That required much smaller vessels, which Oglebay didn’t have in its fleet. The company filed for bankruptcy on February 23, 2004, with $440 million of debt, most of which was incurred as part of the push into limestone. It would emerge from bankruptcy but never recover its footing. After selling off its fleet piecemeal to retire its debt, it was acquired by Carmeuse North America.
Four patterns emerged among the failed adjacency moves in our research. The first was that a change in the company’s core business, rather than some great opportunity in the adjacent market, drove the move—witness Oglebay Norton’s desperation to reduce its reliance on steel. A second was that the company lacked expertise in the adjacent markets, leading it to misjudge acquisitions and mismanage competitive challenges. Avon made this mistake with a move into health care in the early 1980s, including the acquisition of medical-equipment-rental businesses and substance-abuse centers—a strategy justified by its “culture of caring.” But these acquisitions did nothing to build on Avon’s core asset, its door-to-door sales force, and overlooked the regulatory realities, in which it had no expertise. Avon took a bath. After significant losses, it took a total charge of $545 million for dismantling its health care business in 1988.
The third recipe for disaster was overestimating the strength or importance of the capabilities in a core business. Successful companies are particularly prone to this; their ability to achieve in their own market makes them overly optimistic about their prospects in others. Laidlaw, the school-bus operator, fell victim to this type of thinking when it figured it could leverage its considerable expertise in logistics in the ambulance services business and went on a buying spree. The company suffered big losses in the ambulance business, taking a $1.8 billion write-down on it in 2000.
Finally, adjacency strategies tended to flop when a company overestimated its hold on customers. Just because people buy one service from you doesn’t mean they’ll buy others. Several utilities seeking to expand in the mid-1980s fell prey to this kind of thinking. When regulators began threatening to cut rates, utilities looked for opportunities in other industries. Some made a classic mistake: They jumped into high-growth markets without having any idea about whether they were qualified to operate in them. They thought they could simply leverage their customer bases and sell them products like life insurance, but they found few buyers.
Bets on the Wrong Technology
The huge rewards for breakthrough products and services understandably inspire many companies to search relentlessly for the next Google or eBay or iPod. Still, in our research we discovered that many technology-dependent strategies were ill-conceived from the get-go. No amount of luck or sophisticated execution could have saved them. To keep pursuing the strategies that produced these failures—some quite spectacular—companies had to go to great lengths to deceive themselves.
Motorola’s Iridium satellite-telephone unit—a $5 billion venture that filed for Chapter 11 less than a year after the phone system went live—is widely cited as a failure of execution or marketing. In fact, the failure stemmed from a misguided captivation with technology. The project began in the 1980s to solve a legitimate problem: Cell phones were expensive and lacked global connectivity, and existing satellite alternatives were cumbersome and unreliable. But as Motorola pursued its development plans, it ignored its own engineers’ warnings that the ultimate product would share the limitations of early 1980s cellular technology even as cell phones got better and cheaper with every passing year. Motorola was so enamored with its technology that its market research amounted to little more than marketing. For instance, when it asked if customers would like a global portable phone for a “reasonable price,” it didn’t define “reasonable” as an initial outlay of about $3,000, plus monthly charges and pricey minutes; and its description of a phone that would “fit in your pocket” assumed that your pocket would hold a brick.
Federal Express made a similar mistake in the mid-1980s with Zapmail, a service whereby couriers would pick up paper documents and deliver them to a nearby processing center, where they would be faxed to another processing center, close to the destination, and delivered by courier to the recipient, all within two hours. The price was $35 for up to five pages, with a discount and faster delivery if the customer brought the documents into a FedEx office. At the time, few companies owned fax machines, because they were expensive and transmission quality was often poor. As prices fell and the technology improved rapidly, fax machines proliferated; soon it seemed silly to use FedEx as an intermediary. In 1986, FedEx shut Zapmail down, taking a $340 million pretax write-off after losing $317 million during its two years of service.
Rushing to Consolidate
As industries mature, the number of companies in them diminishes. Holdouts have an incentive to combine and reduce capacity and overhead and gain purchasing and pricing power. Our research shows that it is sometimes better to sit back and let others fumble through consolidation. Though there’s more glory in being the buyer, it may be wiser to sell and pocket the cash before industry conditions deteriorate.


Take the demise of Ames Department Stores. The company pioneered the concept of discount retailing in rural areas four years before Sam Walton got into the game. But it got reckless in its attempts to build a national presence. In its zeal to compete with Wal-Mart, Ames made a series of acquisitions, without adequately considering what it would take to win that battle. The moves didn’t build on its core strength—merchandising—and exacerbated its greatest weaknesses: back-office systems like accounting. For instance, after Ames acquired discount chain G.C. Murphy in 1985, it suffered an enormous amount of shrinkage (industry speak for theft) because it had no system for checking inventory. Disgruntled Murphy’s employees were reportedly stealing goods off delivery trucks and then logging complete shipments into stores. In 1987, Ames lost $20 million worth of merchandise and couldn’t tell why. Even as the company struggled to integrate G.C. Murphy, Ames’s managers went for another, bigger, takeover—Zayre, for which it paid $800 million, a glaring overpayment. The company filed for bankruptcy in 1990 but recovered, only to make the same mistake again. After struggling with the disastrous acquisition of Hills Department Stores, Ames again filed for bankruptcy in 2000 and was liquidated in 2002.
Consolidation plays are subject to several kinds of errors. For one thing, you may be buying problems along with assets. Ames repeatedly overlooked the fact that many of the stores it bought were damaged goods. For another, increased complexity may lead to diseconomies of scale. Systems that work well for a business of a certain size may break as a company grows. USAir bought Pacific Southwest Air for $385 million in 1987 to expand into the West and then bought archrival Piedmont for $1.6 billion. The company almost tripled in size in a bit more than a year, and its information systems couldn’t handle the load. Service suffered, computers repeatedly broke down on payday, and crews were taxed to the limit by their new schedules. Before the merger, USAir and Piedmont had operating profits six to seven percentage points higher than the industry average; after the merger operating profits were 2.6 points below the industry average.
Furthermore, companies may not be able to hold on to customers of a company they buy, especially if they change the value proposition. And last, other options may be preferable to being the industry’s consolidator. Ames didn’t have to go toe-to-toe with Wal-Mart. It was doing nicely as a regional retailer with a far more limited product line. As far as we can tell, Ames never considered holding on to its position and potentially selling out to Wal-Mart down the line.
Roll-Ups of Almost Any Kind
The notion behind roll-ups is to take dozens, hundreds, or even thousands of small businesses and combine them into a large one with increased purchasing power, greater brand recognition, lower capital costs, and more effective advertising. But research shows that more than two-thirds of roll-ups have failed to create any value for investors.
We were interested to find that many roll-ups were afflicted by fraud—among them, MCI WorldCom, Philip Services, Westar Energy, and Tyco—but we won’t focus on those in this article because for the most part the lesson is simply, “Don’t do it.” Instead, let’s look at the fortunes of Loewen Group. Based in Canada, it grew quickly by buying up funeral homes in the U.S. and Canada in the 1970s and 1980s. By 1989, Loewen owned 131 funeral homes; it acquired 135 more the next year. Earnings mounted, and analysts were enthusiastic about the company’s prospects given the coming “golden era of death”—the demise of baby boomers.
Yet there wasn’t much to be gained from achieving scale. Loewen could realize some efficiencies in areas like embalming, hearses, and receptionists, but only within fairly small geographic proximities. The heavy regulation of the funeral industry also limited economies of scale: Knowing how to comply with the rules in Biloxi doesn’t help much in Butte. A national brand has little value, because bereaved customers make choices based on referrals or previous experience, and being perceived as a local neighborhood business is actually an advantage. In fact, Loewen often hid its ownership. And it damaged whatever reputation it did have with its methods of shaming the bereaved into buying more expensive products and services (such as naming its low-end casket the “Welfare Casket”).
Nor did increased size improve the company’s cost of capital. Funeral homes are steady, low-risk businesses, so they already borrow at low rates. The cost of acquiring and integrating the homes far outweighed the slight scale gains. What’s more, the increase in the death rate that Loewen had banked on when buying up companies never happened. Fast-forward several years and the company filed for bankruptcy, after rejecting an attractive bid. (Relaunched under the name Alderwoods, Loewen was sold to the same suitor for about a quarter of the previous offer.)
Often roll-ups cannot sustain their fast rate of acquisition. In the beginning, all that matters is growth—buying a company or two or four a month, with all the cultural and operational issues that accompany a takeover. Investors know that profitability is hard to decipher at this point, so they focus on revenue, and executives know that they don’t have to worry about consistent profitability until the roll-up reaches a relatively steady state. Operating costs frequently balloon as a result. Worse, knowing that the company is in buying mode, sellers demand steeper prices. Loewen overpaid for many of its properties. In another case, as Gillett Holdings and others tried to roll up the market for local television stations in the 1980s, the stations began demanding prices equal to 15 times their cash flow. Gillett, which bought 12 stations in 12 months and then acquired a company that owned six more, filed for bankruptcy protection in 1991.

Finally, roll-up strategies often fail to account for tough times, which are inevitable. A roll-up is a financial high-wire act. If companies are purchased with stock, the share price must stay up to keep the acquisitions going. If they’re purchased with cash, debt piles up. All it took to finish off Loewen was a small decline in the death rate. For Gillett, it was an unexpected TV ad slump. When you go into a roll-up, you need to know exactly how big a hit you can withstand. If you’re financing with debt, what will happen if you have a 10%—or 20% or 50%—decline in cash flow for two years? If you’re buying with stock, what if the stock price drops by 50%?
• • •
The vast majority of business research focuses on successful companies, in an effort to generalize from their traits, tactics, or strategies. Executives scrutinize healthy businesses for best practices they might be able to imitate. Our research looks at the data that others tend to ignore: companies that tried to do the same thing as the winners and failed. We know that companies are capable of learning from failure, given the right incentives. Airlines have a better-than-average record on preventing disaster because their own personnel go down with customers. Perhaps that’s an overly dramatic example, but we do believe that enormous value lies in learning from companies that have lost millions, if not billions, in pursuit of fundamentally flawed strategies.

Franchising in India

Franchising in India
International Franchise Lawyers Association e.V. (IFLA)
IntroductionThe franchising industry rightly deserves to be called the wave of future businessin India. The phenomenon of franchising developed at the end of Second WorldWar and the system has taken its roots in the United States of America, wherealmost 50% of all retail sales are through franchise outlets. Decades later, Indiahas begun to see the growth of both domestic and international franchisesbalancing the philosophy of the free market with the philosophy of swadeshi(indigenous) products.Franchising encourages spirit of entrepreneurship with its essence lying in anagreement between two independent undertakings, the franchisor and thefranchisee. The consideration is the payment of some fee or royalty to thefranchisor against the rights granted to the franchisee to market the goods andservices of the former with their brand names using the franchisor’s trade marksand business methodology for which the franchisor would also provide the knowhowand technology.
Emergence of the Indian marketOne of the primary factors which control the success of a franchising business inan emerging economy like India is the ability of a foreign franchisor to identifyand seize the appropriate moment when the business environment is favorableand reap its rewards. Home to over a billion people, including a flourishing classof urban consumers possessing considerable amounts of disposable incometogether with the continued growth of the economy have strengthened India’sclaim to be a viable and beneficial destination for a foreign franchisor.India ranks as the fourth largest economy globally in terms of purchasing powerparity (PPP) with GNP of US $ 2.91 Trillion (2001-02). According to a recentreport by UNIDROIT, the foundation of a successful franchising industry in anycountry lies in the existence of a “healthy commercial law environment” whichhas been defined as one with a ‘general legislation on commercial contracts, withan adequate company law, where there are sufficient notions of joint ventures,where intellectual property rights are in place and enforced and wherecompanies can rely on ownership of trademarks and know-how as well as onconfidentiality agreements’. The Indian business and legal set up is characterizedby all these attributes, a fact which has been acknowledged as well as exploitedby numerous foreign companies.
India offers vast openings for a franchisor to set up its business; createawareness for his products or services and exploit the enormous market offered.As a result, it comes as no surprise that India has recently been declared as thesecond most attractive destination for retailers among 30 emerging markets.Though current investment regulations of the Indian Government bar foreigninvestment in the retail sector, it hasn’t deterred foreign participation. Rather thanshying away from the enormous market that India offers, international companieslike Marks & Spencer, the global retail chain of stores have taken to entering intodifferent forms of franchising arrangements, ranging from just use of its trademark for a fee to the standard model of allowing its system to be used for afranchise fee.Seasoned franchisors such as McDonalds were one of the first to realize thewidespread prospects offered by India and extended its services into this market.The international recognition of its brand together with the adaptation of itsproducts to suit the preference of Indian consumers, which include offering morespicy items in its menu, has resulted in McDonalds becoming a household namein India.An important aspect which determines the feasibility of any franchising businessin a country relates to the class of consumers it caters to. India is a country withthe largest young population in the world; a staggering 870 million people arebelow the age of 45 years, a market that will suit the products and services ofmultinational franchising companies primarily dealing in Food &Beverages (F&B)and lifestyle products. Indian consumers have experienced the standard ofservices offered overseas and have sufficient exposure through media, whichhas further fuelled their expectations. They now want to avail of the benefits thata foreign franchisor can generate for them.However, to state that a franchisor can rely on the international recognition of hisbrand and proven business system to ensure a successful venture in India wouldbe nothing short of an oversight. Almost every product or service has a market inIndia but sometimes, innovative strategies like ‘indianisation’ of its products andmarketing techniques must be employed by a foreign franchisor to further accessthe sizable market of India. A notable example in this regard is the deliberateexclusion of beef by McDonalds giving due consideration to the religioussentiments of the Indian public. Majority of India’s population is follower of theHindu religion which preaches that the cow is considered sacred and is thereforeanti cow slaughter.
The Legal Framework in IndiaThere is no specific legislation regulating franchise arrangements in India, butthere are various laws which affect the relationship between thefranchisors and franchisees, including intellectual property laws, taxation, laborregulations, competition laws, property and exchange control. A deepunderstanding of the laws related to the business of franchising is imperative fora foreign franchisor which is planning a foray into the India market.The Government permits foreign franchisors to charge royalties up to 1 % fordomestic sales and 2 % on exports for use of the foreign franchisor’s brand nameor trade mark, without transfer of technology. In effect, this means that by lendingjust their brand name or trade mark to an Indian company, a foreign companycan receive royalties. The laws in India also permit lump sum and royaltypayments to be made by Indian franchisees to their foreign counterparts for useof foreign techno logy, which includes manuals, systems etc. Lump sumpayments up to US$ 2 million are permitted and royalties of 5% on domesticsales and 8% on exports can be paid to the foreign franchisor. In addition, foreigncompanies can enter into consulting agreements and receive up to US$ 1 millionper project. Amounts in excess of these can also be received but with thepermission of the Indian Government. These rules allow a foreign franchisor tostructure its business in India in such a way so as to ensure that it can repatriatethe maximum amount from India.
A foreign franchisor also needs to decide whether to appoint a master franchiseefor the entire country or appoint franchisees around the country independently orthrough its subsidiary which acts as a master franchise. The franchisee will notonly be responsible for developing and adapting the foreign prototype to a newand different market in which it has limited name recognition, but will also beresponsible for implementing the expansion plan of the franchisor for an entirecountry. It is important to recognize that a potential master franchisee in NorthernIndia may have an extremely strong network in that part of the country but maynot be able to provide similar resources in other parts of the country. India is ahuge market and demands, networks and languages vary from region to regionand state to state. It may be a better idea to appoint different franchisees fordifferent regions rather than trusting one master franchisee to control theappointment of suitable sub-franchisees around the country. Further, it is vital toconduct a thorough financial and legal due diligence or feasibility report on one’spotential partner, which includes a check on the owners, directors, financialstatus and its ability to invest and expand the business.
Taxation is another issue which deserves due consideration. It is important toknow the local sales tax, property tax and withholding tax. Eventually, the localtax laws and the existence of treaties between the countries involved mayhave considerable influence on the structure adopted. Where the franchisorreceives royalties, service or franchise fees, tax has to be paid under theincome tax act (as income arising and accruing in India), whether thefranchisor is an Indian or foreign party. In a case where the foreign franchisorsends training personnel and supervisors to India, the salaries payable tothese persons may be subject to personal income tax, whether anarrangement is made to deduct the tax at source or they are taxed as selfemployedpersons (if they come as consultants).
In calculating the amount of tax payable by the franchisor or the franchiseecompany, the deductions available in tax laws of India can be important for taxplanning purposes. Some of these relate to rent, repairs and insurance inrespect to premises used for business; depreciation and expenditure onresearch; and, expenditure of capital nature on acquisition of patent rights orcopyrights. However, the availability of tax advantages would depend on thetype of franchise, the product of the franchise and where the unit is to belocated.It must be noted that the above is subject to double taxation avoidanceagreements (DTA) involving India and any foreign country. The tax liabilitywould accordingly be reduced. The income tax law in India gives recognitionto this and double taxation agreements take precedence over the terms of theIncome tax act.A signatory to the international conventions on intellectual property rights,India offers adequate protection to trademarks or brand names as well ascopyright and designs of the foreign franchisor. A significant step takenrecently is the recognition and protection extended to service marks in Indiaenabling the foreign franchisor to license its mark to a franchisee in order toextend the services synonymous with him to the consumers in India.Enforcement mechanisms are becoming more reliable, which has previouslybeen a bone of contention for foreign corporations.The key issue to a beneficial relationship between any franchisor and itsfranchisee is related to the smooth transfer of technology and training ofpersonnel followed by regular assistance provided by the franchisor in therunning of the business. Like other developing countries, India had, tillrecently, a restrictive technology policy which attempted but didn’t succeed inattracting substantial foreign technology. Owing to this, franchisors initiallypreferred to spread their business in countries which were investment friendlyor culturally similar to the country of their origin.
India: New OpportunitiesPost 1991, India has liberalized the economy and has also emerged as aninformation technology and outsourcing hub. These, coupled with theomnipresent knowledge of English language amongst Indians havesubstantially bridged the cultural divide between India and the westerncountries. Indian franchisees have successfully comprehended andimplemented technology which initially may have been alien to them and haveprovided the required impetus to the franchising industry. In addition tobringing down the costs for the franchisors, the increase in the level ofeducation amongst Indians has created a pool of talent and skill which can berelied on by the foreign franchisors for beneficial partnerships and its fruitfuloutcome.
India offers a large and expanding consumer market with an increasingpurchasing power which amounts to almost 350 million, more than the entirepopulation of some European countries put together. World EconomicReform’s Global Competitiveness Report, 2002-03 has declared India ashaving the best technology licensing regime causing an upturn in the interestof foreign companies to invest in India.One of the most vital tools for the expansion of any business relates to itsadvertising, marketing and brand management. The competence of theadvertising and media sector in India is globally recognized. An extensive medianetwork is always at the disposal of the foreign franchisor to reach the populationof India of over a billion and create awareness of its services and products.Sponsorship of events and festivals by franchisor companies is a commonoccurrence in India.
ConclusionForeign franchisors should take time to understand the huge potential Indiaoffers to their business. Like any business expansion strategy, a foray into theIndian market would require a detailed feasibility study and calculation of risksattached to it. On the other hand, the Indian Government must be open toconfidence building measures in favor of the international franchisors includingpolicy amendments and adoption of a single focus approach to the promotionand regulation of the franchising industry in India.
Note about authors and firm:Srijoy Das (sdas@archerangel.com, +91-11 26261302) is a Partner with the lawfirm of Archer & Angel, based in New Delhi, India with offices in Chennai andMumbai. The firm advises on franchising, intellectual property, foreigninvestment, technology and corporate law.Kartik Srivastava (ksrivastava@archerangel.com +91 -11 51641302) is anassociate in the Corporate and IP department.For further details please contact:DAS, SrijoyARCHER & ANGEL AttorneysK-4 South Etension - 2New Delhi - 110 049IndiaPhone + 91-11-26261302Fax + 91-11-26261303sdas@archerangel.comhttp://www.archerangel.com/

Case Study on Starbucks

Starbucks Corporation
Background 1971-87
Private Company 1987-92
Public Company 1992-
Starbucks Becomes a Public Company
Starbucks' initial public offering (IPO) of common stock in June 1992 turned into one of the most successful IPOs of the year (see Exhibit 3 for the performance of the company's stock price since the IPO). With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network (see Exhibit 1). Starbucks' success helped specialty coffee products begin to catch on across the United States. Competitors, some imitating the Starbucks model, began to spring up in many locations. The Specialty Coffee Association of America predicted that the number of coffee cafés in the United States would rise from 500 in 1992 to 10,000 by 1999.
The Store Expansion Strategy
In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favorable demographic profiles but which also could be serviced and supported by the company's operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a "hub"; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, then additional stores were opened in smaller, surrounding "spoke" areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores. All of the new zone vice presidents Starbucks recruited came with extensive operating and marketing experience in chain-store retailing.
Starbucks' store launches grew steadily more successful. In 1995, new stores generated an average of $700,000 in revenue in their first year, far more than the average of $427,000 in 1990. This was partly due to the growing reputation of the Starbucks brand. In more and more instances, Starbucks' reputation reached new markets even before stores opened. Moreover, existing stores continued to post year-to-year gains in sales (see Exhibit 1).
Starbucks had notable success in identifying top retailing sites for its stores. The company had the best real estate team in the coffee-bar industry and a sophisticated system that enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. The company's site location track record was so good that as of 1997 it had closed only 2 of the 1,500 sites it had opened.
Real Estate, Store Design, Store Planning, and Construction
Schultz formed a headquarters group to create a store development process based on a six-month opening schedule. Starting in 1991, the company began to create its own in-house team of architects and designers to ensure that each store would convey the right image and character. Stores had to be custom-designed because the company didn't buy real estate and build its own freestanding structures like McDonald's or Wal-Mart did; rather, each space was leased in an existing structure and thus each store differed in size and shape. Most stores ranged in size from 1,000 to 1,500 square feet and were located in office buildings, downtown and suburban retail centers, airport terminals, university campus areas, or busy neighborhood shopping areas convenient to pedestrian foot traffic. Only a select few were in suburban malls. While similar materials and furnishings were used to keep the look consistent and expenses reasonable, no two stores ended up being exactly alike.
In 1994, Starbucks began to experiment with a broader range of store formats. Special seating areas were added to help make Starbucks a place where customers could meet and chat or simply enjoy a peaceful interlude in their day. Grand Cafés with fireplaces, leather chairs, newspapers, couches, and lots of ambience were created to serve as flagship stores in high-traffic, high-visibility locations. The company also experimented with drive-through windows in locations where speed and convenience were important to customers and with kiosks in supermarkets, building lobbies, and other public places.
To better reduce average store-opening costs, which had reached an undesirably high $350,000 in 1995, the company centralized buying, developed standard contracts and fixed fees for certain items, and consolidated work under those contractors who displayed good cost-control practices. The retail operations group outlined exactly the minimum amount of equipment each core store needed, so that standard items could be ordered in volume from vendors at 20 to 30 percent discounts, then delivered just in time to the store site either from company warehouses or the vendor. Modular designs for display cases were developed. And the whole store layout was developed on a computer, with software that allowed the costs to be estimated as the design evolved. All this cut store-opening costs significantly and reduced store development time from 24 to 18 weeks.
A "stores of the future" project team was formed in 1995 to raise Starbucks' store design to a still higher level and come up with the next generation of Starbucks stores. Schultz and Olsen met with the team early on to present their vision for what a Starbucks store should be like—"an authentic coffee experience that conveyed the artistry of espresso making, a place to think and imagine, a spot where people could gather and talk over a great cup of coffee, a comforting refuge that provided a sense of community, a third place for people to congregate beyond work or the home, a place that welcomed people and rewarded them for coming, and a layout that could accommodate both fast service and quiet moments." The team researched the art and literature of coffee throughout the ages, studied coffee-growing and coffee-making techniques, and looked at how Starbucks stores had already evolved in terms of design, logos, colors, and mood. The team came up with four store designs—one for each of the four stages of coffee making: growing, roasting, brewing, and aroma—each with its own color combinations, lighting scheme, and component materials. Within each of the four basic store templates, Starbucks could vary the materials and details to adapt to different store sizes and settings (downtown buildings, college campuses, neighborhood shopping areas). In late 1996, Starbucks began opening new stores based on one of the four templates. The company also introduced two ministore formats using the same styles and finishes: the brevebar, a store-within-a-store for supermarkets or office-building lobbies, and the doppio, a self-contained 8-square-foot space that could be moved from spot to spot. Management believed the project accomplished three objectives: better store designs, lower store-opening costs (about $315,000 per store on average), and formats that allowed sales in locations Starbucks could otherwise not consider.
For a number of years, Starbucks avoided debt and financed new stores entirely with equity capital. But as the company's profitability improved and its balance sheet strengthened, Schultz's opposition to debt as a legitimate financing vehicle softened. In 1996 the company completed its second debt offering, netting $161 million from the sale of convertible debentures for use in its capital construction program. Exhibit 6, Exhibit 7, and Exhibit 8 present Starbucks' income statement and balance sheet data for recent years.
Product Line
Starbucks stores offered a choice of regular or decaffeinated coffee beverages, a special "coffee of the day," and a broad selection of Italian-style espresso drinks. In addition, customers could choose from a wide selection of fresh-roasted whole-bean coffees (which could be ground on the premises and carried home in distinctive packages), a selection of fresh pastries and other food items, sodas, juices, teas, and coffee-related hardware and equipment. In 1997, the company introduced its Starbucks Barista home espresso machine featuring a new portafilter system that accommodated both ground coffee and Starbucks' new ready-to-use espresso pods. Power Frappuccino—a version of the company's popular Frappuccino blended beverage, packed with protein, carbohydrates, and vitamins—was tested in several markets during 1997; another promising new product being tested for possible rollout in 1998 was Chai Tea Lattè, a combination of black tea, exotic spices, honey, and milk.
The company's retail sales mix was roughly 61 percent coffee beverages, 15 percent whole-bean coffees, 16 percent food items, and 8 percent coffee-related products and equipment. The product mix in each store varied, depending on the size and location of each outlet. Larger stores carried a greater variety of whole coffee beans, gourmet food items, teas, coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers, and other accessories. Smaller stores and kiosks typically sold a full line of coffee beverages, a limited selection of whole-bean coffees, and a few hardware items.
In recent years, the company began selling special jazz and blues CDs, which in some cases were special compilations that had been put together for Starbucks to use as store background music. The idea for selling the CDs originated with a Starbucks store manager who had worked in the music industry and selected the new "tape of the month" Starbucks played as background in its stores. He had gotten compliments from customers wanting to buy the music they heard and suggested to senior executives that there was a market for the company's music tapes. Research that involved looking through two years of comment cards turned up hundreds asking Starbucks to sell the music it played in its stores. The Starbucks CDs, created from the Capitol Records library, proved a significant addition to the company's product line. Some of the CDs were specifically collections designed to tie in with new blends of coffee that the company was promoting. Starbucks also sold Oprah's Book Club selections, the profits of which were donated to a literacy fund supported by the Starbucks Foundation.
The company was constantly engaged in efforts to develop new ideas, new products, and new experiences for customers that belonged exclusively to Starbucks. Schultz and other senior executives drummed in the importance of always being open to re-inventing the Starbucks experience.
Store Ambience
Starbucks management looked upon each store as a billboard for the company and as a contributor to building the company's brand and image. Each detail was scrutinized to enhance the mood and ambience of the store, to make sure everything signaled "best of class" and that it reflected the personality of the community and the neighborhood. The thesis was "Everything matters." The company went to great lengths to make sure the store fixtures, the merchandise displays, the colors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the company's passion for coffee, and that rewarded customers with ceremony, stories, and surprise. Starbucks was recognized for its sensitivity to neighborhood conservation with the Scenic America's award for excellent design and "sensitive reuse of spaces within cities."
To try to keep the coffee aromas in the stores pure, Starbucks banned smoking and asked employees to refrain from wearing perfumes or colognes. Prepared foods were kept covered so customers would smell coffee only. Colorful banners and posters were used to keep the look of Starbucks stores fresh and in keeping with seasons and holidays. Company designers came up with artwork for commuter mugs and T-shirts in different cities that was in keeping with each city's personality (peach-shaped coffee mugs for Atlanta, pictures of Paul Revere for Boston and the Statue of Liberty for New York).
To make sure that Starbucks' stores measured up to standards, the company used "mystery shoppers" who posed as customers and rated each location on a number of criteria.
Building a Top Management Team
Schultz continued to strengthen Starbucks' top management team, hiring people with extensive experience in managing and expanding retail chains. Orin Smith, who had an MBA from Harvard and 13 years' experience at Deloitte and Touche, was brought in as chief financial officer in 1990 and then was promoted to president and chief operating officer in 1994. The four key executives during the company's formative years—Howard Schultz, Dave Olsen, Howard Behar, and Orin Smith—contributed the most to defining and shaping the company's values, principles, and culture. As the company grew, additional executives were added in marketing, store supervision, specialty sales, human resources, finance, and information systems. Schultz also took care to add people to Starbucks' board of directors who had experience growing a retail chain and who could add valuable perspectives.
Employee Training
Accommodating fast growth also meant putting in systems to recruit, hire, and train baristas and store managers. Starbucks' vice president for human resources used some simple guidelines in screening candidates for new positions: "We want passionate people who love coffee . . . We're looking for a diverse workforce, which reflects our community. We want people who enjoy what they're doing and for whom work is an extension of themselves."16 Some 80 percent of Starbucks employees were white, 85 percent had some education beyond high school, and the average age was 26.
Every partner/barista hired for a retail job in a Starbucks store received at least 24 hours training in the first two to four weeks. The training included classes on coffee history, drink preparation, coffee knowledge (four hours), customer service (four hours), and retail skills, plus a four-hour workshop called "Brewing the Perfect Cup." Baristas were trained in using the cash register, weighing beans, opening the bag properly, capturing the beans without spilling them on the floor, holding the bag in a way that keeps air from being trapped inside, and affixing labels on the package exactly one-half inch over the Starbucks logo. Beverage preparation occupied even more training time, involving such activities as grinding the beans, steaming milk, learning to pull perfect (18- to 23-second) shots of espresso, memorizing the recipes of all the different drinks, practicing making the different drinks, and learning how to make drinks to customer specifications. There were sessions on how to clean the milk wand on the espresso machine, explain the Italian drink names to customers, sell an $875 home espresso machine, make eye contact with customers, and take personal responsibility for the cleanliness of the coffee bins. Everyone was drilled in the Star Skills, three guidelines for on-the-job interpersonal relations: (1) maintain and enhance self-esteem, (2) listen and acknowledge, and (3) ask for help. And there were rules to be memorized: milk must be steamed to at least 150 degrees Fahrenheit but never more than 170 degrees; every espresso shot not pulled within 23 seconds must be tossed; customers who order one pound of beans must be given exactly that—not .995 pounds or 1.1 pounds; never let coffee sit in the pot more than 20 minutes; always compensate dissatisfied customers with a Starbucks coupon that entitles them to a free drink.
Management trainees attended classes for 8 to 12 weeks. Their training went much deeper, covering not only the information imparted to baristas but also the details of store operations, practices and procedures as set forth in the company's operating manual, information systems, and the basics of managing people. Starbucks' trainers were all store managers and district managers with on-site experience. One of their major objectives was to ingrain the company's values, principles, and culture and to impart their knowledge about coffee and their passion about Starbucks.
Each time Starbucks opened stores in a new market, it undertook a major recruiting effort. Eight to 10 weeks before opening, the company placed ads to hire baristas and begin their training. It sent a Star team of experienced managers and baristas from existing stores to the area to lead the store-opening effort and to conduct one-on-one training following the company's formal classes and basic orientation sessions at the Starbucks Coffee School in San Francisco.
Product Supply
Dave Olsen, Starbucks' senior vice president for coffee, personally spearheaded Starbucks' efforts to secure top-notch coffee beans to supply the company's growing needs. He traveled regularly to coffee-producing countries—Colombia, Sumatra, Yemen, Antigua, Indonesia, Guatemala, New Guinea, Costa Rica, Sulawesi, Papua New Guinea, Kenya, Ethiopia, Java—building relationships with growers and exporters, checking on agricultural conditions and crop yields, and searching out varieties and sources that would meet Starbucks' exacting standards of quality and flavor. Reporting to Olsen was a group that created and tested new blends of beans from different sources.
Although most coffee was purchased in the commodity market—coffee was the world's second largest traded commodity—coffee of the quality sought by Starbucks was usually purchased on a negotiated basis at a substantial premium above commodity coffees, depending on supply and demand at the time of purchase. Coffee prices were subject to considerable volatility due to weather, economic, and political conditions in the growing countries, as well as agreements establishing export quotas or efforts on the part of the International Coffee Organization and the Association of Coffee Producing Countries to restrict coffee supplies.
Starbucks entered into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and to limit its exposure to fluctuating coffee prices in upcoming periods. When satisfactory fixed-price commitments were not available, the company purchased coffee futures contracts to provide price protection. Nonetheless, there had been occasions in years past when unexpected jumps in coffee prices had put a squeeze on the company's margins and necessitated an increase in the prices of its beverages and beans sold at retail.
Roasting Coffee Beans
Starbucks considered the roasting of its coffee beans to be an art form. Each batch was roasted in a powerful gas oven for 12 to 15 minutes. Highly trained and experienced roasting personnel monitored the process, using both smell and hearing, to judge when the beans were perfectly done—coffee beans make a popping sound when ready. Starbucks' standards were so exacting that roasters tested the color of the beans in a blood-cell analyzer and discarded the entire batch if the reading wasn't on target.
On a daily basis, when he wasn't traveling in search of coffee supplies, Dave Olsen checked coffee samples from the roasting process, sniffing the aromas, tasting sample cups, and recording his observations in a logbook.
In 1998, Starbucks had three roasting plants. The company's smallest plant, built in 1989 and originally thought to be big enough to supply the company's needs for the next 10 years, was dedicated to supplying the company's mail-order business. In 1993, a 305,000-square-foot plant was opened in Kent, Washington, just south of Seattle; its output mainly was being used to supply stores west of the Mississippi. In 1994, the company began construction of an $11 million roasting facility in York, Pennsylvania, that could be expanded to 1 million square feet to supply stores east of the Mississippi.
Bonding with Customers
About 5 million customers per week were patronizing Starbucks stores in early 1998. Stores did about half of their business by 11 am. Loyal customers patronized a Starbucks store 15 to 20 times a month, spending perhaps $50 monthly. Some customers were Starbucks fanatics, coming in daily. Baristas became familiar with regular customers, learning their names and their favorite drinks. Christine Nagy, a field director for Oracle Corporation in Palo Alto, California, told a Wall Street Journal reporter, "For me, it's a daily necessity or I start getting withdrawals."17 Her standard order was a custom drink: a decaf grande nonfat no-whip no-foam extra-cocoa mocha; when the baristas saw her come through the door, she told the reporter, "They just [said,] 'We need a Christine here.'"
Mail Order Sales
Starbucks published a mail-order catalog that was distributed six times a year and that offered coffee, candies and pastries, and select coffee-making equipment and accessories. A special business gift-giving catalog was mailed to business accounts during the 1997 Christmas holiday season. The company also had an electronic store on the Internet. In 1997, sales of this division were about $21.2 million, roughly 2 percent of total revenues; almost 50,000 mail-order customers were signed up to receive monthly deliveries of Starbucks coffee as of late 1997. Starbucks management believed that its direct-response marketing effort helped pave the way for retail expansion into new markets and reinforced brand recognition in existing markets.
Joint Ventures
In 1994, after months of meetings and experimentation, PepsiCo and Starbucks entered into a joint venture arrangement to create new coffee-related products for mass distribution through Pepsi channels, including cold coffee drinks in a bottle or can. Howard Schultz saw this as a major paradigm shift with the potential to cause Starbucks business to evolve in heretofore unimaginable directions; he thought it was time to look for ways to move Starbucks out into more mainstream markets. Cold coffee products had generally met with very poor market reception, except in Japan, where there was an $8 billion market for ready-to-drink coffee-based beverages. Nonetheless, Schultz was hoping the partners would hit on a new product to exploit a good-tasting coffee extract that had been developed by Starbucks' recently appointed director of research and development. The joint venture's first new product, Mazagran, a lightly flavored carbonated coffee drink, was a failure; when test- marketed in southern California, some consumers liked it and some hated it. While people were willing to try it the first time, partly because the Starbucks name was on the label, repeat sales proved disappointing. Despite the clash of cultures and the different motivations of the two partners, the partnership held together because of the good working relationship that evolved between Howard Schultz and Pepsi's senior executives. Then Schultz, at a meeting to discuss the future of Mazagran, suggested, "Why not develop a bottled version of Frappuccino?"18 Starbucks had come up with the new cold coffee drink it called Frappuccino in the summer of 1995, and it had proved to be a big hot-weather seller; Pepsi executives were enthusiastic. After months of experimentation, the joint venture product research team came up with a shelf-stable version of Frappuccino that tasted quite good. It was tested in West Coast supermarkets in the summer of 1996; the response was overwhelming, with sales running 10 times over projections and 70 percent repeat business. In September 1996, the partnership invested in three bottling facilities to make Frappuccino, with plans to begin wider distribution. Sales of Frappuccino reached $125 million in 1997 and achieved national supermarket penetration of 80 percent. Sales were projected to reach $500 million in 1998; Starbucks management believed that the market for Frappuccino would ultimately exceed $1 billion.
In October 1995 Starbucks partnered with Dreyer's Grand Ice Cream to supply coffee extract for a new line of coffee ice cream made and distributed by Dreyer's under the Starbucks brand. The new line, featuring such flavors as Dark Roast Espresso Swirl, JavaChip, Vanilla MochaChip, Biscotti Bliss, and Caffe Almond Fudge, hit supermarket shelves in April 1996; by July, Starbucks coffee-flavored ice cream was the top-selling superpremium brand in the coffee segment. In 1997, two new low-fat flavors were added to complement the original six flavors, along with two flavors of ice cream bars; all were well received in the marketplace. Additional new ice cream products were planned for 1998.
Also in 1995, Starbucks worked with Seattle's Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it.
Licensed Stores and Specialty Sales
In recent years Starbucks had begun entering into a limited number of licensing agreements for store locations in areas where it did not have ability to locate its own outlets. The company had an agreement with Marriott Host International that allowed Host to operate Starbucks retail stores in airport locations, and it had an agreement with Aramark Food and Services to put Starbucks stores on university campuses and other locations operated by Aramark. Starbucks received a license fee and a royalty on sales at these locations and supplied the coffee for resale in the licensed locations. All licensed stores had to follow Starbucks' detailed operating procedures, and all managers and employees who worked in these stores received the same training given to Starbucks managers and store employees.
Starbucks also had a specialty sales group that provided its coffee products to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and select retailers. One of the early users of Starbucks coffee was Horizon Airlines, a regional carrier based in Seattle. In 1995, Starbucks entered into negotiations with United Airlines to have Starbucks coffee served on all United flights. There was much internal debate at Starbucks about whether such a move made sense for Starbucks and the possible damage to the integrity of the Starbucks brand if the quality of the coffee served did not measure up. After seven months of negotiation and discussion over coffee-making procedures, United Airlines and Starbucks came up with a way to handle quality control on some 500-plus planes with varying equipment, and Starbucks became the coffee supplier to the 20 million passengers flying United each year.
In addition, Starbucks made arrangements to supply an exclusive coffee blend to Nordstrom's for sale only in Nordstrom stores, to operate coffee bars in Barnes & Noble bookstores, and to offer coffee service at some Wells Fargo Bank locations in California. Most recently, Starbucks began selling its coffees in Chapters, a Toronto book retailer with sites throughout Canada, and in Costco warehouse club stores. A 1997 agreement with U.S. Office Products gave Starbucks the opportunity to provide its coffee to workers in 1.5 million business offices. In fiscal 1997, the specialty sales division generated sales of $117.6 million, equal to 12.2 percent of total revenues.
International Expansion
In markets outside the continental United States (including Hawaii), Starbucks' strategy was to license a reputable and capable local company with retailing know-how in the target host country to develop and operate new Starbucks stores. In some cases, Starbucks was a joint venture partner in the stores outside the continental Untied States. Starbucks created a new subsidiary, Starbucks Coffee International (SCI), to orchestrate overseas expansion and begin to build the Starbucks brand name globally via licensees; Howard Behar was president of SCI.
Going into 1998, SCI had 12 retail stores in Tokyo, 7 in Hawaii, 6 in Singapore, and 1 in the Philippines. Agreements had been signed with licensees to begin opening stores in Taiwan and Korea in 1998. The company and its licensees had plans to open as many as 40 stores in the Pacific Rim by the end of September 1998. The licensee in Taiwan foresaw a potential of 200 stores in that country alone. The potential of locating stores in Europe and Latin America was being explored.
Corporate Responsibility
Howard Schultz's effort to "build a company with soul" included a broad-based program of corporate responsibility, orchestrated mainly through the Starbucks Foundation, set up in 1997. Starbucks was the largest corporate contributor in North America to CARE, a worldwide relief and development organization that sponsored health, education, and humanitarian aid programs in most of the Third World countries where Starbucks purchased its coffee supplies; Starbucks began making annual corporate contributions to CARE when it became profitable in 1991. In addition, CARE samplers of coffee and CARE-related mugs, backpacks, and T-shirts were offered in the company's mail-order catalog; a portion of the price on all sales was donated to CARE. In 1995 Starbucks began a program to improve the conditions of workers in coffee-growing countries, establishing a code of conduct for its growers and providing financial assistance for agricultural improvement projects. In 1997, Starbucks formed an alliance with Appropriate Technology International to help poor, small-scale coffee growers in Guatemala increase their income by improving the quality of their crops and their market access; the company's first-year grant of $75,000 went to fund a new processing facility and set up a loan program for a producer cooperative. Starbucks stores also featured CARE in promotions and had organized concerts with Kenny G and Mary Chapin Carpenter to benefit CARE.
Starbucks had an Environmental Committee that looked for ways to reduce, reuse, and recycle waste, as well as contribute to local community environmental efforts. There was also a Green Team, consisting of store managers from all regions. The company had donated almost $200,000 to literacy improvement efforts, using the profits from store sales of Oprah's Book Club selections. Starbucks stores participated regularly in local charitable projects of one kind or another, donating drinks, books, and proceeds from store-opening benefits. The company's annual report listed nearly 100 community organizations which Starbucks and its employees had supported in 1997 alone. Employees were encouraged to recommend and apply for grants from the Starbucks Foundation to benefit local community literacy organizations.
On the Fourth of July weekend in 1997, three Starbucks employees were murdered in the company's store in the Georgetown area of Washington, D.C. Starbucks offered a $100,000 reward for information leading to the arrest of the murderer(s) and announced it would reopen the store in early 1998 and donate all future net proceeds of that store to a Starbucks Memorial Fund that would make annual grants to local groups working to reduce violence and aid the victims of violent crimes.
Competitors
Going into 1997, there were an estimated 8,000 specialty coffee outlets in the United States. Starbucks' success was prompting a number of ambitious rivals to scale up their expansion plans. Observers believed there was room in the category for two or three national players, maybe more. Starbucks' closest competitor, Second Cup, a Canadian franchisor with stores primarily in Canada, was less than one-third its size; Second Cup owned Gloria Jeans, a franchisor of specialty coffees, with stores located primarily in malls throughout the United States. No other rival had as many as 250 stores, but there were at least 20 small local and regional chains that aspired to grow into rivals of Starbucks, most notably New World Coffee, Coffee People, Coffee Station, Java Centrale, and Caribou Coffee. Observers expected many of the local and regional chains to merge in efforts to get bigger and better position themselves as an alternative to Starbucks. In addition, numerous restaurants were picking up on the growing popularity of specialty coffees and had installed machines to serve espresso, cappuccino, lattè, and other coffee drinks to their customers.
The company also faced competition from nationwide coffee manufacturers such as Kraft General Foods (the parent of Maxwell House), Procter & Gamble (the owner of the Folger's brand), and Nestlé, which distributed their coffees through supermarkets. There were also a number of specialty coffee companies that sold whole-bean coffees in supermarkets. Because many consumers were accustomed to purchasing their coffee supplies at supermarkets, it was easy for them to substitute these products for Starbucks.
Building the Starbucks Brand
So far, Starbucks had spent very little money on advertising, preferring instead to build the brand cup by cup with customers and depend on word-of-mouth and the appeal of its storefronts. The company was, however, engaged in a growing effort to extend the Starbucks brand and penetrate new markets. In addition to expanding internationally, venturing into ice cream with Dreyer's and into Frappuccino with Pepsi, partnering with licensees, and developing specialty and mail-order sales, Starbucks had recently begun selling its coffees in supermarkets.
Supermarket sales were test-marketed in over 500 stores in Chicago in the summer of 1997. Management believed that the tests confirmed the appeal of offering Starbucks coffee to existing customers in convenient supermarket locations while at the same time introducing new customers to its products. Two-thirds of all coffee was sold in supermarkets. In November 1997, Starbucks hired Nestlé veteran, Jim Ailing, as senior vice president of grocery operations to direct Starbucks' supermarket sales effort. The company started rolling out supermarket sales of its coffees in 10 major metropolitan areas in the spring of 1998. Starbucks coffee sold in supermarkets featured distinctive, elegant packaging; prominent positions in grocery aisles; and the same premium quality as that sold in its own stores. Product freshness was guaranteed by Starbucks' FlavorLock packaging, and the price per pound paralleled the prices in Starbucks' retail stores.
The company was also said to be testing "light roast" coffee blends for those customers who found its current offerings too strong. And, in the summer of 1997, Starbucks quietly test-marketed four 20 percent fruit-juice beverages in one market.19 The single-serve bottled drinks were priced around $2, and at least one contained caffeine. Also on the new-product front was an apple cider made exclusively for Starbucks by Nantucket Nectars. Plus, the company was selling chocolate bars and other candy, and had plans to bring candy production in-house if sales went well enough.
The Future
Industry analysts in 1998 saw Starbucks as being well on its way to becoming the Nike or Coca-Cola of the specialty coffee segment. It was the only company with anything close to national market coverage. The company's most immediate objective was to have 2,000 stores in operation by the year 2000. Its longer range objective was to become the most recognized and respected brand of coffee in the world. The company's efforts to greatly increase its sphere of strategic interest via its joint ventures with Pepsi and Dreyer's, its move to sell coffee in supermarkets, and the possibility of marketing fruit-juice drinks and candy under the Starbucks label represented an ongoing drive on Schultz's part to continually reinvent the way Starbucks did business.
In order to sustain the company's growth and make Starbucks a strong global brand, Schultz believed that the company had to challenge the status quo, be innovative, take risks, and alter its vision of who it was, what it did, and where it was headed. Under his guidance, management was posing a number of fundamental strategic questions: What could Starbucks do to make its stores an even more elegant "third place" that welcomed, rewarded, and surprised customers? What new products and new experiences could the company provide that would uniquely belong to or be associated with Starbucks? What could coffee be—besides being hot or liquid? How could Starbucks reach people who were not coffee drinkers? What strategic paths should Starbucks pursue to achieve its objective of becoming the most recognized and respected brand of coffee in the world?
Arthur A. Thompson, The University of AlabamaJohn E.Gamble, University of South Alabama

Starting a Business in a Down Economy

Starting Up in a Down Economy
Nobody loves a recession*. But many successful entrepreneurs say that, in retrospect, they were lucky to have launched their businesses in tough times.
By: Ryan McCarthy, Nadine Heintz, Bo Burlingham
Published May 2008

Case Study No. 1: How Method Weathered the Dot-com Bust
* A recession is commonly defined as two consecutive quarters during which the country's gross domestic product shrinks. It is too soon to say whether the economy is in a recession now.
When they look back on the early days of their start-up, Adam Lowry and Eric Ryan remember that a lot of potential investors laughed at them. The Bay Area, where they were living, was awash in Internet start-ups. Each week in 2000 brought another glitzy launch party or news that the scantest of business plans had attracted venture capital. Even office landlords were demanding equity from their dot-com tenants. Lowry and Ryan, who wanted to start a company to make -- of all things -- humdrum household products, were decidedly out of step with the times. "You had the sense that there was this real historical thing going on in the region, even if it was not going to end well," says Ryan.

Still, Ryan and Lowry felt they had a good idea. Method, their start-up, wouldn't sell just any household products. Its soap and cleaning supplies would be made from environmentally friendly ingredients and would come in chic packaging. Compared with the products of giants like Procter & Gamble (NYSE:PG) and Clorox (NYSE:CLX), Method's merchandise would be hip. So the partners passed on interesting and potentially lucrative job offers and pooled $100,000 in personal savings to get started.

You know what happened next: The go-go New Economy abruptly ran out of steam. Dot-coms ran out of money, layoffs were rampant, and the entire city of San Francisco seemed to suffer from an economic hangover. People started to worry openly about a recession.
Like most business owners facing hard times, Lowry and Ryan focused on their costs. They were expert bootstrappers, mixing cleaning solution in a bathtub, bottling it themselves, and driving around town to restock shelves. They would accost any store manager who would listen to their spiel. They returned to some stores three and four times before they got an order, and little by little their sales pitch improved. And the partners noticed something else: Compared with the situation a year before, when there seemed to be five start-ups for every idea for a business, the competition was relatively muted. "Starting a business in a recession is like vacationing in the off-season," says Ryan. "It's a little less crowded, and everything starts going on sale."
By spring of 2001, Lowry and Ryan had gotten small-batch production on track and had hired a CEO named Alastair Dorward. But Method's debt stood at $300,000, split among the three men's personal credit cards. Payments to their vendors were three or four months past due, and at one point Lowry and Ryan had just $16 left in the bank. "We had to appeal to the inner entrepreneur of each of our vendors," says Lowry. "We had to sell them on the fact that Eric and I could do something that had never been done before."

Lowry and Ryan also tried again to raise money, and with VCs falling out of love with dot-coms, they found that there was more interest in their idea. In early September 2001, the partners received a term sheet for $1 million -- a sum that would allow Method to get current on its bills and then begin to expand. They were set to close the round on September 11. Needless to say, the deal didn't go through right away; the partners finally closed in November. And there were some serious strings attached. Lowry and Ryan would receive $550,000 up front. Of that money, the legal fees associated with the transaction would eat up $110,000, and $300,000 would go to pay outstanding vendors' bills. That left Method with $140,000 in capital. To get their hands on the remaining $450,000, Lowry and Ryan were obliged to meet a key milestone: They would have to add distribution to 800 stores by March, which was just five months away.
The tenuous nature of Method's financial situation was underscored at the dinner Lowry, Ryan, and Dorward hosted to celebrate the deal. The partners gathered their investors plus their lawyers and accountants at an expensive restaurant in San Francisco. When the bill came, Lowry's credit card was declined. Then Ryan's card was declined. And Dorward's. Their backup cards were declined, too. "It's a good thing Eric knew the owner of the restaurant," says Lowry. "We convinced him we were good for it -- that that guy over there was about to give us a million bucks."

Method did make it into 800 stores by March -- though just barely. When Lowry and Ryan got the remainder of their Series A funding, they paid off old accounts and then jumped right back into fundraising mode. With the recession in full swing, venture capitalists were being very picky when it came to making new investments. But Method, which had been ignored barely 18 months earlier, was suddenly a Bay Area darling. "It was really interesting," says Lowry. "We used to be completely off investors' radar screen, but when the bubble burst, people were clamoring for us. Our business plan wasn't some sort of ad-based or online thing that was hard to understand. Our model was, 'Hey, we're going to make this cool product, and if you think we can sell a lot of it, then it's a good investment."

Being able to raise money in 2001 undoubtedly put Method on the growth path. By 2006, the company had $71 million in sales, and today the founders are pushing to reach $100 million. But Lowry and Ryan look at the period before they raised money, when they struggled and nearly drowned, as pivotal. In retrospect, the fact that they had to hone their pitch in countless meetings with store managers and vendors was fortuitous. They were practiced enough that by the time their big break came -- pitching Target for national distribution -- they didn't blow it. Which raises the question: Did the recession actually make Method better? The founders think so. As Ryan puts it, "The hungriest wolves hunt best."

Jimmy John's article in The Franchise Times

The effervescent Jimmy John Liautaud reflects on 25 years of making sandwiches.

When a friend called to tell me he was headed to Russia to teach Russian bakers how to make money, I knew that would be tough to one-up. But still, I told him I was heading to Champaign, Illinois, to interview Jimmy John Liautaud. There was a moment of reverent silence on the other end of the line, and then he gushed, "Jimmy John, the sandwich guy? This is going to sound strange, but can you get his autograph for my son?"

Turns out his 16-year-old son is a huge Jimmy John fan. His passion for the food and the larger-than-life frontman is fueled in part by the fact that two of his heroes, Minnesota Twins baseball players Justin Morneau and Joe Mauer, have been quoted in the local press as saying they eat Jimmy John's Gourmet Sandwiches before every home game. The 16-year-old and his friends dine at their local Jimmy John's restaurant several times a week.

The next day as I was lunching with Jimmy John Liautaud on grilled salmon and a chopped salad in his conference room, I relayed the request—which he didn't find strange at all. I left with an autographed photo with the inscription: "Ty: Keep kickin' butt in school, date lots of babes and follow the speed limit. Be good. Jimmy John." "You think his dad will be OK with that?" he asks, a big grin lighting up his tanned face. Ty also is receiving two knit hats skaters like, a baseball cap, a T-shirt with the inscription "Subs so fast you'll freak," and a Dickies black jacket that looks like something a mechanic into branding would wear.

The autographed picture, by the way, is going to be a Christmas gift that Ty can place next to his Hank Aaron autographed baseball. Such is the power of irreverent branding.
The request wasn't the first time Liautaud has been asked for his autograph. Once, while hanging out at a college campus in Michigan with a buddy who was the drummer for Smashing Pumpkins, there were more sandwich fans vying for autographs than music fans. "If they think making sandwiches until 5 a.m. is cool, then God bless them," Liautaud says. "I don't think it's cool to be cool, I think it's cool to be real."

It's not just the sandwiches attracting fans to the concept, it's the culture. Threatening to, but never quite crossing the line, it's cheeky, never corporate. For instance, on a sign giving etiquette tips, one line is "Put your napkin on your lap; leave other people's laps alone." Printed on a pair of boxers for sale on its Web site is a phrase that is also displayed in neon in the restaurants' windows: "Free Smells."

There is no shortage of sandwich opportunities out there, so why has Jimmy John's, which at press time had 668 stores open, 20 of which are company owned, been able to attract such a loyal following?
A slice of lifeThis June will be the 44-year-old Liautaud's 25th year in the sandwich business. He refers to it as his 51st semester, since he started making sandwiches right out of high school on a college campus. "I had an idea 25 years ago and worked it through," he says. "I thought once you had a good idea, Ronald McDonald, Dave Thomas, the Colonel and Ray Kroc would want to come to your house," he says, only half in jest. But the food business isn't a fraternity of guys with big ideas swapping recipes. It's a lonely place, as he found out. While he has had mentors—unfortunately not his hero McDonald's Ray Kroc, whose long-ago french fries fried in beef tallow still produce a poignant longing in him—a lot of what he learned about business was at the counter.

His mother was a homecoming queen from Lithuania, and his mixed-race father was the first Liautaud to graduate from college. He graduated with an engineering degree and sold encyclopedias door to door. When asked why, Liautaud shrugs off the question, saying, "He was a hell of a peddler."
Liautaud likes to tell people he graduated second from last in his high school class. While it never fails to get a laugh, the truth is he didn't have that class ranking because he was slow. Like the delivery of his sandwiches, his mind works freakishly fast. He's a visual learner, something his teachers never took the time to uncover. He was the class clown, but never disruptive or disrespectful, he adds.

After graduating from high school—second to last in his class—his father told him he couldn't live at home anymore. His choices were: He could join the Army, which was a family tradition, or if he wanted to start a business, his father would give him $25,000 in seed money and own a 48 percent share of the business.

Liautaud originally wanted to open a Chicago hot dog stand, but after three weeks of investigating the business, he discovered that even with used equipment, it would cost around $43,000. He went back to his dad, who said, "tough"— he had $25,000. "I said, '(Shoot, or words to that effect), what am I going to do now?"

A visit to a friend's apartment at the University of Illinois at Carbondale gave him the answer. They went to a little sandwich shop with great sandwiches on the menu, and even better, the only equipment he could spot was a beer cooler and a meat slicer.
For the next few months, Liautaud traveled the country with his Chevy Citation and sleeping bag, picking up menus from local sandwich shops to study. He baked in his mom's kitchen until he came up with his signature bread. He then bought meat and cheese at the local deli, came up with six sandwiches and had his extended family over to vote. From the six, they choose their four favorites, which became his first menu. The losers, by the way, were liver sausage with Hellmans mayo—his personal favorite—and the "everything" sandwich.

Liautaud had cousins attending Eastern Illinois University, so in 1982 he headed to Charleston, where in one weekend he found a store location and an apartment. The first Jimmy John's Gourmet Sandwiches was located in a converted garage. The house had been turned into a Dixie Cream doughnut shop, and the Panther Lounge was next door. He signed a five-year lease—which was more youthful inexperience than optimism, he adds.

"My dad gave me a Safeguard checkbook and two pieces of advice: Always pay COD and put your money in the bank every day," he says. With his seed money, he purchased a used meat slicer, a second-hand refrigerator, a new oven, a butcher block and six used bread pans. His mom donated one of her old oven mitts. In all, he spent $23,871.

Jimmy John Liautaud met James North, right, on a hunting trip in Alaska. North moved to Champaign, Illinois, from New Zealand to become “the best restaurant operator in the world.” The 30-year-old is now the president of Jimmy John’s Gourmet Sandwiches.
Two of his buddies followed him on his adventure. "I gave them the toughest shifts and took weekends off," Liautaud says. After a month, the first friend quit. Liautaud had to take his shift, and then the second friend quit, telling him he was inconsistent and a poor leader. "I was 19 years old. I was three months into it and there I was, all alone in a sweatbox. It was a hallelujah moment," he says, ruefully.

He worked open to close, seven days a week, "because I didn't know what else to do." By the fourth week of his double-shifts, he knew his customers. "I knew their personalities and which of my jokes they laughed at," he says. If the customer was heavy, Liautaud says he went heavy on the mayo; if they were thin, he went lighter on the mayo. By the sixth week, I had just gotten on my game and the students left (for break)," he says.
Bored, he turned his attention to his Safeguard checkbook. He started adding up the daily deposits, and discovered that his balance was $25,000. "I thought that was all mine," he says, but then realized that although he had been collecting sales tax, he had never actually sent it to the state. His father hired a local accountant who told him he owed the state $12,000. "Stuart (the accountant) made me call the state and tell them," he says, scrunching up his face in remembered distaste. "But they were so sweet." A supervisor came to the store and in the end, the government didn't penalize him. "The state was so gracious, I think they were laughing at me," he adds.

The lesson taught him more than to pay his taxes: "I became connected to the (bank) balance. I could control if it went up or down. I could control my destiny. That's what turned me on."He hired his first employee, and began to relax a little. "I was so excited about the customers. I couldn't believe they would give me $2.10 and say thank you," he says.

The first year in business he rung up $155,000 in sales, which translated to Liautaud making about 92 cents an hour. The second year, sales were $188,000. "I told my dad, 'Dad, you've made $45,000. I think we're even,'" he says. His father, however, disagreed, reminding him the deal was $25,000, plus 10 percent. In 1985, Liautaud bought his partner out, paying cash.Now completely on his own, he opened a second sandwich shop in another Illinois college town, taking over working double shifts when the friend who was going to help him, Billy Burns, was killed in an accident. Once a week he drove to check on the original Charleston store.Financing was one of the stumbling blocks. He felt he had a compelling story, but the banks weren't listening. He had a thriving business, but "I found the way I was presenting it wasn't an attractive deal," he says. He could slice meat for sandwiches, but slicing and dicing data was harder. Doors closed, but he kept "grinding."

Early in the process, Liautaud wrote down his operations system for subsequent stores and adopted a different management style from his early days on the job. He had learned that "instead of setting (employees) up to succeed, I set them up to fail," he says. And while his friend's parting words on his management style still hurt today, Liautaud says he learned from the experience.

In his second shop, he did the prep at night so that when his employee came in the next morning, he could concentrate on the customers—plus sleep in. A nice perk for college kids.
Why he does the things he doesWhen the doors first opened for business, Liautaud didn't have the dollars to advertise, so he used his quirky sense of humor to lure customers into the stores with promises of "free smells" and "freakishly fast service."

And he delivered—a service appreciated in college towns. He gave out free samples, and hung signs on the walls with twisted truisms, such as "Turns out pigs can fly. You just have to make them into sandwiches first" (alluding to Jimmy John's fast delivery service) and "Your mouth isn't watering, it's crying for Jimmy John's."

His employees were hired for their ability to be "real." "It's about being nice, not wimpo have a nice day," he says. No Jimmy John's employee says, "Have a nice day," when a customer leaves the store. "Have a nice day," Liautaud mimics in a kiss-uppy voice. "That's so lame. 'Later, dude.' Now that's real."

His realness is what Church's CEO/president, Harsha Agadi admires about Liautaud. "I'm the classic MBA type, but I've had the unique pleasure to work with three entrepreneurs: Tom Monaghan (Domino's), Mike Illich (Little Caesars) and Jimmy John."
Classic entrepreneurs are "real," explains Agadi, who served on Jimmy John's board, because their whole lives are tied into the day-to-day execution of the brand they created. In essence, they are the brands. "When you meet Jimmy in his R&D lab, that's when you meet the true entrepreneur, not over a desk," he claims. The excitement he has discovering new tastes and recipes is palpable, Agadi says.

"Jimmy's brain is wired a little differently than the rest of us," he says. "He can sense opportunity thousands of miles away and his heart goes after it, not just his mind."
Jimmy John’s menu has expanded since the days of four sandwiches, but it will never serve soup—at least “not while I’m CEO.”Lessons ingrainedAll these years and restaurants later, Liautaud still pays COD and checks go out the same day they come in, he says. His operation is based in part on his mentor's. Jamie Coulter, former CEO of Lone Star Steakhouse & Saloon took him under his wing and showed him the ropes. Jimmy John's is "Jamie's culture on steroids; we've put rocket fuel on it," Liautaud says.Coulter says he met Liautaud when he had just one unit open. "He was a young guy full of passion. I could see he was committed."
Coulter was a friend of Liautaud's father and he was happy to take on the role of guiding him through the restaurant business.
"He's taken everything I taught him to the third or fourth generation," Coulter says. "I'm proud of him."

For his culture, Liautaud is looking for high achievers. His president, James North, is just 30, but has worked for the company eight years. The two met on a hunting trip in Alaska, where they shared a hut, and became friends. North, who is from New Zealand, finally took Liautaud up on his offer to make him the best restaurant operator in the world. He applied for an 18-month visa, to which Liautaud replied, "18 months? You'll only last 12."
But North had the last laugh, he not only lasted 96 months, he proved invaluable.
When the previous president departed, North told Liautaud he could run the company, but on the condition they stop selling franchises for a year and fix the ones they had. "I gave him a chance, because everything he touches turns to gold," Liautaud says. North turned 70 stores around, took over real estate, hiring an industry veteran to run the real estate department, and has led during the sale of a piece of the company to a private equity company.
"I operate outside the box, he operates in the box," Liautaud says of their working relationship.
The culture at Jimmy John's is fast-paced. Just like his stand on sandwich sales—"I don't discount; I don't coupon. It is what it is, take it or leave it"—Liautaud has definite opinions about headquarters staff. "All of the top people I've developed myself," he says proudly. He expects things will get done today, not tomorrow. And he demands people prove themselves first. "With employees, I underpay until they prove their worth, then I overpay and reward them (generously)," he says.

Golfers need not apply. "We don't do next weeks; we don't hire golfers," he says, explaining that golfers start their weekends early, either physically or mentally. OK, so that's a pretty big generalization, but as Liautaud says himself, he's not into political correctness. Being mentally present on Fridays is important, he explains, because "on Fridays we get revered up for the weekends"—which generate 70 percent of the chain's revenues. "We give respect to the operators."

Liautaud is big and brash, but as North says, "You can't not like the guy. His presence is always felt." Liautaud is still involved in the marketing, and the irreverent humor that makes the ads, commercials and signage in the shops freakishly clever. He also likes to take people under his wing and give counsel. And they don't have to work for the company to take advantage of his talking points.

On a recent outing at an athletic shoe store, the clerk handed his 8-year-old son Fred a pair of shoes to try on. Liautaud wasted no time in explaining salesmanship to the young clerk. "I told him, 'the more shoes you put on people's feet the more you'll sell," he says. The clerk started hustling and the end result was "I spent $300 and I think he was enlightened."
Family is important to Liautaud. He married a professional ballerina—"the chemistry is spectacular," he says—and the couple has three children. The family hunts and boats together, and Liautaud likes racing fast cars. He belongs to a race track that he refers to as country-club like. His wife, Leslie, has given up dancing and turned into a playwright.
Jimmy John Liautaud has spent the last 25 years learning how not to be left alone in the store. The sign outside his red-brick headquarters reads: Company headquarters: Everything that has nothing to do with what we do center.

It's all about the operators and the customers, he says, not about headquarters. Not about being corporate. Which has everything to do with why young people want his autograph.

Franchise Times - May 2008