SAN FRANCISCO COFFEE HOUSE

AMERICAN STYLE FRANCHISE IN

(Case Study Analysis)

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 INTRODUCTION

COMPANY PROFILE:

San Francisco Coffee House (SFCH) is the first American-style coffee house in
Croatia. This unique place where one can enjoy the authentic ambience of
this American city got excellent reviews and unusually large media attention.
“Elite Décor”categorized it among 6 best designed restaurants-bars-coffee
shops in Croatia. The local media in Osijek, where the first one was opened,
proudly goes into detail describing the rich choices of American Mocha and
Latte coffees one can enjoy- including an unique environment with soft jazz
music, foreign newspapers and magazines, free unlimited wireless internet
access or “coffee to go” cups to take the coffee with you to the office, school
or when going for a walk.

This cozy coffee shop, housed in Hrvatska, Croatia is decorated in soothing

earth tones. Authentic photos of old San Francisco adorn the coffee color
stained walls and can be admired from the cushioned banquettes inside the
shop. Stylish, multicolored, poured concrete countertops add to the
contemporary feel of this inviting space.
 HISTORY:

On the return to their homeland of Croatia following a six-year visit to the

United States, a couple decided to open their own coffee house, one that is
unique to the Croatian environment - a California-style coffee house that
offers the quality, service, product assortment, ambiance and efficiency
found in sophisticated coffee shops in developed markets, and all for a
locally affordable price. The major challenge faced by the couple is how to
grow. Specifically, should they consider franchising over organic growth? If
so, how should they go about franchising in a country where the market is
developing and where franchising is under-regulated, underdeveloped and
misunderstood?

Jasmina Pacek (MFA) and Denis Tensek (MBA) after their return from the USA
decided to enrich the offer in Osijek with a completely new concept: They
opened San Francisco Coffee House – An unique place in Croatia where you
can enjoy the original atmosphere of this American city and choose one of 17
kinds of special coffees or take them with you when going for a walk, to work
or school...A year after their opening they are ready to expand. Due to a
numerous requests of the visitors from other parts of the country and their
wish to be able to enjoy this environment and the coffee in other cities too,
with the Franchise Center of the Center for Entrepreneurship from Osijek
they developed their franchise offer. They are already negotiating with
entrepreneurs from different cities around the country, where the speed of
the implementation of the idea will be important because SFCH is giving
territorial exclusivity.

SFCH website described the coffee house as-

“"On vacation and wondering where to get that perfect cup of gourmet
coffee or tea? Try the San Francisco Coffee House’’. This charming shop with
friendly bilingual staff is situated on the spectacular Osijek Marina and offers
a comfortable outdoor place where you can relax with friends, listen to music
and enjoy a full menu of espresso drinks, smoothies and
frappes...complemented, of course, by a variety of yummy pastries and
bagels! You might even want to take a bag of rich coffee beans home with
you to remind you of your leisurely mornings in Osijek.”

1. QUESTIONS

QUESTION 1:

SHOULD TENSEK AND PACEK CONSIDER FRANCHISING

OVER ORGANIC GROWTH?

Yes , franchising will prove to be a better option for Tensek and Pacek over Organic
Growth. Franchising will help them grow faster and thus lead in competetion from
other coffee houses. The option of franchising can lead them to dominate faster and
to reach far-off customers without any delay. The franchising decision can also help
them to cater the large population who are already aware of San Francisco Coffee
House (SFCH) and are waiting it to open branches at different parts of Croatia.
As the franchisor we usually have the company that due to the years of successful
business experience managed to built its brand and developed the successfull
business model that can be applied to another location with the knowledge transfer.
For company that is looking into expansion, the reasons to use the franchise model
rather than to open more company owned units very often are financial (common
but not the only or exclusive reason). The financial reason is definitely important
since when opening a new franchise unit the largest portion of the expanses is
covered by the franchisee (the franchise buyer). Even when the financial resources
are not limited , it is always better not to engage your own assets if you can engage
somebody elses. Other reasons to sell the franchise instead of opening the company
owned unit are the motivation of the person running the unit (the feeling of
increased responsibility when running own company and working for himself), the
shared risk, not have to worry about the employees, utility expenses and control the
daily business that are all responsibility of the franchise buyer.

Hence we can say that in this case “FRANCHISE IS THE BUSINESS MODEL
WHERE THE INTERESTS OF BOTH SIDES (San Francisco Coffee House and
Franchisee) ARE MET.”

QUESTION 2:

WHAT ADJUSTMENTS WOULD THEY NEED TO MAKE FOR

FRANCHISING IN THE CROATIAN CONTEXT?

Franchise is a business model in which a company sells the right to use their trade
mark and the business model to another company that in return pays the franchise
fee and the percentage of the monthly sale of goods and services. It is suitable for
almost all business segments: restaurants, hotels, bakeries, car services, real estate
agents, beauty saloons, house cleaning , etc.
Even if in Croatia we think of franchise as something we buy from abroad, however
ther are Croatian companies that are strong enough, experienced and have a good
reputation to become franchisors. It does not necceseraly requires large
investmenets but well thought out business model, that can be replicated in another
location.
Although franchise as a business model undoubtedly shows an exceptional potential
and the adaptability to different industries and business environments – even four
decades after the first franchise appeared in Croatian business environment – it still
hasn't been fully developed as a business model.
Even though franchise business model is present in Croatia for over four decades,
the real development of this business model still lies ahead. The first franchise
came to Croatia in 1969 with Diners Club International. Franchise agreement
enabled the franchisee based in Zagreb to operate in the whole former Yugoslavia
and other Balkan countries. Croatian Diners Club franchisee was awarded twice by
the franchisor for exceptional business results achieved in the Eastern European
market.
The first more significant discussions on the advantages and disadvantages of
franchise business model came together with McDonald's which entered Croatian
market in the early 1990s. McDonald’s established a company McDonald's Hrvatska
Ltd., signed business agreements with key suppliers – strategic partners in Croatia
with some of them investing additionally in their production capacities to meet the
needs and quality requirements of this multinational company. McDonald's
expanded throughout Croatia by opening its own, "company" restaurants or by sub-
franchising to other locations. McDonald’s presentations in cities where the
franchisor sought partners/franchisees generated great interest of potential
franchisees with many questions referring to the nature of the franchise agreement
offered by McDonald's, i.e. to the rights and obligations of both sides in a franchise
relationship. Couple of years after McDonald's, several other franchisors appeared
on Croatian market with Hungarian bakery franchise Fornetti and an US restaurant
franchise Subway standing out as the most recognizable ones.
Institutional Support for Franchising in Croatia:
Croatian Franchise Association was established in 2002 with main objectives
to promote and advertise franchise licensing in Croatia, to group the
franchisor companies comparing their feedback and to establish policies and
standards for franchise licensing in Croatia. Even though the mission and
objectives of this Association are of great significance for franchisors in
Croatia, especially taking into consideration low level of awareness on basic
franchise concepts among entrepreneurs, the Association today has only a
few members. Main activities of the Association have been based around
promoting and advertising franchise opportunities in various media and the
co-organization of an international forum Franchise and Partnership Expo in
Zagreb. Over the past few years (2003-2006), this event comprised of
regular franchise conferences with a number of domestic and international
experts in different aspects of franchising (bank representatives, lawyers,
university professors and the representatives of major franchisors) as guest
speakers and participants.
Franchising has been present in Croatia since late 1970s, but first real
promotion of this business model brought McDonald's in 1990s. However,
franchising in Croatia has somewhat stagnated on a rather low level which
was interconnected with general economic situation, weak entrepreneurial
climate and low level of innovation and competitiveness of Croatian
companies. At the same time, there are only two franchise support
institutions operating in Croatia – Croatian Franchise Association and The
Franchise Center – part of Center for Entrepreneurship Osijek, both with the
mission of promoting franchise as a business model.
PEST analysis of the major environmental factors influencing franchise
development in Croatia:

Source: Research results - “Franchising development perspectives in Croatia”

QUESTION 3:

HOW COULD THEY PROTECT THEIR INTELLECTUAL

PROPERTY AND BUSINESS FORMAT KNOW-HOW?

This can be done with the help of a FRANCHISEE AGREEMENT.

SFCC need to consider the protection of their intellectual property early in
the formation of the business. It is heartbreaking to find that the idea they’ve
worked so hard to conceptualize and develop is stolen by other people and
companies, where they can end up losing their business format, and most
importantly, their profits as well! Plus, failure to protect their proprietary
information could lead to complex and expensive legal actions later on.
The best course of action is to visit your country’s patent and trademark
office. In the U.S., patent grant provides "the right to exclude others from
making, using, offering for sale, or selling" the invention in the United States
or "importing" the invention into the United States.
It is important that SFCC put in place relevant protections to prevent their
intellectual property being infringed (for example by registering their trade
marks and company name). Once you have adequate protections in place
they can then benefit from their intellectual property through licensing. It is
also easier to protect their intellectual property if it is registered and you can
prove ownership.
A Franchise Agreement is a sophisticated form of Licence Agreement.
Intellectual property rights which can be licensed include statutory or non-
statutory intellectual property rights.
Here we consider non-statutory intellectual property rights that include
know-how, trade secrets, customer lists, formulas, business methods,
personnel training and manuals.
Franchise Agreement is a key factor to promote and enhance a win/win
situation and to protect the respective rights of the parties and the entire
franchise operation. It is therefore certainly advisable, particularly as
franchise agreements are extremely complex, that legal assistance from an
expert skilled in intellectual property and franchising be obtained.
It needs to be reiterated that it is essential that the Agreement properly
identifies all aspects of the franchisor’s intellectual property and other
proprietary rights and that these are properly protected and licensed to the
franchisee. The contract should also focus on and accommodate the specific
needs and requirements of the franchise operation and control the
relationship between the parties in a positive and constructive manner.