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Starbucks Franchise Cost Worth the Profit Potential in 2022?

Written by: Hae-Jung Kim
Last Updated: November 26, 2021
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Have you ever thought about running your own Starbucks franchise business? After all, Starbucks is a dominant force in the coffee industry, maintaining the highest share of the coffee shop market with 40% as of October 2019. Their total net revenue, according to their 2020 annual report, was over $20 billion in 2020. 

One thing to keep in mind, however, is that Starbucks is NOT a franchise. The majority of their units are company owned. That means that earned revenue stays within the company and does not go to outside investors. The rest of their stores are licensed, where outside operators are allowed to use the brand’s trademark and sell their products, but are not obligated to follow any specific business plan or rules. In exchange, licensees must pay a royalty fee to the company. 

The following article analyzes Starbucks’ most recent annual report and their quarterly filings to determine the strengths and weaknesses of their business model and their role as a major contender in the ever growing coffee industry

Starbucks Coffee 

Starbucks was founded in 1971 and became a corporation in 1985. It is a publicly traded company and is listed on the Nasdaq under the ticker symbol “SBUX”. The president and CEO of Starbucks is Kevin R. Johnson, and he has served in his position since April 2017. Their flagship coffee brand is known as “Starbucks”, but they also sell goods and services under subsidiary brands. Like Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi. 

 

Currently, they operate in 83 different markets, with stores across the globe. According to their annual report, they have three main “operating segments” — the Americas, which encompasses the U.S., Latin America, and Canada; International, which includes China, Japan, Asia Pacific, Europe, Middle East, and Africa; and Channel Development, which refers to Starbucks or affiliated brand products being sold outside of their stores. 

Starbucks drinks

Starbucks Revenue, Costs, Number of Units (2019 & 2020)

Costs of Operating a Starbucks

Starbucks Costs (Individual Store)

Average Initial Investment$1,000,000
Required Liquid Assets$700,000
Royalty7%
Daily Operating Expenses$1,770
Yearly Expenses$646,000

Starbucks Costs (Corporation) in millions

Yearly COGS (2020)$20,316
Estimates of Average Cost per Coffee Cup$0.20 – $0.75
Non-Operating Expense / (Income)$-0.7 billion
Tax Expense$0.9 billion

franchise specialist

The Starbucks franchisee fee is $400,000 and includes furniture, fixtures and equipment (FF&E). Costs to open a Starbucks franchise/licensed location ranges from $400,000 to $2,000,000+. The major variation is due to leasehold improvements. If you are opening a simple Starbucks café in a hotel lobby, the cost could be right around $400,000. Not including working capital. 

Operational Costs

Based on an article by Advanton, it costs $1,770 per day to run a single Starbucks store, which averages out to about $646,000 in yearly expenses.

Licensee shall pay Starbucks a monthly royalty (the “Royalty”) equal to seven percent (7%) of the Gross Revenue from each Starbucks Store.

Starbucks locations across the world

As mentioned above, the majority of Starbucks establishments are company owned, making up 55% of the total domestic units. The remaining 45% of the units are licensed, and these stores can usually be found in non traditional establishments like airports or bookstores. 

Internationally, however, there are more licensed units than company owned units, with 54% of stores licensed and 46% company owned outside of the United States. Ultimately, company owned stores still have an edge over licensed units in total, with 51% for company owned stores and 49% for licensed establishments.

The following numbers are taken from Starbucks 2020 FY Annual Report, and are true as of September 27, 2020.

1- Company owned stores (Domestic): 10,109

2- Company owned stores (International): 8,245

3- Company owned stores (Total): 18,354

4- Licensed stores (Domestic): 6,528

5- Licensed stores (International): 7,778

6- Licensed stores (Total): 14,306

(Domestic) Total units: 16,637
(International) Total units: 16,023

Total Starbucks Locations (Worldwide): 32,660

starbucks franchise

 

2. Starbucks Owned Locations

Stores Open as of September 29, 2019

Americas
U.S. 8,791
Canada 1,175
Siren Retail 8
Total Americas 9,974
 
International
 
China 4,123
Japan 1,379
U.K. 288
All Other 65
Siren Retail 5
Total
International
5,860
Total company-operated 15,834

Starbucks Stores Opened (2020)

Number of stores opened % change (since 2019)
Americas
U.S. 332 -19.42%
Canada 58 -29.27%
Siren Retail 2 -33.33%
Total Americas 392 -21.13%
International
China 613 -2.54%
Japan 104 -0.95%
U.K. 6 0.00%
All Other 2 100.0%
Siren Retail —- -100.0%
Total International 725 6.62%
Total company-operated 1,117 -12.05%

 Stores Opened (2020) Comparison *based in U.S.*

 
Number of stores opened% change (since 2019)
Starbucks332-19.42%
Subway90-8.16%
McDonalds2-88.24%
Chipotle16015.11%

Starbucks Stores Closed (2020)

Number of stores closed % change (since 2019)
Americas
U.S. (182) -7.14%
Canada (74) 362.50%
Siren Retail (1) 0.00%
Total Americas (257) 20.66%
International
China (32) 18.52%
Japan (19) 58.33%
U.K. (2) -96.23%
All Other —- -100.00%
Siren Retail —- 0.00%
Total International (53) -49.52%
Total company-operated (310) -2.52%

      Stores Closed (2020) Comparison                           *based in U.S.*

 
Number of stores opened% change (since 2019)
Starbucks(182)-7.14%
Subway(98)-8.89%
McDonalds(4)90.24%
Chipotle(9)28.57%

**Note: negative percentages in the charts displaying closed units are a POSITIVE benchmark, since they indicate a decline in store closures**

Net Starbucks Stores (2020)

Number of stores opened % change (since 2019)
Americas
U.S. 150 -30.56%
Canada (16) -124.24%
Siren Retail 1 -50.00%
Total Americas 135 -52.46%
International
China 581 -3.49%
Japan 85 -8.60%
U.K. —- -100.00%
All Other 2 102.22%
Siren Retail —- -100.00%
Total International 668 219.62%
Total company-operated 803 62.88%

Net Stores (2020) Comparison*based in U.S.*

 
Number of stores% change (since 2019)
Starbucks150-30.56%
Subway00.00%
McDonalds(2)91.67%
Chipotle14611.45%

 

The net percent change of Starbucks units is positive in 2020 (despite negative percentages for individual categories) because in 2019, all of Starbucks Thailand units closed. As a result, net units were low in 2019, and the percent change for net units in 2020 is positive. 

 Stores Open as of September 27, 2020

Number of stores % change (since 2019)
Americas
U.S. 8,941 1.71%
Canada 1,159 -1.36%
Siren Retail 9 12.50%
Total Americas 10,109 1.35%
International
China 4,704 14.09%
Japan 1,464 6.16%
U.K. 288 0.00%
All Other 67 3.08%
Siren Retail 5 0.00%
Total International 6,528 11.40%
Total company-operated 16,637 5.07%

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The above charts show the numbers of company owned stores that opened and closed. Also the net change from 2019 to 2020. In the U.S., they ended the 2019 fiscal year with 8,791 stores. Having opened 332 and closed 182 for a net change of +150 by the end of the 2020 fiscal year. For the Americas as a whole, they ended the 2019 fiscal year with 9,974 stores, having opened 392 and closed 257 for a net change of +135 stores by the end of the 2020 fiscal year. 

Internationally, they ended the 2019 fiscal year with 5,860 stores, having opened 725, closed 53, and transferred 4 for a net change of +668 stores by the end of the 2020 fiscal year.

Company owned Starbucks units accounted for 90% of their gross annual revenue. 

starbucks franchise

3. Starbucks Licensed Locations

Stores Open as of September 29, 2019

Americas
U.S. 6,250
Mexico 748
Latin America 663
Canada 432
Total Americas 8,093
International
Korea 1,334
U.K. 707
Turkey 494
Taiwan 480
Indonesia 421
Phillipines 397
Thailand 392

       Starbucks Stores Opened (2020)

Number of stores opened % change (since 2019)
Americas
U.S. 210 -33.96%
Mexico 15 -69.39%
Latin America 32 -28.89%
Canada 24 -29.41%
Total Americas 281 -37.00%
International
Korea 159 24.22%
U.K. 55 -8.33%
Turkey 42 -10.64%
Taiwan 32 -8.57%
Indonesia 37 -33.93%
Phillipines 10 -74.36%

    Stores Opened (2020) Comparison                         *based in U.S.*

 
Number of stores opened% change (since 2019)
Starbucks210-33.96%
Subway378-9.79%
McDonalds27-65.38%
Chipotle232-29.91%

       Starbucks Stores Closed (2020)

Number of stores closed % change (since 2019)
Americas
U.S. (73) -26.26%
Mexico (11) 22.22%
Latin America (33) 725.00%
Canada (12) 9.09%
Total Americas (129) 4.88%
International
Korea (25) 0.00%
U.K. (29) 383.33%
Turkey (6) 0.00%
Taiwan (11) -15.38%
Indonesia —- —-
Phillipines (11) 450.00%
Thailand (7) —-
All Other (86) 56.36%
Total International (175) 63.55%

**Remember that negative percentages for closures are a POSITIVE thing, because they indicate a decline in the number of closures**

 

       Stores Closed (2020) Comparison                          *based in U.S.*

 
Number of stores opened% change (since 2019)
Starbucks(73)-26.26%
Subway(1976)36.65%
McDonalds(190)55.74%
Chipotle(727)404.86%

                  Starbucks Stores Net

Number of stores % change (since 2019)
Americas
U.S. 137 -37.44%
Mexico 4 -90.00%
Latin America (1) -102.44%
Canada 12 -47.83%
Total Americas 152 -52.94%
International
Korea 134 30.10%
U.K. 30 -44.44%
Turkey 36 -12.20%
Taiwan 21 -4.55%
Indonesia 37 -33.93%
Phillipines 1 -102.70%
Thailand 13 96.88%
All Other 179 -57.68%
Total International 449 60.20%%
Total licensed 601 -58.23%

          Net Stores (2020) Comparison                          *based in U.S.*

 
Number of stores % change (since 2019)
Starbucks137-37.44%
Subway(1,601)-60.74%
McDonalds(163)-270.45%
Chipotle(492)-357.59%

Stores Open as of September 27, 2020

Number of stores % change (since 2019)
Americas
U.S. 6,387 2.19%
Mexico 752 0.53%
Latin America 662 -0.15%
Canada 444 2.78%
Total Americas 8,245 1.88%
International
Korea 1,468 10.04%
U.K. 737 4.24%
Turkey 530 7.29%
Taiwan 501 4.38%
Indonesia 458 8.79%
Phillipines 396 -0.25%
Thailand 405 3.32%
All Other 3,283 5.77%
Total International 7,778 6.13%

The above charts show the numbers of licensed stores that opened, closed, and the net change from 2019 to 2020. In the U.S., they ended the 2019 fiscal year with 6,250 stores, having opened 210 and closed 73 for a net change of +137 by the end of the 2020 fiscal year.

For the Americas as a whole, they ended the 2019 fiscal year with 8,093 stores. Having opened 281 and closed 129 for a net change of +152 stores by the end of the 2020 fiscal year. Internationally, they ended the 2019 fiscal year with 7,329 stores, having opened 620, closed 175, and transferred 4 for a net change of +449 stores by the end of the 2020 fiscal year.

In total, they started with 15,422 licensed units at the end of the 2019 fiscal year. Having opened 901, closed 304, and transferred 4 for a net change of +601 by the end of the 2020 fiscal year.

Licensed Starbucks units account for 10% of their total gross revenue. According to the annual report, licensed stores have a lower gross margin and a higher operating margin than company owned stores.


Overall, for both company owned stores and licensed stores, there is a net growth in the number of units added and retained in Starbucks.

franchising

 

4. Starbucks Risk Factors

The following are risks that Starbucks faces as a company and to their business model, as well as an analysis of how it affects them both at the individual unit and corporate level.

COVID-19 Pandemic:

Like many other businesses, Starbucks units both across the United States and the globe encountered challenges from mandatory shutdowns due to the onset of a global pandemic. Even as units began to reopen, Starbucks establishments continued to struggle with modified hours and reduced traffic. Furthermore, the economic downturn brought on by the pandemic has also adversely affected Starbucks. Both in terms of increasing the volatility of their stock price and decreases in consumer activity. Which in turn negatively impacts revenue.

Brand Relevance and Changing Consumer Preferences: 

Much of Starbucks business success relies on their brand image and consumer perceptions of their brand. Any controversies or negative press associated with the name of Starbucks will have a damaging effect on their brand. Also, a detrimental effect overall on their revenue. In terms of consumer preferences, while coffee remains a very popular commodity with both domestic and international consumer markets, this is always subject to change.

If consumers believe that the adverse health effects of coffee or sugary caffeinated beverages outweigh the benefits, they will be less likely to purchase Starbucks products, which will hurt their revenue.

Starbucks Franchise

Cybersecurity:

Like the vast majority of businesses in the modern age, Starbucks is heavily reliant on information technology systems for their business operations. This leaves them heavily susceptible to cyber attacks from hackers, which can severely disrupt the everyday operations of their business.

Labor and Supply Chain.: The increasing cost of coffee beans and decreasing availability has a significant impact on the business operations of Starbucks. Increased costs and decreased availability will lead Starbucks to increase their coffee prices, which could in turn decrease consumer demand and potentially revenue.

Running a Global Business: 

Although Starbucks is primarily dependent on the financial performance of their domestic units, they have become increasingly dependent. Especially on the financial performance of certain international markets that have experienced a large boost in customer demand. This includes China. Which has an enormous consumer market but is also often subject to rocky relations with the United States.

Governmental and Regulatory Changes: 

Finally, Starbucks is subject to the laws and regulation of the governing bodies of the countries in which they operate. Since Starbucks has become a global brand, this not only includes US business and consumer protection laws and regulations, but for each country they have units in.

 
 

5. Starbucks Revenue: Financial Statements Analysis

 

Starbucks Income Statement (in millions)

Fiscal Year Ended
Sep 27, 2020Sep 29, 2019
Net revenues  
Company operated stores$ 19,146.6$ 21,544.4
Licensed stores2,327.12875.0
Other2,026.32,089.2
Total Net Revenues23,518.026,508.6
Product and distribution costs7,694.98,526.9
Store operating expenses10,764.010,493.6
Other operating expenses430.3371.0
Depreciation and amortization expenses1,431.31,377.3
General administrative expenses1,679.61,824.1
Restructuring and impairments278.7135.8
Total operating expenses22,278.822,728.7
Income from equity investees322.5298.0
Operating income1,561.74,077.9
Gain resulting from acquisition of joint venture—-—-
Net gain resulting from divestiture of certain operations—-622.8
Interest income and other, net39.796.5
Interest expense(437.0)(331.0)
Earnings before income tax1,164.44,466.2
Income tax expense239.7871.6
Net earnings including non controlling interests924.73,594.6
Net earnings attributable to non controlling interests(3.6)(4.6)
Net earnings attributable to Starbucks928.33,599.2
Earnings per share – basic$ 0.79$ 2.95
Earnings per share – diluted$ 0.79$ 2.92
Weighted average shares outstanding  
Basic1,172.81,221.2
Diluted1,181.81,233.2

Cash Flow Statement (in millions)

Starbucks Cash Flows Statement (in millions)

Fiscal Year Ended
Sep 27, 2020 Sep 29, 2019
OPERATING ACTIVITIES
Net earnings including noncontrolling interests $ 924.7 $ 3,594.6
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 1503.2 1,449.3
Deferred income taxes, net (25.8) (1,495.4)
Income earned from equity method investees (280.7) (250.6)
Distributions received from equity method investees 227.7 216.8
Gain resulting from acquisition of joint venture —- —-
Net gain resulting from divesitutre of certain retail operations —- (622.8)
Stock based compensation 248.6 308.0
Goodwill impairments —- 10.5
Non-cash lease cost 1,197.6 —-
Loss on retirement and impairment of assets 454.4 142.6
Other 24.5 45.3
Cash provided by/(used in) changes in operating assets and liabilities
Accounts receivable (2.7) (197.7)
Inventories (10.9) (173.0)
Prepaid expenses and other current assets (317.5) (922.0)
Income taxes payable (1,214.6) 1,237.1
Accounts payable (210.8) 31.9
Deferred revenue 31.0 (30.5)
Operating lease liability (1,231.4) —-
Other operating assets and liabilities 280.5 (141.1)
Net cash provided by operating activities 1,597.8 5,047.0
INVESTING ACTIVITIES
Purchases of investments (443.9) (190.4)
Sales of investments 186.7 298.3
Maturities and calls of investments 73.7 59.8
Acquisitions, net of cash acquired —- —-
Additions to property, plant and equipment (1,483.6) (1,806.6)
Net proceeds from the divestiture of certain operations —- 684.3
Other (44.4) (56.2)
Net cash used in investing activities (1,711.5) (1,010.8)
FINANCING ACTIVITIES
Proceeds from issuance of short term debt 1,406.6 —-
Repayments of short term debt (967.7) —-
Proceeds from issuance of long term debt 4,727.6 1,996.0
Repayments of long term debt —- (350.0)
Proceeds from issuance of common stock 298.8 409.8
Cash dividends paid (1,923.5) (1,761.3)
Repurchase of common stock (1,698.9) (10,222.3)
Minimum tax withholdings on share-based awards (91.9) (111.6)
Other (37.7) (17.5)
Net cash provided by/(used in) financing activities 1,713.3 (10,056.9)
Effect of exchange rate changes on cash and cash equivalents 64.7 (49.0)
Net increase/(decrease) in cash and cash equivalents 1,664.3 6,069.7
CASH AND CASH EQUIVALENTS
Beginning of period 2,686.6 8,756.3
End of period 4,350.9 2,686.6
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest, net of capitalized interest $ 396.90 $ 299.5
Income taxes $ 1,699.10 $ 470.1

Starbucks Coffee Franchise Review 

 An important feature to focus on is the section “net earnings attributable to Starbucks” in the income statement. Or “Consolidated Statements of Earnings”. This is the number that Starbucks earns as a company after taking care of all other expenses. And a crucial metric to determine the financial health of a company.

One thing to take note of is the fact that Starbucks experienced a significant decrease in net earnings due to the COVID-19 pandemic. Starbucks Franchise Profit went from $3 billion in 2019 to $900 million in 2020. Although Starbucks is still a profitable company, this loss is significant.

One interesting component of the income statement is the fact that company owned stores account for the vast majority of Starbucks’ yearly revenue, about 90%. These vast discrepancies in revenue does not reflect in the actual makeup of company owned versus licensed stores. Which are practically 50/50. However, this could be an indicator that Starbucks will invest more of their resources into their company owned stores. While issuing fewer licenses.

Cash flow keys

The final piece of analysis takes a look at the cash flows statement  — often considered the most important out of the three financial statements. This is because the amount of cash a business has is a key indicator of their financial health. Companies can go to great lengths to manipulate their earnings. But, the amount of cash it has demonstrates its true ability to meet expenses and repay investors. According to Starbucks’ cash flow statement, they gained a net increase of $1.6 billion in cash. And at the end of the fiscal period, their total cash and cash equivalents amounted to approximately $4.3 billion. 

Starbucks Franchise

Starbucks Revenue: Quarterly Earnings (Q2 2021)

While the annual report measures the financial performance of a company as a whole in the last fiscal year, the quarterly earnings provide a much more recent, up to date outlook on company financials. Overall, Q2 for Starbucks proved to have a significant rebound in sales, showing promise of a full economic recovery from the pandemic.

See a few of the key points of this earnings report, and what this means for the future of Starbucks. Global comparable store sales increased 15% in total, and in the Americas, comparable store sales increased by 9%

Internationally, comparable store sales increased by 35%. Largely driven by an enormous growth in sales in the region of China, where comparable store sales increased by 91%. Overall, this growth was driven by increases in average ticket (the amount of sales per customer). Which compensated for declines in comparable transactions (the amount of times that customers came and purchased Starbucks). 

 

This trend can be interpreted in a number of ways. It could reflect the increasing prices of Starbucks products and coffee as a whole. Which could increase total sales but decrease total transactions. Or it could mean that even as less customers buy Starbucks, the purchasing customers are buying more. 

The company saw an increase in +5 net stores over the Q2 fiscal period (see chart below). Although the proportion of company owned and licensed stores (51/49) remained the same. The majority of stores are located in the U.S. and China regions. 

Consolidated net revenues increased 11% from the previous year to $6.7 billion, and  operating margin increased from 8.1% of the previous year to 14.8% (see chart below).

franchise specialist

Net Stores Opened/Closed

Quarter Ended
March 28, 2021 March 29, 2020
Americas
Company-operated stores (209) 31
Licensed stores 21 37
Total Americas (188) 68
International
Company operated stores 123 78
Licensed stores 70 109
Total International 193 187
Total Company 5 255
Two Quarters Ended
March 28, 2021 March 29, 2020
Americas
Company-operated stores (289) 77
Licensed stores 55 127
Total Americas (234) 204
International
Company operated stores 308 277
Licensed stores 209 313
Total International 517 590
Total Company 283 794
Stores open as of
March 28, 2021 March 29, 2020
Americas
Company-operated stores 9,820 10,051
Licensed stores 8,301 127
Total Americas (234) 204
International
Company operated stores 308 277
Licensed stores 209 313
Total International 517 590
Total Company 283 794

Conclusion

Overall, Starbucks is a very profitable company that operates both company owned and licensed units. Eventhough the pandemic did take a toll on their earnings, their quarterly report shows that they were able to make a strong rebound in 2021 and will likely continue to do so. Although the cost of coffee has increased due to limited supplies, the fact that Starbucks dominates the coffee beverage industry helps mitigate these risks and renders it a strong force in the broader food and beverage industry

As detailed in the graph below from Statista, Starbucks dominates the other major coffee chain in the industry, Dunkin Donuts, by a very high margin in terms of the number of existing outlets. 

Coffee industry growth graph

Although Starbucks does not offer franchises, there are plenty of other coffee businesses that you can explore on the Vetted Biz website along with other successful franchises in the coffee industry

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