San Francisco Coffee house:

An American-style Franchise in Croatia

MA1N0225 Mario MorenoMA1N0229 Maria MA1N0216 Oogi

Introduction

• On the return to their homeland of Croatia following a six-year visit to the United States, a croatian couple has decided to open their own coffee house, one that is unique to the Croatian environment - a California-style coffee house.

• While Croatia had many coffee houses, the wanted to provide a combination of service, quality, products, and atmosphere from their time living in the US.

• This couple started with a single coffee house.• Since the start the felt this idea had the potential to grow into

a franchise. (instead of purchasing a franchise, they considered creating one and adjust it to the local market)

• They decided to use all their US lifestyle and professional experiences to develop this plan.

• Their initial coffee house became a success, and the couple realized that the potential for this concept was national. BUT, how would they grow?

• Growing organically by opening self-owned stores was costly, slow, and hard to control.

• Their concept had started to garner local publicity and inquiries from would-be franchisees began to arise.

• But, how could they franchise in Croatia? • Croatia has a small economy, changing legal system, and

little experience about franchising. The Franchising idea was not ideal for them.So, how can they become the biggest coffee house?

The entrepreneurs

• San Francisco Coffee House(SFCH) is an example of entrepreneurship where two people not only used their life experiences from the other societies where particular product or service was available, but also used their specific professional experience to contribute in creation of this unique visual identity and business and business opportunity.

• The managerial experience Denis gained by working in large American companies and the educational experience gained from an MBA from California State University gave him an advantage in creating a business in Croatia that was world-class, towering above local offerings in service, quality and customer perceptions.

• On the other hand, Jasmina’s international design experience, experience working as Art Director in American corporations, and a Master of Fine Arts and Design gave SFCH a recognizable visual identity and an interior in which visitors can feel the San-Francisco-style coffee shop atmosphere.

• Thanks to their successful careers and profitable real estate investments in the USA, they felt comfortable and confident to return to Croatia with enough capital to help them in their new start, and help their country at the same time.

• The couple even considered taking a master franchise license for Croatia, but the process was long, complicated and expensive in comparison to the expected return.

• Other problem with imported brands was that they often didn’t allow the adjustments needed to succeed in local markets, in this case, product prices were too high for the local purchasing power of Croatia.

The Environment for Franchising in Croatia

• The environment for franchising in Croatia– Insufficient regulation– Little market know-how

about franchising– Low economic development

• On the other hand– European integration had

created opportunities to start bringing in new businesses from the outside.

The Economic Environment

• In 1991, after The Republic of Croatia gained its independence. After independence, the Croatian market became flooded with imported goods of variable quality.

• The Croatian market increasingly opened to great variety of international products and services.

• In the late 1990s, economic growth began and salaries has grown appreciably. Salary growth resulted in increased consumer demand for higher quality world brand names. The habits of younger Croatian consumers had changed.

• Financial institution in Croatia were mostly owned by foreign banks. (around 90 % according to the one source)

• A main characteristic of the Croatian domestic market was the bankruptcy of small entrepreneurs as they struggled to collect their own debts.

Political Environment

• Business environment with standards of EU and with embedded in the local market economy was one of the major goals of the Croatian government’s policies.

• The government’s dedication to the reform of the national economy could seen attract foreign investment for the development of the Croatia’s domestic and international market.

• Foreign investments in Croatia were regulated by the Company act and other legal norms. According to the act: foreign investor would invest alone or as a joint-venture partner with a Croatian company or private citizen.

• Government’s desire for foreign investment, investors gained access to a number of newly opened market; entrants could take advantage of a number of incentives, tax benefits and custom privileges .

Institutions of Franchising

• The Republic of Croatia had approved a number of laws which resulted in Croatia’s acceptance into WTO and CEFTA (Central European Free Trade Agreement); these legal changes also allowed Croatia to begin negotiations for acceptance into the EU.

• There was no specific legal basis for franchising in Croatia and no legal standard for development of franchising .

• There were two Centers for Franchising, one in Osijek and one in Zagreb. Each of these centers had worked with the Croatian Franchising Association to stimulate franchising development in several ways:

Institutions of Franchising (cont’d)

• Education about franchising- The Franchise Center in Osijek, for example, had organized seminars, “Franchise A to Z”

• Franchising Promotion- both centers and the association were trying to promote franchising as a way of doing business through the local media- interviews, articles, in the newspapers and magazines, etc,;

• Creating Web sites with information about franchising on the Internet- Information on the portal with current news about franchising in Croatia, information about new franchisor, and newly opened franchised locations;

• Connecting franchisors with potential franchisees- one section of the franchise portal contained offers from franchisors interested in Croatian market.

• Helping domestic companies to become franchisors- The Franchise Center in Osijek, with the help of Poduzetna Hrvatska, organized training for potential franchise companies if they decided to use franchising as a growth strategy.

Barriers to Franchising Development

• During the September 2006, Franchise Center of the Osijek conducted a small survey about the barriers facing franchising in Croatia. Their responses included: o Laws-There was no legal regulation of franchising in Croatia.o Franchise professionals- there was a dearth of professional related to

franchising; there was too few educational efforts and too few franchise consultant

o Problems with banks- Banks did not recognize franchising as a relatively safe way of entering in to a new business and did not have any specialized loans for the franchising industry.

o Small market- there were only about 4 million inhabitants in Croatia.o Franchising was not a well-known way of doing business- People seldom

recognized franchising; many thought it was connected with insurance; people were not willing to enter into something with which they were unfamiliar.

Barriers to Franchising Development

• According to the survey, there were some identifiable reasons for the relatively slow development of franchising in the Republic of Croatia:o Entrepreneurial thinkingo Lack of franchising educationo Weak national franchising association.

• Industry experts reported that there was an excellent chance for franchising in Croatia, that was the possibility of high growth in this sector.

• The survey showed that although franchising was not a familiar way of doing business, experts saw a bright future for franchising in Croatia.

Franchisor Industry Number of outlets

McDonald’s Fast food 16 restaurants

Subway Fast food 6restaurants

Fornetti Bakeries Over 150 locations

Dama service Refilling tones cartridges 3 locations

Berlitz Foreign language school 1 location

Firurella Weight lose center for women 2 locations

Berghoff Kitchen equipment 3 locations

• Foreign Franchisor in Croatia (source: Round table- Franchising in Croatia, October 24-25, 2006)

Competition

• Franchises has become more well-known in Croatia starting in the early 1990s, after the first McDonald’s was opened in Zagreb.

• According to the Croatian Franchise Association, there were approximately 125 (25domiestic) franchise systems present in the Croatian market. These systems operated 900 locations and employed almost 16000 people.

• Companies in more than 20industries had chosen franchising as a growth option, with sales industry and fast-food sectors accounting for more than 20% of the market.

• Other segments with important shares included the tourists industry, rent a car companies, courier service and fashion industry.

• Domestic Franchisors in Croatia (Source: Round table- Franchising in Croatia, October 24-25, 2006)

Competition(cont’d)

• No well-known international coffee houses had done so. Competition for coffee houses was mostly local. Local competitors offered a roughly homogeneous product .

• Coffee consumption in Croatia was quite high; many Croatians spent time between meals, in the morning, or at coffee bars, which often also served beer and other alcoholic products.

• While regular bars and other restaurants competed with coffee shops for customers, coffee shops were relatively cheaper, providing a comfortable environment for socializing.

• Supplier of coffee were many and included both international and local brands.

The Opening of “San Francisco Coffee house”

• Osijek and Tensek offerings American-style coffee bar which offering would consists of different types of coffee and that they include novel (in Croatia) possibility of getting coffee to go. They decided to adapt this ubiquitous American concepts to the local Croatian market.

• Under the impression that “Made in USA” brand would be positively new market and they named the coffee bar “The San Francisco Coffee House.”

The Opening of “San Francisco Coffee house” (cont’d)

• During that time Tensek traveled several times US researching idea’s, studying the technology of coffee making, and bring back some supplies and ingredients.

• He tried to find good location. He found an excellent location in town’s center.• Since SFCH was the 1st American coffee house in Croatia.• The SFCH assortment was unique for this market. It offered its customers coffee in

17 different latte and mocha variants and American-style muffins in several varieties.

• Tensek and Pacek to adapt to their target market, guests were provided Croatian and international newspapers and magazines and free wireless. The ambiance was also enhanced by smooth jazz and billboard music from 1970s , 1980s and 1990s.

• SFCH had employees who underwent training for working in coffee shop salaries were almost 20 % higher than other local coffee shops.

• Human resource management was one of the areas where Tensek had brought his American corporate experience into Croatia. SFCH provided full paid vacation and benefits for its employees.

• SFHC made an extra effort to maintain excellent relationships with suppliers.

What Should Be Done Next?

• Some of the reason why companies preferred to develop franchise rather than grow organically included lower risk, faster growth, local market knowledge by franchise and the franchisee’s motivation to succeed. They wanted these benefits too.

• The barriers which the SFCH faced in franchising in the local market were challenging:o Not enough information about franchising as a resulto No well-established support organizations for development of

franchise networks in Croatiao No significant support from financial institutions

Could the couple develop franchising in market where local conditions were less than conductive?

• Franchising is one of the ways of business growth. Croatia has been a developing country so opportunities for franchising have been quite big.

• However, lack of regulations, laws and knowledge of franchise was a serious problem for them. Croatian people were less willing to enter franchising business.

• Croatian banks were also not familiar with franchising system, and the rigid rules of giving loans prohibited people to take loans. Developing franchise in Croatia hasn’t been an easy formula, rather there have been some obstacles.

• However, it still looks like a profitable development.

Question1

Could they gain national prominence?

• The company has been on the good way to gain national prominence. They already gained regional recognition and were serious to expand.

• The founders were determined to make franchising, had a good business plan, and were a unique coffee shop which gave them a huge advantage.

• Moreover, big chain coffee shops are not that interested to enter Croatian market because of its size.

Question2

How could they overcome the weaknesses they possessed and the environmental threats? • As for the overcoming environmental threats, San Francisco

Coffee House should start promoting franchising by educating staff, maybe suppliers and other business associations.

• They could organize some meetings and seminars where they would talk about the advantages of being a franchisee.

Question3

How could they seize the opportunities in the marketplace using their unique experience, capabilities and strengths?

• Their unique observations, experience in the USA, professional capabilities and overall strengths make the San Francisco Coffee House a successful company with good prospects of development.

• They could introduce other services to the coffee house which would enrich American ambience and spirit, e.g. limited edition cups, cups for selling etc.

• Having second coffee shop (in other location) would be very expensive, but if they will prosper well for several years more maybe if would be possible.

• Franchising system would be a perfect solution but in Croatia then there were some limitations and uncertainties.

Question4

Thank you for your

attention!!!