Here’s Why A “Company Owned” Model Works For Starbucks

Restaurant companies are employing different methods of expansion and efficient management. While McDonald’s is moving towards a 95% franchised model and Burger King (owned by Restaurants Brand International) is already operating an efficient franchised model, nearly 50% of the 25,000+ restaurants of Starbucks (NYSE:SBUX) are still company owned. The company is growing aggressively but its expansion strategy is not based on a shift towards a franchised based model. Our forecast estimates that by 2023, the company will still have a 50:50 ratio for franchised and company owned restaurants.

Maintaining Company Culture And A Higher Control Over Employees

Higher operating expenses for company-owned restaurants, higher capital spend, and the ease in expansion through a franchisee model has encouraged other restaurant companies to shift towards a fully franchised model. As McDonald’s works on this transition the company has started witnessing a growth in operating profits. However, a franchise-based model leads to lower control of the company management on day-to-day operations and Starbucks’ management wants to maintain a certain level of control on its stores and hence favors company-owned restaurants. The company wants its baristas to understand its culture, vision, and value statement, and believes that this is possible only if its restaurants are company owned. While Starbucks has adopted the franchisee model for international expansion and several of its domestic stores are also licensed, the company still has a significant percentage of company owned stores in order to maintain its culture.

Efficiently Run, Profitable Company-Owned Restaurants

Starbucks has been running its company-owned restaurants efficiently and the company generates a higher EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) margin from these stores compared to its peers. The company generated a 21% EBITDA margin from its company-owned restaurants in 2016 (and we estimate a similar figure for 2017) compared to the 19% figure for McDonald’s.  Chipotle Mexican Grill which follows a 100% company-owned model, generated an EBITDA margin of around 25% in 2015, before the company was hit by the E. coli virus and margins declined significantly. While this number is higher than Starbucks’ margin figure, Chipotle operates only 2,000 company owned restaurants and the comparative number for Starbucks is around 12,500. This indicates that Starbucks has been able to scale up its restaurants without compromising significantly on margins. Company operated restaurants contribute more than 50% towards Starbucks’ EBITDA, indicating that they are more profitable compared to franchise restaurants since the number of restaurants under both categories are nearly equal.