Should Starbucks Consider A Franchisee Model To Drive Growth?

Most restaurant companies either already have or are adopting a 100% franchised model to aid growth. McDonald’s has improved its profitability significantly by moving towards a 95% franchised model, since company owned restaurants need higher capital expenditure and costs in terms of labor and other operating expenses are high. Starbucks (NASDAQ: SBUX), on the other hand, has a nearly 50:50 ratio of company owned and franchised restaurants and the company is likely to maintain this ratio in the future. Starbucks’ management believes that company owned restaurants are essential for quality control and hence it is likely to continue with this model.

We believe Starbucks does not need a franchisee model to drive growth since the company has expanded company owned restaurants in the past without compromising on margins. Its company owned restaurants are profitable and efficiently run. You can click here to access our interactive model which includes the charts below and analyze how company owned restaurants are likely to contribute to Starbucks’ growth in the future.

In 2017, 54% of Starbucks’ EBITDA was contributed by company owned stores, while franchisee (licensed stores) contributed 30% toward the company’s EBITDA. The company had nearly the same number (approximately 13,000) of company owned and franchised stores in 2017. While the company is expanding aggressively (especially in China) and using the franchised model to expand in several locations, its company owned stores are profitable and essential for “a certain level of control” which the management wants to retain.

You can click here to access our interactive model which includes the charts above and analyze how company owned restaurants are likely to contribute to Starbucks’ growth in the future.

Starbucks is growing aggressively, however its company owned restaurants are profitable and essential for the company to maintain its quality and brand value. Growth is likely to come in the current  50:50 ratio of company owned and franchised restaurants and this strategy should work positively for Starbucks’ valuation.

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