Starbucks vs Subway

Topics: Entrepreneurship, Franchising, Starbucks Pages: 6 (1639 words) Published: October 20, 2013
Serving Up Success
There's something to be said for doing things your
way. Learn how the masterminds behind Starbucks
and Subway followed different paths to megasuccess.
from: Entrepreneur magazine - November 2003
By Joshua Kurlantzick
They have built two of the best-known and most
successful businesses in the food and beverage
industry. Their brands have become household names
in America, rivaling longer-established companies.
They've delivered large profit margins in an industry
where margins are historically tight and competition is
extremely fierce. They've brought their companies
overseas, and now there are new words for their
products in Japanese, Hindi and even more exotic
languages.
But Fred DeLuca, founder of sandwich supremo
Subway, and Howard Schultz, founder of coffee
conglomerate Starbucks, each did it his way. Indeed,
their roads to profit diverged on one key point: Schultz
has kept his chain company-owned, while DeLuca has
built his corporation through franchising. (In fact,
Subway retains only one company-owned store.) In
both cases, the decision to franchise or to remain
company-owned was perhaps the critical element in
building the business. And in both cases, the decision
paid off. Earlier this year, Subway, which DeLuca
founded in 1965 with a $1,000 loan, opened store No.
18,000. The sub chain now has more outlets in the
United States than McDonald's, yet it has continued to
post growth rates higher than most other food and
beverage chains. It has also opened outlets in more
than 70 countries. For its part, since its founding in
1971, Starbucks has grown into a company with over
7,000 outlets worldwide and sales topping $2 billion per
year. In an exclusive interview with Entrepreneur,
DeLuca and Schultz explain why they chose the roads
they did, examine the advantages and disadvantages of
their strategies, and consider whether other
entrepreneurs should emulate their paths.
How and why did you first decide to franchise or not?
Fred DeLuca: When we first started the company, I
didn't have any thoughts of franchising. We just had
company-owned stores. But we quickly saw that
company-owned stores that were not close to company
headquarters didn't run as well—management of these
stores seemed less dedicated and less entrepreneurial.
So we figured we had to create a system in which all the
stores would be like the ones close to company
headquarters, where managers had the feeling of being
very invested in the company's performance, of really

caring about the company's success. We thought that
the best way to make store managers really care about
Subway's success, and have that kind of unique
entrepreneurial spirit, was to franchise.
Howard Schultz: We believed very early on that
people's interaction with the Starbucks experience was
going to determine the success of the brand. The
culture and values of how we related to our customers,
which is reflected in how the company relates to our
[employees], would determine our success. And we
thought the best way to have those kinds of universal
values was to build around company-owned stores and
then to provide stock options to every employee, to
give them a financial and psychological stake in the
company. We thought the best way to get to those
values would be to have all the employees working for
us. [As a result,] Starbucks has the lowest employee
turnover of any food and beverage company.
I always viewed franchising as a way to get access to
capital, because you're using other people's money to
grow, essentially. And we were dealing with a premium
product—something that can be hard to learn, that you
have to explain to the customer, that requires an
educated staff. It would have been hard to provide the
level of sensitivity to customers and knowledge of the
product needed to create those Starbucks values if we
franchised. You can be just as entrepreneurial and
experimental in a...
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