Business Format Franchising Model of Cater2me - Case Study Example

Business Format Franchising for Startups: “Cater2me” case analysis Contents Executive Summary 3 PART I 4 Cater2me: Business Case 4 PART II 6 Success factors for Startups and Entrepreneurs 6 Expansion and Growth Options for a Start Up 8 Format Franchising as a Growth Option 9 Conclusion 10 Bibliography 12 Executive Summary The paper describes the Business Format Franchising model as a potential long term growth option for startups and small businesses. The first part of the paper is a case study based on “Cater2me” firm, launched by two American partners Zach Yungst and Alex Lorton in San Francisco in 2010. The firm provides food delivery service for the employees of smaller companies with a unique selling point of providing convenient and reliable variety in their catering options. The customer and supplier centric focus of Cater2me is responsible for the unique culture of the firm which supported the growth of the firm from a single center to ten centers across American cities by 2014. Start ups succeed when entrepreneurs are able to correctly anticipate the needs of a niche market and then work steadily to capitalize on the unique points of their service. Cater2me was successful in part because it was self financed and did not opt to achieve quick profit growth as is often required by venture capital funding. The owners can now further expand the business through Format franchising, which will allow Cater2me to reach across the Atlantic into the bustling London market through licensing their brand, operations value and culture to aspiring business owners. The format lets the franchisor keep control of their original idea while including and incorporating local insights from the franchisees and minimizes the risk for both the groups. It is a symbiotic relationship where Cater2me will provide the necessary support (training, managerial and operational processes, brand value etc) to their franchised outlets in overseas centers and the business owners themselves will take on the routine work and risk associated with running the branches. PART I Cater2me: Business Case Partners Zach Yungst and Alex Lorton had the idea for their startup Cater2me, while walking across downtown San Francisco, admiring the variety of food options available at street side vendors. They were also aware of how these vendors were limited to a restricted customer base and did not have the options for scalability that were available to restaurants or better financially backed establishments. They saw a market opportunity for bridging the gap between the vendors and the corporate customers who would be eager to sample the vast variety of food items if only it was conveniently packaged and delivered. Cater2me began in 2010 as a service providing quality food options to the various corporate offices and other tech startups operating in San Francisco who are not big enough to afford their own kitchen or chef operations (Darlin, 2011). A customer centric business, Cater2me provides a basic platform for ordering food where the customer just has to put in the number of employees needing to be served, address and any special dietary requirements and the startup would provide them with a varied, culinary experience. The process has been made as simple as possible to provide the greatest convenience to their busy employed customers. Cater2me considers their relationship with both their clients and their vendors as of extreme importance for maintaining their success in the marketplace. Based on strong customer loyalty, word-of-mouth marketing and the sheer deliciousness of the food provided by the 70 plus vendors the company buys from, Cater2me has been able to expand tremendously in the past few years; they have recently delivered their 5 Millionth meal (Anthony, 2014). The company employees 65 people and is operating in 10 major cites now including San Francisco, New York, Chicago, Washington DC, Austin and Boston. More impressively, the company is entirely self-financed with zero venture capital. The owners, who have both worked in private equity and finance sector, say that their business model cannot sustain the quick growth that the capital backed ventures require. Their slow, steady expansion requires gaining customer loyalty and developing vendor networks at each new place that they operate in to ensure their business promise of reliably delivering unique food (Griffith, 2013). There is no room for error in this particular service industry; customers will only provide Cater2me with one chance to prove their superior service and unless they are completely satisfied there will be no repeat business for the firm. The vision of the business is best described as “Curating unique food experiences for thousands of companies around the country”. This vision is supported by several informal mission objectives which include (Anthony, 2014): A growth model sustained by quality service and customer satisfaction Development of a dedicated and passionate team in each of Cater2me centers through providing exemplary working conditions and work life balance Working with vendors on an equitable basis to ensure growth, profits and opportunity for all and to provide economic growth in the community For Cater2me’s the following long term objectives are suitable. Many of the company’s original long term goals have already been achieved since the inception but can be further increased till 2018: To remain financially independent and profitable. A steady growth that supports their vision and mission. The company should aim to be present in at least 20 major urban centers. To have an employee team of 100+ members. Increase customer and vendor portfolio by 15%. International expansion in at least one operationally viable major customer base. For this purpose, London can be one of their potential expansion cities for Cater2me as the corporate culture and lifestyle of one of the world’s largest financial center is similar to what has traditionally been the company’s target market. PART II Business Format Franchising Success factors for Startups and Entrepreneurs Successful startups are not a rare find in the technology and software sector where even one idea can propel an entrepreneur to long term success. However, this does not mean that more traditional formats of business have become completely obsolete. As proven by Cater2me the jobs of middle men are still relevant in the age of technology driven connectivity; while it is true that customers and businesses can find each other much more easily now via the internet there is still a lot of opportunity available for the savvy entrepreneur to find a niche service of product which somehow fulfills customer needs for convenience or delight (Darlin, 2011). The only necessity is that the entrepreneur should be aware enough to find out these niche needs and then provide an effective solution for them. Entrepreneurs need to be able to monitor trends and exploit them early on in order to gain advantage from their peers. Similarly they need to be able to utilize existing resources in a creative manner creating novel solutions for the target customer. One more method they could apply to search up opportunities is to look for what is missing in the market as the owners of Cater2me did (Kaufmann and Dant, 1998) Cater2me came into existence in an industry which already had heavy competition from various other internet food service providers, who were providing the same basic options to their clients in term of food choices and convenience. However, Zach Yungst and Alex Lorton both realized that by simply providing a better menu to choose from and by focusing on customer service they could create their own USP in the market and gain loyal clients (Anthony, 2014). Furthermore, instead of relying on outside capital and leveraging their financials for a possible quick growth, the two entrepreneurs chose to start out on their own, taking on manageable risk and growing organically. While such a method may not bring in quick profits; it does allow more room for experiments and creative business management; and demands for basic hard work to sustain the business idea (Kaufmann and Dant, 1998). It can be argued that Cater2me might not have had the same success if instead of building up supplier and customer networks the owners had been pushed towards increasing the bottom line and creating new profit centers within the business itself. Cater2me is not just a catering service it is also a contributing factor towards the local economies, providing a platform for small business vendors to expand their operations with the help from Cater2me’s staff. The unique culture and values of the firms are resonating with their stakeholders including customers, employees, suppliers and business advocates and have allowed Yungst and Lorton to develop strong brand value in the market (Baum and Locke, 2004). Expansion and Growth Options for a Start Up The ultimate goal of every business owner is to grow their business and increase its economic and financial impact. For Startups the challenges began much before the growth stage, as theses small businesses have to be cultivated straight from a basic idea into a viable business operation. Only after the original idea has been firmly established can the owners start to plan ahead for growth and expansion (Maltby, 2010). In most industries the biggest constraint for any small business is the lack of financial capital or the mismanagement of the funds available. The Silicon Valley culture, however, is more supportive of these small tech start ups which have been proven to be a viable model in the internet age. Venture capitalists, equity partners, angel investors are all available and willing to listen to any new ideas which show potential and then provide them the monetary backing required to build and expand the ideas into successful businesses (Griffith, 2013). The caveat being that the entrepreneur often loses out on complete managerial independence and the startup’s may become amalgamated into the bigger identity of the financial backers. The option of bank loans is also available but the risk of leverage may prove to be too much for a business that is just starting up. Discussing the specific case of Cater2me, this Startup avoided a lot of the pitfalls that cause the failure of other ventures by sticking to a business model and business values that reflected the owner’s own interest and took into account the specific needs of their customers. Their financial acumen allowed the owners to grow organically and succeed both financially and in terms of their market penetration. In the past 4 years the company went on to expand to 10 different cities with a large network of stakeholders sustaining this growth. It is only expected that the entrepreneurs will opt to grow further and even towards international markets. As Cater2me has already proved their own business model in diverse American cities, the owners can now move their business internationally with some confidence. The basic need Cater2me fulfills is of saving convenience and providing reliable variety of food to hungry employees; the London corporate and financial sector is brimming with smaller, employee centered firms that can become potential employees of the firm if the service is brought here. While there are multiple strategies available to Yungst and Lorton for international (and local), expansion including direct operations, forming a partnerships or starting a joint venture this paper will discuss Business Format Franchising as the viable option for Cater2me (Reach, 2012). Format Franchising as a Growth Option Under a franchise model the original entrepreneur licenses out his business idea, trademarked product or product design to other business owners allowing them the use of the already established model or brand. In the “Business Format Franchise” model the franchisor offers a far wider range of managerial, financial and strategic support to the franchisee in order to help create an extension of the original business which is as close to the initial entrepreneurial idea as possible (Sinha, 2014). One definition of the model of the model as provided by the International Franchise Association (IFA) of America is as follows: “A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obligated to maintain a continuing interest in the business of the franchisee in such areas as knowhow and training; wherein the franchisee operates under a common trade name, format and or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources” (Sinha, 2014). The main benefit for the franchisee is that they get access to a tried and tested idea thus mitigating some of the risk involved in starting up their own business. The support provided by the franchisor may extend to areas such as marketing, advertising, strategic planning, training, operations manuals and standards and quality- control guidance all which will contribute towards efficient business operations and cost control for the business owner. A successful brand also lends immediate credibility and market recognition for any new branch of the business, thus creating an existing and possibly loyal customer base. The disadvantage to the business owners is that the terms of the license often do not leave much room for creative control or innovative management decisions and much of the risk associated with any business operations remains such as effects of the local market, regulations, customer preferences or geographical factors (Asgharian et al, 2013). Conclusion For a Startup like Cater2me, the role of the Franchiser can be a strongly beneficial with regards to rapid expansion in the US as well as in the international market. By allowing local business leaders, such as entrepreneurs in London, access to the Cater2me operating systems, values, culture and brand name the company can infiltrate multiple markets at once while still keeping control of the original vision of the company (Maltby, 2010). The biggest advantage to the franchiser in such a contract is that the franchisees have knowledge about the local market structure and the legal environment that can cut down the hassle in developing the brand in a new geographical region (Reach, 2012). While the company already has centers in 10 different cities, the business is still being managed by the original owners but for greater scalability, their ideas and management style needs to be expanded widely. By developing a formal Business Franchise Format strategy for the firm, Yungst and Lorton can ensure that the unique culture and values of Cater2me are soundly transferred to other aspiring business owners who can then incorporate the same business model in their own locations. As long as the franchise contract is maintained properly with Cater2me providing the necessary training and support, these franchises will work towards enhancing the brand value of the firm. From a cost efficiency point of view, such an expansion strategy is also feasible for the entrepreneurs who will not need to invest in developing networks, business infrastructure and customer interest in completely different markets. In this symbiotic relationship, franchisees will provide the required investment for the branches of the Startup while Cater2me supports them with the business experience. Bibliography Grifith, E., 2013. How Cater2.me is quietly scaling without venture capital. Pando Daily. Retrieved from: < http://pando.com/2013/05/06/how-cater2-me-is-quietly-scaling-without-venture-capital/> [Accessed 10th Sep 2014] Darlin, D., 2011. The Middleman Is Thriving on the Internet. The New York Times, Sep 24. Retrieved from: < http://www.nytimes.com/2011/09/25/technology/internet/lunch-catered-by-internet-middlemen.html?_r=0> [Accessed 10th Sep 2014] Anthony, H., 2014. Catering Startup Cater2.me Says It Has Served 5M Meals. Tech Crunch. Retrieved from: http://techcrunch.com/2014/09/05/cater2-me-5-million/ > [Accessed 10th Sep 2014] Asgharian, E., Dadfar, H. and Brege, S., 2013. Entrepreneurial Process In Franchised Outlets. Journal of WEI Business and Economics-April 2013 Volume 2 Number 1, p 59-71. Reaich, N., 2012. Franchising as a Method of Business Expansion. Biz/Ed. Retrieved from: ,http://www.bized.co.uk/notes/2012/02/franchising-method-business-expansion> [Accessed 10th Sep 2014] Kaufmann, P.J. and Dant, R.P., 1998. Franchising And The Domain Of Entrepreneurship Research. Journal of Business Venturing, 14, 5–16. Sinha, DK., 2014. Franchising: Types, Advantages and Disadvantages. Your Article Library. Retrieved from: [Accessed 10th Sep 2014] Maltby, E., 2010. Three Best Ways to Expand Overseas. The Wall Street Journal, May 28. Retrieved from: < http://online.wsj.com/articles/SB10001424052748704596504575272621261177324> [Accessed 10th Sep 2014] Baum, J.R and Locke, E.A., 2004. The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth. Journal of Applied Psychology, Vol. 89, No. 4, p587–598. Read More