Franchisee Owner says a "Second Cup" Makes Cents
A conversation with a new franchise owner
By Melanie Joy Douglas, Monster.ca
Right away, I can tell that Osmand Souba is a hands-on man, and very involved with his new business. He insists I have something to drink - I indulge in the city’s finest white hot chocolate - and relax at a table while he finishes up with his customers.
The Second Cup, at 1595 Bayview Ave, is cozy and clean. Located in a desirable neighbourhood, the business boasts a lovely patio perfect for people-watching, and plenty of options to sit inside - chairs, benches, or a couch in front of a gas fireplace.
Osmand Souba left a career in financial planning to open up his very own Second Cup franchise four months ago. The store was fifteen years old, but was newly renovated in 2005. As the previous owner’s contract expired, corporate took over the franchise for roughly a year before Osmand came along and made it his own.
Osmand makes sure every customer is happy, cleans up the work area, and replenishes supplies before he joins me at the table.
So, Osmand, why a franchise?
I’ve always been interested in the food business, but I don’t have any experience in it. Opening a franchise was the logical choice for me because it provides a lot of support – it really helps you learn the ropes of running an independent business.
The franchisor teaches you, and obviously, with a franchise, you’re working with a name that’s been all over the place. Everybody knows it. You don’t have to start from the ground up, attracting new customers. Not only are you buying into a successful business model, you’re buying into an already established customer base.
Why a Second Cup? Why not a McDonald’s or Kelsey’s?
Even if I had the money to open up a McDonald’s or Kelsey’s, I don’t have the experience. I wouldn’t be successful because I need to start at a smaller scale. Here, at Second Cup, I’ve got seven to nine employees, with two employees working at a time. There’s not a lot of food involved. If you go you go to Kelsey’s or a bigger chain, you have to hire at least 25 people. You have to have way more people working at one time. You have to manage these people. It’s a bigger scale. There’s a lot more going on. If you don’t have a lot of experience, personally, I don’t think it will ever work. To start with, the franchise will not even take you without a proven record of experience at that level.
So, running a coffee shop made sense for me. I think the two top coffee shops in Canada are Starbucks and Second Cup. However, Starbucks is not a franchise. It’s corporate-run; you cannot own a Starbucks. So, Second Cup was it.
Second Cup is different from say, Tim Hortons. At Tim Hortons, all you have to do is take money and give a product in return. Take money, give a coffee. Take money, give a donut or a soup. Second Cup is more communal. It’s a neighbourhood thing where you meet people from the community. You get to know everybody. I’ve been here for just four months, and I know a lot of people already and they know me too. It’s about dealing with people and building relationships. It takes people skills to own a Second Cup whereas it’s more about taking orders and doing math to own a Tim Hortons.
Was it important for you to take over a store that was already established as opposed to building a new Second Cup from the ground up (literally)?
Yes. Even just taking over a business – there are just so many things to think about and do. Without any experience, it would have been completely overwhelming to open a brand new store. I would have had to establish everything from scratch. Everything. I think it’s a good idea for people new to the franchise business to look at ones already established.
You’ve got staff already, but obviously you make changes where appropriate. With this kind of business, you want the staff to reflect the way you do business, so I made a few changes. But things are more organized; you’ve already got regular customers.
Briefly take me through the process of getting this franchise.
Second Cup puts on seminars for people interested in opening up a franchise. I went to a seminar to listen to what they had to say. They were expecting about 70 people and had 70 chairs set up, and I think over 150 people turned up. I submitted my application and got a call. They first call and screen you over the phone – ask you why you’re interested, have you explain your business experience, and ensure you’ve got the financial resources to make it happen. Then, I went to my first interview, which was about 45 minutes. The VP of Operations said that of those 150 people who attended the Second Cup seminar, they maybe interviewed four of them. People are interested in owning a franchise, but they have little idea of what’s really involved.
Anyway, I got called back for a second and third interview – each were about an hour and half long. You interview to be accepted for a Second Cup. You don’t apply for a particular location; you apply for a Second Cup franchise – wherever that may be. After you’re approved, you have to find a location that suits both the buyer and seller – what you think is good for you and what they think is good for you.
At first, I wanted one in a hospital. The guy who interviewed me said, listen, from what I’ve seen, if you get a Second Cup in a hospital, you’ll be bored. It’s buying and selling – not much interaction beyond that. So, I ended up at this location, which worked out really well.
It does take about six months to go through the process by the time you’ve interviewed and dealt with the franchisor, and talked to the bank and had your financing approved—the bank takes a lot of time.
Banks don’t like food. A lot of banks won’t even get into the food industry. You need to have a solid business plan, especially for approaching the bank. You can’t make your own - you must go to an accountant. Yes, a good business plan will make it easier and applying for a franchise is better because it has a successful business model as opposed to investing in a completely independent store. But again, financial institutions aren’t crazy about the food business. There’s a high turnover and a lot of people who get tired of it fast.
Okay, let’s talk money. For the standard ten-year contract, what was the total investment required? How much are your royalty fees?
The franchise fee, which is an initial fee, was $25,000. That money goes toward things like training and resources. Then, there’s a down-payment of between $100-140k, and you must have another $150-200k to be financed with the bank. Bigger franchises like restaurants start at the $2 million mark.
Royalty fees are 9% of gross sales and another 3% for marketing. This 3% includes advertising, promotions, uniforms, and seasonal changes we make such as holiday cups, aprons, uniforms, and so on. It may seems like a lot, but the business makes money.
Have you encountered any hidden or unexpected costs yet?
Hidden no, but unexpected, yes. Whatever you do, you have to have another $10-15k in your pocket. It’s like owning a house. Things go wrong or unforeseen costs come up.
Were the projected sales and profit figures provided by the franchisor accurate?
In my case, they showed me past performance. They wouldn’t give me any projections for this business; they told me to do my homework. I was bothered at the beginning. I thought – why should I have to find that out? Why can’t they tell me? But it’s because the franchisor doesn’t want to misrepresent. Their job is to choose a location, train you, and make sure franchisees follow standards. You get an accountant to help you figure out earning potential. It’s not their responsibility.
Let’s talk about the franchisor’s responsibility. What kind of management and staff training was provided?
You have to go what they call ‘Coffee College’ for four weeks. Everyone made fun of me: Coffee college? They’re going to teach you for four weeks how to make coffee?
They did teach us how to make the products and work with the machines, but that was only two days of the four weeks. Training is divided into two parts: Product knowledge – everything about Second Cup, its history, the coffee beans and their history… And the other half is about business – putting together a business plan and following it, accounting, paperwork, projections, inventory, balance sheets, product and loss statements, how to be product-specific… You’re responsible for reporting to the head office. You have to learn a lot.
They also take you to Costa Rica for five days and they show you how they collect beans. You have to pay for it, but it’s mandatory to go. You don’t stay in a hotel – you stay and sleep on the farm, with the farmers. It’s really hands-on. You get a real sense of the entire process right from the beginning.
What restrictions have you faced? How much freedom do you have? For example, what if your friend makes amazing cookies? Can you sell them in your store?
Second Cup has a list of suppliers. Now, they don’t force you to go to X or Y, but they give you a list of about five of them and they say – choose what you want of those five. I agree with this perspective because I might have a friend who makes amazing cookies and I go buy these and sell them in my store. Then, there’s another Second Cup owner who has a friend who also makes cookies. They don’t taste very good, but they cost half the price. These low quality cookies at one store will affect all Second Cups. I might be serving good cookies, but another Second Cup has bad ones and people will remember that. You would never say ‘Joe’s Second Cup has bad cookies’. You’d say ‘Second Cup has bad cookies’. So, with a franchise, you have to stick to your approved suppliers to maintain the quality behind the Second Cup name.
And you’re satisfied with the quality of goods supplied by the franchisor?
Yes… or I wouldn’t be here. Don’t forget - a lot of quality issues fall on the owner. If I leave my products hanging around for ten days, they’re not going to be any good. It’s about freshness and following standards. Once you follow standards, you’re good. It’s a top quality product, but it has to be maintained and taken care of. You have to get used to the idea that there is waste involved when you’re constantly ensuring that what you’re selling is fresh.
So what needs to be approved by the head office?
This is your own business. As long as you adhere to the standards of the franchise, you can do anything you want. For example, our standards are that you cannot have a TV in the store. So, I’m not going to ask for approval for a TV. But, I can put in any couch, furniture, or decorations I want. Or, I can have live music, if I want.
I know you’ve only been here for four months, but so far, what have you done to make your franchise successful?
Well, there are so many things we can do and want to do. Right away, we added a patio out front. There were no chairs or flowers before. We want to take out some of these tables and some of this bench and add another couch. We can certainly improve the look of the store by adding things and making it more comfortable. This store was corporate for a year between the previous owner and when I took it over. So for that year, people would come in and they wouldn’t know who owned the place. Employees came from all over to work here for that time – they came from corporate – they didn’t establish any relationships. So, I think that’s what we’re working on now – establishing relationships with our customers, trying to get to know everybody. It’s very important because if you know me, then you’ll come to ‘Osmand’s coffee shop’ as opposed to going to any ‘Second Cup’.
Also, I think you need to do more specific marketing for your store than the franchise as a whole does. The franchise markets on a national level, advertising the brand and the name. You have to advertise your own store. I go through community newspapers, local media, through sports clubs. I’ve already sponsored athletic teams.
What’s your advice for aspiring franchisees?
When you apply for a franchise, you’re excited. The franchisor makes you think that they’re doing you a favour by granting you a franchise. It is a business model that is successful, and yes, you have to be an outstanding person in many ways to get it. But at the same time, you have to understand that you are investing a lot in it and bringing a lot to the table too. You have to do your homework. You’re investing your money, your time, and your own life into this business. Don’t feel that they’re doing you a favour. You’re doing them just as much of a favour. They need you because you’re successful. Think it over and make sure it’s the right decision. Once they approve you, they know you’re a good candidate, and they want you. It’s a partnership, in a sense.
Also, know that it’s a lot of work. Yes, you’re on your own. Yes, you can leave whenever you want. But once you get here, you realize… well, you can’t leave. It’s a 24-hour job. Even when you’re not here, you’re thinking about it or having to do work relating to it. I work 12-hour days six or seven days a week.
Are franchises in your future?
I might open another one or two Second Cups. If I can’t run this business successfully, then obviously I can’t own another one. Not only because they won’t let me, but I won’t want to. It’s always good to learn on a smaller business model – and you can grow by opening another store of the same level or opening a bigger franchise. I would stay in franchises because the support is really good.
About Second Cup
Second Cup is Canada's leading specialty coffee franchisor, backed by 30 years of franchise experience coast to coast since 1975.
From a humble beginning in 1975 as a shopping mall kiosk that only sold whole bean coffee, Second Cup has become Canada's largest specialty coffee retailer. And since its inception, Second Cup has grown to more than 360 cafes across Canada and over 15 cafes internationally, making Second Cup a second home to hundreds of guests everyday.
In addition to its locations, its tour product line has also grown from simply whole bean coffee to more than 30 premium coffees, specialty beverages, complimentary foods, and merchandise items. In 2002, Second Cup became a member of the Cara Operations family of restaurants, which include Milestones, Kelsey’s, Montana’s, Swiss Chalet, and Harvey's.