11.1 Introduction Denis Tensek (MBA) and his wife Jasmina Pacek...

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11.1 Introduction Denis Tensek (MBA) and his wife Jasmina Pacek…

11.1 Introduction

Denis Tensek (MBA) and his wife Jasmina Pacek (MFA) spent a considerable amount of time in the U.S.; both went to graduate schools in California and have worked for well known American companies. Armed with the know-how they obtained from their experiences in the U.S. they left their management positions and returned to their homeland of Croatia in order to spend time with their family and to help their country develop.

On their return, they decided to start their own business. While con- sidering many business possibilities and researching the local market for opportunities, they got an idea based on the experience they had gained in the U.S. and opened an American-style coffee house, with an atmosphere reminiscent of San Francisco’s. While Croatia had many coffee houses, few had the combination of service, quality, products, and atmosphere that they remembered from their time living in the U.S.

Denis and Jasmina recalled their days in the U.S., and the economic success stories of the major coffee franchise chains such as Starbucks. They even considered taking a master franchise license for Croatia, but the process was long, complicated, and extremely expensive in com- parison to the expected return. The fact is that Starbucks has very low local brand recognition in Croatia. The other problem with importing brands is that they often do not allow the adjustments needed for suc- cess in local markets, the major one in this case being the pricing of their products simply being too high for the local purchasing power of a developing country such as Croatia.

Therefore, Denis and Jasmina decided to open their own coffee house, one unique to the Croatian environment – a California-style coffee house offering the quality of service , product assortment, ambi- ance, and efficiency found only in sophisticated coffee shops in the

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212 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg

U.S., and all of it at locally affordable prices. The pricing was an even more important parameter because the plan was to be put into action in the city of Osijek, situated in the region that was most heavily impacted by the war with the Serbs, and still among the least economically devel- oped regions in the country.

Denis and Jasmina started with one single coffee house that from the start had a potential to grow into a franchise. Instead of purchasing a franchise, they went down the other route and created one of their own, that had all the elements of the modern franchise chains that were available on the international market but with the adjustments needed to suit the local market. They decided to use all of their U.S. lifestyle and professional experiences, as well as understanding of habits and behaviors of the local market, to create this new concept in Croatia.

Right from the start, the coffee house was a success. Business was up week by week, month by month. And, operating profits reached a satisfactory level. Motivated with the success of the first coffee shop in one of Croatia’s poorest regions, the couple realized that the potential for this concept was national, if not regional or international. But, how would they grow? Should they develop their own outlets or open more company owned outlets?

Growing organically by opening self-owned stores was costly, slow, and hard to control. They had neither the means nor the manpower. They knew they did not want to put more capital at risk, and did not have the time to travel to various locations around the country. Furthermore, their concept had started to get local publicity and inquiries from would-be franchisees began to show. But, how could they franchise in Croatia?

Croatia has a small economy, changing legal system, and little expe- rience in franchising. Growing through franchising was appealing, but they only had one store, the business was young, and franchising was unfamiliar to the emerging market of Croatia. The conditions for franchising were not ideal. They analyzed the coffee house business in Croatia and the infant and risky franchise sector.

Aside from whether to franchise or not, how could they protect their intellectual property, business format know-how? How could they fight off imitators? What would happen if Starbucks or other major coffee chains entered the market? What should be the next steps? How could they become the biggest and most successful coffee house nationally or regionally?

11.2 The entrepreneurs: Jasmina and Denis

In winter 2003, after spending six years in the U.S., spouses Jasmina and Denis returned to Croatia. San Francisco Coffee House (SFCH) is

Alon, I. (2010). Franchising globally : Innovation, learning and imitation. Retrieved from http://ebookcentral.proquest.com Created from uql on 2020-02-19 22:17:52.

San Francisco Coffee House Opens in Croatia 213

an example of entrepreneurship where two people not only used their life experiences in other societies where a particular product or service was available, but also their specific professional experience to contrib- ute toward creating this unique visual identity and business oppor- tunity. The managerial experience Denis gained by working in large American companies and the educational experience from an MBA from California State University gave him an advantage in creating a world-class business in Croatia that towered above local offerings in service, quality, and customer perceptions. See Figure 11.1.

On the other hand, Jasmina’s international design experience, expe- rience working as Art Director in American corporations, and a Masters in Fine Arts and Design from the University of California, gave SFCH a

Figure 11.1 The interior and exterior of the SFCH, Osijek

Alon, I. (2010). Franchising globally : Innovation, learning and imitation. Retrieved from http://ebookcentral.proquest.com Created from uql on 2020-02-19 22:17:52.

214 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg

recognizable visual identity and an interior in which visitors could feel the San-Francisco-style coffee shop atmosphere. Thanks to their suc- cessful careers and profitable real estate investments in the U.S., they felt comfortable and confident in returning to Croatia with enough capital to help them in their new venture, and help their country at the same time.

11.3 The environment for franchising in Croatia

The environment for franchising in Croatia is not ideal because there is insufficient regulation, little market know-how about franchising, and low economic development. On the other hand, the emerging market and the new openness to European integration have created opportuni- ties to start bring in new businesses from the outside.

11.3.1 The economic environment

In 1991, after the Republic of Croatia gained its independence, the Croatian market increasingly opened to a great variety of interna- tional products and services. As a result of the economic growth which began in the late 1990s, salaries have grown appreciably, especially in the larger cities and in certain other parts of Croatia.1 Salary growth resulted in increased consumer demand for higher quality global brand names, which were not widely available in Croatia at that time. After independence, the Croatian market became flooded with imported goods of variable quality. The habits of younger Croatian consumers have changed as a result of this increased supply: international brands became must-haves for younger consumers, while older people tended to continue to seek out domestic brands. Inevitably, perhaps, purchas- ing habits also varied geographically.2

Financial institutions in Croatia are mostly owned by foreign banks – around 90 percent according to one source3 – and many of these acquisitions have occurred in the last few years. Although there is a pre- dictable variety of capitalization options for would-be entrepreneurs, a chief characteristic of the Croatian domestic market is the bankruptcy of small entrepreneurs as they struggle to collect debts. Although barter is a common fixture of the domestic market (i.e. between local compa- nies), the international ownership of local banks makes such traditional arrangements problematic.

Basic statistics on the economy are shown in the Table 11.1.

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San Francisco Coffee House Opens in Croatia 215 Table 11.1 Basic socioeconomic data on Croatia

Annual data

Population (m) GDP (U.S.$ billion;

market exchange rate) GDP (U.S.$ billion;

purchasing power parity) GDP per capita (U.S.$;

market exchange rate) GDP per capita (U.S.$;

PPP)
Exchange rate (av)

HRK:U.S.$

2007(a) Historical averages (%)

2003-2007

4.0 Population growth 0.0 51,452.4(b) Real GDP growth 4.9

69,211 Real domestic demand 5.0 growth

12,863 Inflation 2.6

17,303 Current account balance -7.1 (% of GDP)

5.35(b) FDI inflows (% of GDP) 6.4

Source: The Economist (2008) http://www.economist.com/countries/Croatia/profile.cfm? folder=Profile-FactSheet (retrieved June 11, 2008).

11.3.2 Political environment

Creating a vibrant business environment in accordance with the stand- ards of the European Union and with countries embedded in the local market economy is one of the major goals of the Croatian government’s policies. The government’s dedication to the reform of the national economy can be seen in its desire to attract foreign investment for the development of Croatia’s domestic and international markets.

Foreign investments in Croatia are regulated by the Company Act and other legal norms. A foreign investor in Croatia has a number of organizational options available to him or her according to this act: a foreign investor can invest alone or as a joint-venture partner with a Croatian company or private citizen; there are no constraints as to the percentage of foreign ownership that is possible. In addition, in keeping with the government’s desire for foreign investment, investors can gain access to a number of newly opened markets; entrants can take advan- tage of a number of incentives, tax benefits, and customs privileges that are available only to foreign investors.

11.3.2.1 The institutions of franchising

During the last few years, The Republic of Croatia has approved a number of laws which resulted in Croatia’s acceptance into the World Trade Organization (TWO) and the Central European Free Trade Agreement (CEFTA); these legal changes have also allowed Croatia to begin

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216 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg

negotiations for acceptance into the European Union. Nevertheless, there is no specific legal basis for franchising in Croatia. Franchising is mentioned in the Croatian Trade Act (Narodne Novine, 2003), where the generalities of potential franchising agreements are stated, but men- tion is made in only one article and that mention is very condensed. Therefore, there is no legal standard for the development of franchising and no legal parameters (yet) for franchising agreements: at the present time, business practices on the ground determine the appropriateness of such agreements.

Since the concept of franchising is relatively new to Croatia and its inhabitants, little knowledge exists about it. There are two Centers for Franchising, one in Osijek and one in Zagreb, Croatia’s most vibrant city. Each of these centers works with the Croatian Franchising Association to stimulate franchising development in several ways:

Educating about franchising – The Franchise Center in Osijek, for exam- ple, has organized seminars called “Franchise from A to Z,” in order to educate entrepreneurs about franchising and its benefits;

Franchising promotion – both centers and the association are trying to promote franchising as a way of doing business through local media – interviews, articles in the newspapers and magazines, etc.;

Creating websites with information about franchising on the Internet – with information on the portal with current news;

Connecting franchisors with potential franchisees – one section of the franchise portal contains offers from franchisors interested in the Croatian market; there are several inquiries each week from potential franchisees;

Helping domestic companies to become franchisors – The Franchise Center in Osijek, with the help of Poduzetna Hrvatska, organized train- ing for potential franchise consultants who can help domestic compa- nies if they decide to use franchising as a growth strategy;

Establishing franchise fairs and round tables.

Foreign franchises tend to choose one of two potential pathways into the Croatian market: distribution-product franchising and/or business- format franchising. Larger, better-known franchisors like McDonald’s open offices in Croatia and offer franchises to interested entrepreneurs in order to ensure quality control, while smaller and less well-known franchisors sell master franchises to local entrepreneurs in order to ensure the benefits of local knowledge and cost savings.

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San Francisco Coffee House Opens in Croatia 217 11.3.3 Barriers to franchising development

In September 2006, the Franchise Center of the Center for Entrepreneurship in Osijek conducted a survey of 50 people, ask- ing what they (representatives of banks, entrepreneurs, and lawyers) thought about the barriers facing franchising in the Croatian. Responses included:

Laws – there is no legal regulation of franchising in Croatia. The word “franchising” is only mentioned in trade law. The absence of clear legal precedent makes it difficult for Croatian lawyers to help their clients, especially during the contracting phase – whether franchisor or fran- chisee, foreign or domestic investor.

Franchise professionals – there is a dearth of professionals related to franchising: too few educational efforts and few franchise consultants who could help potential franchisors in developing their own networks or advise franchisee about selecting one.

Problems with banks (lack of familiarity with franchising) – banks do not recognize franchising as a relatively safe way of entering into a new business and do not have any specialized loans for the franchising industry. According to a survey conducted by the Franchise Center (2006), some banks’ representatives said that they would also ask for a guarantee for a loan from the franchisor. Banks are unwilling to edu- cate their employees about this way of doing business. Banks seem una- ble to distinguish between start-up entrepreneurs creating footholds in new franchise sectors and franchisees who are entering preexisting, proven franchise systems.

Small market – because there are only about 4 million inhabitants in Croatia, there is pessimism about whether the largest franchisors will come to Croatia because of logistical problems: the perception is that it is much easier to open a site in London than in Croatia. Large and famous franchisors are looking for bigger areas to capture the popula- tion, and they often resist adapting to local standards and prices. Smaller franchisors that would like to enter Croatia are not as well known to Croatian entrepreneurs and are, therefore, seldom selected.

Franchising is not a well-known way of doing business – people seldom recognize what franchising is; many think it is connected with insur- ance. This is the biggest barrier according to the survey because people are not willing to enter into something with which they are unfamiliar. Further seminars and round tables need to be organized in order to educate entrepreneurs about franchising and its costs/benefits.

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218 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg

According to the above-mentioned survey, there are some identifi- able reasons for the relatively slow development of franchising in the Republic of Croatia: entrepreneurial thinking, lack of franchising edu- cation, and a weak national franchising association. First, many entre- preneurs would rather own their own companies and have complete “business freedom” than submit to the restrictions they see as being related to becoming part of a system – from production and distri- bution to sales and to the “forced” cleaning of the premises. Second, Croatian entrepreneurs are not completely familiar with the benefits which can be gained by being a member of a successful franchising system.

While the tone above sounds pessimistic, industry experts also reported that there is an excellent chance for franchising in Croatia, that there is the possibility of high growth in this sector (up to 30 per- cent), and that Croatia’s future membership of the EU will provide the necessary boost to franchising development. This survey showed that although franchising is not a familiar way of doing business, experts see a bright future for it in Croatia.

11.3.4 Competition

Franchises have become better known in Croatia since the early 1990s, after the first McDonald’s was opened in Zagreb. “McDonald’s expan- sion into the Croatian market has tended to use two franchising meth- ods: direct franchising and business-facility lease arrangements…Such lease arrangements allow for franchisees to become entry-level fran- chisees using less capital at the outset.”4

Other franchisors followed McDonald’s lead. For example, one of the relatively new restaurant franchising concepts in the Croatian market is the Hungarian company Fornetti, which managed to spread its mini- bakeries business rapidly throughout Croatia by using franchising. It was founded in 1997, and today has more than 3000 sites in Central and Eastern Europe.5 Other international franchises represented in Croatia include Benetton, Subway, Dama Service, and Remax.

According to the Croatian Franchise Association, there are approxi- mately 125 franchise systems (25 of them domestic) present in the Croatian market. These systems operate approximately 900 outlets and employ almost 16,000 people.6 Companies in more than 20 industries have chosen franchising as a growth option, with the retail and fast- food sectors accounting for more than 20 percent of the market. Other sectors with important shares include the tourist industry, auto rental companies, courier services, and the fashion industry.

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San Francisco Coffee House Opens in Croatia 219

Tables 11.2 and 11.3 show the best known foreign and domestic fran- chisors in Croatia by industry and number of outlets as of 2007.

While a few restaurant franchisors have already entered the market, no well-known international coffee house has made its mark in Croatia. Competition for coffee houses was mostly local, dating back to Croatia’s early days of independence. Local competitors offered a roughly homo- geneous product – coffee – and most did not bother to create a visual identity, a brand, or a new concept. Price, location, and ambiance distin- guished one coffee bar from another. Competitive rivalry from abroad, however, is imminent. The question is not if international coffee houses will come, but when?

Coffee consumption in Croatia is quite popular; many Croatians spend time between meals, in the morning, or at night at coffee bars, which often also serve beers and other alcoholic products. While regular bars

Table 11.2 Foreign franchisors in Croatia

Franchisor

McDonald’s Subway Fornetti Dama Service Berlitz Firurella Berghoff

Industry

Fast food
Fast food
Bakeries
Refilling toner cartridges Foreign language school Weight loss center for women Kitchen equipment

Number of outlets

16 restaurants
6 restaurants
More than 150 locations 3 locations
1 location
2 locations
3 locations

Source: Round table – Franchising in Croatia EFF/IFA International Symposium, October 24-25, 2006, Brussels.

Table 11.3 Domestic franchisors in Croatia

Franchisor

Elektromaterijal X-nation
Rubelj Grill Skandal

Body Creator Bio & Bio Bike Express San Francisco

Coffee House

Industry

Household appliances’ distribution Fashion
Grill
Fashion

Weight loss center for women Health food
Courier service
Coffee bar

Number of outlets

More than 50 stores 40 stores/units
17 restaurants
15 stores

4 centers 3 shops
1 location 1 location

Source: Round table – Franchising in Croatia EFF/IFA International Symposium, October 24-25, 2006, Brussels.

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220 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg

and other restaurants compete with coffee shops for customers, coffee shops are relatively cheap, providing a comfortable environment for socializing. Suppliers of coffee are many and include both international and local brands. Coffee, itself, is basically a commodity.

11.4 The opening of the San Francisco coffee house

Osijek is a town with many coffee houses and bars, and visiting them is part of the lifestyle of the local population. But, they all suffer from one competitive problem: they all offer roughly the same limited product line without any differentiating concept. Denis and Jasmina noticed that what was missing in the market was an American-style coffee bar in which most of the offerings would consist of different types of coffee and include the novel (in Croatia) possibility of get- ting “coffee to go.” They decided to adapt this ubiquitous American concept to the local Croatian market. They were under the impression that the “Made in U.S.A.” brand would be positively received in their “new” market, so they named the coffee bar “The San Francisco Coffee House.” During the development of the business plan, Denis traveled to the U.S. several times, researching ideas, studying the technology of coffeemaking, and bringing back with him some of the supplies and crucial ingredients.

Denis had chosen the location for the San Francisco Coffee House very carefully: he was looking for a location with a minimum of 80 square meters near an area with heavy foot traffic, since their main target market was business people. He found an excellent location in the town’s center – across from the green market, near three university departments, several lawyers, and public notaries’ offices – for which he signed a five-year lease with provisions for extending the lease and a right to first refusal if the owner wanted to sell the premises. After the first few months, they found that their major client markets were students and business professionals of all ages.

Since SFCH was the first American coffee house in Croatia, this unique place where one can enjoy authentic ambiance of this American city got excellent reviews and unusually large media attention in the first six months of its existence. Elle Décor categorized it among the six best decorated service industry interiors in the country, compliment- ing the brave mixture of styles and materials Jasmina used to create this urban, bright, and sophisticated environment. The result was even more amazing taking into account that the entrepreneurs had worked within a limited budget of 40,000 as start-up capital.

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San Francisco Coffee House Opens in Croatia 221

The SFCH product range is also unique for this market. It offers its customers coffee in 17 different latte (with milk) and mocha variants and several varieties of American-style muffins. Coffee can be drunk in the relaxing but urban atmosphere of the bar or it can be taken out in “to-go” packaging. In order to adapt to their target market, its guests are provided with Croatian and international newspapers and magazines, and there is free wireless access to the Internet (which is extremely rare in Croatia). The ambience is also enhanced by smooth jazz and chart music from the 1970s, 1980s, and 1990s.

SFCH has eight employees and is managed by Tanja Ivelj. The employ- ees are all young people, some of them without any previous employ- ment experience, and most of whom have worked in SFCH since its inception. When searching for employees, Denis looked for trustwor- thy, loyal, and honest people. For each workstation, employees have a detailed job description and detailed checklists for each shift and for weekly and monthly routine duties.

Once employed, all employees take a course in working in a coffee bar. Their salaries are almost 20 percent higher than those of compara- ble employees at other local coffee shops. Every six months all employ- ees have scheduled performance review. If this is satisfactory there is a further 5 percent salary increase. Human resource management is one of the areas where Denis has brought his American corporate experi- ence into Croatia. In Croatia, employee rights, salaries, and general terms of employment are in most cases ambiguous. In addition, con- trary to common practice in Croatia, SFCH provides full paid vacation and benefits for its employees. As a result, in an industry where the turnover rate is extremely high, SFCH was able to achieve less than 20 percent staff turnover over the first three years of operation. As Denis said: “satisfied and motivated employees offer high standard of service to the end customer.”

SFCH has made an extra effort to maintain excellent relationships with its suppliers, settling bills promptly in a market that is known for its slackness. Wise and responsible financial management is the com- pany’s priority.

The market has also rewarded SFCH. The summary of the financial performance of the company’s operations is shown in Table 11.4.

11.5 What should be done next?

Jasmina and Denis looked at the facts: franchising is one of several pos- sible models for business growth and is widely used in economically

Alon, I. (2010). Franchising globally : Innovation, learning and imitation. Retrieved from http://ebookcentral.proquest.com Created from uql on 2020-02-19 22:17:52.

222 Ilan Alon, Mirela Alpeza, and Aleksandar Erceg Table 11.4 SFCH financial performance

Income data

Net revenue
Total expenses
Direct costs
Depreciation 4000.00

Gross profit
Operating expenses
Earnings before I&T
Taxes 14,520.00 Earnings after I&T 51,480.00

developed countries throughout the world. Some of the reasons why companies prefer to develop franchise networks rather than to grow organically include lower financial investment, lower risk, faster growth, local market knowledge by franchisee, and the latters motivation to suc- ceed. They wanted these benefits too.

The barriers which SFCH faced in franchising in the local market are challenging:

There is just not enough information about franchising. As a result, entrepreneurial and institutional awareness of franchising is quite low;

There are no well-established support organizations for the develop- ment of franchise networks in Croatia. There are only two Entrepreneurship Centers in Croatia which offer services regarding franchise network development;

There is no significant support from financial institutions. Banks fail to recognize the relatively low risk of investment in start-up entrepreneurs/ franchisees compared to independent start-up entrepreneurs, among other factors mentioned earlier.

Moreover, the company was still young and as yet unproven in other locations. The couple could simply enjoy their local success, they could open additional stores by themselves, or they could try to sell franchises of their concept. All three options had significant upside and down- side risks. Their intuition told them they should use franchising, but serious limitations existed. Could they develop franchising in a mar- ket where local conditions are less than conducive? Could they gain national prominence? The couple had never run a franchising busi- ness and did not have the necessary experience and knowledge. How

Alon, I. (2010). Franchising globally : Innovation, learning and imitation. Retrieved from http://ebookcentral.proquest.com Created from uql on 2020-02-19 22:17:52.

2006

2007

25,000.00 140,000.00 81,000.00 11,000.00 158,000.00 59,000.00 99,000.00 21,780.00 77,220.00

20,000.00 130,000.00 760,00.00

120,000.00 54,000.00 66,000.00

Answer this:

San Francisco coffee house opens in croatia Evaluation, qualitative & quantitative, key conclusions from analysis. – Identify, explain & justify your options/alternatives to resolve the problems. – Identify, explain, justify, prioritize your criteria to evaluate alternatives for solutions. – Evaluate your options/alternatives against your criteria. – Explain and justify the evaluations. – Apply appropriate course/topic related concepts, theory tools and frameworks that are relevant for the issues/problems in the case

11.1 Introduction Denis Tensek (MBA) and his wife Jasmina Pacek…

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