Cafe Coffee Day Franchise — Franchising of Coffee Day Xpress Stores
Why should you NOT go in for a Coffee Day Xpress Franchisee
How a typical franchisee model is set for a loss for most of the franchisee owners.
This is a real life experience that I wish to share with all those franchisee aspirants who look at a Coffee Day Xpress kiosk and think of owning a franchisee like that. Being an MBA (finance) from a top 30 Business School of the world and thinking that I know it all, even I could not see what is inside the franchisee business till I got my hands wet by running the franchisee for more than an year.
I have tried all possible ways and means and ran a franchisee for close to 2 years (at three locations suggested by the staff) and lost heavily every month. Finally I decided to cut my losses and exit. I am just writing this post to make other people aware of what is going on behind the scenes.
How it all starts?
You will see an advertisement or will be curious to know the franchisee model and enquire about the Coffee Day Xpress franchisee. Your name and contact information will be sent to a very smart and shrewd business development team. They will highlight the best parts of their franchisee model like-
- Low investment – of only Rs. 3,20,000 compared to other leading franchisees
- High returnable money of Rs. 2.60.000 after 3 years
- High margins (more than 25% in some cases)
Don’t get tempted by all these numbers as this is how they use your money:
1. The upfront money that you pay (Rs. 3,20,000) is more than the entire set up cost of the kiosk and equipment. Talk to an expert at providing all that they provide in the kiosk and the equipment and they will tell you that you can get a similar kiosk for less than Rs. 1,00,000 for your own company. So, you are paying for your kiosk and all its machinery and much more.
2. High refundable deposit is nothing but about more than double the actual value of a depreciated kiosk that these people will sell to the second franchisee for Rs. 3,20,000. So they make money here also.
3. High Margins –The biggest catch here is that these margins are NOT on Gross Revenue but on NET Revenue which is post tax of about 11.11%. First of all most of the items that you will be told to sell at the kiosk will just fetch you about 8% or 15% margins that too post tax and ONLY coffee and Some food items will be at 25% level. If you do the math, for every 100 rupee that you generate in revenue, you will ONLY get
a. For items at 25% commission you will get about Rs. 22 only. Here is how – Revenue of 100 – 11(tax) = 89 and 25% of 89 = 22.25 .
b. For items at 15% commission you will get about Rs. 13 only. Here is how – Revenue of 100 – 11(tax) = 89 and 15% of 89 = 13.35.
c. For items at 8% commission you will get about Rs. 7 only. Here is how – Revenue of 100 – 11(tax) = 89 and 8% of 89 =7.
Bulk of all the items that you will sell will be in the 8% range, hence you will even out at somewhere close to only 14%-16% of Gross Revenues.
So all this hoopla on high commissions is actually a farce.
Then when you get in and start running the franchisee
You will slowly find out about all the hidden expenses and charges that were somewhere in the Contract that you signed but verbally might have been told to you that these are minor. Here are all the points that you should consider:
- Fixed Expense – Generally any outlet that you run will have the following and other fixed expenses
o Rent – Depends upon location and on an average is about Rs. 10,000 per kiosk
o Electricity – About Rs. 350 units per month for a standard kiosk, so multiply with electricity rate. At an average rate of Rs. 7.50 (including power backup charges) this comes out to about Rs. 2,600 per month.
o Maintenance Charges of the location – anything between free and Rs. 2,000 per month depending upon building
o Salary of the operator – About Rs. 5,000 per month
o Other charge of about Rs. 5,000 per annum (For what, I have yet to know)
o Dress, POS Software and other charges – Will come to about Rs. 500 per month minimum.
o Wastage – This is a big part of the total equation. The clause says that ALL the items that you order, if sold shall have to be shared with the Coffee Day Xpress company but if not sold then YOU PAY all the wastage. Hence suppose you sell a sandwich for Rs. 30 with a maximum share of 25% commission, you get – 25% on (Rs. 30 less 11.11% taxes) = 6.66. But if you are unable to sell the same, you shall have to pay the cost price of the same sandwich to Coffee Day Xpress.. which will be about Rs. 15. So, in effect, for every sandwich you waste, you have to sell 3 more to break even. This is a case for the item where you get 25% share, what about an item where you get 8% commission, for every Rs. 100 of revenue you will make about Rs. 7 and for Rs. 100 worth of wastage, you lose Rs. 50.. So calculate yourself.. (you will have to sell 8 units to breakeven the loss of wastage of one unit)
o Shelf life of goods – Most of the food items that you will keep will have the following issues – The food where you get 25% commission will come with a shelf life of 1 -2 days and the food with more shelf life will give you only 8% share.. So, this essentially is also a trap.
o You cannot control Menu or Pricing – The company does not let you control the menu, pricing and quality of food. They will make tall claims but at my outlet, when some customers got sick with food poisoning after eating the coffee day xpress food, I was approached and complained. I met many coffee day xpress staff members and to my dismay, I could not do anything. So, the company decides what to sell and where to procure it from but you are the one who will face the public if things go wrong.
o Undisclosed Expenses – There are many undisclosed expenses that will be accounted to the franchisee. These are expenses like any pilferage of goods ( I agree that it is franchisee’s responsibility to check the pilferage) etc..
o You do not collect Cash – There is a guy assigned by the company to collect cash from the outlet. Now this guy comes to the outlet, collects cash and deposits the cash in the company. Then the company calculates what they sold, takes out THEIR profit FIRST and then after all the expenses IF SOMETHING is owned to the franchisee that is credited to their bank account. Now, if there is pilferage going on at the outlet with the collusion of the person collecting cash and the operator at the kiosk, you will ONLY get to know f it when you are billed and that happens ONCE A YEAR. So you will get to know 6-8 months down the time that you had pilferage and the company charged you for that. And now you cannot do anything. They will simply deduct the money from the advance that they have to return you. So, at the end of the day the company does not lose anything, it is you who will lose whatever there is.
If you calculate, essentially you will end up having a fixed expense of about Rs. 20,000 per month including wastage. Now, to make this money you should essentially be at a location where you make a Gross Revenue of about Rs. 1,50,000 per month. (A Gross Revenue of Rs. 1,50,000 will give you a commission of about Rs. 22,500 which is bare minimum for you to break even considering the interest loss on the initial capital of Rs. 3,20,000 that you started with)
When you meet the representatives of Coffee Day, they will always tell you that the potential sales from a particular building will be more than Rs. 2,00,000. I have yet to come across outlets where they have themselves told that the sales will not be lower than this number.
In reality, some employees at the company have told me that ONLY 10% of the outlets really make money and the rest 90% of them just survive and struggle. Of-course I can neither quote them nor can I defend this reality.
How it is all totally unfair?
What I read earlier and was preached was that the franchisee model is a perfect symbiotic model where the franchisor and franchisee share the rewards and risks but what I experienced is far from truth.
- You Bear ALL Risks - All the risks are passed on to the new franchisee who doesn’t know a lot about the franchisee and gets in. This is totally evident from the Wastage contract.. why is it that company wants to be your partner in revenue whenever you sell but doesn’t want to be your partner in losses whenever you don’t?
- You Pay All Initial Cost - All the money that is needed to pay upfront to start the franchisee comes from you. Actually the money they take is more than what is needed, hence some initial profit comes to the company on your behalf from day one.
Why are they also owning some stores?
Now the worst part is that they themselves own some kiosks and stores – why.. its simply because wherever they get a great deal where they see a lot of money to be made, they open a company outlet and wherever they see risk, they look for a person like you or me to franchise, so that when they go for an IPO, they can say they have 300 outlets…
Then when you run the franchisee
The other part is that now when you run the franchisee, there will be no one to support you with your complaints and issues. You will just juggle with the so many people who continue to shift their responsibility to others, that after one time, you will simply hang up and most likely close down or continue to bear the losses. They will make several tall claims, but none of them will hold true. I personally have received so many complaints regarding to their food quality from the consumers which I have passed on and have always been promised that they are improving, bringing in new items and changing the vendor etc. etc.. but till date nothing has happened and it remains the same.
Now, when you cannot control what you can keep on your outlet, then how can you increase your sales and thereby your profits. You will continue to spend money on the fixed expenses but will be unable to control the menu or food quality, then you will simply want to go to a temple for purification. No pun intented.
Simply ask them the following questions when they approach you:
1. How many franchisees do you have in the city?
2. How many of them have more than 1 outlets? Most likely you will see that these are people who have at-least one outlet at hospital. Hospital location is the only location where you make money.
3. Can you give me the telephone numbers of a few franchisees that own only 1 unit. They won’t. They very secretly protect the identities of the franchisees simply because they do not want you to contact them.
My simple suggestion, DON’T GO IN FOR A COFFEE DAY XPRESS FRANCHISEE
My aim was simply to help you all who are considering this so that you can de-risk yourself. Good Luck
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