Biggby’s Big Gulp: Metro Detroit Plan is Litmus Test for U.S.

AR-302179975.jpg&MaxW=290The executive team behind Biggby Coffee wants to turn the Lansing-based chain into a national brand. But first, they say, the company has to dominate Southeast Michigan.

The company looks to open 136 Biggby Coffee shops in metro Detroit by the end of 2015, bringing its total store count in the area to 150.

President Mike McFall and CEO Bob Fish of Global Orange Development LLC, which operates as Biggby Coffee, said mastering metro Detroit is a litmus test to see whether the company can dominate a larger market.

“Metro Detroit is going to get every ounce of effort we have,” McFall said. “We are not spreading resources over seven states. Rather, four or five counties.”

Biggby has a strong presence in Kalamazoo, Lansing and Grand Rapids — about one store for every 24,000 people. In metro Detroit, it looks to open one store for every 30,000 people, following a food chain market penetration model.

“I know what we can do per a given population in other areas of Michigan, and we think metro Detroit is a similar market,” McFall said.

Biggby set aside $1.1 million to spend on advertising in the metro area, McFall said, mostly through cable TV and billboards, to generate buzz about the company and attract potential new franchisees.

“We are using broad-based marketing,” he said. “We believe that by building the brand and developing and building successful units, that will, in the end, get us more franchisees.”

Biggby’s real estate strategy is different than other franchise systems. Instead of selecting sites “at the corner of Main and Main,” McFall said, the company looks for sites that are slightly off the main drag or perhaps are existing independent stores that can be converted.

The company said it has borrowed many of its expansion ideas from Subway, the sandwich giant operated by Milford, Conn.-based Doctor’s Associates Inc., that ranks as one of the world’s largest and fastest-growing franchises, according to Forbes.com.

In fact, McFall said, Subway has been trying to acquire both Global Orange Development and Global Orange LLC, a separate entity created to own the intellectual property, but neither party could agree to terms for a sale.

He said a 2006 conversation between himself, Fish and Fred DeLuca, co-founder of Subway, changed Biggby’s business plan.

“Fred is an advocate on focusing on one thing or the other, either being a franchise-based company or owning the units,” McFall said. “He told us, ‘You guys are doing both marginally.’ His position was to make sure we chose to be one or other.”

Fish and McFall listened. In 2006, they sold nine company-owned Biggby stores to focus on franchising. Delivery and roasting also are outsourced; Biggby uses Lansing-based Paramount Coffee Co. to roast its beans.

“The idea behind selling stores was we wanted to focus on being the best franchise company we could,” McFall said. “We will get back into owning stores, but we will be franchisees of our own concept and hire an operator.”

There are 142 Biggby locations throughout the Midwest, all of which are owned and operated by franchisees. The company does not sell territories.

Systemwide sales for Biggby reached $59 million in 2012, and McFall said revenue is expected to reach $68 million in 2013.

But make no mistake: The goal for Biggby is turn it into a national brand. “This is step one of developing a much bigger company,” McFall said.

Alan Liddle, managing editor of special projects for industry publication Nation’s Restaurant News, said Biggby has a shot at reaching its goal of opening 136 stores in two years if it finds the right franchisees and sites.

“It’s ambitious, but if the stores are small and don’t require a great amount of capital, it could happen,” he said.

Potential franchisees are required to have $70,000 in liquid assets and a total available credit line of $250,000, which covers the entire cost of opening a franchise, from equipment, furniture and outdoor signs to inventory. A common target for potential franchisees are empty-nester couples where one spouse can focus on the coffee business while the other earns money from an existing job.

The average Biggby coffee shop is 1,400-1,500 square feet. Franchisees pay 5 percent of total sales in royalties to Global Orange Development and an additional 2.5 percent is used for advertising.

“And if you have a system which relies on franchisees to do the leg work, then you are cutting down on resources you need to open 136 stores.” said Liddle, adding that Subway has been successful using that model.

But there is a downside, too.

“As a franchisee, you wonder if the company is as invested in each store,” he said.

Biggby isn’t the only coffee company to see metro Detroit as a growing market.

In 2012, Oakville, Ontario-based Tim Hortons Inc. made a big push in metro Detroit. Tim Hortons opened its 130th store in metro Detroit in December 2012. The company declined to comment due to a quiet period before their fourth-quarter earnings are released Thursday.

Minneapolis-based Caribou Coffee Co. has 22 locations throughout metro Detroit.

“We are always looking to expand our footprint in our key markets,” Alfredo Martel, senior vice president of marketing and product management for Caribou Coffee, said in an email.

Darren Tristano, executive vice president of Chicago-based food industry research firm Technomic Inc., warns that coffee is becoming over-saturated and established brands like Seattle-based Starbucks Corp. are contracting.

“Coffee is very saturated today and it’s full of a lot of major brands who have strong brand recognition,” Tristano said. “And growth in individual units that are specifically serving coffee has begun to slow.”

But Tristano says there is room for growth if Biggby can keep operating costs down.

“I would say, there is room for opportunity if they can keep unit economics down,” Tristano said. “They would need to be profitable with about $400,000 in annual sales and look for nontraditional sites (like a food court, airport, hospital, university or convenience store).”

Beyond bricks and mortar, Biggby is working on a prepackaged line of coffee drinks, and has its beans in 300 grocery stores, including Costco and Sam’s Club. But McFall and Fish refuse to lose sight of their goal of becoming a national coffee chain.

In fact, McFall said Biggby has been approached by myriad businesses looking to help it expand its product offerings and retail presence in stores.

“We don’t mess around with every single idea that other people think we should do with our company,” McFall said. “There are a million ideas out there, from gift baskets to online clubs, but we are solely focused on being an extraordinarily good coffee retailer.”

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