Co-ownership: is this the future of franchising?

Darren Schultz, founder of the Stellarossa café brand is rethinking the franchise business model.

Darren Schultz

With his long-time business partner Phil Cronin, Darren co-founded Stellarossa backin 2009, opening two stores in the Brisbane CBD. They started franchising the brand in 2010, selling the first two cafes as their first franchised stores. Over the next two years, the duo opened another seven stores in the CBD, including their first cafe/bar model at Eagle Street Pier in 2011. Currently, the group operates some 23 franchised stores in South East Queensland, but some pretty big changes are on the horizon.

A successful change of focus

“When we started, the model we were targeting was good, quick coffee and easy food items to grab and go,” says Darren. “Our goal was always to franchise Stellarossa and we did pretty well with that city-based model. The franchise partner could operate Monday to Friday with weekends off. It was fairly straightforward. But we soon realised we were running out of sites.”

With CBD opportunities diminishing, Stellarossa ventured into their first shopping centre café model at Westfield Chermside in 2012, quickly followed by their first regional-based store in Mackay. Darren and Phil soon discovered they were onto a winner.

“It was all new to us, we were thinking on our feet,” says Darren. “We had to get into a larger format — breakfast, lunch and dinner — and licensed as well.”

After the initial transition period to the model, Darren realised they’d found their solution to the dwindling supply of CBD sites, in fact, he says Stellarossa will probably never do another CBD store again, so successful has the change of focus been.

Outer Brisbane Suburbs Stellarossa Cafe Warner Qld

“In the city, you’ve got to make a lot of hay in five days,” he says. “Then during school and public holidays, your business falls off a cliff. But in those outer suburbs and regional areas, our business actually gets busier during the holidays.” Things were looking up, but the boys knew they’d really hit the jackpot when they opened Stellarossa Mango Hill in 2013. This was their first store in a smaller centre, home to a large- format Coles and about 20 specialty stores. This has become the strongest growth sector and focus for the brand.

It was a frontier we had never really considered, those outer suburbs of Brisbane,” says Darren. “The franchisee loved the format, and actually came to us with the site. It really opened the floodgates and blew us away how successful that business was and our business model really changed from that point on. We decided to concentrate on the outer extremities of Brisbane and regional areas — that would be our target market.”

Adjusting the model for the marketplace

After a few years of solid expansion, Darren has signaled another shift in the business model, intentionally curbing growth to adjust Stellarossa’s fit in the marketplace. The past year has seen a re-brand with a new look and new menu.

“Over the past 12-18 months there’s been quite a shift in our focus,” says Darren. “We haven’t extended the leases on some of our smaller espresso bars and closed a few of them. It’s been done on purpose so we could re-evaluate our business model, the feel of our sites, and hit the ground running for 2019.”

One of the big challenges to get right is to stay current from a menu perspective and to this end Stellarossa has hired another corporate chef (they now have two) to up the ante in the food space.

“We’re constantly trying to keep ahead without getting too obscure to the point where people don’t get it. We’ve got to remember our market probably isn’t interested in deconstructed eggs benedict,” Darren laughs. “They want the real deal — quality, fast and at a reasonable price. People will pay that little bit extra for quality and that’s what we’ve got to deliver.”

The new frontier

On the horizon for 2019 is 10 new cafes including a foray into the drive-through market at three of those sites. Best described as the “new frontier” in café businesses, with both seated and drive-through customers, extended hours and high-volume trade, drive-through cafes, operated well, are a potential goldmine for smart investors. The big challenge is finding the right site, but Darren is adamant that Stellarossa has done its homework.

Training In The Hq Kitchen With Qualified Chef

“We’re sitting in a real sweet spot at the moment, with some great opportunities coming up,” says Darren. “And we’ve put a lot of work into finding the best sites, employed specialists in the field to perfect our procedures, work flow and space, and we’re ready to smash that out over the next year.”

The first Stellarossa drive-through will be in Sippy Downs on the Sunshine Coast. “That’s going to be predominantly drive-through grab and go with a small café and a little bit of seating,” says Darren. “The development is mainly a service station, KFC and McDonald’s — all very drive-through.”

Darren emphasises that Stellarossa will carefully evaluate each site on its merits, hammering the market research to find out exactly what the target market wants and needs, adding that the likes of Caltex, Subway and KFC, to name a few of the businesses that will share upcoming sites with Stellarossa, “don’t move into an area if they don’t think it’s going to work”.

The second drive-through Stellarossa project, due to open at Beenleigh in April-May 2019, is a very different beast. It will be a full sit-down cafe model, possibly licensed, as well as a full drive through — two cafes in one. Even more exciting for Darren, it’s on track to be the first Stellarossa ‘co-ownership’ model, which will play a big part in the company’s franchise investment plans going forward. Stellarossa and the franchise owner will be partners, sharing risk and reward according to the proportion of their individual investment. This will also drastically lower the initial investment cost for the new business owner, who also gets an experienced, capable and dedicated partner as a bonus – Stellarossa HQ.

“We’re...going to be partnering up with franchisees on a case-by-case basis,” Darren says. “A partner will be able to come in, whether they purchase 20 per cent, 40 per cent, whatever the percentage may be in their circumstance. But we’ll be holding the lease — putting our money where our mouth is.”

The Beenleigh operation will be an equal partnership. “With Beenleigh, our partner will hold 50 per cent. I’m working with a husband and wife team at the moment and their goal is to eventually have several stores in the drive- through group. We’re really excited because at the end of the day, it will be our business as well, and we can be a lot more proactive.” This is quite a different approach to the ‘traditional’ franchise model.

58 Full Page Image Committed To Even Better Coffee Awarding The Winner Of The Stellarossa Barista Competition


And Darren says there will be nothing to stop an enthusiastic partner increasing their percentage stake in the operation. “There will be no barrier to a partner increasing their percentage. And we’re also looking at a model where a partner can come in with little or no stake and just sweat equity with maybe 10 per cent. Then, over time, they can buy into the business. Because there are a lot of young people out there who haven’t got the bucks, but they’ve got that twinkle in their eye.”

There will be an extensive agreement associated with each partnership and Darren says if someone finds it’s not for them, they will be able to get out. However, he stresses that the selection process for prospective partners should mean that an escape clause won’t be necessary. “We’re drilling right down so they know that while they can do very well in the industry, it will be hard work.”

Coffee Makes You Happy

Darren even envisages the Beenleigh site becoming an ongoing training centre for future Stellarossa partners or franchisees. “We’ll put our future franchise owners or partners through their paces in the store.”

Looking ahead, Darren says there’s the potential for Stellarossa to implement this partnership model at every new site and move away from the “us and them” mindset that can occur in a franchisor-franchisee relationship.

“This is a mindset that I feel is weighing franchising down significantly at the moment. I’ve always had partners and a partnership can be extremely powerful if it’s handled properly.”