Caribou Coffee Adds U.S. Franchising to Growth Journey

For the first time in its nearly 30-year history, Caribou Coffee will franchise in the U.S., a historic benchmark that resulted from three crucial factors, CEO John Butcher says.

The initial driver was the roll out of the Caribou Cabin design in 2019. The prototype is a 600-square-foot drive-thru model with a walk-up window, but no indoor seating. The restaurant provides a full coffee bar, limited food options and an outside patio seating/dining space, according to the brand’s FDD. The coffee chain has since opened 17 of these stores, with another half-dozen or so scheduled to debut by the end of 2021.

The second contributing factor, Butcher adds, is Caribou was “pressure tested” for the past 18 months because of COVID. Despite those challenges, the CEO says the brand continues to fare “incredibly strong.”

The third and final aspect is the formation of Panera Brands, a recently established fast-casual platform featuring Panera, Caribou, and Einstein Bros. Bagels. The three concepts combine for nearly 4,000 locations and 110,000 employees across 10 countries. Butcher says the alignment pairs Caribou with “other premium successful companies and provides access to help us accelerate and amplify our growth in some key areas.”

“We feel like now is the time for all those reasons,” he notes.

Domestic franchising will be Caribou’s fourth lever of growth, with the current three being U.S. licensing (135 stores), company-run outlets (314), and international franchising (269).

Butcher says corporate store expansion will remain a priority, as will licensing, which is similar to franchising. Under this partnership, Caribou signs deals with host facilities that have built-in captive audiences, like airports, college campuses, casinos, resorts, and corporate headquarters. The executive views these kiosks as opportunities to build awareness and set up future franchisees for success. This type of format offers a full coffee bar, food options, and some seating where space is available, Caribou's FDD states. Kiosks are about 300–1,000 square feet and may allow for a drive-thru.

Although the U.S. franchising strategy is new, Caribou isn’t initiating the program without precedent. The coffee chain has franchised internationally since about 2005, and Butcher says this experience offered Caribou a head start.

Caribou has high brand awareness throughout the Midwest and Southeast, so those will be the key markets to target “sophisticated proven operators in the franchise space to help us develop,” Butcher says. Amid this process, the chain will be focused on quality of operators, and not quantity.

“We want the right franchises,” he says. “We want high-quality, high-caliber people that care about our brand and care about serving people as much as we do. We'll have high expectations for the growth that we instigate, but it needs to be the right growth. We are focusing our attention on finding the right partners, not a lot of partners.”

Caribou Coffee

The first five Cabin stores that opened in Q4 2019 saw average unit sales rise from $47,368 in January 2020 to $105,625 in December.

Butcher expects the creation of Panera Brands to play a significant role in achieving those franchising benchmarks. Each of the fast casuals fall under JAB Holdings, a German-based conglomerate that purchased Caribou for $340 million in 2012, back when the chain had a little more than 600 stores in 22 states, Washington, D.C., and 10 international markets.

Caribou should have plenty of experience to rely on; according to the QSR 50, Panera ended 2020 with 1,196 franchise units in the U.S. and Einstein finished with 337. Butcher thinks Panera Brands presents an opportunity for Caribou to “outpunch our weight class.”

“Each company operates independently and we are each accountable to drive the growth and serve our guests as appropriate for our strategy, but make no doubt about it—it’s an outstanding opportunity for us to accelerate faster than if we were on our own,” the executive says.

As domestic franchising deals begin to formulate, Butcher says Caribou is pleased enough with the Cabin prototype to likely make it the primary development tool, at least in the near future. Butcher describes the model as “very efficient and wicked fast,” and he believes the prototype satisfies many needs guests have expressed to the company, especially during the morning daypart.

The first five Cabin stores that opened in Q4 2019 saw average unit sales rise from $47,368 in January 2020 to $105,625 in December. For all of fiscal 2020, the handful of stores earned an AUV of $954,537, according to Caribou’s FDD.

The prototype has received high satisfaction scores from customers, and overwhelmingly positive feedback from employees.

“Importantly, our teams love working in the cabins,” Butcher says. “Typically our teams pass around an iPhone and create their own music playlists for the day. The tempo, the energy, is exceptionally high. It's just fun to go to a cabin, let alone to visit and get these outstanding products. You get to have outstanding experiences with our teams.”

Butcher says Cabin locations are usually in spots where “people are in cars and have a need for coffee,” which includes rural areas, interstates, and high-traffic suburbs. Most are freestanding, while one is endcap.

Caribou Coffee

Caribou is seeking growth in a coffee market that’s projected to grow at a compound annual growth rate of 4.8 percent through 2025.

Although the slimmer Cabin prototype has gained momentum, Butcher says the traditional Chalet design with indoor seating still has an important need as a community gathering place. These stores are roughly 1,600 to 1,800 square feet, and provide a full line of beverages and food. They can be freestanding, endcap, or inline, and come with or without drive-thru.

Among 216 company-owned Chalet locations that were active as of December 29, 2020 and recorded sales for more than 39 weeks in 2020, 96 had drive-thru and 120 didn’t. Restaurants with the drive-thru channel experienced average gross sales of $992,940 last year, while the ones without earned $511,213 in average gross sales.

“Any location that had a drive-thru attached was better set up to meet the demands of our customers throughout COVID,” Butcher says. “We invested tremendous energy in developing technology and providing our team with tools like curbside and order ahead. We rolled all of those out in all store formats over the course of the past 18 to 24 months, but certainly stores that have drive-thrus performed in large better than stores without.”

Caribou is seeking growth in a coffee market that’s projected to grow at a compound annual growth rate of 4.8 percent through 2025, according to data from ResearchAndMarkets.com. And it’s not the only mid-level coffee brand embarking on major expansion. Dutch Bros. Coffee, which has around 500 stores, went public in September and believes it has room for 4,000 units in the next 10 to 15 years. Unlike Caribou, most of Dutch’s future opportunities will come via corporate expansion.

However, Butcher would put up Caribou’s product with anyone else’s on the market, noting the chain is the “only national coffeehouse that serves 100 percent Rainforest Alliance certified beans” and the only one to offer a “completely clean beverage menu, meaning no artificial colors, flavors, preservatives, or sweeteners.”

“When I look back at what this brand has stood for, for the past three decades, I could not be more excited that that commitment to purpose, the commitment to people, to these amazing products is leading us into this next adventure for us with domestic franchising,” Butcher says. “It's really a privilege to be with the organization at a point in time where this is coming to fruition."