Sales and Distribution Management

Dunkin Donuts (E) : 1988 Distribution Strategies

Group - 1
Section – A
 About Dunkin’ Donuts
• Started in 1950 by William Rosenberg as a coffee – and – doughnut
shop in Massachusetts
• Pioneer in Business Format Franchising
• By 1987 – 1478 stores; 1449 franchised
• Also sold – Muffins, Croissants, Cookies, Soup & Croissant
sandwiches
• Presently – 10,000 outlets in 32 countries
• No. 1 ranking in Customer Loyalty (Coffee)
• Franchisee reported sales of $6.4 Billion

William Rosenberg's philosophy was, "Make and serve the freshest, most delicious coffee and
donuts quickly and courteously in modern well-merchandised stores.”
 About Dunkin’ Donuts
• Vision - To be recognized as a company that responsibly
serves our guests, franchisees, employees, communities,
business partners, and the interests of our planet.
• Values
– Respect for their employees, franchisees, Farmers &
Communities
– Passionate about their offerings
– Sense of service – Society, Community
– Sustainable Living – Concern for Planet
 Customers
Association
•Customers strongly associated the store with donuts
(85%,75%) and coffee (30%, 52%).
Purchase reasons
•Customer chose Dunkin’ Donuts primarily because of the
freshness and the consistency of the product.
•Convenience was another purchase reason. (“on the way to
home or office” – work related purchase)
Satisfaction level
• High and flat – the company found it tough to increase the
satisfaction level and doughnut was getting the lowest scores.
 Customers
Segmentation
based on

Consumption Time of last Frequency of

Purchase Occasion
Location purchase occasion Purchase

Weekday
In shop - 3 Social -11% Breakfast/Snack at shop
Heavy -22%

Breakfast/Snack Takeout
In Car - 4
Noon Snack Takeout
Family – 70% Late Night Snack
Medium– 48%
Takeout
At work - 2
Weekend
In Home - 1 Work -19% Breakfast/Snack Takeout Light- 30%
Late Night Snack
Takeout
 Focused development strategy
• Development was done in already high penetrated areas

• Shops only in 168 out of 334 U.S Standard Metropolitan

Statistical Areas(SMA)

• 423 new stores opened but only in 75 different SMA’s

• Concentration was increased in a small number of

markets
 Fear & greed factors

• The perception that the competing new or existing

franchises might take away their current market share in
their area.

• So franchises tended to expand in their own area rather

than watching someone else set up a store in their area

• This led to uncontrolled development in certain regions.

 Difference between the regions
Region 1 Region 2
Integral part of development strategy No focus given in the development
strategy
Expansion due to ‘fear and greed’ Relatively little franchise expansion
factors activity
Expansion was solidified Haphazard expansion
Twice the store sales as that of Less store sales
Region 2
Less number of rent relief shops Double stores on rent relief

Continuity of ownership Not found

 Immigrant franchises
• Negative consumer reaction

• Managerial challenges like language barriers and cultural

differences

• Reverence of food among these communities led them to

retain the items beyond the freshness limit and thereby
spoiling the image of Dunkin Donut’s good quality

• Solidarity levels were high

 Franchising
• Two types of franchising :
1. Business Format Franchising – Right to reproduce the business formula and systems
2. Product Franchising – Independent business operations by franchisee; contractual outlet for
branded goods

Dunkin Donuts opted for Business Format franchising

• Pioneers in Franchising System

– International Franchisee Association
– Dunkin’ Donuts University

Issue: Expansion of franchisees

Dunkin Donuts Franchisee agreements:
1.No territorial Exclusivity
2.Formal Grievance procedure – only if company develops property for new outlet
 Franchising
• Conflict Management procedure –
– Existing franchisee can object to the location of new outlet with
extensive evidence of expected effects
– Committee might form a solution or recommend on decision of
opening the shop
– Right to open the shop rests with the company – irrespective of
committee’s recommendations

• If outlet is franchisee developed

– No grievance procedure –antitrust law
– Company screens the locations
– Site Deficiency letter
 Franchising
• Development burden shifted to Franchisees
– Staffing problems and high administrative costs in Company- operated shops
– Decline in rental income due to decline in sales growth
– Escalating development costs
– Increasing franchisee objections to expansion
Return on investment declined

• Sub franchising:
(i)  company owned stores can be established
(ii) This type of franchising is beneficial when company tries to adapt to the local habits
(iii) Stores development is not pre-determined

• Exclusive:
(i) company owned stores cannot be established
(ii) This is beneficial when company tries to standardize the operations to have efficiency
(iii) Opening schedule of new stores have to be planned before signing the agreement
 Franchising
• Evolution of Franchisees:
– Company developed to franchisee developed
• Early 1980s – 80% of all new franchisee-operated
shops were company developed
• 1987 – 80% of all new shops were franchisee
developed
• Franchisee developed – More committed to business
with higher returns for the company
 Shop Operations
• Franchisees had to manufacture their Donuts unlike just selling it
• Franchisees with no experience had to manufacture and as well as
manage retail operations
• Operated in 3 shifts (11PM to 6AM, 7AM to 11AM, 12 PM to 7PM)
• Region II experienced lot of absenteeism during 11PM to 6AM shift
• In Region I bakers rate was high which reduced the company’s
overall margin
• Often family members had to lead with the retail customers
• As sale of Donuts reduced from 1968 to 1988 the company
increased the complexity by line extension
• Apart from this company also faced over capacity issues where it
was able to produce just 140 dozens of donuts/ shift
• Two third of the donut was produced during 11 PM to 6 AM shift
 Issues
• No territorial exclusivity for franchisees
– New franchisees drew customers away from existing franchisees
– Formal grievance procedure was also not rigid
• Decreasing ROI due to heavy investment in real estate
related to business
– Decline in sales growth also contributed to reduction in ROI
– In the franchisee-owned outlets, Franchisees started selling their franchise
after the breakeven
– Franchisees incapable establishing their own property expected company to
develop sites
• Concentrated development strategy provided company with
lesser opportunity to expand in other regions
– They had little/no recognition in other regions
– They were hesitant in investing in those regions to achieve market
penetration
• Franchisees, who were immigrants, faced language
barriers and cultural differences
• Staffing was extremely difficult
– Night shift bakers often did not turn up
– Franchisees had to find replacements to perform the job
– Front-of-the-store staffing was also a serious problem
– This reduced their profit margins
• Over capacity of existing full producing units
– Lack of trademark recognition in unexplored territories and market
saturation in highly penetrated areas were the reasons
• Increased complexity due to extended product line
• Lack of aggressive promotions due to fear of losing out
margins
 Distribution Strategies
• The management was convinced that the decreasing sales
growth, stiffening competition and worsening sales to capital
ratio required a new emphasis on expanding distribution
• “…We know we’re not going to get people to eat a lot more
doughnuts, but by increasing our distribution we can get a
lot more people to eat our doughnuts…”
- Tom Schwarz, President of Dunkin Donuts

• Three approaches:
1. New Markets
2. Sale of Branded Products
3. Opening Satellite retail outlets
 New Markets
• Opening new stores in less saturated markets
• Either through focused company development of specific
markets or through use of area franchising
• Focused Company Development: Dunkin Donut enters new
or underdeveloped markets sequentially, opening the stores
necessary to achieve economies of scale, before moving on
to the next market.
CRITIQUE: Would avoid the haphazard development currently prominent in region II thus
driving growth in less saturated markets. However, would require Dunkin to take an
active role in the development of real estate for the sites
 New Markets
• Area Franchising: Could take two forms Sub
franchising(the master franchisee had exclusive rights to
sub franchise to individual operators) and Exclusive
development franchising(Franchisee purchases the
exclusive rights to a territory and agrees to operate a
specified number of shops in the area within a specified time
period)

CRITIQUE: Sub franchising added another layer between the franchisor and
operating franchisee.
Exclusive development franchising resembled company owned shops in large areas
Both types allowed franchisor to expand quickly in new markets.
Also, did not require company to invest in development of properties.
 Branded Products
• Supply branded products to convenience store chains
• Local franchise could deliver fresh products twice daily to
10-15 convenience stores

CRITIQUE: Possibility of friction between franchisees in more saturated markets.

(need to design system to allocate specific chain outlets to franchisee)

Quality control would be a significant problem(need for franchisee to check stores

and ensure product freshness)

Franchisees did not see the benefit of switching to branded products when they
were already supplying unbranded products.(Similar margins, with added
responsibility of delivering products)
 Satellites
• Non producing units, which were serviced from full
producing units
• Could take the form of a storefront, a stall in a mall or a cart
in a train station
• Lower cost and more profit margins than a full producing
unit
CRITIQUE: Coordination would be difficult
Additional investment burden for franchisees
 The way forward..
• Combination of New Markets and Satellites
• Because of intense competition in region 1, the sales
growth is almost stagnant for Dunkin. In order to have an
increase in sales growth , entering new markets stand to
be the better option.
• Entering new markets would mean being unaware of
customer behavior and preferences, hence making Sub
franchising the correct model. (region 2)
 The way forward
• Region 1 wherein Dunkin already does well, will look to
drive growth through satellites
Satellites : Dunkin Donuts + Baskin Robbins
• Considering Dunkin Brands owns the Baskin Robbins
brand as well, combining it with Dunkin Donuts in the same
outlet serves to make a much profitable use of the prime
sites acquired
• The main reason is that the peak sales for doughnuts and
ice creams differ dramatically. Whereas the majority of
doughnut sales are in the morning, ice cream sales peak in
the evening
 Policy for micro-territories
• Segment the territories on the basis of sales and profits into
under-developed, developing and developed
• Territory size are smaller for developed market and larger
for under-developed markets
• Dunkin Donuts will assess how many and what type of
outlets are optimal for a territory
• Exclusive territory development only for the under
developed markets
• Let the developed markets include more than one franchise
• In case the franchise in a developed market wants to retire,
the first right to buy his store goes the existing franchise
Thank You!