William Rosenberg opened his first coffee-and-doughnut shop in Quincy, Massachusetts, in 1950. In 1995 he began licensing the right to imitate his retail operation to independent owner/operators, called franchisees. Business format franchising, as this type of cloning relationship came to be known, was in its infancy in the early 1950s. By the late 1980s, however, business format franchising had become a major force in retailing in the United States. Meanwhile, Dunkin’ Donuts had experienced similar growth.
As of the end of 1987 there were 1,478 Dunkin’ Donuts units in operation in its North American region, of which 1,449 were franchised. Dunkin’ Donuts licensed an additional 191units throughout the rest of the world. By early 1988, however, deteriorating sales to capital ratios, stiffening competition, and uneven expansion threatened not only the level of company profitability but also its relationship with the franchisees. A number of options that related primarily to increased distribution were being explored.
Any new changes in strategy would require careful examination of its effect on both the franchisees and the company. Competition from convenience stores and supermarket bakeries was becoming increasingly acute. In 1988 there were over 20,000 supermarket bakeries, and the second-largest selling item in those bakeries was doughnuts. Moreover, convenience stores were expanding into food service at an alarming rate and had become a serious threat. By 1987 nearly 80% of all new shops were franchisee-developed.
This was much easier to accomplish in Region I(the eastern United States and Canada) where 75% of all domestic Dunkin’ Dounts shops were located, where the average store sales were significantly higher than in Region II(the western United States), and where existing franchisees were much more active in purchasing real estate and developing stores in order to expand their existing operations. In a nationwide sample of customers who lived within 15 minutes of a Dunkin’ Donuts shop, 86% had purchased doughnuts on their last visit to a Dunkin’ Donuts shop(75% in the Northeast), and 30% had purchased coffee(52% in the Northeast).
Average store sales were significantly lower in Region II than in Region I, and there were more than twice as many shops in Region II on rent relief. One of the greatest contrasts between the two regions was in the amount of coffee sold. Northeastern Dunkin’ Donuts outlets were primarily coffee shops were customers came to buy one or two doughnuts and a cup of coffee. Everywhere else in the country Dunkin’ Donuts was primarily a doughnut shop where customers purchased doughnuts by the dozen.
Shops in the Northeast averaged about 235 dozen doughnuts and 1,900 cups of coffee a day while elsewhere the shop averaged 260 dozen doughnuts and 850 cups of coffee. The differences had a significant sales and profit impact. Doughnuts averaged $ . 45 a piece, but sold for approximately $3. 00 by the dozen, and coffee was a high-margin item. Franchisees contributed 5% of gross sales to an Advertising and Promotion Fund. Because of the uneven distribution of Dunkin’Dounts shops nationwide, there was no national media purchased, and all television and radio advertising was on a market or regional basis.
Recently, approximately 20% the advertising budget was being spent promoting new products such as sandwiches, which were designed to shift Dunkin’ Donuts away from its dependence on doughnuts and spread demand more evenly throughout the day. Many believed that there was a serious need to attract more sophisticated franchisees or to simplify the marketing programs and the production processes. Dunkin’ Donuts management was convinced that the decreasing sales growth, stiffening competition, and worsening sales-to-capital ratio faced by the company and its franchisees required a new growth strategy.
Three distinct approaches emerged: the development of new and/or previously underdeveloped markets, the sale of branded products through convenience stores, and opening satellite (i. e. , non-producing)retail outlets. Dunkin’ Donuts corporate policy was to test all new strategies thoroughly before asking the franchisees to adopt them. New markets Some managers favored expanding distribution by opening new stores in less saturated markets, either through focused company development of specific markets or through the use of area franchising.
However, it was likely that such a strategy would require Dunkin’Donuts to take an active role in the development of the real estate for the various sites. Branded products Some managers proposed that Dunkin’Donuts contract with convenience store chains to supply branded products to participating outlets. It was expected that a local franchisee could deliver fresh Dunkin’Donuts’ products twice daily to between 10 and 15 convenience stores. It was assumed that the franchisees would lease the delivery vehicles, and there would be no additional franchise fee.
Satellites Dunkin’Donuts management believed that in many operating markets there were “seams” of consumer demand which existed between the full-producing shops but which could not support an additional producing unit. To preempt competition from gaining a toehold in those locations, one option was the use of satellite outlets. Satellites were nonproducing units which were serviced from nearby fullproducing units. They could take the form of a storefront, a stall in a shopping mall, or even a cart in a train station.
Tom Schwarz, president of Dunkin’Donuts, commented on the current situation, “We know we’re not going to get people to eat a lot more doughnuts, but by increasing new opportunities we can get a lot more people to eat our doughnuts. We’ve got some work to do!