DUNKIN’ DONUTS (E):

1988 DISTRIBUTION
STRATEGIES

SDM || Batch 2 || Group 10

Kanhaiya Poddar || Yashwanth Kotha || Vignesh || Navaneeth Gandi
Tony Augustine || Srisai Pavan || S. Abhinand
 EXPLAIN THE FRANCHISEE VS THE OWN STORE PHILOSOPHY  WAS THE COMPANY RIGHT IN THE 1978
STRATEGY?  WHICH IS EASIER TO MANAGE A CO OWNED STORE OR A FRANCHISEE OWNED STORE

Co Own Store Philosophy Franchisee Philosophy

The company owns and runs the store.
Maintains and control over single aspects of the business.
The Company enjoys all of the profits.
Money cannot be earned through royalties.
Growth is slowly thus ensuring the optimal conditions for
your business
Spend less time training and developing materials
Either the company or franchise owns the store but the store
is run by franchisee.
Business can be expanded to different areas around the
country or the world.
Day-to-day duties are handled by franchisee and thus
management gets lighter hand.
Money can be earned through royalties.
Growth is steadily and gradually.
Spends more time in training and developing materials.
 It is easier to manage a co-owned store than a franchisee.
 Although franchisees are typically required to follow the franchisor's operating procedures, the units are owned by entrepreneurs
and not the company. The franchisee is ultimately responsible for profits and losses, so he may decide to implement changes on
his own without notifying the franchisor.

Was the company right in the 1978 strategy?

Pros:
Royalty income generated
Penetration increased deeper in the market.
Average sales increased.

Cons:
Formal Grivances was the major issue.

Thus, yes the decision was right.

 WHAT'S THE MAIN PROBLEM IN REGION I AND REGION 2
Region 1
In 1987 there were 1,100 Dunkin’ Donuts shops concentrated in 96 of the
156 SMSAs of Region I. Thus increased concentration of shops in a small
no. of markets.
Fear and Greed factor was developed, sought to expand their own business
and preclude development in their area by competing franchisees.
The network was of interconnected ownership of extended families and
friends which solidified company’s market position.
Coffee is high margin product compared to doughnuts. Since in region 1
coffee sales was high, average sales was high compared to Region 1
The continuity of ownership characteristics was observed in Region 1.
Reverence for food led some franchisee to retain the products beyond their
freshness limit.
Region 2
In Region II there were 378 shops in 71 of the 178 different SMSAs. Thus
increased concentration of shops in a small no. of markets
Relatively little franchisee-expansion activity. Market penetration was more
often because the company had developed the property itself.
Expansion was haphazard
No trademark recognition and no marketing or operational efficiency.
Coffee sales was low and thus average sales were significantly low
compared to region 1
38% Franchisee holders were immigrants. Managers sense negative
consumer reaction and language and cultural differences created managerial
challenges.
Reverence for food led some franchisee to retain the products beyond their
freshness limit.
WHAT ARE THE ALTERNATIVES THAT ADDRESSES THE DD DISTRIBUTION PROBLEM AND SUITS THE  AIM IN
BECOMING NATIONAL AND NOT HAVING LOPSIDED DISTRIBUTION DEVELOPMENT

1. New Products:
Idea was to open new stores in less saturated markets, either through focused company development of
specific markets or through the use of area franchising.
Area Franchising: Area franchising did not require the company to invest in the development of the
properties. Following are types of Area Franchising.

SUB FRANCHISING EXCLUSIVE DEVELOPMENT FRANCHISEE

The master franchisee purchased the exclusive rights to sub-franchise to The franchisee purchased the exclusive rights to a territory and agreed to
individual owner operators in a particular territory open and operate a specified number of shops in the area within a
specified time period.

The franchisees paid a master franchisee a royalty percentage of sales, and
the master franchisee, in turn, paid a royalty to the franchisor
Sub franchising added another layer between the franchisor and the
operating franchisee. The master franchisee typically assumed all or most
of the duties of the franchisor in its territory
when the areas were large, the individual shops resembled company-
owned shops in that they were operated by salaried managers instead of
the franchisees themselves
Exclusive development franchising retained the direct connection between
operating franchisee and the franchisor

Cont.
2. Branded products:
 Idea was to to expand the distribution of existing stores.
 Donuts contract with convenience store chains to supply branded products to participating outlets.
 expected that a local franchisee could deliver fresh Dunkin’ Donuts’ products twice daily to between 10 and 15 convenience stores.
 The products would be displayed in illuminated Dunkin’ Donuts self-serve display cases.
Issues with the strategy:
 It would involve an additional investment by the franchisee of $19,000 for cases and other equipment (usually financed by a five-
year note).
 Management knew it would cause additional friction between franchisees in the more saturated markets
 Quality control also would be a significant problem. It would be necessary for the supplying franchisee to carefully monitor the
convenience stores and ensure that products which had passed their freshness limit were removed and discarded.
 There was also a question as to which products would be made available under this program.
 Franchisees who were already supplying the local convenience stores on an individual basis with unbranded products did not see
the benefit to them of switching to branded products
 Margins were not expected to improve, and unlike the current arrangements, the franchisees would have to deliver the products to
the convenience stores. Other franchisees did not like the idea of “competing with themselves
2. Satellites:
 Satellites were nonproducing units which were serviced from nearby full-producing units. They could take the form of a
storefront, a stall in a shopping mall, or even a cart in a train station.
 Full-producing units typically required an investment of about $455,000 for the land, site improvement, and building, plus
$115,000 for the ovens and other equipment
 Satellite sites were generally leased. Development Group managers estimated the average weekly sales of a satellite to be
$6,100.
 food costs as a percentage of sales were expected to be the same as for the producing unit because a greater proportion of the
doughnuts would be sold as singles. The payroll costs as a percent of sales were expected to be approximately the same for
satellites as for the producing units.
 company managers thought that in order to obtain the optimal mix of producing and nonproducing units, it would be necessary
to sell exclusive micro-territories to qualified existing franchisees.
Issue with the Idea:
 Coordination would be difficult.
WHAT IS THE DIFFERENCE BETWEEN EXCLUSIVE  MACRO AREA DEVELOPMENT AGREEMENT AND MICRO
DEVELOPMENT AGREEMENT AS A PART OF THE SATELLITE DESIGN STRATEGY?
MACRO AREA DEVELOPMENT AGREEMENT
The company, therefore, carefully screened all potential new locations,
examining the competitive environment, sales and profits of nearby Dunkin’
Donuts shops, shopping activity, demographics, and the physical attributes of
the site in an attempt to optimize Dunkin’ Donuts’s penetration (i.e.,
distribution) pattern in each market without jeopardizing the businesses of
existing franchisees.
Franchise agreements typically granted the franchisee the right to operate
only at a specified location and provided no territorial exclusivity.
An operating franchisee could find that another franchisee had been granted
the right to open an outlet in close proximity to its previously operating
outlet.
The company had adopted and published to the franchisees a policy that
provided for a formal grievance procedure if the company had developed the
property for the new outlet .
If the company disagreed with the franchisee’s choice of locations, it sent a
“site deficiency letter” outlining the reasons it would not approve the site.
MICRO AREA DEVELOPMENT AGREEMENT
The company would assess how many and what type of outlets would be
optimal for the micro-territory surrounding a particular franchisee (typically
1-2 producing shops and 1-3 satellites).
The franchisee would be offered the exclusive rights to the territory in return
for a prepaid fee equal to the cumulative franchise fees for that combination
of outlets.
The franchisee would agree to find the specific sites and develop the specified
outlets within a five-year time period
If the shops were not opened according to schedule, the franchisee could lose
the territory and forfeit the fees.
Although purchasing a micro-territory would protect these profitable areas
from other franchisees, opening additional shops would mean an increase in
the franchisee’s investment and a possible decrease in the sales of his or her
successful shop.
 WHAT IS THE CAPACITY UTILIZATION  OF OUTLETS  IN REGION I (II)?

 Most shops were open 24 hours a day, 7 days a week.

 In order to meet the company’s freshness standards, Dunkin’ Donuts recommended three production shifts: 11 fM to 6 AM, 7 AM to 11 AM, and Noon to
7 PM.
 Frequent baking was vital to maintaining the company’s reputation for freshness, and the company set shelf-life limits on the sale of various products
In Region 1
 where there was an especially low level of unemployment, franchisees found attracting reliable counter personnel and assistant managers very
difficult.Thus the shops’ revenues tended to be lower as well. Increases in labor costs, like capital investments, therefore, were severely squeezing
franchisee profits.
 There was overcapacity due to the existing full-producing units.
In Region 2
 the excess capacity was often due to lack of trademark recognition.
In both Region
 DD kitchen with the standard configuration provided the production capacity for up to 250 dozen doughnuts per shift. However, shops were typically
staffed with one baker per shift could prepare 140 dozen per shift. Thus the issue of under-capacity arises.
 Uneven Capacity distribution as production was not spread evenly across the two or three shifts. Two-thirds of the baking was done at night because
60% of each day’s business was done between 6 AM and 10 AM.
  WHAT WOULD HAVE TO CHANGE  FOR YOU TO SUPPORT THE FOLLOWING DESIGNS

 a)Area development agreements in region II: when the areas were large, the individual shops resembled company-owned shops in that they were operated
by salaried managers instead of the franchisees themselves.
 b) Sub Franchising in Region II: The master franchisee purchased the exclusive rights to sub-franchise to individual owner operators in a particular
territory, Sub franchising added another layer between the franchisor and the operating franchisee. The master franchisee typically assumed all or most of
the duties of the franchisor in its territory
 c) Focused fill ins development  in region II: Delivery cost should be handled by the company. Production forecast should be done by the company and
optimally provide data so that cost on wastage can be reduced.
 d)Revitalization of co owned stores division: Expense incurred would increase. The company management has to overlook all daily operations and thus
more employees would be required.
 e) Focusing on Branded products through supermarkets channel design: The franchisee is willing to deliver branded products to nearby outlet. The
francisee could incur the additional investment. The margin earned would increase for francisee.
 f) Satellite units and exclusive micro areas: If there is full producing units and over-capacity issue. Co-ordination issue needs to be solved.
 WHAT'S MOST DIFFICULT PROBLEM IN DEVELOPING SATELLITE AREAS

 One of the most serious problems facing Dunkin’ Donuts management was the development of a policy regarding the
design of the exclusive development micro-territories. This includes below:
1. How big should territories be?
2. Should they require more than one or two additional shops?
3. Should territories be designed without regard to existing franchisees’ desires to purchase them?
4. What criteria should be used to determine whether to permit a franchisee to buy a territory?
5. If the franchisee is not operationally or financially qualified to purchase a territory or is not interested in buying, should
the territory around his or her shop be held open or sold to another franchisee?
6. A particularly difficult issue involved those markets where there had already been significant development. Should
territories be defined so as to include more than one franchisee’s existing shop, or should some markets be immune
from exclusive territory development?
THANK YOU