DUNKIN’ DONUTS:

1988 DISTRIBUTION STRATEGIES

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?

• In a company owned stores model, the
company has control over every aspect of
the business while in a franchisee model,
the company is managed with a lighter
hand leaving day to day duties to the
franchisees
• Dunkin’ Donuts shifted to the franchisee
model and reduced the number of
company operated stores due to staffing
problems and increase in administrative
costs
• In 1978, the company adopted a highly focused strategy of
growing in markets where it already had the greatest penetration
• This strategy significantly increased the concentration of shops
in a relatively small number of markets
• Overall sales were increasing but some individual stores started
suffering. As a result some franchisees lost faith in the
company’s willingness to look after their interests
• This strategy provided company less opportunities of expanding
in other regions and as a result the company had little
recognition in other regions
• If a company wants complete control of the operations and other activities, then it should go with the
company owned stores. In a company owned store, the company can control the service quality.
However administrative and staffing costs increase

• Franchisee model saves on the administrative and staffing costs but poor service quality in a
franchisee owned store can result to overall negative brand image of a company. However, franchisee
model is easier to manage overall

• The following are the advantages of franchising:

oBring your business to different areas around the country or the world
oManage the company with a lighter hand, leaving day-to-day duties to franchisees
oEarn money through royalties
oGrow steadily and gradually
WHAT'S THE MAIN PROBLEM IN REGION I AND REGION 2
• Both the regions were different in terms of sales, market penetration and faced different situations on account of
historical development of the company differently in both.
• In Region 1, development was rapid due to multiple partnerships with friends and family which lead to increased
franchisees. But here overpenetration became critical. Sometimes forced to leapfrog over other franchisees, managers
felt that development here became out of control. Though the overall sales increased but the individual store sales fell
leading them to anger and suffering.
• In Region 2, there was relatively low expansion with company having little recognition built. So here is was at
disadvantage as compared to competitors who invested heavily for market penetration.
• The three broad options of distribution channels:
• Intensive distribution: Aiming maximum market coverage by using all available outlets. If a brand is not available
consumers picks another. Like soft drinks.
• Selective Distribution: Using a limited number of outlets in a geographical area to sell products.
• Exclusive Distribution: When the firm distributes its brand through just one or two major outlets in the market, who
exclusively deal in it and not all competing brands.
• Though Dunkin Donuts competed with doughnut shops, bakeries, convenience stores. But they realized that
consumers purchased cause at Dunkin cause of product quality and freshness. This uniqueness can be
followed in their franchisee model with selective distribution, wherein the donuts of this brand are there at
its outlets only.

• The 6 steps needed for efficient distribution channel framework while franchising:
• Understanding that primary purpose of distribution channel is satisfying end user needs. Focusing on the
roles of intermediaries in that direction.
• Identifying and prioritizing customer channel function requirements.
• Benchmarking our existing and competitors channel capabilities w.r.t. functional requirements. These can
help region 2 to increase market penetration and compete with competitors like Winchell’s in Kansas City.
• Arriving at feasible channel options.
• Evaluating the benefits and costs associated with each option.
• Elaborating upon channel overlaps. Looking for channel synergies and reducing dysfunctionalities. In
region one the multiple franchisees shall be focused in the direction of synergy.
 WHAT ARE THE ALTERNATIVES THAT ADDRESSES THE DD DISTRIBUTION PROBLEM AND SUITS
THE AIM IN BECOMING NATIONAL AND NOT HAVING LOPSIDED DISTRIBUTION DEVELOPMENT?
• Invest more on penetrating Region II:

• Focused sequential development of Region II franchisees (Central & Western US) by promoting the benefits of
franchisee-developed shops such as higher returns and building personal equity
• Invest on training immigrant franchisee owners in Region II to reduce cultural differences & language barriers as
much as possible. Focus on standardizing processes
• Satellites could be set up in Region II to reach customers who are otherwise not visiting the full-producing units

• Gaining back control of Region I:

• Reduce the number of franchisees competing in close proximity in Region I, especially in highly concentrated areas
• Cap on number of new franchisees opening up close to existing large shops using exclusive territory rights
WHAT IS THE DIFFERENCE BETWEEN EXCLUSIVE MACRO AREA DEVELOPMENT AGREEMENT AND
MICRO DEVELOPMENT AGREEMENT AS A PART OF THE SATELLITE DESIGN STRATEGY?
Satellites were non-producing units which were serviced from nearby full-producing units. Eg. Stalls, Carts, etc.

Exclusive Macro Area Development Agreement Exclusive Micro Area Development Agreement

 Franchisee purchased the exclusive rights – operate
specified number of shops for specified time period
 Direct connection between operating franchisee and the
franchisor
 Determined how many & what type of outlets would be
optimal for the micro-territory surrounding the
qualified existing franchisee
 1-2 producing shops or 1-3 satellites

 For large areas, they were operated by salaried managers  Prepaid fee equal to cumulative franchise fees for the
instead of franchisee owners combination of outlets

 Area franchising did not require the company to invest  Franchisee finds the site & develops it within a five-
in development of properties year time period
WHAT IS THE CAPACITY UTILIZATION OF OUTLETS IN REGION 1 AND IN
REGION 2?
Region 1

We see that Dunkin Donuts had a lot of concentration in terms of choosing the shops in some specific places, such that
there were 1100 shops in 96 of the 156 Standard Metropolitan Statistical Areas (SMSA).

We further witness that, even though the wages in the franchisee outlets were high, they could manage with only
running on two shifts.

The presence of ownership mindset and beliefs especially in North-eastern outlets, led to a solidified market potential
and able to achieve output more sufficiently as compared to region 2, and thereby making more free cash flows.

The main sources of revenue in the Northeast also arose from coffee consumption, having high net margins as
compared to doughnuts, and therefore able to make more output in this market.
WHAT IS THE CAPACITY UTILIZATION OF OUTLETS IN REGION 1 & REGION 2?
Region 2

There was a more acute concentration in this market with 378 shops being concentrated in only 71 of the 178
SMSAs. We could see more of a haphazard development in this region.

The operation efficiencies were really spotty with inefficient returns with less average store sales and mostly
subsisting on rent reliefs.

The night shift workers often didn’t show up with franchisees having a lackadaisical attitude over following
company norms of three shifts.

There was an increased problem of overcapacity where often times one shift demanded 250 doughnuts to be
prepared as against the actual 140 possible. These along with the broadening product line, due to health conscious
customers was putting stress on the franchisees to show results.
 WHAT WOULD YOU CHANGE TO SUPPORT THE
FOLLOWING DESIGNS:
a) Area Development agreements in region 2:
• Continuous site development
• Revitalization of company operated stores
• Removal of haphazard development through mapping of shops so as to earn consistent revenues

b) Sub Franchising in region 2:

• Master Franchisee taking a more active role in coordinating the operations between the company and the sub-
franchisee
• Development of pilot outlets to test the viability of the new setup by introducing adaptations after which the
outlet can operate through the normal franchisee route
• Excess fees that can be generated through the setup to the franchisor can act as an enabler for such setup to be
viable
WHAT WOULD YOU CHANGE TO SUPPORT THE
FOLLOWING DESIGNS:
c) Focused Fill-ins development in region 2:
• Open and operate specified number of shops in a particular period to ensure direct control over things.
• Avoidance of spotty developments through proper strategic mapping and therefore achieve economies of
scale.
• Proper fund allocation so as to comply with the development schedule.

d) Revitalization of co-owned stores division:

• Even though the company owned stores have comparatively better financials, they need to focus on better
varieties of food lines, without compromising quality.
• Better variants in terms of coffee, as it can be seen to be a star product in the northeast region to increase
their margins there.
WHAT WOULD YOU CHANGE TO SUPPORT THE
FOLLOWING DESIGNS:
e) Focus on branded products through supermarket channel design:
• Make understand the potential franchisees that the customers in convenience stores were different from that in franchisees,
which could lead in additional sales.
• Reduction in friction between franchisees, based on the fact that convenience outlets would be earmarked to each franchisees
based on where they want these products to be sold, where people prefer branded doughnuts, which can give high PBT for
the company.
• Quality control to be always in place.

f) Satellite Units and exclusive micro areas:

• Supply from shops with excess capacity and franchisee support in terms of control.
• Better incentives for franchisees efficiently handling micro areas under their control, that is the non-producing entities and the
producing entities.
• Better allocation of satellite stores, so that it is not just optimally situated, but also not cannibalising sales in the producing
stores. So, the exclusive territory would be properly micro-managed.
WHAT'S MOST DIFFICULT PROBLEM IN DEVELOPING
SATELLITE AREAS?
Satellite areas alternative has issues, mainly:

• Determining the size of the territories. For the optimal size, Dunkin’ Donuts will have to study the
seams of consumer demand diligently

• Determining how many additional shops to be allocated in a territory

• Determining the criteria to permit a franchisee to buy
• Designing of territories according to franchisee’s willingness to buy
• For already highly penetrated markets, determining an exclusive territory with only 1 existing
franchisee’s shop will be tough