Since the inception of Dunkin’ Donuts in the early 1950’s and until 1989, Dunkin’ Donuts Inc., brand management / ownership controlled its own destiny.
Founded by Bill Rosenberg in 1950, Dunkin’ Donuts Inc. had an extremely entrepreneurial culture, in which the franchisor’s employees and its franchisees were treated like “family”. Bill prided himself on having personal relationships with many of his franchisees, whom he respected and truly cared for.
As a general rule, the franchisor and franchisees worked well together to help grow the brand, understanding fully that the success of the brand was dependent upon the success of each party; franchisor and franchisees. Bill had always preached “in order to have a successful franchise system, you had to have a healthy franchisor and healthy franchisees.”
At that time, there was not an association of Dunkin’ Donuts franchisees. Such associations were rare and the Dunkin’ Donuts franchisees saw no need for such an association. Things were going pretty smoothly. Communications between franchisee and franchisor were good. Franchisee profits were good. The system was growing at a slow and steady pace.
In 1988 a rift developed in the Board of Directors between Dunkin’ Donuts president Bob Rosenberg (Bill’s elder son) and Chairman & Founder Bill Rosenberg. The rift was about the strategic direction that the franchisor should take moving forward.
At the time there were about 2,000 Dunkin’ Donuts franchisees largely based in the Eastern seaboard. Bob saw the future of coffee and donuts as too limiting and wanted to create a portfolio company including other restaurant concepts, while Bill adamantly held to his belief that the road to success was by investing only in their core (coffee and donuts) business in order to turn Dunkin’ Donuts into a national franchise system.
Rift Turn into a Crisis, 1989
The rift erupted into a true brouhaha in early 1989 when Bob and the board voted to become Chili’s Restaurant master franchisees in the Northeast. After the vote, Bill stormed out of the Randolph, MA corporate offices stating “you will never see my face here again.” To ensure that promise, Bob immediately had his Dad’s portrait removed from the lobby of the headquarters and shipped to Bill’s residence.
While family squabbles are certainly sad, there were important ramifications for the Dunkin’ Donuts Brand. The company could no longer rely on Bill’s strong leadership skills and fervent dedication to the core business. A more immediate threat developed when Bill decided to sell all his Dunkin’ Donuts Inc. stock (then traded on the NASDAC), perhaps because he had lost faith in the direction the brand was taking, perhaps to punish the Bob and board for defying his vision. In any event, millions of shares of Dunkin’ Donuts stock were in play.
Hidden Real Estate Profits
It was common knowledge that Dunkin’ Donuts, Inc. made its profits on initial franchise fees and ongoing royalty fees. What was largely unknown was that it made a significant percentage of its bottom-line profits in leasing and subletting corporate controlled real estate back to franchised stores. An interesting quirk of American Accounting Standards did not allow for the true market value of these real estate investments to be shown on the books but rather only the depreciated value. Simply stated, there was tremendous “hidden” value in Dunkin’ Donuts stock.
George Mann, a Canadian entrepreneur, understood this and started buying up Bill’s stock and tried to take over the company. Evidently, his strategy was to disassemble the company, selling off (freeing) the valuable real estate assets from the core franchising revenue stream. Mann saw that the sum of the parts was worth far greater than the whole.
1989: The DDIFO Was Born
Many Dunkin’ Donuts franchisee leaders saw their great vulnerability in a potential ownership and franchisor management change. They, with the approval and recognition of the franchisor, created the DD Independent Franchise Owners, Inc., (DDIFO) an association of established Dunkin’ Donuts franchisees. The mission was simple: To speak with a clear, unified voice that they exist and that they supplied the lifeblood cash flows that created Dunkin’ Donuts stock value, to support and categorically resist changes to the then current management team.
DDIFO started with a few hundred franchisees, which represented the majority of franchisees in the Northeastern U.S and some shops from the rest of the country. The DDIFO bought and paid for a full page ad in the Wall Street Journal to boldly state their case. Simultaneously, franchisees came to understand that the franchisor was legally responsible to answer to their stockholders and that their interests now diverged from those of the franchisor. From then on, DDIFO spoke on behalf of its members and represented franchisee interests.
A White Knight Appears
Dunkin’ Donuts Brand management saw the handwriting on the wall, so to speak, as to Mann’s huge threat, and found a White Knight” in Allied Lyons of England, who paid a premium price of $325 MM to buy the brand, and averted Mann’s hostile bid. Mann got substantial “Greenmail” profits from the increase of his basis and the Allied bid. Mann smiled and went on his merry way, much richer for the experience.
Allied Lyon’s core business was in liquor. They also owned hundreds of pubs in the UK, as well as Baskin Robbin’s, an established US Ice Cream franchisor. Dunkin’ Donuts management convinced the Allied Lyons board that there was growth potential in the Dunkin’ Donuts brand, hidden value in Dunkin’ Donuts controlled real estate, and synergy with the Baskin’ Robbins brand, perhaps creating a multi-branded retail franchise shop model.
Perhaps most important for the DDIFO, Allied Lyons had little interest in managing the Dunkin’ Donuts brand; the current management team would likely stay in place and things could return to “business as usual.”
The “White Knight” Gets Increasingly Hungry
As previously stated, Allied Lyons paid $325 MM for Dunkin’ Donuts. They wanted a good ROI on their purchase and demanded management “lean up” the organization, accelerate development and find new sources of revenue.
Allied was not interested in Dunkin’ Donuts, excepting to the extent it could help them become more dominant in their core business. Simply stated, they used cash flows from the Dunkin’ Donuts investment to buy more liquor brands. And buy more brands they did.
Inevitable squabbles ensued. As the franchisor accelerated growth, raised the bar on franchised store performance, and increased franchise fees, the DDIFO tried to negotiate with the brand and mitigate these changes. Simultaneously, times were generally very good for franchisees. Profits had grown and were very good. For the most part, “happy days were here again”.
Also along the way the Allied Domecq Quick Serve Restaurant (QSR) Division grew by acquisition. It bought Mr. Donut brand from International Multifoods, which fueled growth by the conversion of hundreds of shops and introduction of scores of highly entrepreneurial Mr. Donut franchisees who were stifled by their franchisor. It also saw the purchase of the TOGOS Great Sandwich franchisor to round out the QSR portfolio.
The brand envisioned “Trombo” (triple combo) restaurant development under a single roof. The brand pushed combo development to successful Dunkin franchisees who largely failed to accept the unit economic model. DDIFO assisted in pushing back as the franchisor pressured franchisees to take the plunge.
Allied Grows thru Acquisition and then Sells Out
Between the years 1989 and 2003, Allied Lyons had become the number three liquor company on the world. They bought South American liquor giant Pedro Domecq brand in the mid 1990’s to become Allied Domecq. Allied Domecq controlled many of the world’s great liquor brands including Stolichnaya and Sky Vodka, Ballentine’s and Laphroig Scotch Whiskies, Courvoisier Cognac, Clos Du Bois winery and the great Château Latour of Paulliac, Bordeaux, France.
The Allied Domecq board of directors saw that it was unlikely to become the number two or number one liquor brands and decided to sell to Pernod Ricard, their number two rival. Pernod Ricard had no interest in QSR and decided to sell off non-core brands. In 2005, Dunkin’ Donuts was once again in play.
DDIFO wanted to protect its member’s business interests in this transaction and actively worked with advisory council members to protect franchisees interests during the transaction. Dunkin’ Brands CEO Jon Luther guided the transaction to eventually land Dunkin’ Donuts with the consortium of private equity firms of Bain Capital, T. H. Lee and the Carlyle Group.
That group paid $2.42 Billion for Dunkin’ Donuts, Baskin’ Robbins and TOGO’s, which concerned DDIFO greatly. Given this astronomical price paid for the QSR brands, what additional cuts or draconian actions could DDIFO members expect to see? DDIFO saw great danger and acted to protect the interests of its members.
DDIFO Changes with the Times
Since the advent of private equity ownership, DDIFO has re-clarified its mission, which is to communicate, to educate, and to advocate on behalf of our members. DDIFO became increasingly vocal proponents, speaking out to express the unique voice of Dunkin Donut franchisees and their independent business concerns.
In 2007, DDIFO became a founding member of the Coalition of Franchisee Associations (CFA) to leverage the collective strength of member franchisee associations in terms of providing a forum for franchisee association leaders to collaborate and share best practices. The CFA will monitor and support legislation that is beneficial to franchisees.
In 2008, DDIFO’s then franchisee board of directors created a new board comprised of non-franchisees to serve as directors. The new board of directors; comprised of well-respected professionals in the franchise community, shields franchisees from being singled out for speaking or acting in the best interests of DDIFO members.
The decision to go to a professional board came about because the franchisees wanted to make a change for positive reasons. The franchisees wanted DDIFO to be a better run and more professional franchisee association that would serve the franchisees more effectively and efficiently.
While Dunkin’ Brands recognizes and respects DDIFO’s right to exist, they choose not to formally recognize DDIFO and have no official lines of communication to the franchisee organization.
It is the goal of DDIFO with and without official recognition of Dunkin’ Brands to not only work hand-in-hand with our elected franchisee advisory council members, but also to offer DDIFO members a strong and independent voice that only acts in the best interests of Dunkin’ Donut franchise owners.
Dunkin’ Donuts locations are 100% franchisee owned and operated. DDIFO will continue its mission never losing sight of its number one goal to be relevant and engaging to Dunkin’ Donuts customers and continue to provide Dunkin’ Donuts high quality products to our dedicated customers.
Ultimately, DDIFO believes that Dunkin’ Brands will eventually see value in the fact both organizations share the collective responsibility as brand stewards, by officially recognizing DDIFO and opening formal lines of communications.