“Skin in the game,” is how Dunkin’ President Scott Murphy explains the decision to increase the number of corporate-owned locations. “It demonstrates to our franchisees that anything we ask them to do, we will now be executing at a large scale alongside them.”
While Dunkin’ has acquired franchise units from time to time – including five years ago – the move was typically designed to stabilize poor performing stores before reselling them. But the recent purchase of SMB Donuts’ 31-store Ohio network was designed to get Dunkin’ back into the retail business. Inspire Brands has made it clear there are no plans to spin-off the Ohio shops to another franchisee anytime soon. The company plans to own and operate the stores themselves.
Rob Branca, who partnered with Ken Blum to create SMB Donuts 15 years ago, says the greater Cleveland market has undergone many changes over the years, as the area’s real estate prices have increased. New residential, retail and restaurant development in the area coincided with Dunkin’ getting established in the market.
“If they have their own stores, it means that they believe in their concept, and have been ready to invest energy, time and money to open and run them. It can re-assure franchisee candidates and franchisees”
“Customers really took to the Dunkin’ brand as we built more stores,” Branca says, acknowledging that Ohio had only a handful of stores run by strong operators before SMB began developing its locations. “At first the beverage mix was low, but we were able to grow it with time.”
Branca says SMB wasn’t for sale, per se, but after the group accepted an offer from a private buyer, Dunkin’ stepped in and exercised its right of first refusal—and the deal was done. As a long-time operator and a BAC member, Branca says he recognizes why this move was important for Dunkin’/Inspire Brands.
“I’m pleased that our franchisor is now able to directly dig much deeper into operations. I believe that it will allow us to work even better together to achieve that key goal of improving the workplace experience for our crewmembers.”
It’s no surprise that Dunkin’ is trying this model of self-ownership; other brands in the Inspire Brands portfolio – Arby’s, Baskin-Robbins, Buffalo Wild Wings, Jimmy John’s, Rusty Taco, and SONIC Drive-In – have corporate-owned locations as well. Dunkin’ was acquired by Inspire Brands two years ago and, unlike other restaurant parent companies like Yum! Brands and Darden, Inspire operates thousands of locations. “This gives the company an advantage when approaching the franchisee base with any major changes, such as new store prototypes or technology,” says Restaurant Business editor Jonathan Maze, a longtime industry journalist who writes about restaurant finance, mergers and acquisitions and the economy.
For Dunkin’, Inspire Brands CEO Paul Brown is following the playbook he used when he took over Arby’s in 2013. At that time, Arby’s was selling its company-owned restaurants to franchisees, which Maze calls a typical step franchisors take when acquiring struggling units. But Brown put a stop to this and stopped re-franchising. The decision turned out to be a good move for the sandwich chain, which increased sales and profitability. The move also likely gave the company some credibility with franchisees. Arby’s currently owns about 28 percent of the 3,300 stores in its system. “Inspire Brands tends to operate a bit differently than a lot of other companies and their strategies on company stores are a perfect example; they want brands to own some company stores,” Maze says.
Franchisors running their own stores show a positive signal to franchisee candidates as well as their franchisees, according to Rozenn Perrigot, a professor in business administration who specializes in franchising at the Graduate School of Management at the University of Rennes, France.
“If they have their own stores, it means that they believe in their concept, and have been ready to invest energy, time and money to open and run them. It can re-assure franchisee candidates and franchisees,” says Perrigot, who has studied the coexistence of franchised units and company-owned units within a same chain in the hospitality and retail sectors. She says this is also a way for franchisors to capture the specifics of their businesses through direct contact with customers, employees and other stakeholders. “They have access to all key figures on sales, customer behaviors and purchases, as well as operational challenges, such as unsatisfied customers, aggressive local competitors and staff turnover. [That] enables a better understanding of what franchisees face and feel.”
Prior to purchasing Dunkin’, Inspire Brands owned approximately 20 percent of its total restaurant units, but that percentage dropped to about 7 percent because of the concentration of franchisee-owned units in the Dunkin’ and Baskin Robbins systems. Dunkin’ shops were previously close to 100 percent franchisee-owned. According to Perrigot, a blend of company-owned and franchisee-owned stores, no matter what the industry, is the norm. “I consider 100 percent franchised chains an exception,” she says.
Historically, brands have franchisees run their restaurants, but strategies for operations lately have “been all over the map,” Maze says, with some fast-food entities buying units and others selling company-owned stores to new or existing franchisees. Franchising typically generates greater profits for brand owners because they can shift real estate, capital and labor costs onto franchisees, speeding growth. As a public company, Dunkin’ routinely pointed to its asset-light strategy, but brands gain certain advantages by operating their own stores.
Last fall, the casual chain Chili’s acquired 23 restaurants in the mid-Atlantic region, and Krispy Kreme also has been snatching up franchised units in the last few years. Both brands believe this shift will allow them to better control their markets and implement strategies to grow sales and profits. Maze points out the best measure of a restaurant operator – corporate or franchisee – is how the stores ultimately perform.
Critics of Dunkin’s store-buyback strategy say that there is nothing Dunkin’ is likely to learn by operating its own stores that it cannot learn from its franchisees. “If anything, it’s likely to receive low-quality information,” said Phillip Kane. CEO and managing partner of Grace Ocean, LLC, a boutique advisory firm in northeast Ohio. He explains that companies whose core business is not operating retail stores tend not to be good at it. “If I were Dunkin’, I’d endeavor to learn things through my franchisees whose core business is running stores. Why throw good money after bad trying to do something that will never be a core competency? That’s a bad idea.”
Dunkin’/Inspire emphasizes the company has no plans to change its asset-light model, and franchisees will continue to own the bulk of Dunkin’s 9,500 U.S. locations. DDIFO Restaurant Analyst John Gordon, principal of Pacific Management Consulting Group, believes the Ohio network will give Dunkin’/Inspire a better vision of what it is like to run stores and develop new units outside of the brand’s core markets. “It is a well-established Dunkin’ market with growth potential,” he says.
The stores in Ohio boast sales that are 10 to 20 percent above the national average. And, as Maze points out, they have room to grow. He believes Dunkin’ ultimately wants to own 100 to 200 locations to test new ideas and get a better sense of what franchisees are dealing with. “I don’t think franchisees should be concerned about that number,” Gordon adds.
Murphy acknowledges Dunkin’ franchisees will be closely watching how well the company-owned stores perform, but he is leaving the door open to the possibility of running more corporate-owned stores. Murphy told Entrepreneur that “[W]e recognize that we need each other to be successful, and we stay focused on driving franchisee profitability, which in turn fuels system growth.”
Gordon emphasizes that “visibility into store-level issues is important,” and he does not foresee Inspire competing with Dunkin’ franchisees over future development sites.
“Owning corporate units and using them as a test bed demonstrates to franchisees that the franchisor never settles and never stops looking for new opportunities that could benefit the brand and franchisees,” said Alicia Miller, co-founder and managing director of the Catalyst Insight Group, a Pennsylvania management consulting and advisory firm. “Owning corporate stores can be partly about optics. The franchisor can say to franchisees, “Hey, we feel your pain on these issues because we’re operators ourselves.”