What franchisees should remember about Dunkin’s prior history as a private-equity-owned brand
For many, 2020 will be a year to forget. But for the restaurant conglomerate Inspire Brands, it will be a year to remember. Having spent billions to acquire Dunkin’ and Baskin Robbins, Inspire has a tall – or Grande – order to fill: secure a sufficient return on its investment for the private-equity backers that made the deal happen.
Many of today’s Dunkin’ franchisees were not around when the private equity firms Bain Capital, Thomas H. Lee Partners and the Carlyle Group controlled the brand in the mid-2000s. Some still remember the fear and acrimony that defined the franchisee/franchisor relationship at that time. Franchisees who served as board members of DDIFO chose to resign so they wouldn’t have a target on their backs. How franchisees will be impacted by the new PE-backed ownership group is unclear, but if history is any guide, it could get rocky.
Inspire Brands is a relatively new company. Bankrolled by private-equity owner Roark Capital, it has made a bold statement to “invigorate great brands and supercharge their long-term growth.” With its $11.3 billion purchase of Dunkin’ Brands, Inspire is now among the largest restaurant groups in the country. But, industry watchers acknowledge Inspire is not a “buy and flip company. They hold their brands and build value,” unlike other private-equity groups, according to DDIFO Restaurant Analyst John Gordon, founder and principal of Pacific Management Consulting Group. Since going on its QSR buying spree in 2018, Inspire hasn’t even whispered about spinning any of its holdings off to the public markets. Dunkin’ franchisees can expect to be part of Inspire for some time, but just how will those days unfold?
A new view inside the brand
Already Inspire has made a move at the top, moving former CEO Dave Hoffmann out of a franchisee-facing role. Hoffmann will serve as Senior Advisor to Inspire CEO Paul Brown, with Scott Murphy taking over as Dunkin’ Brands chief. Making changes at the top is one way for new owners to get a different view inside their company. Often, such moves are focused on discovering new ways to unlock value.
Inspire paid a premium for Dunkin’ because it believes the brand can ultimately be more valuable than it is today. There are many ways through which companies can unlock value. When the private equity firm 3G Capital bought Burger King, it slashed overhead at headquarters, streamlined food preparation and shrank the payroll and capital budgets by selling company-owned stores to franchisees, according to Forbes Magazine. A long-time franchisee in another system recently described to Independent Joe what he saw after his brand was taken over in a leveraged buyout. “Focus on every nickel. Save costs by cutting to the bare minimum and expect people to do more with less,” he said.
Franchise attorney Robert Zarco, who specializes in commercial litigation, agrees efforts by private-equity backed brands are typically designed with one goal in mind: return on investment.
“There are two ways to increase the return to your investors. No. 1: increase revenue. No. 2: reduce expenses. The consequences of both will fall on the shoulders of the franchisees,” Zarco says.
There are many ways to raise revenue, but Zarco believes likely steps include store remodeling, new product rollouts, and massive advertising and marketing campaigns. “If it’s advertising, new marketing fees could be tacked on to new program roll-outs coupled with additional fees [on top of what franchisees already pay]. Or, it could be through some programs or system-enhancement vehicle other than the FDD-disclosed marketing fees. The franchisor can label it something else, but if it walks like a duck and quacks like a duck, you know exactly what it is,” he says.
DDIFO General Counsel Carl Lisa recalls how Dunkin’ increased the franchisee fee renewal from 4.9% to 5.9% during the Bain-Lee-Carlyle years. He also recalls the relentless push for expansion. “There was increasing pressure for franchisees to build in close proximity to other stores. We had development zones that were well-spaced, but [the brand] created new zones to squeeze out revenue.” It is why, Lisa says, many long-time Dunkin’ franchisees will say privately, “If I could close one-third of my stores, I’d be better off.”
Experts believe the Inspire-led Dunkin’ will press for further expansion, which will again generate concern among franchisees that their business is being cannibalized by the brand. As Zarco points out, adding a third unit to a two-store market will generate increased royalties for the franchisor, even as it potentially decreases revenue for the franchisees.
Dunkin’s asset-light model also ensures the franchisor is shielded from the cost and the risk of new development. Dunkin’ generates fees when it sells new development rights as well as when it sells term to existing franchise agreements. Based on what he saw when Bain, Lee and Carlyle owned Dunkin’, Based on what he saw when Bain, Lee and Carlyle owned Dunkin’, Lisa believes franchise-related fees will likely be on the increase while Inspire owns the brand.
A dark period
During its private-equity days Dunkin’ gained the reputation as being “the most litigious brand out there,” as Zarco told the Boston Globe in 2009, when Dunkin’s hometown paper exposed the brand’s loss-prevention unit as a profit center that targeted the franchisees whom the brand wanted out. Later that same year, the New York Post reported, “between Jan. 1, 2006, and Aug. 21, 2009, Dunkin’ was involved in 356 cases against its franchisees, the vast majority of which were filed by the company. At the end of 2008, the company had 2,250 US franchisees.”
These cases created churn that generated franchise fees for new stores and penalty dollars from disgraced operators. “You got rid of franchisees that were trouble and you made money,” Zarco says, repeating witness testimony from a trial he litigated. “We had a [Dunkin’] loss prevention guy testify under oath that the department would set people up for failure.”
As a long-time protector of Dunkin’ franchisee interests, Lisa questions how the Inspire deal will be good for franchisees. “What I see is that we have valuable assets that we fought long and hard to maintain, such as [National DCP],” but for franchisees, he says, “I see a lot of minuses.”
According to industry expert Jonathan Maze, editor of Restaurant Business Magazine, “On balance, what we tend to hear from [Inspire Brands] franchisees is generally positive.” But, he also pointed out that the debt Inspire absorbed in the Dunkin’ acquisition could lead to “challenges in the franchisee relationship.”
One of Inspire Brands’ directors is former Dunkin’ boss Jon Luther. He was in the corner office when chief legal officer Steve Horn led the loss prevention unit, which may have been a factor in his early departure from the brand. While there is no reason to expect a return to Luther’s tactics, Luther’s knowledge of Dunkin’ was a likely factor in Inspire’s decision to make the deal—debt and all.
The days ahead will reveal how Inspire plans to generate revenue and cut costs. It is too early to know if those plans will harm franchisee equity. It is also too early to know whether Dunkin’ will still invite franchisees to the table so they can have a say in new brand initiatives—especially if those initiatives will require franchisees to absorb additional costs. As Lisa points out, even if Dunkin’ maintains its robust advisory council system, the Brand Advisory Council has no independent resources to operate outside the brand’s purview and get broader context on an issue.
“Franchisees may worry their equity is being threatened.” DDIFO is where franchisees will need to turn in the event there are problems ahead, Lisa says.
Zarco believes franchisees need to be on the lookout for any moves Inspire makes to generate revenue. “I strongly advise and suggest that franchisees unite to strengthen their already powerful voice because issues are undoubtedly going to arise,” Zarco says.
In this new year – with a new brand structure to consider – this may be the time for Dunkin’ franchisees to reconsider their relationship with DDIFO.