It sounds like a developer’s dream: open a Dunkin’ Donuts franchise near a major commercial building or hospital. Employees, visitors and patients will surely stop in for a cup of coffee on their way in, their way out or during a break.  Landing such a development deal would surely be profitable—even in a tough economy. But, as many franchise owners have learned, profits dry up and customer counts drop when the building lands its own deal to sell Dunkin’ Donuts coffee on-site.

Talk to any franchise owner in any market and he’ll tell you he is either being affected by one of these channel distribution deals—often called “office coffee”— or fears he soon will be. One franchise owner in Pennsylvania said his weekly sales dropped 40% after a commercial building near his shop established an office coffee program.

“Some people now walk right by our shop to buy coffee there because they know it’s cheaper. Of course it’s cheaper—they don’t have the overhead I do,” said the owner who asked his identity remain anonymous.

Office coffee is operated by Sara Lee through a deal with Dunkin’ Brands. According to a 2007 press release, “Sara Lee Foodservice is successfully partnering with Dunkin’ Donuts to be the exclusive provider of Dunkin’ Donuts coffee to foodservice customers across the United States. This exciting agreement gives Sara Lee the right to sell and market Dunkin’ Donuts coffee to offices and cafeterias.”

Carmen Marzella remembers attending the meeting in Michigan when office coffee was first announced. An attorney and franchise owner from North Carolina, Marzella was serving on the RAC at the time.

“They described at the meeting how this was going to not only be good for the brand, but also for the franchise owners,” he said. “They told us it would drive customers and increase overall sales.” Marzella hasn’t seen that spike in his market.

Dennis Gramm is an investor in HSG Restaurants in Indiana. He witnessed the impact of office coffee directly. After HSG invested a half a million dollars in a location next to the Howard Regional Medical Center in Kokomo, Indiana in 2008, Gramm noted almost a 100 customers a day stopped visiting the store because the hospital began serving Dunkin’ Donuts coffee.

“When we opened the store we experienced higher than anticipated sales. We expected that to level off, especially because the downturn in the auto industry was hitting Kokomo especially hard,” said Gramm. “But, once the hospital started selling Dunkin’ Donuts coffee, we started seeing an impact on sales.”

Gramm recalls talking to the food services administrator at the hospital who said they were selling three thousand cups of coffee a day. The hospital’s pricing was comparable to the HSG shop next door and it was much more convenient for hospital visitors and employees.

Franchise owners we talked with say they understand the Brand’s desire to increase sales through third party partnerships like the one with Sara Lee. What they don’t understand is why they are never informed of a new deal that will impact their sales and customer count.

According to Gramm, he would have created different economic forecasting for their Kokomo location had they known a deal was brewing with the hospital.

“Institutional use needs to be highly selective because it has potential to impact the viability of neighborhood stores,” he said.

DD Office Coffee Program thru Sara Lee

DD Office Coffee Program thru Sara Lee

Marzella points out office coffee and other channel distribution programs are permissible because there is no language in the franchise agreement that prohibits them. He and others say they’d like to see better lines of communication so that an owner would know that an office coffee program is about to start in their area—or that one is pending at a location they are developing.

If there is one bright spot amid the office coffee situation it is that coffee brewed in office buildings is typically of poorer quality than coffee made in the stores.

According to Gramm, more customers have returned to the store next to Howard Regional Medical Center in search of a better cup of coffee. 

“The hospital staff was telling our store manager the coffee wasn’t as fresh or flavorful so they had to come back,” he said.