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Michael Zill
mzill1@binghamton.edu
Professor Debi Mishra
MKTG 350 Channels of Distribution
December 5, 2013
Dunkin Donuts Case
The Dunkin Donuts case illustrates the issues with agency problems with and methods of
governing franchises by the franchisor. Through correct business models and management, the
groups on both ends of franchise businesses can work fluidly and in the same direction. However,
if the franchisee does not agree with the decisions of corporate or the management does not
believe the franchisee is living up to expectations, problems can result and be difficult to resolve
because of contracts, finances, publicity, etc. In addition, the company may encounter
complications when deciding how to grant franchise licenses to current and potential franchise
owners. Through careful planning and execution, companies can create successful franchises that
cooperate with franchisees and lead the entire company to greater opportunities.
At first, franchisee Tommy wants to buy out the store from Dunkin Donuts and turn it
into an independent coffee shop. Tommy has not had positive relations with Dunkin Donuts
because he believes that headquarters was not performing in his best interests and is ripping him
off (hence the 2000 lawsuit). When the franchisee believes the company is not performing in his
best interest, he or she may not cooperate with standards or directives from the company.
Therefore, he does not want to renew his contract, which is up in two years. In the end, Tommy
wishes to sell out the franchise, either to Dunkin Donuts for $80,000 or another franchisee,
although this option would probably result in a lower payout. Because of Tommys displeasure
with Dunkin Donuts, Tommy takes his money and buys out the building which he leased from.

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Dunkin Donuts is constantly unhappy with Tommys store because it consistently
performs below par and operates under a fairly old contract with outdated conditions. In addition,
the store is very close to Dunkin Donuts headquarters, which has made for negative press/
relations. Dunkin Donuts decides to definitely not renew Tommys contract in two years, and if
possible, disassociate from Tommy even sooner. At this point, Dunkin Donuts has adaptation and
lock-in problems with Tommy because of the contract they have with him, his tendency to work
towards his own goals, and the fact that Dunkin Donuts had little idea that Tommys franchise
would end up like this.
That said, Dunkin Donuts agrees to sell the franchise to Tommy for $50,000, or purchase
the store for $80,000. Both of these options seemed attractive to Dunkin Donuts because they
would disaffiliate from Tommy. Dunkin Donuts wants to prevent moral hazard, but cannot
reward Tommy for his below-par efforts. If they are to punish him, they risk retaliation and a lack
of cooperation with Tommy. When Tommy buys the building and becomes landlord, Dunkin
Donuts encounters agency problems and a conflict of interest, because they are making
purchase/sale deals for a store in a building that Tommy now owns. Tommy doubles his price from
$80,000 to $160,000, putting Dunkin Donuts in an awkward spot. No matter what, Dunkin
Donuts has to put up with Tommy as landlord, but now has to decide whether to pay Tommy
$160,000 or threaten to disenfranchise Tommy in order for him to lower the price or agree to
other options.
Dunkin Donuts has to invest $180,000 in the store and deal with Tommy as landlord no
matter which option was selected. If Dunkin Donuts agrees to pay the $160,000 to Tommy, the
company maintains satisfactory relations with Tommy, but loses out because of the high price
paid. If Dunkin Donuts threatens Tommy with disenfranchisement, Tommy might lower the price
of the store, but corporate would have to pay litigation expenses in dealing with negotiations, and

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would most likely have negative relations with Tommy as landlord. Dunkin Donuts also has to
consider why Tommy purchased the building that the store was situated in. The company would
surely not want Tommy to interfere with operations, which is possible given his longstanding
franchise ownership. The company also has to consider the negative press towards current/ future
franchisees and customers generated from corporate in harsh negotiations with a franchise owner.
The DSM certainly wants to maintain a positive image, while disassociating from Tommy. A
possible direction to take would be to down-bid Tommys $160,000 as low as possible and then
purchase the building from Tommy, which could then be sold to another, more reasonable person
to lease from. This option would be most ideal to avoid expenses other than that of the purchase.
Dunkin Donuts could then turn around and sell the franchise to Royce.
In the case of opening a new franchise in either Allston or Brookline, Dunkin Donuts must
carefully analyze each option through proper inspection of expected cash inflows/ outflows,
screening of candidates, and dealing with the communities involved. Besides the amount of money
each potential franchise could make, Dunkin Donuts must look at the potential of the
relationships with the franchise owners and determine which will be most beneficial and
progressive for the company.
To prevent adverse selection, Dunkin Donuts must engage in screening and signaling to
choose the correct option. Ultimately, the Allston option is more attractive to Dunkin Donuts for
a number of reasons. First, the location of the store has already been purchased and does not face
any objection from the community. Second, the total cost of setting up the store is $50,000 less
than the one in Brookline, and annual operating costs are approximately $40,000 less. Thirdly, the
projected annual sales from the Allston option are about $25,000 higher than those of the
Brookline option. Additionally, over $15,000 more of the Brookline option is financed by debt,
rather than personal finances. The Brookline option also faces opposition from concerned citizens

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because of the negative effects they believe the store will have on the community. However, the
Brookline is attractive in that the potential franchisee Herman has about double the assets as
Benito and has consistently maintained the highest scores from DSM in all aspects of the store.
Setting up the Allston store might result in more agency problems because of inconsistencies in
what the Dunkin Donuts corporation promises and what the franchise delivers. It might also
suffer greater financial distress in the event of unexpected drops in sales or unforeseen events.
The opposition from the Brookline Village Citizens Work Group is very real. The group has
many convincing reasons why the store should not open in Brookline, and a town hall meeting
could easily sway the community in favor of banning Dunkin Donuts. They say that the consensus
is that a drug store would be preferred in the location. In addition, they fear the traffic would
create danger for elementary school students. They also believe undesirable people would hang
around the Dunkin Donuts store. Further, the store would be located right next to a Catholic
church, which most likely has very strong ties to the community. It can be very difficult for brandname stores to infiltrate communities with a long history of locally owned shops because the
community likes to maintain its uniqueness and influence.
Dunkin Donuts role in dealing with the citizens group opposition should be that of a
community-friendly, consumer-orientated business with specific plans to address the concerns of
the public. Prominent employees in the business should attend the town hall meeting in order to
address the issues upfront and show that they care. Dunkin Donuts can point out the benefits of
having a coffee shop in the community, as well as prove how traffic/ safety of children will not be
affected greatly by the store. In addition, they can connect with the community by conveying their
simple store ideas and point out the economic benefit of having a strong brand-name store in
the neighborhood. The store could very well bring customers to surrounding businesses, thus
improving the local economy. As for the Catholic church next door, Dunkin Donuts could speak

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personally to those in charge in order to put to rest any fears the church might have about opening
up a store.
Dunkin Donuts must provide a framework that allows for franchise owners to maximize their
potential while management leads the entire company in the same direction. Through the use of
proper relationships (DSM) and involvement of franchise owners in company decisions, Dunkin
Donuts can increase their profitability, enhance the uniformity of store offerings/ image, and
engage in business partnerships that pursue the general benefit of all those involved.