Sales and Distribution Management

Dunkin Donuts (E) : 1988 Distribution Strategies

Group - 1 Section A

About Dunkin Donuts

Started in 1950 by William Rosenberg as a coffee and doughnut shop in Massachusetts Pioneer in Business Format Franchising By 1987 1478 stores; 1449 franchised Also sold Muffins, Croissants, Cookies, Soup & Croissant sandwiches Presently 10,000 outlets in 32 countries No. 1 ranking in Customer Loyalty (Coffee) Franchisee reported sales of $6.4 Billion
William Rosenberg's philosophy was, "Make and serve the freshest, most delicious coffee and donuts quickly and courteously in modern well-merchandised stores.

About Dunkin Donuts

Vision - To be recognized as a company that responsibly serves our guests, franchisees, employees, communities, business partners, and the interests of our planet. Values Respect for their employees, franchisees, Farmers & Communities Passionate about their offerings Sense of service Society, Community Sustainable Living Concern for Planet

Customers
Association Customers strongly associated the store with donuts (85%,75%) and coffee (30%, 52%). Purchase reasons Customer chose Dunkin Donuts primarily because of the freshness and the consistency of the product. Convenience was another purchase reason. (on the way to home or office work related purchase) Satisfaction level High and flat the company found it tough to increase the satisfaction level and doughnut was getting the lowest scores.

Customers
Segmentation
based on

Consumption Location

Purchase Occasion

Time of last purchase occasion

Frequency of Purchase

Weekday In shop - 3 In Car - 4 Family 70% At work - 2 Social -11%

Breakfast/Snack at shop Breakfast/Snack Takeout Noon Snack Takeout Late Night Snack Takeout

Heavy -22%

Medium 48%

Weekend

In Home - 1

Work -19%

Breakfast/Snack Takeout Late Night Snack Takeout

Light- 30%

Focused development strategy

Development was done in already high penetrated areas Shops only in 168 out of 334 U.S Standard Metropolitan Statistical Areas(SMA) 423 new stores opened but only in 75 different SMAs Concentration was increased in a small number of markets

Fear & greed factors

The perception that the competing new or existing franchises might take away their current market share in their area. So franchises tended to expand in their own area rather than watching someone else set up a store in their area This led to uncontrolled development in certain regions.

Difference between the regions

Region 1 Region 2

Integral part of development strategy

Expansion due to fear and greed factors Expansion was solidified Twice the store sales as that of Region 2 Less number of rent relief shops Continuity of ownership

No focus given in the development strategy

Relatively little franchise expansion activity Haphazard expansion Less store sales Double stores on rent relief Not found

Immigrant franchises
Negative consumer reaction Managerial challenges like language barriers and cultural differences

Reverence of food among these communities led them to retain the items beyond the freshness limit and thereby spoiling the image of Dunkin Donuts good quality
Solidarity levels were high

Franchising
Two types of franchising :
1. Business Format Franchising Right to reproduce the business formula and systems 2. Product Franchising Independent business operations by franchisee; contractual outlet for branded goods

Dunkin Donuts opted for Business Format franchising Pioneers in Franchising System
International Franchisee Association Dunkin Donuts University

Issue: Expansion of franchisees Dunkin Donuts Franchisee agreements:

1. 2. No territorial Exclusivity Formal Grievance procedure only if company develops property for new outlet

Franchising
Conflict Management procedure
Existing franchisee can object to the location of new outlet with extensive evidence of expected effects Committee might form a solution or recommend on decision of opening the shop Right to open the shop rests with the company irrespective of committees recommendations

If outlet is franchisee developed

No grievance procedure antitrust law Company screens the locations Site Deficiency letter

Franchising
Development burden shifted to Franchisees
Staffing problems and high administrative costs in Company- operated shops Decline in rental income due to decline in sales growth Escalating development costs Increasing franchisee objections to expansion

Return on investment declined

Sub franchising: (i) company owned stores can be established (ii) This type of franchising is beneficial when company tries to adapt to the local habits (iii) Stores development is not pre-determined Exclusive: (i) company owned stores cannot be established (ii) This is beneficial when company tries to standardize the operations to have efficiency (iii) Opening schedule of new stores have to be planned before signing the agreement

Franchising
Evolution of Franchisees:
Company developed to franchisee developed
Early 1980s 80% of all new franchisee-operated shops were company developed 1987 80% of all new shops were franchisee developed Franchisee developed More committed to business with higher returns for the company

Shop Operations
Franchisees had to manufacture their Donuts unlike just selling it Franchisees with no experience had to manufacture and as well as manage retail operations Operated in 3 shifts (11PM to 6AM, 7AM to 11AM, 12 PM to 7PM) Region II experienced lot of absenteeism during 11PM to 6AM shift In Region I bakers rate was high which reduced the companys overall margin Often family members had to lead with the retail customers As sale of Donuts reduced from 1968 to 1988 the company increased the complexity by line extension Apart from this company also faced over capacity issues where it was able to produce just 140 dozens of donuts/ shift Two third of the donut was produced during 11 PM to 6 AM shift

Issues
No territorial exclusivity for franchisees
New franchisees drew customers away from existing franchisees Formal grievance procedure was also not rigid

Decreasing ROI due to heavy investment in real estate related to business

Decline in sales growth also contributed to reduction in ROI In the franchisee-owned outlets, Franchisees started selling their franchise after the breakeven Franchisees incapable establishing their own property expected company to develop sites

Concentrated development strategy provided company with lesser opportunity to expand in other regions
They had little/no recognition in other regions They were hesitant in investing in those regions to achieve market penetration

 Franchisees, who were immigrants, faced language barriers and cultural differences Staffing was extremely difficult
Night shift bakers often did not turn up Franchisees had to find replacements to perform the job Front-of-the-store staffing was also a serious problem This reduced their profit margins

Over capacity of existing full producing units

Lack of trademark recognition in unexplored territories and market saturation in highly penetrated areas were the reasons

Increased complexity due to extended product line Lack of aggressive promotions due to fear of losing out margins

Distribution Strategies
The management was convinced that the decreasing sales growth, stiffening competition and worsening sales to capital ratio required a new emphasis on expanding distribution We know were not going to get people to eat a lot more doughnuts, but by increasing our distribution we can get a lot more people to eat our doughnuts
Tom Schwarz, President of Dunkin Donuts

Three approaches:
1. New Markets 2. Sale of Branded Products 3. Opening Satellite retail outlets

New Markets
Opening new stores in less saturated markets Either through focused company development of specific markets or through use of area franchising Focused Company Development: Dunkin Donut enters new or underdeveloped markets sequentially, opening the stores necessary to achieve economies of scale, before moving on to the next market.
CRITIQUE: Would avoid the haphazard development currently prominent in region II thus driving growth in less saturated markets. However, would require Dunkin to take an active role in the development of real estate for the sites

New Markets
Area Franchising: Could take two forms Sub franchising(the master franchisee had exclusive rights to sub franchise to individual operators) and Exclusive development franchising(Franchisee purchases the exclusive rights to a territory and agrees to operate a specified number of shops in the area within a specified time period)
CRITIQUE: Sub franchising added another layer between the franchisor and operating franchisee. Exclusive development franchising resembled company owned shops in large areas Both types allowed franchisor to expand quickly in new markets. Also, did not require company to invest in development of properties.

Branded Products
Supply branded products to convenience store chains Local franchise could deliver fresh products twice daily to 10-15 convenience stores
CRITIQUE: Possibility of friction between franchisees in more saturated markets.(need to design system to allocate specific chain outlets to franchisee) Quality control would be a significant problem(need for franchisee to check stores and ensure product freshness) Franchisees did not see the benefit of switching to branded products when they were already supplying unbranded products.(Similar margins, with added responsibility of delivering products)

Satellites
Non producing units, which were serviced from full producing units Could take the form of a storefront, a stall in a mall or a cart in a train station Lower cost and more profit margins than a full producing unit
CRITIQUE: Coordination would be difficult Additional investment burden for franchisees

The way forward..

Combination of New Markets and Satellites Because of intense competition in region 1, the sales growth is almost stagnant for Dunkin. In order to have an increase in sales growth , entering new markets stand to be the better option. Entering new markets would mean being unaware of customer behavior and preferences, hence making Sub franchising the correct model. (region 2)

The way forward

Region 1 wherein Dunkin already does well, will look to drive growth through satellites Satellites : Dunkin Donuts + Baskin Robbins Considering Dunkin Brands owns the Baskin Robbins brand as well, combining it with Dunkin Donuts in the same outlet serves to make a much profitable use of the prime sites acquired The main reason is that the peak sales for doughnuts and ice creams differ dramatically. Whereas the majority of doughnut sales are in the morning, ice cream sales peak in the evening

Policy for micro-territories

Segment the territories on the basis of sales and profits into under-developed, developing and developed Territory size are smaller for developed market and larger for under-developed markets Dunkin Donuts will assess how many and what type of outlets are optimal for a territory Exclusive territory development only for the under developed markets Let the developed markets include more than one franchise In case the franchise in a developed market wants to retire, the first right to buy his store goes the existing franchise

Thank You!