Sales and Distribution Management

Group - 1Section – A

Dunkin Donuts (E) : 1988 Distribution Strategies

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

CustomersAssociation•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

Consumption Location

Segmentation

Purchase OccasionTime of last

purchase occasionFrequency of

Purchase

In shop - 3

In Car - 4

At work - 2

In Home - 1 Work -19%

Family – 70%

Social -11%

Light- 30%

Medium– 48%

Heavy -22%Weekday

Breakfast/Snack at shop

Weekend

Breakfast/Snack Takeout

Noon Snack Takeout

Late Night Snack Takeout

Late Night Snack Takeout

Breakfast/Snack Takeout

based on

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 SMA’s

• 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 No focus given in the development strategy

Expansion due to ‘fear and greed’ factors

Relatively little franchise expansion activity

Expansion was solidified Haphazard expansion

Twice the store sales as that of Region 2

Less store sales

Less number of rent relief shops Double stores on rent relief

Continuity of ownership 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 Donut’s 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.No territorial Exclusivity

2.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 committee’s 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 company’s

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 we’re 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 areasBoth 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 difficultAdditional 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!