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Like the baker who decorates his pastry with confectioner's sugar, Dunkin' Brands CEO Nigel Travis and his executive team use numbers to sweeten the story of success they present to Wall Street. Since Dunkin' Brands (DBI) went public in 2011, the stock has performed well--perhaps even better than many expected. It's more than doubled since the July 2011 IPO.

But that's the Wall Street story. The franchisee story--attaining proper shop economics, shop expansion, profits, return on investment--is a longer, more complicated game.

I monitored the two-day Annual Investor Session last month in Canton where the focus was, understandably, on the Dunkin' investor story. And, while there are some clear differences between the way the franchisor, its franchisees and the investment community view the world, overall Travis and his team did a fine job of presenting a sweet story which Wall Street believes, at least for now.

The Numbers Tell the Story, But Whose Numbers matter?

Investors like Dunkin' stock (symbol: DNKN) largely because of its expansion potential, low capital needs and predictable and growing franchisor cash flow. But that franchisor cash flow comes from franchisees investing, operating and expanding.

Perhaps that is why Travis revealed more about domestic, new store economics than any franchisor has done in recent memory. He indicated the annual sales average for new stores opened in 2012 was $936,000 with a $420,000 buildout investment and a 13-15% earnings before interest, taxes, depreciation and amortization (EBITDA) margin--resulting in a 25-30% cash on cash return.

It must be noted, however, that the EBITDA calculation above ignores franchisee capital expenditures (CAPEX), overhead and debt service requirements. Chief Financial Officer Paul Carbone noted the 25-30% cash on cash return in year one for the emerging and west markets but, that calculation ignores future year's CAPEX and maintenance CAPEX.

My opinion, based on studying several prior Dunkin' presentations and working with franchisees, is that franchisees generally need more than the 25% cash on cash return metric, and should say so the next time DBI asks their opinion.

Wall Street anticipated DBI raising the number of targeted US openings this year. Instead DBI retained its 2013 guidance at plus 330 to 360 domestic Dunkin' shop openings for this year--including the opening of the first Denver store in Q4 2013.

Going forward, however, Travis indicated the company will increase the US DD new store opens outlook for 2014, implying it would be 6% versus the previous guidance of up to 5%.

Dunkin' continues to promote the themes that the company is asset light and sees lots of white space available for US expansion. Travis makes the point that new stores opening within the expansion zone continue to improve their all-important first-year numbers.

Getting Products to Market

Now that Dunkin's western distribution center is up and running, DBI has a better story to tell with regard to its supply chain. At the investor session, Chief Supply Officer Scott Murphy noted the average national pricing cost of goods sold for a typical Dunkin' located in the southwest section of the US unit--most likely the Phoenix market, generated savings of 300 basis points or 3 percentage points.

Murphy says that is right on target. And, while he did not specify savings in other regions, it is anticipated that improvements to the supply chain as a result of the new National DCP Agreement will yield savings from the elimination of fuel surcharges, reduction in distribution markup and new sourcing.

One point of interest to franchisees in established markets involves the use of frozen products--JBOD--and fresh-baked products.

According to Murphy, DBI's product distribution goal is a combination of products baked in central kitchens (CML) for morning and early afternoon hours and JBOD products in the evening.

He also suggested that older CMLs, those at the end of their economic life cycle, would likely close and merge. When questioned about the development of CMLs in new markets, Murphy said, "Once 40 to 50 shops were gained, that capital would be injected and a CML built."

He did not address from where the capital funds would come or how a CML would service its debt and maintain its economics over time.

Franchisee and Franchisor Differences in Perspectives

The entire presentation theme typifies the difference in perspective between DBI and its franchise owners, what Travis calls a "pluralistic notion" defining the interests of franchisees versus the interests of the franchisor. He admitted there are--and should be--differences in philosophy, driven by profit differences.

Franchisor profitability and growth can conflict with franchisee profitability and growth. And, there is the way franchisor and franchisee view time. Dunkin' Brands--and Wall Street--emphasize short term metrics, which fundamentally differ from franchisees' long-term perspective. The franchise owner looks at the return on investment over the entire term of a contract that can span economic peaks and valleys.

Still, Travis and his team believe in recognizing these differences and being flexible enough to build bridges to success.

At one point the CEO was specifically asked about issues Dunkin' Donuts has with its franchisees.

He said, "It was tough to think about major disagreements. We redid the franchise agreement; we tackled the supply chain..."

It was the CFO, Paul Carbone, who noted the primary issue of contention was where to build new units and which franchisee(s) should be allowed to proceed first.

Chief Operating Officer, Paul Twohig addressed new store development and, the sensitive topic of cannibalization. He said DBI used market site intercepts and market surveys.

But, at the end, determining how many new units to build and how close those should be situated to existing locations came down to both art and science.

The Future

On Wall Street, every quarter tells a new story. For Dunkin' Brands, key factors that will foster brand visibility and sales growth in emerging markets include robust national cable television advertising and the presence of Dunkin' Donuts products in the grocery channel.

DBI, like many successful companies, sees the value in collecting data on its customers through its customer relationship management (CRM) program which helps drive new marketing initiatives, like the DD Perks program and the DD mobile phone app.

These initiatives can assist new and existing franchisees increase customer counts and unit level economics--which translate into profits for both the franchisee and the franchisor.

Wall Street has learned that Dunkin's asset light story really puts the pressure on franchisees to invest capital, time and effort into building new locations and expanding existing ones. So far, the investor community likes what it sees and hears.

As I write this, Dunkin' stock is peaking and Travis is proudly pointing out how the company culture has changed since 2008, becoming a more operations focused and franchisee-friendly culture.

Travis's philosophy and DNKN's performance are fundamental to the Wall Street story.

But, the Dunkin' franchisee story is more complicated. What remains to be seen is whether long-term returns on franchisee investments, and the collaborative spirit with Dunkin' Brands will hold up in the face of increased pressure to close the white space and keep the profits--and the coffee--flowing.

For more of John Gordon's articles, please read here.

A Dunkin’ Donuts that actually meshes with its urrounding neighborhood: Ben Walsh, deputy commissioner for business development in Syracuse, and Dominic Robinson, director of the Northside Urban Partnership, see the new restaurant as a model for citywide development

Sean Kist of the Post-Standard reports that there are many quiet reasons to be happy about a new Dunkin’ Donuts at North Salina and Division streets in Syracuse. The place is a reminder of why urban design matters, and it demonstrates what can happen when you bring together concerned merchants and a developer who listens.

Most important, it serves as a kind of memorial to Richard Wiese Jr., a relentless and tenacious neighborhood advocate.

“Oh, yeah,” said his widow, Betty Wiese, owner of the Lewis Uniform Co. on the North Side. “He always enjoyed a good fight.”

Rich Wiese, who at 63 died unexpectedly in January, was chairman of the Greater North Salina Street Business Association.

For years, the members looked with longing at the empty lot at North Salina and Division. They’ve always believed North Salina has a business district of unusual historical integrity, and with the right energy — and the right investment — it could be a vibrant hub.

So the association grew worried when it learned the Wolak Group — a Maine company that’s built about 80 Dunkin’ Donuts restaurants — intended to put one up on the corner. “We’d been hoping for a three-story building there, with underground parking,” Betty said. The immediate fear was that a traditional “big box” fast food joint would diminish the overall flavor of the street.

Yet the developer rejected a confrontational approach. Ben Walsh, deputy commissioner for business development in Syracuse, and Dominic Robinson, director of the Northside Urban Partnership, said the Wolak Group and its architect, Bob Abbott, offered a design that quickly addressed many concerns. The building, for instance, would be flush with the sidewalk — in the fashion of other old North Salina storefronts.

“We wanted it to have the look of a Dunkin’ Donuts, but we also wanted to fit into the area,” said Tom Santurri, Wolak’s vice president of operations and franchisees. Still, there were two sticking points when the idea went before the city Planning Commission. Neighbors called for residential units on the top floor, and they were concerned about a proposal to create a North Salina exit for a drive-thru window.

Read more at: Post-Standard

DDIFO Sponsor Plotwatt, the Durham based Technology Company that provides energy management solutions to businesses and homeowners throughout the United States, has been invited to present its data, technology innovations, and results to the White House Office of Technology and the Department of Energy as part of the Green Button Initiative.

The DOE’s Green Button initiative is designed to provide electric utility consumers with access to their detailed energy usage. 

Plotwatt’s patent-pending technology measures this usage either directly from the electrical breaker boxes in commercial installations or from smart meter data in residential installations.  That software technology then “learns” how each electric appliance in a business or home operates and is able to show customers usage, cost per month for each appliance in electricity charges, and how to reduce energy consumption and cost.

“Plotwatt is very excited about this opportunity”, stated Luke Fishback, CEO of Plotwatt.  “Plotwatt has been working with The White House and the DOE for a year and we’ve provided results well above the standards set by the Green Button initiative.  We have thousands of residential installations and our commercial division is working with multiple franchised quick-serve restaurant concepts. 

Using our technology customers can plainly see the reduction in energy consumption and the reduction in monthly electric charges”.

PlotWatt is a technology company that helps multi-location businesses and homeowners save money by reducing energy bills and improving appliance management. The company, headquartered in Durham, North Carolina, was founded in 2008.

As winners of the 2011 GE Ecomagination challenge and recipients of over $4 Million in grants, prizes and investment the PlotWatt team of scientists, mathematicians and computer programmers is committed to finding simple, low cost ways to save you money on energy bills.

North Carolina Dunkin’ Donuts franchisee Pete Turner worked with Plotwatt to analyze his restaurant power consumption in real time and recommend efficiency changes, and had this to say. 

“These changes have resulted in thousands of dollars of savings annually at our flagship DD/BR next to the Duke campus.

They also offer notification via text msg if say a freezer compressor doesn’t kick on in a certain amount of time.

Additionally, they offer automatic monitoring of refrigeration temperatures which eliminates the need for crew to take temps every 4 hours.   It results in immediate savings.

The future belongs to the efficient and Plotwatt is all about efficiency.

Plotwatt is a Sponsor of the DDIFO National Conference at Mohegan Sun and exhibited the details of their program last Friday September 28th at the DDIFO conference.

Thursday, September 27th

11:00 am - 5:00 pm DDIFO Board of Directors Meeting
6:00 pm - 9:00 pm Dunkin' Donuts Franchise Owners Gala Dinner and Hall of Fame Awards Ceremony

Friday, September 28th

8:30 am - 10:00am Registration: Networking, Breakfast; Sponsor Booths Open for Business

10:00 am - 10:15am Great Hall Welcome and Opening Remarks: Matt Ellis, Emcee

10:15 am - 11:15am Great Hall "Dunkin' Brands' stock ownership shift" John Gordon, DDIFO Restaurant Analyst discusses how the exit of private equity and the emergence of institutional investors will impact franchisees

11:15 am - 12:15 pm Breakout sessions

Nipmuc Room - "Implementing the Affordable Health Care for America Act" Dan Field of Morgan Brown & Joy presents guidelines for implementing federal healthcare reform laws in your business, so you can stay ahead of the curve.

Shinnecock Room - "A Thousand Voices in the Choir is Effective and Impressive" DDIFO Government Affairs Director Joseph Giannino and incoming DDIFO Executive Director, Edwin Shanahan, examine specific examples of how legislation and regulation could impact your bottom line and share different strategies to protect your interests.

Great Hall "Dunkin' Donuts Market Development Panel"

Panel discussion moderated by Professor Patrick Kaufmann, Boston University Marketing Department Chair.

Panel includes: Whayne Hougland, Executive Director and General Counsel of the Long John Silver's Franchise Association and the Fazoli's Franchisee Association; Attorney Eric Karp, counsel to numerous franchisee associations; Steve Gabellieri, Dunkin' Donuts franchise owner and former Vice President of Operations for Dunkin' Brands.

12:45 pm - 1:45 pm Buffet Lunch;

Sponsor Booths Open for Business

1:45 pm - 2:00 pm Great Hall "Proud to be a DD Franchisee" Jim Coen, DDIFO President

2:00 pm - 3:00 pm Great Hall Keynote Address: "An Afternoon with Sean Tuohy"

3:00 pm - 3:30 pm Great Hall "Town Hall Meeting" Question and answer session with franchisee leaders and DDIFO members

3:30 pm - 5:00 pm Open Session: Networking, Refreshment Break; Sponsor Booths Open for Business

5:00 pm Conference Ends

For More Information about the event Click Here.

To register for the Event Click Here.

After six year of ownership, the trio of private equity (PE) firms that purchased Dunkin’ Brands for $2.4 billion, has effectively cashed out their remaining 30 percent stake. Bain Capital, Carlyle and TH Lee took a $500 million stock buyback in July 2012; the trio had already cashed out their investment through stock sales initiated after the July 2011 initial public offering (IPO).

This was not unexpected as private equity firms typically have an investment window of five to six years. Recently the Washington Post reported the PE firms earned $1.8 billion profit on their ownership of Dunkin’ Brands (DBI). Because Bain and Lee are not publicly traded companies, the exact amount is not known. The firms made their money chiefly through management fees, a percentage of the investment gain, and their own DNKN stock gains.

So, while the basic mission of DNKN remains the same – grow the brand, support the stock price and make money – the environment its leadership faces is changing. 

New owners are institutional investors, their mindset explained

Based on SEC filings to date, it appears that the following three institutional investors will comprise 68.1 percent – or the vast bulk of the DNKN’s total ownership: 

•  Fidelity Investments (seven separate funds), 38.5%
• Prudential and its money management firm, Jennison, 19.2%  
• Morgan Stanley (two funds) 10.4%  

This is extraordinarily highly concentrated ownership versus other stocks.  The top three investors will have significant power and attention.

Other significant investors include Vanguard, Oppenheimer and Hartford (9.9% combined). One hedge fund investor, Coative Management, owns 3.7%. Company insiders, chiefly Jon Luther and Nigel Travis, own 2.7%. It is estimated that Dunkin’ franchise owners have just a tiny ownership portion, less than 1%.

Institutional investors (e.g., mutual funds, pension plans) are passive investors and tend to be hands-off operationally, yet are oriented towards extraordinary stock price returns. Most of their shares trade via computer programs. They receive large amounts of attention from company executives and stock analysts.

Expected Impact on DNKN

Dunkin’ Brand’s leadership will face environmental changes.

Unlike those from the PE trio which was focused on improving and brand, receiving dividends, shepherding a successful IPO and then exit, the new institutional stock owners are focused on long term growth and stock price.

Both Nigel and the new CFO, Paul Carbone must now spend considerable time with the new investors. The players will be different than interfacing with the prior Bain and Carlyle board members who had an extensive prior retail and restaurant focus.

Josh Kosman, the merger and acquisitions (M&A) reporter for the New York Post indicated via an interview he felt that the new institutional investors would “certainly be less hands on, but would be focused on long term strategies to maintain growth, versus the more short term focus that Bain, Carlyle and TH Lee typically employ.”  

Secondly, DNKN needs to reconstitute its board and find a new majority – independent board members that are not aligned with the company. Right now, only three of eleven directors aren’t part of the prior PE or company ownership group. One independent director now on board is Raul Alvarez, the former McDonald’s chief operating officer who retired in 2010. He could be a candidate for the lead independent director role, an official board position of power and influence.  Jon Luther cannot be in that role.

Some of the PE group directors will stay on until their terms expire in 2014 or 2015. Luther and Travis are on the board with 2014 expiration terms.

DNKN will also need to establish a funding mechanism for dividend payouts and stock buybacks – while remaining in compliance with their lender covenants. This will cause internal funds reshuffling. Last year DNKN posted $245 million in earnings before depreciation, amortization, interest and taxes but only $34 million in net income.

It’s clear the future focus is going to be on same store sales, unit growth, reported earnings and return on capital.  These are the metrics that drive stock prices, over time.

Finally, DBI executive bonus targets may change, to be more challenging. Currently Travis and team have primary, secondary and personal goal targets. Total revenue, same store sales and EBITDA are among the current targets.  Likely, same store sales and earnings growth rate will be more highly ranked in the future.

Pressure of being a highly priced company

Among some investors, there is the perception that DNKN stock is overvalued and likely to miss targets. Spending more time with the institutional investors will be necessary to relieve those concerns.

With DNKN’s high stock multiple (2011-2012 rolling year price earnings ratio of 33.5 to 1 on an adjusted basis) the pressure will be on to meet growth targets. Restaurants typically trade in the 10 to 20-times earnings range. DNKN must hit both the revenue and earnings guidance that it gives, but also the generally higher forecasts the analysts create. Thus, it can’t low ball the projections   

Will history repeat itself?

Kosman noted that two other restaurant chains which were part of Bain’s investment portfolio – Burger King and Dominos – had rough times after the PE firms exited. Burger King began a massive decline in 2009-2010, seven years after Bain’s purchase and three years after its 2006 IPO.  A new PE firm, 3G Capital, is now in control and has cut costs in order to achieve favorable U.S. sales momentum. But franchisees suffered along the way.

Bain purchased Dominos in 1997 and its U.S. trends flattened and later declined between 2006 and 2010. Despite some international growth and a stock price peak in 2010-2011, thanks to improving macro restaurant/pizza sector trends and the introduction of its 2 pizzas for $5.99-each promotion, U.S. Dominos unit counts have been flat and U.S. franchisee profitability has not been enough to sustain new store growth.

Many industry observers, including this analyst, feel that the Dunkin’ Donuts brand, and especially its U.S. Dunkin’ Donuts franchisee base, gives it a stronger position versus those brands. Dunkin’ franchisee economics is stronger than those of both Burger King and Dominos on a per unit basis.

Recommendation going forward: be vigilant, communicate

Franchisees should carefully monitor DBI and be on alert for short-term stunts that could help DNKN achieve positive quarterly numbers but could actually weaken Dunkin’ Donuts structurally. Typically, those revolve around  marketing execution (same store sales gains versus store profitability), new product development and licensing, over development of new shops and risk of cannibalization, sale/resale of shops and territories; and other ways DBI can make money by stretching existing practices. If and when that happens, franchisees should use their communications capabilities to be sure investors and consumers understand how ownership could be damaging the long-term viability of this beloved brand. 

John will be speaking at the DDIFO Annual National Conference at Mohegan Sun on Friday September 28th, 2012. For more information Click Here.

The Greater Boston Chamber of Commerce threw its support today behind a new health-care payment reform bill filed by the Legislature's conference committee, saying it was a step forward for health-care affordability and transparency.

"It sets a goal for health-care costs that builds on the progress we've made over the last 18 months, while preserving the innovation that drives our health-care system," said Chamber Executive Vice President Jim Klocke.

Chamber officials said Bay State health-care premium growth slowed in recent months, driven in part by new agreements between insurers and providers that move away from the fee-for-service model.

"The legislation will also help patients make more informed choices, by providing access to information on health-care costs and quality," Klocke said.

Retailers are also praising an amendment on Gov. Deval Patrick's desk that repeals the fines businesses are charged for hiring too many employees that already have insurance under a different health-care provider.

Businesses are currently fined $295 per employee per year for uncovered workers, unless the business offers prime insurance and has an enrollment rate over 25 percent, said Vincent Errichetti, executive director of the Restaurant and Business Alliance, adding the amendment particularly benefits veterans, students, retired people and spouses.

"The math of the formula just was really hurting small businesses because small businesses couldn't afford to absorb those types of costs," Errichetti said.

"Paying for insurance and paying for a penalty is not fair," added Robert Branca, chairman at Dunkin' Donuts Franchise Owners Mass PAC. "The penalties to me seem needless. They don't modify my behavior one bit. They just cost extra money that I could put into expansion."

Jon Hurst, president of the Retailers Association of Massachusetts, called the amendment "the number one win of the two-year session for small businesses."

"It's a reform of the Fair Share assessment and there have been too many businesses, not just retail, that have been unfairly assessed for employees that are fully insured yet opt to buy insurance from a spouse, the spouse's employer, from parents, some other source," Hurst said. "Whether it was real or not there were a lot of employers reluctant to grow because they didn't want to have to deal with red tape or potentially more insurance costs associated with the 11 full-time equivalent threshold. That should help us gain more jobs in the small business sector."

The DD Independent Franchise Owners (DDIFO), which represents the largest independent association of Dunkin’ Donuts franchise owners in the US, is pleased to announce the appointment of Edwin Shanahan as the new Executive Director of the organization. Shanahan officially starts on July 30, 2012 and will work alongside DDIFO President Jim Coen who will remain in his role until November 30.

“We are excited to bring someone of Ed’s talents and abilities to the DDIFO team.  His demonstrated experience in government relations, trade association leadership, and membership advocacy issues will serve our DDIFO members well,” said DDIFO Chairman Daniel Connelly.

Shanahan is a graduate of Central Connecticut State University and previously served as CEO of the Greater Boston Real Estate Board, where he helped grow the association to 7,000.

The DDIFO Board of Directors, along with the franchisee roundtable leadership team, decided to bring Ed on board prior to Jim’s departure to ensure a smooth and seamless transition. Among his first duties as Executive Director, Shanahan will embark on a listening tour which will enable him to sit down with as many DDIFO franchisee members and support team personnel as possible.

“Organizations such as the DDIFO must be ever vigilant in their defense of both the opportunity and the promise of small business.  It is a noble cause to represent the men and women who’ve taken the risks, dedicated the time and undertaken the extraordinary effort to ensure a business’ success, and to have their trust and support to move this organization forward in that regard is both humbling and at the same time, inspiring.”

Franchisees interested in taking part in the listening tour can contact Ed directly by phone: 617 549-0884; or by email at [email protected] or [email protected].

Media Contact: Contact:

Matt Ellis

Ellis Strategies, Inc.

[email protected]

This is a must listen! Click Here to listen to Robert Branca on the Jeff Katz Show talk about a Bad Law!

Robert Branca, a Dunkin’ Donut franchisee in Mass, NY, Ohio and Fla., spoke to Jeff Katz a radio talk show host in the Boston area on AM 1200 this morning (7/19/2012) at 8:30 am.

They may have gotten his title wrong but he did a great job in explaining how all the good intentions legislators have and many times it is warranted, can lead to monumental problems for small business owners and in the case of the tip pooling law in Mass. negatively impacting lower wage workers and even the customers of the establishment.

Changing a mistaken law is one of the hardest things to do, because people who benifit from that law, defend it. In the case of the tip-pooling law, plaintiff attorneys are benefiting by suing Dunkin’ Donuts and Starbucks because of the ambiguity written into the law.

DDIFO, DDFO MassPAC, RABA, Starbucks and others have joined together to try and get the law changed. This legislative session closes July 31, 2012 and we need to do everything possible to change the law.

If you are a Massachusetts residence and ask you State Senator to SAVE THE TIP CUP, to find your State Senator Click Here!

Read Senator Rodrigues, one of the orginal sponsors of the the tip pooling legislation in 2004, letter to Senator Joyce urging his committee to add an amendment to change the law.

As Chicago customers popped into the Dunkin’ Donuts at 1519 West Madison for their everyday morning fuel on June 1st, they might have looked up and wondered what on Earth Mrs. Illinois Lisa Sonnenberg and Bulls broadcaster and former NBA great Bill Wennington were doing hanging out together up on the roof with a bunch of local police officers.

Sonnenberg and Wennington were two of the celebrity guests who appeared to help Dunkin’ Donuts franchisees across the state raise money for the Illinois Law Enforcement’s Torch Run. Each year 3,000 police officers march 1,500 miles, carrying the Flame of Hope to its ultimate destination in Normal, Ill., for the Special Olympic Games.

The Chicago-area store to raise the most money was 12371 Derby Road in Lemont, Ill., which totaled $6,602.24. The statewide response was incredible – Dunkin’ Donuts across Illinois raised a grand total of $243,000, crushing 2011’s total of $215,000. The “winning” store in the state was 2306 E. Oakland Avenue in Bloomington, Ill., at a whopping $8,400! Other participating Chicagoland Dunkin’ Donuts included Batavia, Naperville, and Willowbrook, Illinois.

Hosting the event was the Illinois Dunkin’ Donuts franchisees’ way of helping state police officers “shout from the rooftops” to raise money and increase awareness about Special Olympics.

Dunkin’ Donuts franchisees in the Chicago area held their annual “Cops on the Roof” event to lend financial and community support the Illinois Law Enforcement Torch Run, which benefits the Special Olympics. For the 10^th year in a row, police officers staked out rooftops at about 130 Dunkin Donuts in Illinois starting at 5 a.m.

Local police officers carry the Flame of Hope to support the Special Olympics.

In exchange for these officers “doing time,” Dunkin’ Donuts donated to the cause. They also donated a free donut to every customer who visited the cops and gave to the cause, and generous givers (over $10 amounts) received even more free goodies like a Torch Run travel mug and a free medium coffee.

Lisa Sonnenberg is the stunning winner of the 2012 Mrs. Illinois pageant. Bill Wennington is a retired Canadian basketball player who won three NBA championships with the Chicago Bulls.