Dunkin’ Donuts – the birth of a new distribution and

franchising concept
Ruth A. Schmidt
Acting Head of Department, Department of Retailing and Marketing, the
Manchester Metropolitan University, Manchester, UK
Brenda M. Oldfield
Research Assistant in the Department of Retailing and Marketing, the
Manchester Metropolitan University, Manchester, UK

Dunkin’ Donuts is a global pre-eminence. A rapidly changing environ-

retailer of coffee and bakery Introduction ment and strong competitive pressure from
products. The company is 99 Dunkin’ Donuts is a wholly owned subsidiary other fast food operators serve to stimulate
per cent franchised and has of Allied Domecq plc which operates world- the corporate management team to strive to
used the franchising system wide, making and selling coffee, doughnuts, be innovative in experimenting with alterna-
as a route to market entry and other related bakery products. Founded tives to organic growth. The aim is to identify
and expansion worldwide. The in the USA in 1950, the business started inter- and test ways of accelerating the achievement
original historic roots of the national expansion in 1970, was acquired by of pre-eminence. Ultimately the goal is to
company are in the USA and Allied Domecq in 1990, and is now the world develop those paths which prove successful
despite wide international leading retailer in its field. into new franchise opportunities.
expansion since the 1970s, The company mission statement clearly
the US market continues to sets out a continued emphasis on growth and
serve as a testing ground for market leadership: “Our dream for the future Business format franchising
innovations prior to interna- is to be among the world’s most recognized
tional roll-out. Based on The Dunkin’ Donuts’ chain is 99 per cent
and respected brands. To accomplish this, we franchised. Each franchised outlet pays 4.9
observation and key infor- are passionately committed to pursuing the
mant interviews with core per cent of total sales revenue to Allied
following values in every interaction with all Domecq plc. Traditionally, site selection has
members of the management those whom our system touches:
team during a visit to Rich- always been very much in the hands of the
• trust and integrity; franchisee. The franchisee typically finds the
mond Project in 1994, the • teamwork;
case explores the initial site, does all the work to evaluate the pro-
• continuous improvement and learning; posed site’s potential, making use of Dunkin’
phase of the introduction of a • joy.
central production facility as Donuts’ “location data report” which is a
an innovative route to pre- Our mission is to be the pre-eminent retailer vehicle containing all the company’s criteria
eminence in one test market. of high quality coffee, doughnuts and related for site evaluation. This is then presented to
Strategic and operational bakery, snack, and beverage products in each the development manager whose responsibil-
issues are discussed, high- market in which we compete. In addition, we ity it is to verify the report. The franchisee is
lighting the differences and wish to be pre-eminent retailers in these responsible for negotiating the lease with the
efficiency gains of the central product categories as measured by total sales landlord and then works with the Dunkin’
production facility cum satel- versus any of our competitors throughout the Donuts’ construction managers to work out
lite store approach compared USA.” plans for the store and to construct the facil-
to the traditional stand-alone In the USA alone, Dunkin’ Donuts ity. Historically, the Dunkin’ Donuts concept
on-site production approach. currently generates an annual sales volume has operated on the basis that doughnuts are
Implications for future devel- of $1.4 billion. Pre-eminence in a local market manufactured and sold on the franchised
opments are discussed. is defined as 4.5 per cent of consumer expen- premises. Prospective franchisees spend six
diture on fast foods and multi-media advertis- weeks at the Dunkin’ Donuts University,
ing expenditure to match the cost of 44 weeks’ where they learn bakery and equipment
TV exposure. The number of distribution handling skills, and receive training in qual-
points needed to achieve this is based on the ity control, health and safety, human resource
This case is based on
information obtained in the area population and advertising. Each store management and basic accounting skills.
autumn of 1994 and should contributes 5 per cent of sales revenue to Even though Dunkin’ Donuts features the
be interpreted on the basis corporate advertising. Currently the national advantages of having the back-up and
of information available to sales average is $10,500-$11,000 per store per economies of scale associated with a strong
management at that time. week. However, where pre-eminence is franchisor, the responsibility of managing
achieved, sales can go up to $17,000 per week. and building the business is essentially retail
Dunkin’ Donuts has already accomplished driven. In the USA, the Dunkin’ Donuts
pre-eminence in some parts of the USA, e.g. system organises the franchisees into 65
British Food Journal the Boston area surrounding the corporate districts and six zone advisory councils.
100/2 [1998] 119–124 headquarters. The experience of operating in Operating standards, sales and profitability
© MCB University Press these areas serves as a yardstick to set targets goals are agreed between corporate manage-
[ISSN 0007-070X] ment and the zone advisory councils and
for other areas currently striving for
[ 119 ]
Ruth A. Schmidt and communicated to the other franchisees
Brenda M. Oldfield through newsletters, shop visits and meet- Competition
Dunkin’ Donuts – the birth of ings. A key determinant in the power balance In the drive towards pre-eminence in the
a new distribution and between franchisee and franchisor is the fact
franchising concept Richmond area, Dunkin’ Donuts have to com-
that the buying of raw materials is controlled pete on two key fronts, coffee and doughnuts.
British Food Journal
by the franchisees. Negotiations are carried In markets where Dunkin’ Donuts have
100/2 [1998] 119–124
out through co-operatives owned and oper- already achieved pre-eminence, such as the
ated by the franchisees on a regional level Boston area, coffee sales are around 70 per
and five regional distribution centres are now cent of total turnover, as compared to areas
in operation in Mid-Atlantic, Midwest, like Richmond where coffee sales are only 10-
Canada, Northeast and Southeast. 12 per cent of turnover. Dunkin’ Donuts’
development manager explained “I am from
Richmond and I have always seen Dunkin’
New routes towards pre-eminence Donuts’ image as doughnuts. If I wanted a
– the Richmond project coffee I would go to the 7-11”. This historically
Innovation of the basic business franchising distinct difference in image is reflected by the
format formula and the rigorous testing of sales of Dunkin’ Donuts’ doughnuts as a
new, potentially faster routes towards pre- branded product in 7-11 outlets, alongside
eminence are central to Dunkin’ Donuts cor- their own flavoured coffee varieties. To over-
porate development strategy. In this, Rich- come the image created by the Dunkin’
mond, Virginia, currently serves as a test Donuts name and to achieve increased coffee
market for the USA. Currently some way off sales, corporate advertising focuses on coffee.
pre-eminence, Richmond was selected for To enhance competitiveness on the coffee side
three key reasons. First, it is close to the of the business, Dunkin’ Donuts is currently
Boston head office and therefore relatively experimenting with the introduction of a self-
service concept at selected sites in the Rich-
easy to monitor. Second, labour availability is
mond area. The self-service concept matches
good and labour costs are relatively low, and
current 7-11 practice and allows the use of
third, advertising costs are low.
“express” queues at busy times.
The aim of the Richmond project is to test
On the doughnut side, the main competitor
out an accelerated path towards market pre-
in the Richmond area is Krispy Kreme, a
eminence, achieving full market penetration
nationwide operator, who mainly concen-
via a predetermined number of satellite dis-
trates on the wholesale side. For Dunkin’
tribution points linked to a central produc-
Donuts, 98 per cent of their business is on the
tion facility (CPF) and to maximise profitabil-
retail side, for Krispy Kreme, 80 per cent of
ity through joint site developments with
turnover reflects wholesale trade to retail
Baskin-Robbins.
outlets and supermarkets. Krispy Kreme
The project’s goals are to satisfy customer
doughnuts differ from the Dunkin’ Donuts
demand, to achieve and surpass break-even
product in that they are sold hot, contain
and to run a network of 25-30 stores. In Octo-
preservatives and are smaller, sweeter and
ber 1994, 11 outlets were up and running. It is
lighter. Krispy Kreme’s main advantage lies
projected that the project as a whole will
in the economies of scale generated through
reach break-even point in October 1995. Pre-
the use of larger scale production facilities
eminence in the Richmond area will involve
geared to supply the wholesale side of the
the opening of initially 25 distribution points
business as well as the relatively much
within 40 minutes drive of the CPF, generat-
smaller retail side. However, Krispy Kreme’s
ing annual sales of $9m. This should be the
company owned outlets are generally of an
case by 1997. Combination stores, featuring
older type (around 20 years old). They are
both Dunkin’ Donuts and Baskin-Robbins
designed to let the retail customer see the
will be used to maximise returns on the
back shop factory through a glass partition.
prime sites acquired for the project. It is pro-
By comparison, in a typical Dunkin’ Donuts
jected that around 30-35 outlets can be opened
shop the customer only sees the front-stage
and supplied by the Dunkin’ Donuts CPF
display, production in the back room remains
without market saturation being reached.
invisible and is geared to production for the
Until a full evaluation of the project’s out-
one outlet only.
comes is possible, it is thought best that all
retail outlets involved should be company
owned and controlled. Corporate forecasts
The central production concept
indicate that the central production concept
can develop a market to pre-eminence in half In Richmond the centralised production con-
the time it would take via the traditional cept was developed as a unique way of match-
route. ing and surpassing the economies of scale
[ 120 ]
Ruth A. Schmidt and enjoyed by competitors such as Krispy estate and development manager. However,
Brenda M. Oldfield Kreme, and driving growth through retail while there are projections which form part
Dunkin’ Donuts – the birth of sales at the same time. of the master budget for the project as a
a new distribution and The Richmond central production facility whole, there are no budgets as such for the
franchising concept
is a large scale doughnut factory, also known individual stores, owing to lack of experience
British Food Journal
as the “kitchen”. The kitchen opened in Feb- of what the actual costs are really like. This is
100/2 [1998] 119–124
ruary 1994 and is located in the north-west of counteracted by close monitoring, making
midtown Richmond. Having such a central use of the SIS information. Daily delivery
facility allows Dunkin’ Donuts to develop reports are printed out to allow the supervi-
retail-only sites and at the same time max- sor to monitor sales of individual product
imise economies of scale in production, lines. The shops’ orders are based on a combi-
advertising and equipment costs. The bene- nation of last year’s figures and the orders
fits of greater centralisation are reflected in from the previous week and day. Units can
tighter staffing and greater control over mon- print out in the shop what their order for the
itoring and responding to issues of operations next day should be. The retail multi-unit
costs. The key factors noticeable when exam- manager uses the print-out as the basis for
ining the central production facility and this forecast, but can amend it to take local
comparing it with the traditional Dunkin’ information into account, e.g. a forthcoming
Donuts shop are the scale and degree of football match in the area etc. This informa-
automation of operations resulting in low tion is summarised to give the kitchen a com-
labour intensity. This is illustrated by the fact plete production order for each product line.
that a special order from a high school for 200 In the kitchen, the production process is
dozen glazed doughnuts which would have activated by the completely aggregated infor-
taken all day to complete if manufactured on mation from the shop information system as
the retail premises takes only 20 minutes to to the total production of each type of dough-
complete in the “kitchen”. nut required for the shift.
In addition, for each shop, a daily SIS report
shows the sales projected and generated for
Communication and control the day. It also compares labour hours pro-
The distribution points communicate with jected for the day with those actually spent
the kitchen via the shop information system and draws the supervisor’s attention to those
(SIS), which links the whole network of employees who are coming close to overtime.
Dunkin’ Donuts facilities and forms an A weekly sales report for the units involved
important link in the processes of forecast- in the project is produced once a week. This is
ing, budgeting and control. based on a handwritten summary produced
Current targets for project management by the managers, which is a method that is
focus on enhancing product quality, building thought to ensure that managers will spend
branded business, controlling labour costs time on and pay attention to this important
and controlling food costs by keeping wastage area. On the basis of figures to date, the team
down. For budgetary control purposes, the is currently in the process of drawing up
kitchen is treated as a profit centre in its own budgets for the next financial year. Once
right. At the outset a model budget for the approved, the shop budgets will be fine-tuned
kitchen was drawn up which is now every week on the basis of the latest incoming
constantly adjusted in the light of real information.
results. The CPF budget for the next financial On the retail side as well as on the produc-
year is set in a bottom up/top down process tion side, the project has placed emphasis on
by the production and distribution manager the streamlining of operations. Traditionally,
who passes it to Dunkin’ Donuts’ head office one manager has been responsible for one
in Boston. They in turn pass it on to Allied freestanding outlet and one cart in a petrol
Domecq. It is then returned through the same station. For the project, this has been
hierarchy with amendments to fit the corpo- replaced by a system in which a multi-unit
rate master budget. manager (MUM) is responsible for three to
In the stores, control issues mainly focus on five freestanding outlets. Each location has
labour targets and wastage. In addition, for one supervisor and around eight employees.
each store certain items are projected as fixed Also there is one supervisor for every three
$ amounts, including cleaning expenses, carts. The MUM is responsible for the admin-
repair and maintenance, uniforms, office istration of correct company procedure and
expenses, till discrepancies, etc. The aggre- staff development and coaching. The supervi-
gate annual budget for the retail side of the sor is in charge of hiring employees, complet-
Richmond project is set by the district retail ing the orders via the shop information sys-
sales manager in conjunction with the real tem, working with the MUM in implementing
[ 121 ]
Ruth A. Schmidt and disciplinary procedures and monitoring CPF the least automated part of the process is
Brenda M. Oldfield wastage on the different product lines. in the finishing and packing areas. While
Dunkin’ Donuts – the birth of Both the cost structure and the nature of powdering with icing sugar is relatively auto-
a new distribution and the jobs have been altered. For the traditional mated through the use of “tumblers”, where
franchising concept
outlets, shop staff carried out a dual function, doughnuts can pass through and be powdered
British Food Journal as they were involved in both production and on a belt, filling with jelly and cream takes
100/2 [1998] 119–124
retailing. For the project’s retail-only sites, place at filling units which are hand operated
the focus is exclusively on customer service. and can only deal with two doughnuts at a
Each member of staff carries out all the work time. It may, therefore, be just as effective to
processes required to deal with any given carry out this process in back-room facilities
customer. The customer is the guest. How- on the retail premises, which would also
ever, at busy times, spontaneous team work allow greater flexibility.
helps to streamline the job. Staff do things for Food usage cost is the cost of food produced
each other as they notice them. This works on the premises, including sandwich fillers,
best where staff succeed in accepting each coffee, cream, etc. This varies with the share
other for what they are, finding ways of being of these items of the overall sales mix. For
productive together and making the most of coffee, freshness is ensured by throwing out
each other’s complementary strengths and what’s left after 18 minutes. To minimise
weaknesses. Often this is an organic and wastage the coffee makers can be set to brew
spontaneous process which takes place with- half or a third of a pot to match the pace of
out the participants even consciously realis- customer throughput. This is down to the
ing it. supervisor’s judgement based on on-the-job
To monitor the quality of service provided observation. Linked to food usage costs are
to the customer, there is a regular mystery paper costs, which include all the items
shopper programme aimed at providing feed- needed as part of a sales to a customer, e.g.
back. A standard form called the shop assess- paper napkins, cups, trays for sandwich
ment guide (SAG) has been designed, based fillers, etc., and increases where coffee and
on a customer perspective to be used in quar- sandwich sales are boosted.
terly shop visits. Such shop visits are carried
out for franchised and corporate owned out-
lets. In the franchised shops the mystery The future of the project
shopper visit is a form of peer group assess-
Further future developments of the Rich-
ment. A franchisee also contributes to the
mond project centre around the two key areas
shop visits of the corporate stores, to assure
of the selection of new sites and the develop-
mutual trust and a level playing field. This
ment of new stores to their full potential
system has evolved to counteract some initial
through the integration of the Dunkin’
potential for friction surrounding the mys-
Donuts and Baskin-Robbins formats in the
tery shopper audit. Dunkin’ Donuts’ manage-
same shops and under the same management.
ment recognise that the budgetary control
Dunkin’ Donuts are currently developing
process can have a strong motivating impact
five types of distribution point. Freestanding
if used correctly. It is intended that as soon as
units are detached buildings situated next to
the budget is in place, a performance based
busy roads. They have good visibility, limited
bonus programme will be designed and
seating and some drive-through facilities.
implemented.
End-cap units are Dunkin’ Donuts shops
While traditionally food costs were largely
located in a corner position on the outside of
determined and controlled through the pro-
shopping centres. Cart systems are used to
duction process which took place on the
integrate a doughnut distribution point into a
premises, for the retail-only stores food cost is
larger host environment. Wholesale and
split into two items, food production cost and
branded product locations facilitate the sale
food usage cost. From the retail outlet’s point
of the product through third parties. At pre-
of view, food production cost is the charge
sent the CPF delivers to 11 store locations,
from the kitchen at transfer prices, plus
between six and ten branded locations and
wastage costs. The cost of purchasing the
six wholesale locations (typically hotels).
product from the kitchen is semi-variable,
there is a minimum spend which is required
to fill the shelf space available and offer the
customer reasonable choice. Slightly higher
Site selection
wastage levels mean higher food production A detailed break-even analysis is carried out
costs for retail-only outlets. To try to reduce prior to the acquisition of a new location. In
this, the company is currently also experi- the Richmond area, Dunkin’ Donuts do not
menting with a limited amount of on-site own any land, but hold ground leases. The
finishing. The reason for this is that in the leasehold is depreciated over ten years.
[ 122 ]
Ruth A. Schmidt and However, if there is a land lease and a new Proximity of other outlets must also be
Brenda M. Oldfield building is erected, then depreciation is taken into account when assessing a potential
Dunkin’ Donuts – the birth of charged over the term of the lease. For the site. Experience has determined that a popu-
a new distribution and lation of 35,000-50,000 people is needed to
break-even analysis, fixed costs include rent,
franchising concept
depreciation on the leasehold, equipment support one Dunkin’ Donuts store, and 30,000-
British Food Journal 35,000 for one Baskin-Robbins.
100/2 [1998] 119–124 costs and renovation costs. Nationwide,
Allied Domecq expect new shops to achieve
break-even on their operations within two
and a half years. In the context of the Rich- Integration of Dunkin’ Donuts and
mond project, currently only type A locations Baskin-Robbins
are acquired. These are locations which The combination of the Dunkin’ Donuts’ and
break even from the first day of opening. In Baskin-Robbins’ offerings in the same outlet
the Richmond project, site selection for the serves to make much more profitable use of
new company owned and controlled retail the prime sites acquired. The main reason is
outlets is carried out by the corporate real that peak trading differs dramatically
estate and development manager, who between the two. Whereas 65 per cent of
decides on the site, negotiates the lease, gets Dunkin’ Donuts’ sales are generated between
planning permission and works with the 6.00 a.m. and 11.30 a.m., Baskin-Robbins’
construction manager to determine design trading peaks between 6.30 p.m. and 9.00 p.m.
issues. She also decides on the correct media Because of the slight differences in the popu-
mix for the advertising campaign. Company lation bases required to support the two con-
control strengthens bargaining power, this is cepts, it is envisaged that the optimum mix
useful in negotiating with landlords for the will be 60 per cent Dunkin’ Donuts to 40 per
best sites. cent Baskin-Robbins. The company is cur-
Key selection criteria for new sites include: rently scanning the market for potential
• population density and characteristics; lunchtime concepts to add to this combina-
• traffic flows; tion. Clearly, having a retail concept capable
• proximity of other outlets. of trading round-the-clock in this manner
also further strengthens the argument
The population density within a half mile and against production on the premises.
a three mile radius of the proposed site is The traditional Baskin-Robbins’ format
assessed. In addition, an evaluation of socio- makes use of a CPF with no manufacturing
demographic population profiles is carried on the premises. For Baskin-Robbins the
out. To this purpose, Dunkin’ Donuts sub- trend is also towards greater efficiency. While
scribe to a number of demographic profiling in the older locations Baskin-Robbins sell
services, such as Equifax and CACI. Corpo- around 48 varieties of ice cream, there is a
rate traffic flow criteria state that during the tendency to open more shops, with less vari-
peak hours of the morning, mid-afternoon ety in each shop. The Baskin-Robbins’ slogan
and evening, a potential site must be accessi- incorporates 31 sorts “one for every day of the
ble to at least 1,200 cars. Actual traffic flows month”, but in some of the cart locations only
are determined in three ways. The first stage the eight most popular flavours are sold.
is a preliminary assessment through the use Richmond is the first area for which both
of published official counts. If this appears Dunkin’ Donuts and Baskin-Robbins are
satisfactory, the real estate and development controlled by the same management. For the
manager conducts her own car count outside rest of the USA they are still managed as two
the proposed site, using a purposive sampling separate brands. Because of differences in
approach to cover key times during each day management information systems Dunkin’
in the course of one week. This exercise Donuts and Baskin-Robbins combination
results in the gathering of qualitative as well stores are still managed largely as two busi-
as quantitative data. It is complemented by an nesses under the same roof. For the Rich-
analysis of the main activity generators in mond project there is currently only one such
the area (e.g. employment, retail activity). “combo” operating, but most of the new
This provides an insight into the reasons why stores will be combos and three of the exist-
the cars observed are there. The outcome of ing outlets are remodelled as combos.
this stage determines whether or not to
progress any further. For a potentially
promising site, the third stage involves the Conclusion
use of a traffic consultant who carries out a Richmond is functioning as a laboratory and
week-long full count. For inner city areas, it will be a while before the innovations fea-
traffic flow counts may be supplemented by tured have any claim to being tried and
pedestrian flow data. tested. If the project succeeds then this opens
[ 123 ]
Ruth A. Schmidt and up the opportunity for marketing the central CPFs. Early informal communications indi-
Brenda M. Oldfield production concept with retail-only satellite cate that there is a lot of interest in such a
Dunkin’ Donuts – the birth of stores as a new franchise concept. concept from existing Baskin-Robbins’ fran-
a new distribution and
Currently much of the focus in Dunkin’ chisees who are keen to enhance the use of
franchising concept
Donuts’ franchisee training and development their assets. However, the real corporate chal-
British Food Journal
100/2 [1998] 119–124 is on the manufacturing side. Once lenge for the future may lie in the successful
franchisees have acquired their outlets, they identification of a suitable third concept that
lead hard lives with unsociable hours, typi- could add yet another peak in trading during
cally starting work at 1 a.m. in the morning to the lunchtime spot.
prepare the doughnuts for the morning rush.
The retail-only concept would give the com- Further reading
Forward, J. and Fulop, C. (1993), Issues in Fran-
pany greater control over the product and
chising: An Analysis of the Literature, NatWest
would also be likely to attract a much wider
Centre for Franchise Research, London.
base of potential franchisee. The training
Key Note (1991), Franchising, Key Note Publica-
focus could be on the service and marketing tions, Hampton.
side of the business, with just enough product Sanghavi, N. (1991), “Retail franchising as a
knowledge to be able to identify the causes of growth strategy for the 1990s”, International
problems. It is envisaged that groups of fran- Journal of Retail & Distribution Management,
chisees could invest in the joint ownership of Vol. 19 No. 2.

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