Dunkin’ Brands (DNKN): A 100% Franchised Business Built on a “Morning Ritual”
Guest Write-up by Jayden Preston
Overview
Dunkin’ Brands owns two well-known quick service restaurant (QSR) brands, i.e. Dunkin’ Donuts that sell coffee and baked goods, and Baskin Robbins, selling hard serve ice cream. Dunkin’ Brands is now purely a brand owner, as they currently employ a 100% franchised business model, with over 20,000 points of distribution in more than 60 countries worldwide.
They organize their business into four segments: Dunkin’ Donuts U.S. (DDUS), Dunkin’ Donuts International (DDI), Baskin-Robbins International (BRI) and Baskin-Robbins U.S. (BRUS)
Dunkin’ Donuts is the more important brand to the business. Despite the term “Donuts”, it has moved away from its root to become a major coffee beverage house in the US. It is a national QSR leader in serving coffee, selling more than 1.9 billion cups of hot and iced coffee and espresso-based beverages per year. For 11 straight years, Dunkin’ Donuts has been named the top brand for customer loyalty in the out-of-home coffee category in the US. In FY2016, systemwide sales of DDUS was $8.6 billion, with 58% coming from coffee and other beverages. The brand is even considering shortening its name to Dunkin’. For Dunkin’ Brands, their Dunkin’ Donuts segments generated revenues of $630.9 million, or 79% of total segment revenues in FY2016. Dunkin’ Donut’s brand equity is much stronger in the US, generating $608.0 million in revenue, while the international segment only had $22.9 million in revenue.
The situation reverses for Baskin-Robbins. Its international segment generated revenues of $119.0 million, while the US segment produced $47.5 million. The brand develops and sells a range of frozen ice cream treats such as cones, cakes, sundaes, and frozen beverages. The brand is highly recognizable in the US, where it enjoys 89% aided brand awareness in the US and internationally in South Korea, Japan and the Middle East.
As of December 31, 2016, there were 12,258 Dunkin’ Donuts points of distribution, of which 8,828 were in the U.S. and 3,430 were international, and 7,822 Baskin-Robbins points of distribution, of which 5,284 were international and 2,538 were in the U.S.
Franchising Agreements
Let’s talk first about their franchising agreements.
A franchisor usually has several means to make their franchisees “captive”: 1) Royalties as a percentage of gross sales, 2) Rental payments on properties, 3) Required purchases from a company-owned supply chain and 4) Marketing fund pay-ins.
As with many franchisors, the majority of the Dunkin’ Brand’s revenue comes from royalty income, usually set as a percentage of gross sales made by franchisees, and other franchisee fees, including initial franchisee fee in the US. This is an upfront payment for the right to operate one or more franchised brands from Dunkin’ Brands.
The effective royalty rates for the different segments are 5.5% (DDUS), 4.8% (BRUS), 2.4% (DDI) and 0.5% (BRI). The much lower royalty rates for BRI reflects a difference in business model for that segment. Dunkin’ Brands derives revenue from the sale of ice cream …
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