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Bad feelings brewing among shop owners

Dunkin' Donuts franchisees say outside deals cut profits

Email|Print|Single Page| Text size + By Erica Noonan
Globe Staff / February 14, 2008

Relations between Canton-based Dunkin' Brands Inc. and some franchise owners have turned bitter over the chain's new agreements to allow Procter & Gamble, Sara Lee Foods, and Hess gas stations to distribute its coffee - something franchisees fear will cut deeply into their profits.

A survey of 100 New England and New York franchisees representing more than 1,000 stores, scheduled for release this morning by Dunkin' Donuts Independent Franchise Owners Inc., found 95 percent strongly oppose deals that allow P&G to sell discounted coffee beans in 40,000 stores nationwide, Sara Lee to sell the coffee in office buildings and private cafeterias, and Hess stations to dispense it through drink kiosks.

Owners group president Mark A. Dubinsky said he believed Boston-area franchisees were being sacrificed for a growth-at-all-costs corporate strategy designed to fuel a profitable initial public offering. Dunkin' Donuts has about 5,300 US locations, a number it has said it hopes to triple by 2020.

"This could make sense in other parts of the country where there is less brand awareness, but here in New England where we have one store for every 6,000 people, it dilutes the brand," he said. "We're taking coffee sales and moving them out of existing franchise stores."

Eighty-four percent of franchise owners said they have lost money because of increased competition, with nearly a quarter reporting a 20 percent or more decline in sales of 1-pound coffee bags. Sixty percent said the P&G deal "devalues" their franchises, and nearly all reported "declining cash flow" over the past year, a reflection of factors including increasing food and fuel prices, the group said. Specific income drops were not solicited in the survey.

The P&G deal, for one, pits discount bags of coffee beans against bags for sale at Dunkin' shops. In fact, many franchisees complained they had to keep their beans discounted during the recent holiday season - high season for gift sales - because local BJ's Wholesale Clubs offered them cheaper. Franchise owners paying as much as 5.9 percent of total sales in royalty franchise fees said they were outraged. "It's killing me," said one respondent. "They are infringing on the core of our business," wrote another.

Steve Caldeira, chief global communications and public affairs officer for Dunkin' Brands, said yesterday in a statement that the new partnerships "benefit all franchisees by building customer and brand loyalty in both existing and new markets."

"We share a common goal with our franchisees to build franchisee profitability by responding to 'on-the-move' consumers' desire for their brand of coffee wherever they go," Caldeira said. "Quite simply, if our franchisees do not do well, then we do not do well."

Industry observer Dennis Lombardi said company-franchisee tensions are common when a brand chooses a no-holds-barred growth strategy. Time will tell if more customers become loyal to Dunkin' coffee because of the extra brand exposure, said Lombardi, executive vice president of food-services strategies at WD Partners in Columbus, Ohio.

"Generally, the more people who can be persuaded to use a brand, typically the better off the brand is and all the people in the franchises are," he said. "But not every change will benefit every franchisee."

Lombardi said it was unlikely Dunkin' would jeopardize its brand by going lax on standards with noncompany vendors. Chief competitor Starbucks managed to successfully deliver its coffee on airline flights and keep the integrity of its brand, he said. But Starbucks' stores are company owned, so it did not have to contend with franchisees.

Survey respondents also complained the corporation has become increasingly heavy-handed, demanding franchisees invest $25,000 in pizza and flatbread convection ovens and related equipment, or else face closure, said Dubinsky, who sold his family's chain of 27 stores in Lawrence, Methuen, New Hampshire, and Vermont last year. More than 60 percent of survey respondents agreed with the statement "Dunkin' Brands uses fear and intimidation as a tactic to manage or control its franchisees."

Other franchisees fear the recent deals are just the beginning and Dunkin' Brands will also license other vendors to sell bottled coffee drinks and packaged pastries, further cutting into the market, Dubinsky said.

"We have no idea what's next. It's unprecedented in the history of the brand to have such a focus on outside channels of distribution," he said.

Caldeira would not say if the chain was considering more outside distribution deals or whether new vendors would pay the same advertising-fund fee - 5 percent of total sales - typically charged to franchisees.

Erica Noonan can be reached at enoonan@globe.com.

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