CEO Bruce at a franchisee-owned distribution center, photo/DCP

BELLINGHAM, Mass. — "The value to the franchisee community is immense and cannot be understated." Those words from a long-time Dunkin' Donuts franchise owner only begin to describe the historic impact of the recent deal, which created a national franchisee-owned distribution cooperative—the National DCP—and spawned a new agreement with franchisor Dunkin' Brands (DBI).  As unprecedented as this agreement is, granting franchisees control over virtually all aspects of their supply chain, it is equally valuable to Dunkin' Brands, which credits the pact with paving the way for the company's national expansion. By striking the right balance between what Dunkin' and its private equity owners wanted and what the DCP was seeking, the two sides have a five-year agreement, with the potential for 20 more on top of that.

The DCP (National Distribution Commitment Partnership, LLC) is the nation's largest dedicated supply chain and distribution provider, specific to the food service industry, with revenue close to $1.5 billion.

"It's a best in class operation and service," said Dunkin' franchisee Michael Batista, who became chairman of the National DCP Board of Directors in January 2012. "I think everybody sees this as building the DCP of the future and maintaining excellence for years to come and maintaining the obligations we have to our members. That goes beyond what we are obligated to do for DBI—we have to deliver for our franchisees—that's the most important thing."

In the agreement that created the National DCP (NDCP), boards of directors of four regional cooperatives agreed to merge into a single entity, with a single board and—more importantly—with a new agreement defining the relationship with Dunkin' Brands.

The DCP was already unique because few, if any, franchised restaurant systems also have a supply chain cooperative that franchisees own and operate. But, as a result of the new deal, it now also controls sourcing as well as distribution.

"That means we go from being a vendor to being a partner and that is exciting," said Batista. "We are at the table early on to drive the cost of existing and new products. If we were strong before, we are stronger now."

A wing of one of the franchisee-owned distribution centers, Bellingham, MA.

Another critically important piece of the relationship agreement is the DCP's role in new product development. According to Jason Williams, an attorney with Frost Brown Todd, who represented the co-op in the creation of the NDCP agreement, "We were never in the room when those decisions were being made." But, now with the new agreement, the NDCP expands from distribution into procurement through which, Williams says, "the potential savings are astronomical."

Even before news of this historic merger was reported in business and industry press, DBI had announced its plan to more than double the company's existing footprint in the next 20 years. Expansion west of the Mississippi River was a central theme of DBI's pre-IPO story to Wall Street. But, because the investment for new stores comes from franchise owners, DBI knew it needed a way to make development more appealing to franchisees outside the traditional Northeast-to-Midwest-to-Southeast triangle.

In its press release announcing the procurement and distribution agreement with the National DCP, Dunkin Brands said, "Most importantly, the agreement supports the company's domestic expansion plans by providing franchisees in new markets with the same product costs as franchisees in the more highly built-out, established Dunkin' markets. Uniform product costs will be phased in over a three-year period beginning in 2012."

John Justo, a Rhode Island franchise owner and former National DCP board member, says because the DCP will have unified control over its operations, and be able to leverage the synergies inherent in the supply chain, it will be able to eliminate cost variations across the system. The result: the introduction of flat pricing so a franchise owner in New Hampshire will pay the same cost of goods as a franchise owner in Nebraska even though the cost of getting those goods to them differs.

"Franchisees are now able to expand to other regions with the comfort of knowing there is a roadmap to flat pricing (by year three), and that service levels and processes will be consistent regardless of where their shops are," said Justo.

While negotiations for the new DCP contract were underway, Dunkin' Donuts franchise owners were crossing their fingers that commodity prices would calm down. 2011 brought some of the highest coffee and dairy prices in years, due in large part to the weakness of the U.S. dollar. Kevin Bruce, the chief executive of the DCP, called it a "speculator dynamic." As money managers fled currency and poured investors' money into commodities, those prices spiked and franchisee profits plunged. The DCP purchases over 90 million pounds of coffee every year so any price fluctuation can cause major ripples across the Dunkin' system.

In a March 2011 interview, Bruce predicted that as economic conditions improved, commodity prices would return to pre-recessionary levels. "People are fleeing currency as an investment and going elsewhere, like commodities, until something better emerges. But, when that happens, the speculators will pull out and then prices will come down and come down quickly."

As the starting middle linebacker for two NCAA Division I Football National Championship teams at the University of Southern California, Bruce brings a laser focus to his job as head of the DCP. The merger and subsequent agreement with DBI meant one thing to Bruce: cost savings.

And that includes not just taking advantages of the economies of scale that come with merging four operations into one but also leveraging the strength of the co-op to negotiate more competitive prices with vendors. "If it wasn't a cost savings deal we wouldn't have done it," he said.

"The agreement shows a commitment to franchisee relations on the part of the brand," said Williams. "It also shows investors that in terms of future development, there is stability in the supply chain. Each of those is important to potential investors.

Even with all the tangible benefits resulting from the DCP merger and DBI relationship agreement, there is an intangible that was important for franchisees: longevity for future generations.

"It totally sets up the next generation and that was one of the principles that guided us through this," said Justo.

Family has always been at the heart of Dunkin' Donuts—many of the system's earliest franchisees came on board because someone from their family was involved. That was particularly true for the immigrant families who established themselves as American businessmen.

Chris Prazeres, who was a member of both the National and Northeast DCP boards through the end of 2011, is a second generation Dunkin' franchise operator and first generation American. For him, the new DCP creates an important foundation for his family. "This agreement will be in play long after my kids are in this business," he said.

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