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CANTON, Mass. – Dunkin' Brands Group Inc. (Nasdaq:DNKN) announced Wednesday that it has extended the contract of chairman and CEO Nigel Travis through December 2018. His current contract was set to run out in December 2016.
Franchisees in his system see the CEO's continuation as a good thing. Half-way through his now ten-year term, the 64-year-old corporate leader has helped shape tremendous positive change for one of the country's largest quick service restaurant franchising chains. He has taken the private company public and he has overseen several initiatives that have empowered Dunkin's franchise owners. Now he says he wants to focus on benchmarking franchisees' store profits and raising their store earnings before interest, taxes, depreciation and amortization (EBITDA).
Analysts already estimate Dunkin' store earnings to be higher than their key competitors (see chart).
Mr. Travis will lead Dunkin' Brands as both its chairman and CEO. Some critics advocate separating a CEO from the chairmanship role in order to provide independence to look after the needs of shareholders, as opposed to the supposed self-interests of the company's officers and staff. For example Tim Hortons, a franchise donut chain based in Canada, separates the two roles – Marc Caira is its chief executive officer, while Paul D. House is the chairman of the board.
Nell Minow, board member and founder of GMI Ratings, a firm that gathers corporate governance data and provides analysis, explains that in the United States it is the overwhelming practice to combine chief executive officer and chairman positions. "The idea of splitting them comes from a 1980's proposal in the United Kingdom, where there were many more insiders on the board." Minow says that in the U.S. the CEO and chairman positions are usually split when "it is meaningless." As an example, she cites the blending of the two positions and their authority for Michael Dell, founder of Dell Computers, as he went from holding both positions at the same time, down to just one, and then back to both again. Minow also points out public corporations tend to have separate individuals in the two positions of CEO and chairman when "the company's in trouble and wants to placate the shareholders." Dunkin' has no such trouble and doesn't need to pacify angry investors.
The lead independent director position is an increasingly popular one among shareholders as a person who helps guide the board's directors to look after investor interests. It is a corporate board check against a CEO and chairman who might lean too heavily toward looking after corporate employee self-interests over the independent director's duty to maximize shareholder wealth. Dunkin' Brands lead independent director of the board is Raul Alvarez, former president and COO at another quick service restaurant chain – McDonald's Corporation.
Dunkin' shareholders have seen their stock prices increase 38.81 percent in the past 12-month period, from March 6, 2013 to March 5, 2014. In its fourth quarter ending December 28, 2013, the company's profit grew by 23 percent. Analysts, such as Mark Kalinowski of financial firm Janney Montgomery Scott, have a buy recommendation on its shares. For the moment things look good at Dunkin'.
Another critical issue for corporate officers is retirement age. Dunkin's Travis, who holds dual American and British citizenship, will be 68 when his employment contract expires after he's been at the helm for 10 years. Some companies mandate their CEOs retire at 65 and have a succession plan prearranged for that event. But in a day in which the average American lives 78.7 years and the average British citizen lives 81.1 years, according to OECD statistics, is 65 too young for a franchisor CEO to retire just because he or she hits an arbitrary number? Travis' predecessor Jon Luther was 63 or 64 when he retired as CEO of Dunkin' Brands in December 2008, but continued with the company as executive chairman, retiring from the position of non-executive chairman in May 2013. At age 69 Luther is presently chairman of Arby's Restaurant Group Inc.
Charlie Loudermilk, founder and leader of Atlanta-based franchising firm Aaron's, a rent-to-own furniture chain, retired in 2012 as an octogenarian. And last year Truett Cathy stepped down as both chairman and CEO of Chick-fil-A at the ripe old age of 92. He was just having too much fun running the company that he founded to call it quits before that.
Corporate governance expert Minow explains that her firm's database of chief executive information shows hundreds of CEOs in America's largest corporations who are over 70 years old. "My thinking is that all [contract extension] decisions should be based on results, not age," declares Minow.
Mr. Travis seems to be delivering results for Dunkin' franchise owners. "Since 2009, under the leadership of Nigel and his management team, Dunkin' Brands' nearly 100 percent franchised system has delivered a compounded annual growth rate of 6.2 percent in systemwide sales, had strong comparable store sales [and] added almost 3,300 net new Dunkin' Donuts and Baskin-Robbins restaurants," states Dunkin' Brands lead independent director Raul Alvarez.
Dunkin' had its initial public offering, going from private to publicly traded in the summer of 2011. In reminding investors what this CEO has done for them, Alvarez declares that Travis "returned approximately $650 million to shareholders during its two-and-a-half years as a public company."
Ed Shanahan, executive director of DD Independent Franchise Owners, an association that has a charter to specifically look out for the interests of its thousands of franchisee members, says, "We are delighted to learn of Nigel Travis' contract extension. He has brought consistent stability and exceptional growth to the Dunkin' brand and we're all the better for it – the company, the investors and most importantly, the franchise owners who are the very heart and soul of Dunkin' Brands!" Shanahan adds, "We congratulate Nigel and look forward to working with Dunkin' under his leadership for many years!"
That franchisee sentiment is a far cry from several years ago when many store owners were angry under then-CEO Jon Luther's leadership. Franchise attorneys were calling Dunkin's franchisor-to franchisee relations one of the most litigious in the industry. There was outrage over invasion of franchisees' privacy and accusations of entrapment. That perception of franchisor abuse sparked the DD Independent Franchise Owners, a franchisee association that is not formally recognized by franchisor Dunkin’, to organize a sort of think tank, what they called the Global Strategy Group. Its aim was to draw a consensus on specific, reachable goals to curb franchising abuse. The small strategic group reached out to leaders in the officially recognized arms of the brand advisory council and regional distribution center to strategize on how franchisees could gain control of the national supply chain in order to minimize vendor kickbacks to the franchisor. It also sought the advice of some of the country's top experts on what a more balanced franchise agreement would specifically look like and what laws needed to be enacted in order to better protect their investments.
When Mr. Travis came in as chief executive and later was appointed chairman, the perception among franchisees was that the new CEO cleaned house, removing some of the old, and in the eyes of franchisees, abusive guard. Travis soon helped build structures and tools to empower franchisees. For example, under Travis the franchise agreement was renegotiated to enshrine in perpetuity that brand advisory council members were to consist of elected franchisee representatives. Franchisees say in the old days Dunkin’ sometimes tried to rig the elections to favor their own man. The now more credible delegates, who were elected and trusted by franchisees to represent them, could better push back on the franchisor concerning operational issues.
“Where Luther was big on franchisor dictates, Nigel has avoided mandates,” says one insider on the difference in leadership styles. Now there is a collaborative focus on key figures and improving franchisee profits.
In a letter to Dunkin' and Baskin-Robbins franchise owners on Wednesday, Nigel Travis wrote that he was pleased to have signed an extension to his employment contract. Travis immediately focused his remarks on the operational measurements of the restaurants of the almost one hundred percent franchised chain. "We have developed an operations culture with a strong focus on improving unit economics, supporting our franchisees and better serving our guests. We have delivered improved same-store sales, strong systemwide sales and have added almost 3,300 net new Dunkin' Donuts and Baskin-Robbins restaurants around the world, as well as remodeling several thousand more locations. We have improved our guest satisfaction ratings, positioned ourselves to be leaders in the QSR industry through new retail technologies, brought to market hundreds of successful, innovative products, and developed a reputation for cutting-edge marketing, which has further driven the global recognition of our two brands."
Although Dunkin's board members have a fiduciary responsibility to Dunkin' Brands' shareholders, it has no such fiduciary obligation by law to its franchisees. But Dunkin is recognizing and now publicly declaring that the profitability of its franchise owners must be part of its focus in its effort to increase shareholder value. "Going forward, the company is well positioned for future growth, and Nigel and his team remain focused on driving franchisee profitability and delivering shareholder value," says the board's lead director Alvarez.
Is Dunkin's leadership talking the talk without walking the walk in driving the profitability of its franchises? Most franchisors have a difficult time finding, and sometimes even caring, whether franchise owners are profitable. Five years into Mr. Travis' term as chairman and CEO, that is not the case with Dunkin'. It is now measuring the bottom line and health of the franchised restaurants. In an earnings call early last month, Mr. Travis told analysts that he is benchmarking profits at the store level. "Franchisee profitability is very strong," Travis declared. "New Dunkin' Donut stores in the U.S. exceeded our internal targets on all of the metrics by which we monitor the health of the new store openings. Systemwide, franchisees are seeing the highest EBITDA dollars and highest EBITDA percentage on record for traditional Dunkin' Donuts restaurants," declared the CEO in an earnings conference call.
Franchisees also see the shift of the franchisor towards looking at franchisee profitability. Franchisee Robert Branca says, "At every single [Brand Advisory Council] meeting we are working on taking costs out of our system. The focus could be described as 'maniacal.'" The advisory council leader thinks the supply chain cooperative and the franchisor's benchmarking of franchisee profitability gives Dunkin' restaurants a strong competitive advantage against companies such as Krispy Kreme, Tim Hortons or McDonald's. To add to that, the advisory council chartered a formal Profitability Subcommittee as a lens in which the economics of each new product introduction is examined with rigor for its impact on a store. "It means bottom-line money in a franchisee's pocket that many other franchisors could care less about because they get paid from the top line," says Branca, president of Branded Management Group. (Franchisors generally receive their royalties and funds based on a franchise establishment's revenue, not profits.)
The profit margins of Dunkin's franchised stores are not yet a matter of public record. The average restaurant's profits are not published in Dunkin's Franchise Disclosure Document, nor do they yet appear in the firm's quarterly reports. Nonetheless, restaurant unit economist John Gordon of Pacific Management Consulting Group estimates that the midpoint profit margin for an average Dunkin' Donuts' store EBITDA currently ranges from 13 to 18 percent of revenue. "This is before debt service (principal and interest) and maintenance capital requirements are paid," he explains. The analyst adds how rare it is for a franchisor to monitor and benchmark bottom-line performance of its franchises. "Dunkin' Brands should get a gold star for talking and thinking about franchisee economics," says Gordon. "Almost no other restaurant franchisors discuss or report on it publicly."
Branca explains a simple rule of franchising. A franchise system will not grow without franchise owners spending money. But franchisees will not spend money if they are not profitable. He observes that Dunkin's benchmarking of franchisee profits and focusing on the franchisees' bottom line has given franchise owners more confidence in the franchisor. "Perhaps the most striking result of that focus [on store profit] is that 90 percent of the brand's growth comes from existing franchisees, a fact that we repeat when there is a disagreement," says the multiunit franchisee.
*Note from Pacific Management Consulting Group on the chart: The chart estimates Dunkin' Donuts and US Tim Hortons store EBITDA margins are stated before debt service (principal and interest), and maintenance capital expenditure costs. Reported Krispy Kreme (YTD Q3 2013) results include retail and wholesale store operations. Estimates per Pacific Management Consulting Group.