UPDATE: Dunkin' Replies
(click here, Jun 11, 2012 at 6pm ET)

Just when you thought Dunkin' has reformed, tales of former corporate spies have re-emerged. Private eye Michael Mershimer, who left Dunkin's employ years ago, says he was hired by the crafty franchisor to dig up the dirt on untrustworthy franchisees.

…investigators have been trained in more than how to tell the difference between a Dunkin' donut and an imposter. They are often recruited from the ranks of federal law enforcement, like the IRS or Customs, people used to handling major investigations, Mershimer said.

…The mystery shoppers are part of a loss prevention strategy that tries to ensure major brands - Quiznos, Baskin Robbins, Burger King - maintain consistency and don't lose money to crafty franchise owners.

...Dan Ribacoff is a private investigator who has staked out thousands of franchises for quality assurance, using tactics that ranged from a surveillance van equipped with night vision goggles for a steak house to Dumpster diving for a Rita's Ice shop. "After they closed, we'd go in and jump into the Dumpsters and find non-Rita's syrup," Ribacoff said.

...Franchisees will go to any lengths to make extra cash without reporting it to the brand, Mershimer said. – ABC News

Dunkin's former spy culture

In normal franchise systems, mystery shoppers and field operation managers are employed to measure store performance and lift operating standards. A franchisor's field operations person, the subject matter expert of franchise unit performance, knows immediately if a restroom or even a donut is not up to Dunkin' specs. But ABC News reports that a few brands have unfortunately caught the shutter bug of Dunkin's former bad spying habits, when Dunkin' went the extra mile in hiring private eyes, backed by in-house attorneys. That spying system took on a life of its own.

Photo/BMM

A Dunkin' franchisee explained to Blue MauMau that a number of years ago, the franchisor hired private detectives that were playing the role of "junior G men," interviewing store staffers that had been fired for stealing in order to dig up any accusation — e.g. if owners allegedly employed illegals or underreported store earnings to the franchisor. Handed that information, the franchisor would "file a lawsuit without any evidence of real wrongdoing," according to one franchisee leader. Worse, franchisors would entrap franchisees with bogus allegations by threatening to tell the state, federal governments or even spouses about alleged misbehaviors. Franchisees felt that these tactics were used just to snap up their stores for pennies on the dollar. The company's own chief legal officer told a forum of attorneys that these were good techniques to intimidate franchisees into negotiating with them.

Attorneys began calling the system the most litigious chain in the industry.

Those heavy-handed tactics of yesteryear have gone, replaced by technology and a better managed network. "We have moved the whole system over to a new POS that makes it pretty impossible to underreport sales," says a large multi-unit Dunkin' franchisee. He also points out that the new franchisee supply chain cooperative has been able to drive down food costs that an individual couldn't match if buying elsewhere.

Motivated franchisees change Dunkin' and franchise law

The blowback from the secret police-like tactics of Dunkin's Loss Prevention Department was that it motivated franchisees to come together. "It united us like never before," says a franchise owner. This empowered the Dunkin' Donuts Independent Franchise Owners Association, with its leadership under association president Jim Coen and his predecessors. They quietly began a multi-prong approach to tame the franchisor, largely behind the scenes. Jon Luther, CEO at the time, stepped away as chief executive. A new CEO, Nigel Travis, was put in his place. Nigel quickly disessembled the infamous Loss Prevention Department, moving it in October 2008 from under chief legal officer Steve Horn and rearranging it under chief financial officer Neil Moses. Horn left the company within a week or so of that move. Luther eventually was pulled from daily activity.

"Dunkin' Brands Inc. responded to our unity by not bringing in just any new CEO, but by deliberately choosing Nigel Travis, who has a reputation of collaboration with franchisees," observes the franchisee. Travis was the previous CEO of Papa John's, which is known for large multi-unit franchisees that regularly collaborate with franchisor management. "Travis was empowered to make whatever changes he believed needed to be made to move beyond the years of mistrust," says the franchisee insider.

Had things not changed, the chain at war with itself would have been ill-prepared for a public offering last summer.

Having moved out of Dunkin' headquarters, nonexecutive chairman Jon Luther now is able to use his free time to assist other quick service restaurant chains in their franchising activities, companies like Arby's. This year he is the chair of the International Franchise Association, a trade group of some 1,300 franchisors and their suppliers.

Where once there might have been hidden kickbacks to the franchisor, Dunkin' franchisees are now in charge. Franchisees negotiated their regional distribution centers to be a national franchisee cooperative that runs all supply chain activities, including purchasing. Unknown to the rest of the world, franchisees also collectively negotiated a much better franchise agreement as the franchisor prepared to become publicly traded.

Better motivated to put aside petty differences that can sometimes accompany competing small business owners and peers, Dunkin' Donuts Independent Franchisee Association members stretched into the political arena. They successfully lobbied for a Rhode Island bill to curb franchising abuse.The law was the first in years that regulated the franchise relationship among U.S. states. The association then introduced a similar fair franchising bill in Massachusetts, which has been used as a template by lawmakers in other states. They also reached out to other franchisee groups for help.

Should franchise owners groups copy Dunkin's spy tactics?

What's good for the goose is good for the gander. Franchisors have been known to cheat. Independent franchisee associations could easily follow Dunkin's Loss Prevention Department's lead and hire a gaggle of private detectives to spy on franchisor executives. Private Dicks could be instructed by advising attorneys on what real-world evidence to gather as proof of contract breaches so that franchisees can win lawsuits. These franchise SS troops could search corporate garbage cans for signs that the franchisor receives hidden kickbacks and misappropriates franchisee funds. Detectives could follow franchisor executives at night to find out if they are cheating on their spouse, living above their means, or engaging in drug habits. These executives could be confronted with photos and evidence of things that just look wrong. Franchisees could then imply that the franchisor employee's spouse, the company or the IRS will be informed — unless they give in to their demands. It's been done to franchisees, so why not use the same tactics on franchisors?

Don't.

Spying on a franchisee or on a franchisor may be good business for a private dick to tout, but for a franchise system it is caustic. Whether it is franchisor Rita's Ice, troubled Quiznos, or even franchisees thinking about hiring spies, like Dunkin' once did under CEO Jon Luther and his predecessors, the chain needs to understand that it has the potential of giving birth to the franchise equivalent of the Third Reich. The distrust and abuse that it spawns will be a living hell. Spying and the franchisor-franchisee war that will follow, places a brand at risk. The good news for franchisees that fight is that senior franchisor executives will likely be kicked out and the chain will see a powerful franchisee group in place representing franchisees' interests.

Empowered franchisees benefit franchisor

"Wiping away the old regime made a huge difference to our bottom line," observes a franchisee leader. "Those were among our least profitable years. The many bankruptcies that were published had their genesis in that regime. Nowadays (in a Dunkin' brand without spying), we do not have to spend resources and emotion battling the franchisor. Instead we focus on our business. It's taken off again."

Vice chairman of the Coalition of Franchisee Associations and Dunkin' franchisee Robert Branca recently made a similar point. At a panel of franchisors and multi-unit franchisees (pdf) in Las Vegas that Dunkin' CEO Nigel Travis attended, Branca declared to attendees: "When the franchisees succeed, so does the franchisor. The numbers don't lie."

The franchisee association and cooperative are now much more empowered at Dunkin' Brands, something that has also benefitted the franchisor. "A respectful and collaborative relationship has been more mutually lucrative for franchisees and franchisor Dunkin' Brands Inc.," summarizes a franchisee.