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Last week I told you about the “combo” pitch I received from Dunkin’ Donuts, how important my combo store was to my business plan and gave you a taste of their business ethics in the pre-franchise sale period.Then I started signing franchise agreements, and you guessed it, things went from bad to worse.
In this column I will introduce you to the cast of characters I dealt with at Dunkin’ Donuts. This was the crew that regaled me with how we would all work together to improve the stores I agreed to purchase and make money – a partnership, so to speak, combining my hard work, business and real estate experience with the Dunkin’ Donuts brand and everything that brought with it. I would learn soon after the first purchase check cleared that this would not be the case.
The first part of my deal with Dunkin’ Donuts called for me to acquire four small and underperforming stores in Providence which I would be responsible for either remodeling or relocating. I knew this would be hard work but was willing to take this on because Dunkin’ Donuts would also deliver to me a brand new and shiny Dunkin’ Donuts – Togo’s combination store. This store would provide the bulk of my cash flow and without it my business plan would not break even.
I was scheduled to buy the four stores in two separate transactions in November and December of 2001 and then I would buy the combo store in February 2002. I found the closings of the first two transactions a little disconcerting – boy, were the franchise owners and the Dunkin’ Donuts representatives especially happy, even giddy! Only later would I find out that Dunkin’ Donuts booked $150,000 of profits on at least one of the transactions, something they never disclosed to me and that the franchise owners were relieved beyond their imagination to dump these stores on someone else.
I now had to start turning four “C” rated stores around. The “C” rating being “Dunkin-speak” for the lowest rating a franchisee could receive from Dunkin’ Donuts and a rating so bad that Dunkin’ Donuts has the right to terminate the franchise agreement. Marching over to take possession of the first two stores I met my Dunkin’ Donuts “Operations Consultant” Mike Potorski for the first time. The face of the real Dunkin' Donuts about to be revealed and it was not the square-jawed, ‘can’t-wait-to-make-you-rich’ “Business Development Manager”, David Harrington who had just walked off with my check. 0h, no – it was Mike Potorski and his permanently scowled face who was introduced to me about an hour later and who told me “This store is embarrassing. What are you going to do about it? You can’t sell food from this hole—I’ll be back tomorrow”. Still in a dazed stupor of optimism I said to myself ”he must not have gotten the memo about how we were going to work together to improve store quality”. I’ll be writing much more about my “partnership” with Dunkin’ Donuts on improving these four stores in this blog and my book: Dunk’D – My Odyssey through Franchise Hell”.
After I began the arduous and expensive process on improving my stores I started counting the days to the delivery of my new combo store by Dunkin’ Donuts, which was due to be completed only six weeks after my second closing. I was anxious to hear about the construction progress so I called the Dunkin’ Donuts real estate director Rich Zuromski and heard, “Well, it seems we are having a little trouble finalizing the lease”. THE LEASE!!!!! Twenty years in the shopping center and retail business had taught me one thing—store opening dates should not be planned and a deal made to sell a to be opened store when the lease hasn’t even been signed. As January drifted by I continued to walk by my new “combo store” only to see more and more dust build up on the floors of this empty space.
So I called Dunkin’ Donuts. “Rich” I would start with a tightly controlled voice, “when are we going to start construction on the combo store promised me in February”. This was the linchpin to the entire business plan blessed by Dunkin’ Donuts and sent along to CIT for the loan I had guaranteed. This deal would not work without the combo store I kept saying. Rich calmly told me that they were finalizing the lease and that the design team was ready to go on the store layout and construction fit up and turn that key over to me, but maybe now it will be March…., March goes by and I am now three months into learning the hard way how bad Dunkin’ Donuts stores can be, already closing in on the first (of many) $100,000 losing quarters. Well, Rich whispered maybe we can be ready for April.
Imagine my surprise on the morning of May 5, 2002 and just days before the store was to be completed when the phone rang unexpectedly and I heard that hollow sound of a speaker phone at the other end. “Irwin”, said David Harrington, “I am glad we reached you. I am here with Grant Benson (the Senior Market Executive), Jim Vincenzi (the Vice President of Operations) and Bill Rogers (my Corporate Business Consultant) and we just got some information that we had to get to you right away.” “Here we go again” I sensed but I was not ready for this one. I had just completed my Togo’s school training and could make a mean pastrami and cheese sandwich. Dave turned the mike over to Grant Benson who intoned with solemnity that almost sounded genuine. “Irwin, we just found out that not a single Togo’s is operating profitably anywhere in the East Coast and we can not predict when, IF THEY EVER will operate profitably”. Without breaking stride, even though he was delivering a thunderbolt which he said he had learned himself only minutes ago—“you have two choices: switch to a Baskin-Robbins combo or you can walk from the store and start with the first four. By the way I hear you are having some operating problems with them so shape up, will you”
“You have cancer”, may not have gone over any easier than the news he just gave me, but wait…”choice?”… what in God’s name was he saying. I tried to get off the line just to reel in the news and get my arms around a rapidly crumbling business plan drowning in red ink from triple the start up costs I had expected. What do I now? The unspoken answer was ”suck it up pal… read your franchise agreement”.
It does not take a lot of training to understand the principals of a turnaround investment. You do not buy money-losing stores for the sheer joy of watching your bank balance decline. Rather you buy a turnaround opportunity because you can fix the operational issues, get the stores to breakeven, then ramp up the growth with a proven product and ride your sweat equity to profitablity. But when the franchisor who has you now by the throat says, “sorry we were just kidding about that development plan, and by the way, get those ratty stores you’ve only owned for a few months in shape or you will NEVER be able to open new stores”…you better count your fingers after the handshake goodbye.
That creepy feeling erupted in the pit of my stomach and in a flash I knew I was in serious trouble. I had just paid $1.275 million for four stores that I now believed to be worthless, and my business plan had just been smashed by the very people who sold me on the deal and loaned me the money, that now I couldn’t even begin to know how to payback. The precipice was deep and growling.
The reaction on the other side of the phone line was disconnected from the whirlwind in my head. Grant Benson woke me out of the fog with, “What’s your decision?” It seemed he wanted to know on the same call what I was going to do. But what was I to do. Without the combo store I could not break even and the idea of a Baskin-Robbins unit in the middle of a smallish financial district that completely shut down by 6:00 every night and was deserted during the weekend didn’t seem to make sense.
I’ll tell you what I did and how it worked out in Part 3. However, I learned my first lesson of being a Dunkin’ Donuts franchisee that day —your issue never really matters. What matters is getting the royalty check to Dunkin’ Donuts in every Thursday, the rent in on the first of the month and CIT’s payment on time, so Dunkin’ Donuts never has worry about the guaranty they used to suck you into the deal in the first place.
If this sounds like I am just seeing this series of events my way, let me end with a few quotes from a letter I received from Business Consultant Bill Rogers a short time later and when I was still only a few months into turning around my “C” rated stores. A letter I cherish for its sheer terror:
The purpose of this letter is to clearly communicate ADQSR’s expectations regarding franchisee performance ratings system and our on-going working relationship….I ask that you no longer bring up the value your investment…. In conclusion I wish you a great vacation….and take some time to read…the Guidelines”
Best regards, Bill Rogers
Forget Togo’s I was in the hand of insipid, but powerful Monsters!
Pre-publication excerpts and the documents supporting our claims are posted on our website: www.dunk-d.com
|Letter from Bill Rogers July 12, 2002.pdf||110.06 KB|
|Sampalis Purchase Agreement with DunkinHL.pdf||583.37 KB|
|DD RAR Simple Resource Approval-write up for Barkan CIT loan-HL.pdf||367.93 KB|