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Barkan & Jon L. Luther

I thought I saw Barkan standing next to Luther during this morning's webcast of the DNKN IPO NasDDq debut. Can Barkan confirm his presence this morning next to Luther?

I'm glad to see them make up after all the lawsuits and going public book.

The Smartest Guys In The Room

The private equity owners still have a company that's worth what they paid for it in 2006. At $19/share, DNKN is worth $2.4B. Yet, they have extracted over $500M in dividends and fees during their private holding period.

Who said you can't make money in franchising?

DNKN went at $19

Official. Done

Not Impressed With DD

Good question. I never saw none a dunkin donut commercial in the year or two they tried to make a go of it here. Saw a lot of coupons though. Same strategy as the ham and egg franchise operations. Then they blamed the franchisee when they declared bankruptcy. When you're trying to go into a new area where Krispy Kreme is dominant you've got to invest in tv to succeed. Hell, all those Quiznos franchisees complaining about a lack of advertising and I can tell you I actually saw Q hillbillys and singing cats a few times - unfortunately - but never an ad from DD. Also, making the donuts at an area kitchen and shipping them to stores works in high volume locations but where I went a time or two it just meant stale donuts.

DNKN To Price @ $20/Share

The stock is oversubscribed as expected. A good thing for a company going public. Several sources are reporting on The Street the stock will be priced at $20/share over its initial range of $16-$18.

Many will ride the initial hype and jump ship as the smaller retail customers bye in. Our sources believe the stock will settle below the offering price when the greenshoe winds down.

Which Markets Were Those Dunkin's In?

I'm sure it wasn't in either the Northeast or the Mid-Atlantic markets. We're pretty strong in those areas. Once we step outside the core markets, coffee sales tumble, food cost increases, and the pleasure of doing business lacks luster.

You say, "No tv advertising, lots of coupons, no corporate support, poor quality donuts, poor service."

Dunkin' has $289 million rolling annual ad fund. Where's all the money going if it's not on TV nationally?

Edward Ryan's picture

DNKN: Dow Jones LBO Wire

Dow Jones LBO Wire reports:

A strong brand and potential for expansion is helping to generate interest in the initial public offering of Dunkin' Brands Group Inc. this week, but analysts said the company's debt level is high and its valuation is steep compared with other quick-service chains that court a breakfast crowd.

Dunkin' demands a premium because of its low cost of capital model. Dunkin' franchisee capital investments are off balance sheet which makes it an attractive model since they can grow earnings without any intensive capital requirements.

Although Dunkin's 100%-franchise model means low costs of capital and higher operating margins than rival Starbucks Corp., by many other valuation measures Starbucks clearly comes out ahead.

Starbucks clearly dominates the coffee space as the true national coffee brand.

Dunkin' Brands states in its prospectus it had 45 consecutive quarters of positive comparable store sales growth until the economic downturn pulled it into negative territory in 2008 and 2009, but even before that point, the Canton, Mass., company's annual same-store sales growth was slowing, dropping to 4.3% in 2006 and 1.3% in 2007. Though same-store sales are in positive territory now, the level is less than 3%--half the level seen in 2004 and 2005. Its same-store sales are also lower compared with those of Starbucks, which stands at 7%.

Starbucks positively pulled out of the economic downturn because they implemented a very aggressive store closure strategy early on in the recession that allows them to enjoy favorable comp sales today. Both brands implemented significant price increases over the past 2-3 years as commodity prices skyrocketed.

In Dunkin's core markets, store level performance is dictated by cannibalization of new store openings. Starbucks does not need to worry about that today as much as the Dunkin' store level franchisee owners must. Franchisees can not simply close stores to increase comp sales.

Although Dunkin' Brands doesn't have the same level of brand recognition as Starbucks, which has more locations, the company also hasn't penetrated the western U.S. or other parts of the country as deeply, giving it more opportunity to expand.

The company believes it could more than double its current U.S store base of 6,800 to a total of 15,000 in the next 20 years.

Starbucks opened its first store on the East Coast in 1993. Dunkin', on the other hand, has repeatedly opened and closed stores on the West Coast over the course of its 60 year history. During Starbucks' 25 year history, they have successfully dominated the national footprint.

Dunkin' has been selling the Westward expansion for decades. Every time Dunkin' ventures out West they seem to fall flat on their faces. Dunkin' has always been a regional brand that grew out of the Northeast. Dunkin's expansion came slowly with experienced franchisee operators that understood their local markets.

Dunkin' is now touting a 20 year plan; however, the growth plan will not keep pace with Wall Street's expectations. Management will be forced to perform against benchmarks set to a very high bar. Regardless of the future expectations, the private equity owners are pushing for the highest valuation to maximize shareholder returns today at the expense of tomorrow's management failures.    

Which Dunkin Are You Talking About?

I don't have a dog in the fight but I can tell you that Dunkin opened a lot of stores in our area a few years ago. No tv advertising, lots of coupons, no corporate support, poor quality donuts, poor service. The franchisee complaining about the cost of doing business as a DD. Eventually they all closed and the franchisee declared bankruptcy. Sounds a lot like Quiznos to me.

Dunkin' Is Neither Q Nor CSC

The thing about Dunkin' is that the business model has worked in the past for the franchisees. There is a core group of very successful "legacy" Dunkin' franchisees. As long as Dunkin' keeps those franchisees happy, they can go on with their refranchising strategies around them. This has allowed Dunkin' to stay under the radar for so long until recently with the creation of websites like BMM.

Dunkin's history of franchise relationships are most similar to Burger King. So, for a better view on the future of Dunkin', one should explore the state of affairs at Burger King to figure out whether or not BK franchisees are happy today. How many "legacy" franchisees still remain in the BK system today?

Dunkin' Is Neither Q Nor CSC

The thing about Dunkin' is that the business model has worked in the past for the franchisees. There is a core group of very successful "legacy" Dunkin' franchisees. As long as Dunkin' keeps those franchisees happy, they can go on with their refranchising strategies around them. This has allowed Dunkin' to stay under the radar for so long until recently with the creation of websites like BMM.

Dunkin's history of franchise relationships are most similar to Burger King. So, for a better view on the future of Dunkin', one should explore the state of affairs at Burger King to figure out whether or not BK franchisees are happy today. How many "legacy" franchisees still remain in the BK system today?

Unfotunately, there are other

Unfotunately, there are other franchises out there that held the belief that the zees had no say in the matter (independent of the IPO decision) where the zor tried to squeeze every last penny out of the zees Two that come to mind are Quiznos and Cold Stone Creamery. Look where that has got them.

DNKN Begins Trading Tomorrow 07/27/11

Several financial news sites are reporting on Dunkin' today. Pricing of DNKN shares will be set this evening and will begin trading at the opening bell tomorrow morning.

Compared to the 2.8x sales valuation of SBUX, DNKN is being valued at 3.5x 2010 sales. A very hefty valuation for a company that doesn't come close to the distribution of SBUX.

Nigel Travis expects future growth to come from "white space" infills and through international development.

Franchisee Standing In IPO

"Let's see how well the stock would perform if the franchisor actually held this belief."

It is not a "belief" as you say. Rather, it is a contractual and legal reality. Franchisees have no say in the franchisor.

Let's put the issue to rest by thinking of your economic reality:
If the franchisor wanted to squeeze their franchisees, what type of counter action would the franchisees be willing to take? I don't believe squeezing the franchisees is in Dunkin's best interest; however, when times are tough Dunkin has shown their ability to enforce their end of the contract over and over again.

".....as far as Dunkin goes in their IPO you have no standing."

Let's see how well the stock would perform if the franchisor actually held this belief.

DNKN not SBUX

That's right DNKN isn't SBUX. SBUX is a better buy at 22x earnings compared to DNKN's 20x EPS.

The Dunkin' Thread

@Guest23 - No one here is saying that Dunkin' can or can not proceed with their plans to go public. Majority of the comments made in this thread relate to whether or not an investment in DNKN is worthwhile.

Dunkin' is free to do what they want to do. However, the majority of Average Joe investors do not understand the franchise model and the revenue drivers for the franchisor going public.

If one were to dissect Dunkin's business and growth models, they would learn the business is driven by the franchisees. However, certain business strategies are at the detriment of franchisee profitabilty. Lack of franchisee profitability destroys the business model.

A franchisor's business model that is nearly 100% franchised can only be successful if the franchise relationship is strong. A business in a declining life cycle must find new sources of revenue to drive growth. Dunkin's model extracts the necessary revenues from their franchisees - there is nothing of substance in their business plans that says otherwise.

Dunkin is selling 20% to make a profit for investors

This what investors do...make invests and sell in whole or in part to make a return.

It is their company and their unfettered right to sell their shares. You franchisees are not shareholders, you on the other-hand have a conditional right to own, operate and sell your business. Now before you say how unconscionable this situation is...it is what you signed up for in terms of your franchise agreement and as far as Dunkin goes in their IPO you have no standing.

The Rosenberg Family Trust

Did you think he was ever going to give up his Daddy's crown jewel? Must be about 72-73 yrs old nowadays and was looking sharp, fit, and healthy the last time I saw him speak. He is following through on the Harvest of his Daddy's baby. His genius is that he has cashed out on many occasions, and with every pick of the Harvest, he screws the franchisees further. He always dispised them. Probably felt his Daddy paid more attention to them instead of him growing up.

Dunkin Road Show Attendee

Must admit the DNKN K-Cup was delicious. The frozen donuts were nasty.

NYC had a bunch of young suits. Given the rush towards the BR ice cream samples, I'd guess they probably were a bunch of summer interns. However, there was a good group of experienced fund managers who know how to play this debt laden private equity offering.

To hit the EPS targets, we're hearing increased distribution and direct sales participation. Not through the retail stores.

DNKN Road Show

I wonder how many of the NYC attendees were summer interns enjoying the freebies?

Were there any questions on the supply chain and possible opportunities to increase shareholder value from the supply chain?

What is the white space potential East of the Mississippi to sustain their projected 50% EPS growth? Can the core markets handle increased penetration as DNKN is communicating?

Going over to my Keurig to brew me a cup of that DNKN bold. Simply to hot in NYC to run over to my stores....

DNKN IPO Date

If the date is out there, then please share the date with us.

Edward has highlighted Wednesday 07/27/11 because it seems to close-out the Allied ADR's that were issued in 2002. Another Guest, raises the correlation between Robert Rosenberg and Bain Capital. If Robert Rosenberg is a significant equity holder, he would use an alternative investment structure to maintain shareholder control without being named. The ADR shares would have been placed into Bain's investment fund. Since Bain is private, no one will ever know who their investors are.

Tracking the ADR's will reveal the largest fund shareholder at Bain. Identifying the largest shareholder reveals who's really in control.

DNKN IPO

The date is already out there. I wouldn't get too excited about the prognostication.

I beg to disagree with Mr. barkan

About the McDonalds coffee experience. I have found it to be inconsistent and lacking. While McDonalds excels at burgers and fries, they don't have coffee down at all.

I'm sure there may be a few outlier shops that get it right consistently, but that has not been my experience at all, in both corporate shops and franchisee owned shops
( they each have little signs telling you who the owner is-I look).

In fact, they often screw up Chicken McNuggets for my kids, and they've had that product for years. Again, they excel with the burger and fries biz, and they are now taking their eyes off of it to produce a sloppy program. I won't even discuss the "espresso" products that can't be reliably produced even with a push button machine at McDonalds.

Any success they have with McCafe is due to McDonalds being everywhere and real coffee competition being non existing in many places.

What happens if Eddie is wrong?

Does it mean Eddie will finally accept that he doesn't know everything there is to know about Dunkin? Of course, if he is right, I would give him credit for his understanding of the financial engineering behind Dunkin's corporate veil.

Not an easy beast to figure out given Dunkin's intertwined affairs under the corporate umbrella of Allied Domecq North America and it's former parent Allied Domecq PLC.

Bobby Rosenberg was the Chairman of Allied Domecq North America and is a Managing Partner at Bain Capital today.

Frozen Donuts

Pillsbury Dough-Nut-Boy raises a great point. By diminishing the quality of the donuts over time, it is hard for consumers to determine the difference between a fresh baked and a frozen donut. They're both pretty crappy today as compared to the 1970's.

Edward Ryan's picture

Dunkin' To Go Public Between 07/26 & 07/28

I had discussed in Where Is Bain's Equity? Why So Private?:

"To understand the goodwill/stockholder’s equity/paid-in-capital accounting manipulation one must analyze the financial disclosure notes stated in the publically filed financial disclosures for the following companies:"

  1. 1998 – 2006 Allied Domecq PLC – United Kingdom
  2. 2002 – 2005 Allied Domecq North America Corporation – United States - a) American Depository Receipt (ADR) – Ticker AED (Inactive) - b) Over The Counter (OTC) – Ticker ALDCY (Inactive)
  3. 2003 – 2008 Alimentation Couche-Tard – Canada
  4. 2005 – 2010 Pernod Ricard SA – France
  5. 2008 – Present - Pernod Ricard: American Depository Receipt (ADR) – Ticker PDRDY (Active)

The Allied Domecq North America Corporation ADR ALDCY was converted into the Pernod ADR PDRDY. In order to close the books on the ALDCY shares converted to Pernod, the DNKN IPO must be issued on a fiscal date to match the closing of the ALDCY shares held by Pernod.

The time frame would indicate a DNKN stock offering sometime next week on either Tuesday 07/26/11, Wednesday 07/27/11, or Thursday 07/28/11. Once again, this all depends on my understanding of Dunkin's equity ownership structure. 

I guess you can call the above my prediction on the timing of DNKN's IPO. Will wait and see what next week brings.

Enjoy the weekend and stay cool in this heat wave BMM!

Our $.99 Iced Teas are selling like gang busters......and, everyone is going Large!

Fresh/Frozen speaks to quality of product

The reason customers can't tell the difference is due to the quality of the product; both when first served and after it has been sitting around awhile.

Luther told Franchise Times that he did not eat donuts because Luther's daughter was a "fitness guru" and his disdain for the company's namesake product is reflected in the quality of donuts today.

Back in the 1970s, Dunkin made a top-notch product. Now donuts are an afterthought, considered as a low-margin product to be ignored while the company touts coffee sales.

Dunkin' Comp Sales

"Dunkin’ Brands is planning on meeting its future projections by increasing its comp sales, which depends on driving its afternoon daypart business – something it has never accomplished – and then successfully expanding into “contiguous” but nevertheless untested new markets."

I recall attending a franchisee convention in Atlantic City, NJ in 2005. At that time, Jon Luther promised franchisees that they were working on an afternoon product that will double the sales of their businesses. In 2007, we came to learn their product innovation was the introduction of the TurboChef Ovens. When they implemented the Next Generation Sandwich Station (NGSS) with the TurboChef Ovens, all of Dunkin' competitors followed suit. Dunkin' has repeatedly failed in its attempt to bring in a successful afternoon day part driver. However, Dunkin' Brands successfully reaped the benefits of the vendor contracts supporting the NGSS platform.

In a 100% franchised public environment, the only thing that matters is Franchisor EBITDA. As long as the franchisees are willing to take the Dunkin' shovel up their arses, DNKN EBITDA will perform to the analysts expectations. I suggest that if franchisees are willing to ride the Golden Dunkin' Shovel, then they should be buying DNKN by the truckload.

Dunkin' Franchisee Gross Margins

"As a former franchisee, I can confirm the deterioration of the gross margin at the store-level, which has continuously declined over the past twenty years, mostly due to changes in the franchise agreement and operations manual. The gross margin, which was once almost forty percent, has decreased to below twenty percent."

Mr. Barkan must not have been a franchisee for very long. Franchisee gross margins have been deteriorating since Luther came on board in 2003. The biggest slide has been over the past 6 years ever since Jon Luther cut the deal with the private equity owners.

The brand reached maturity between 1995 and 2005. Dunkin' is clearly in the decline stage of it's business life cycle. If there was any growth remaining in the U.S., they would wait on their IPO plans. However, the private equity owners are smarter and are very good at timing the markets

Dunkin's Frozen JBOD

"Wow, I thought, as I heard these words coming out of his mouth – if he really thinks you can fool customers into buying frozen, not fresh, donuts then Nigel has not been getting out of his office at the Canton headquarters."

Mr. Barkan must have left the system long before the launch of the JBOD program. Dunkin' has been testing their frozen donuts in the Mid-Atlantic and Northeast markets in stores that are surrounded by other shops that produce freshly baked donuts. By mixing in their frozen donuts, in markets with fresh baked donuts, Dunkin' is able to test consumer feedback. The strategy allows Dunkin' to listen in on what consumers are saying. For instance, if customers are continuously commenting negatively on the taste profile of a particular store's donuts, then they know the JBOD program is not working. However, this has not been the case. Rather, consumers really do not know the difference between fresh baked and frozen.