Want to Own a Dunkin' Donuts Franchise? Know This First

NEW YORK ( TheStreet) -- Dunkin' Brands ( DNKN) last month said it was finally expanding its doughnut-and-coffee franchise to Southern California.

Dunkin' Donuts has 7,300 U.S. locations (with just 31 company-owned stores). The company is looking to recruit franchisees for Los Angeles, Riverside, San Diego, San Bernardino, Ventura and Orange counties. It expects the first of the new stores to open in 2015.

While the California Dunkin' stores are getting much fanfare, the plan is a continuation of the steady expansion that the Canton, Mass.-based franchisor has been making from coast to coast. This year, Dunkin' Donuts plans to open as many as 360 stores in the U.S., on top of the 150 net U.S. new locations in 2012, fitting in with its goal of ultimately being an organization of more than 15,000 Dunkin' stores. The company has a global total of roughly 10,400 locations (excluding those in the Baskin-Robbins ice cream brand, which it owns).

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TheStreet caught up with Grant Benson, vice president of franchising and business development for Dunkin' Donuts, to discuss the doughnut-and-coffee maker's franchising plans.

Dunkin' used to be in California and then you pulled back, but now you're going at it again. Can you talk about that and why now is a good time to enter that market?

Benson: Dunkin' has been around for 65 years, so in the past there have been markets where someone has come to us and said, 'Look, we'd like to open a store or a couple of stores. Can you support that?' Generally, we have said 'yes' to those situations. One of the things we really learned, though, and it's become increasingly clear in the competitive QSR environment of the past 10 to 15 years, is that if you're going to go into a market, you've really got to go with the intention to go in a big way. So the fact that we may have sprinkled a few stores here or there over the last 60 years in California or somewhere else is not a market-entry strategy. What we've really been doing over the course of the last four to six years is making a significant commitment.

We're going in a methodical manner that would allow us to gain critical mass in that marketplace, become convenient for the guests, and to be able to generate the advertising voice, if you will, necessary to compete. But that's truly no different from how we would go into Nashville, or Des Moines, or any other market where we don't have a lot of presence yet and we're committed to gaining it.

It's no secret that other competitors are looking to expand their presences too. Tell us why it's a good time to be a Dunkin' Donuts franchisee.

Benson: It's a good time to be a Dunkin' Donuts franchisee because of the concepts that Dunkin' Donuts is -- a value proposition, that has a quality product at a valued price, a very attractive menu in the morning, during the day and a growing evening snack. It's an investment that, from a capital standpoint, is reasonable given the sales levels that our units are generally able to drive. It really makes a great business opportunity.

One of the other things is that Dunkin' has the benefit of being able to offer our developers multiple formats in which to enter a market. They can go in with freestanding locations with drive-through; an end-cap strip-center location with drive-through; they can go inline, possibly without a drive-through, in some of the dense urban areas. We can partner with gas-convenience chains. We find ourselves at Wal-Mart Stores ( WMT) and grocery stores. All of those different concepts in that portfolio really allow the Dunkin' franchisee to be able to match the opportunity with a concept that fits the potential of that area.

It may be different from a lot of other concepts where it is pretty much a cookie-cutter plan. It's much more flexible.

It also sounds like just like a whole variety of different investment levels as well.

Benson:Yes. That's the beauty of it. It allows us to go into some of the best real estate where we think the sales are going to be the absolute highest or fill in our more densely penetrated markets with smaller locations that still help us gain market share and provide guests convenience, but don't require the capital intensity or the development lead times and don't put you through the zoning and permitting challenges that full freestanding locations may need.

In the franchise world, a lot of talk today is around multi-unit ownership. Is that required?

Benson: Although we've got franchisees that have up to a couple hundred locations, the average franchisee in the Dunkin' system probably is somewhere in the neighborhood of a half a dozen locations.

We like to see a minimum of five locations or so, but there are situations where that is just not possible given the opportunity left within a market or other factors.

We really like that franchisee to be able to play in the whole portfolio of concepts. Someone who is committed to five or six stores could probably have some of the lower capital concepts in there, and it really allows them to diversify that portfolio out a bit and it also allows them to be able to fund the infrastructure necessary to build a team and create bench strength within their networks.

So who would make a good Dunkin franchisee? One of the things that we really do value is previous restaurant experience. That's very important. With some of the smaller locations, that may not be an absolute requirement if there was other business experience where people were able to demonstrate that they had managed a business, they built a team, they were responsible for a profit-and-loss statement, and they understood the nuances of that.

I saw on the website about some special incentives that are being offered. Can you talk about those?

Benson: Particularly as we go into newer markets, because there is a ramp-up period and it can take a little bit of time to get the full marketing voice that we would want, and you may be dealing with newer franchisees who have some learning to do in the business, it's not unusual for us to offer reductions in the royalties, the percent of the sales that are paid to us as the franchisor. We tend to discount those in some of our newer markets on a sliding scale.

Another thing that we offer is a support of a local marketing side. Dunkin' will provide franchisees some matching funds in order for them to build their business locally in certain markets, and certain newer markets.

Do you provide financing for franchisees?

Benson: We do not. We work very closely with franchisees in preparing business plans and educating their banks. We'll provide banks information necessary for them to better understand the business and we do have some programs that we work with national lenders, but it's not a situation where anybody who comes into the system, Dunkin' is going to loan them the money to open the store. In fact, we've got fairly rigorous requirements for both liquidity and net worth that are one of the preliminary requirements that we look at when someone would reach out to the brand. That varies based on size.

We've set those standards to such a level that when they come in and they prove to us that they've got that much liquidity and net worth, it should be sufficient to be able to go to a local lender or even one of our national lenders, if necessary, and get the financing.

How is the recruiting going in California? Can you share any anecdotes on who is looking to buy or about the demand in general?

Benson: The demand is huge. We started a major franchising push back in 2006 and although we were not franchising in a lot of markets in the country, we did allow people to express interest and to kind of get on the waiting list, if you will. When the market would open, we checked with those people and see if they were still interested. California had always been the market with the longest line, if you will, since we started building that list. Now, that doesn't mean they had three dollars to their name, but there were people that had reached out and had said, 'Hey, I'd be interested in knowing more about this opportunity when you guys decide to come.'

In addition to that, when we announced the entry back on Jan. 16, they really came out of the woodwork. So it was exactly what we expected, exactly what we knew we would get -- very, very high levels of interest, much of which is from existing quick-serve restaurant groups who would be looking to add Dunkin' to their portfolio, and certainly we get our fair share of inquiries from people who just want to be part of the group that brings Dunkin' to the West Coast. And there's celebrities and sports figures and that type of thing, but that doesn't really carry a lot of weight with us. Our interest is in getting the best operators and the best developers into these territories.

With any franchise story, for as many happy franchisees as you may have, there are always those franchisees that are dissatisfied for whatever reason that might be. How do you ensure that your franchisees are happy and satisfied?

Benson: We have to have a good relationship. We are not a concept that operates company-operated locations. So if we are not getting along with our franchisees, and they have got issues, concerns, problems on a broad scale -- that's not to say the guy down the street may not have a challenge -- but if your franchise community is not supportive of what you're doing, they're not going to reinvest. Unlike other chains, we can't say, 'That's OK. We'll just go open 300 more company stores next year and we'll make up for the fact that our franchisees are choosing to sit this one out.' We value the franchisee relationship very, very highly.

We have a firm belief that if we can make our franchisees more profitable, they will continue to invest and reinvest their capital in this brand as opposed to another, and nice things happen for everybody. The only way you generate that is by having the right franchisees in the right sites, and making sure as a franchisor, we're providing what we need to provide, which is the right coaching and counseling, training, innovative product introductions, cutting edge markets and all of that.

My last question for you, Grant, are you a chocolate-frosted guy or a jelly- doughnut guy? What is your favorite?

Benson: I will tell you it's tough to beat the plain glazed doughnut. Regardless of how much frosting or sprinkles or whatever it may be, the good old-fashioned honey-dipped or glazed doughnut will always be the number seller. That's my favorite.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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