Dunkin’ on Monday did something it hadn’t done in a while: Bought some restaurants.
The Canton, Mass.-based coffee chain closed on the acquisition of 31 locations in Ohio. And while the company has over the years periodically acquired franchise units, the last time five years ago, this time it has no plans to sell them to another franchisee.
Rather, the company plans to keep a small number of its own restaurants to get a better sense of the issues affecting franchisees. It’s part of a broad franchising strategy by parent company Inspire Brands, which wants all its brands to operate some restaurants, even if they remain primarily a franchised company.
“In the past we bought troubled markets as a bridge,” Dunkin’ President Scott Murphy said in an interview. “This is going to be a little different.”
The company has no plans to change its “asset-light” model, and franchisees will continue to own the bulk of the chain’s 9,500 U.S. locations. But Dunkin’ ultimately wants to own 100 to 200 locations to test new ideas and get a better sense of what franchisees are dealing with.
“This helps us get close to day-to-day operations,” Murphy said. “We can feel the pain franchisees feel. It lets us make decisions on that.”
Larger and older fast-food brands have eschewed store operations over the past two decades, preferring to let franchisees be the ones to operate the locations. Franchising generates higher profit margins, even though franchisors only take a percentage of total revenue, because they don’t have to pay for as many employees or for things like buildings and supplies.
One of the contrarians to this strategy is Paul Brown, who took over as CEO of Arby’s in 2013 and shortly thereafter put a stop to the company’s refranchising plan. Arby’s staged a dramatic comeback in subsequent years, and the company received the benefit of that improvement.
Arby’s later bought Buffalo Wild Wings and formed Inspire. In addition to the policy of operating some restaurants, Inspire gives Dunkin’ something else that encourages it to operate locations—the infrastructure to operate the locations, like payroll. “All the stuff that we would never get into the nitty gritty of,” Murphy said.
The company started looking at the acquisition this summer. It wanted to buy restaurants in a strong market. Dunkin’ locations in Ohio generate sales that are 10% to 20% above the national average. The market also has white space. “It’s a high-performing network in a good-performing market with some room to grow,” Murphy said. Arby’s also has a lot of locations in Ohio.
“We’re pretty excited about the prospects of that market,” Murphy said.
That said, Dunkin’ isn’t restricting itself to just Ohio, though at the moment the company is focused on getting its operations up and running. “We just closed last night,” Murphy said. “Let us make sure we get this one right.”
But, he said, “we’ve got our eyes on other markets.” At the same time, the brand’s franchisees will pay close attention to Dunkin’s attempt at operating locations. “There are a lot of eyes on us with this market,” Murphy said.
The market should also give Dunkin’ some insight into the challenges facing its operators. Murphy cited a long conversation with some franchisees about delivery. As a franchisor, he gets excited about the service and its ability to generate more royalties.
An operator then shot back that the company is not trying to reconcile all the delivery tablets on a daily basis. “Starting this morning, I am,” Murphy said. “It gives a level of credibility to our policies.”
It’s also a testing ground for new products or technology.
“We have some whiz-bang technology that I’d love to put to work in Ohio and see how it works,” Murphy said.
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