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Financing

How Dunkin’ franchisees are expected to weather the coronavirus storm

Federal assistance, cost cuts, tax changes and other efforts are intended to help operators’ cash flow.
Photograph courtesy of Dunkin'

Dunkin’ Brands expects franchisees to make it through the coronavirus pandemic and its various state-based restrictions thanks to a host of internal and external assistance that should give them enough cash for the coming months.

Executives with the Canton, Mass.-based operator of Dunkin’ and Baskin-Robbins provided a rare glimpse into their operators’ finances Thursday, saying franchisees’ operating cash flow is at 80% of where it was expected to be at the start of the year.

“We are very confident in the financial health of our franchisees,” Kate Jaspon, Dunkin’ Brands’ chief financial officer, said on the company’s first quarter earnings call.

Franchisee health is a big issue for most large fast-food brands, many of which are mostly run by independent business owners who operate the restaurants and pay a percentage of sales to the franchisor.

Many of these companies are small businesses—the typical Dunkin’ franchisee, for instance, has 150 workers.

Operators’ cash flow has become a major concern as sales fell off a cliff in March. Same-store sales at Dunkin’ in the U.S. were up 3.5% in the first 10 weeks of the first quarter, for instance, which would have been the highest mark for the brand in seven years. Traffic was up, too, for the first time in four years.

The brand finished the quarter with a 2% same-store sales decline. Same-store sales declined 35% in late March and early April before recovering to a decline of 25%. The restaurants saw steep declines in morning customers as more people worked from home—though executives said Thursday that they’ve picked up customers in the late morning and afternoons as people take breaks.

That sort of decline generated considerable fear that operators would run out of cash to pay their banks or their landlords.

Dunkin’, like many companies, took broad steps to help operators make it through the problem, including deferrals on royalty and ad-fund payments and rent in situations where the company controls the real estate.

“We’ve had to make decisions without perfect information,” CEO Dave Hoffmann said. “Early on, we rallied around a phrase that no one will remember an overreaction, but they will certainly never forget an underreaction.”

Since then, the federal government established a $349 billion fund, which was later increased, called the Paycheck Protection Program. Many Dunkin’ operators have been approved for such funds.

In addition, Dunkin’ said it has worked with operators’ lenders, vendors and suppliers to provide additional flexibility.

Jaspon said the company has been in “constant contact with our franchisees” and has brought in outside experts to help them with various topics, including managing staff levels and determining operating hours. Many operators are closing at 7 p.m.

Meanwhile, new tax rules are enabling operators who did remodels in the past two years to make a technical correction on this year’s tax returns. Jaspon estimated that this could provide operators with as much as $40,000 in cash per remodel.

Many operators have remodeled restaurants in recent years and needed to borrow to get that done. Jaspon said many lenders have worked with franchisees to defer principal and interest payments.

She added that few operators are in “distress.”

“While we are working with our franchisees, there’s very few who may be in a distressed situation,” Jaspon said. “We have a group that’s working with them, helping them get through these situations. It’s a smaller population than I think you believe, and I think we have great ability to work with those lenders.”

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