Why a franchise-focused business is Dunkin’ Brands’ golden ticket
Opening up shop
Dunkin’ Donuts has pursued an increasingly aggressive expansion strategy since its IPO. The key to this strategy is its franchise-centered business model. Management believes the lack of a significant amount of company-owned stores (35 total across Dunkin’ Donuts and Baskin-Robbin’s platforms) allows the company to focus on menu innovation, marketing, franchisee coaching, and other supportive initiatives to drive brand success. The fees associated with franchising a Dunkin’ Brands restaurant are the key revenue driver for Dunkin’ Brands Group.
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The majority of international royalty fees are 5.0% of gross sales, but this rate is lower in larger markets. For example, the Korean joint venture partner has a lower rate. So the effective international royalty rate for FY2012 was 2.0%. Royalty fees are typically collected weekly—except in the case of Baskin-Robbin’s international franchises. The company generates revenue via the sale of ice cream products, so the effective royalty rate was roughly 0.7%. Royalty fees composed 63.7% of total revenues for FY2012.
Changes to the SDA
The various fees are modified on a case-by-case basis, outlined in Dunkin’ Brands franchising store development agreement contract (or SDA). Restaurants in developing markets are the most common recipient of a fee reduction. Corporate will occasionally reduce royalties for the first few years of a newly opened franchise in a developing market. Likewise, the company may reimburse the franchisee for local marketing efforts. Plus, Dunkin’ Brands will provide certain development incentives as specified by a qualified franchisee (qualifications are set forth in the addendum to the SDA). Management believes these incentives will drive development in infantile markets.