Dunkin' Brands relies almost entirely on its franchisees to generate revenue through royalty fees. In the first three quarters of 2014, franchisee sales totaled $7.2 billion, generating $355 million in royalty revenue for Dunkin' Brands. While Dunkin' Brands has lower costs than competitors due to its franchise model, it also takes on significant debt and has less ability to influence sales growth than vertically integrated brands. Dunkin' Brands aims to grow through expanding its franchisee base rather than raising fees.

1. FINANCIAL ANALYSIS
Revenue
Dunkin’ Brands business model is almost entirely dependent on franchisees to generate
revenue. In international markets, its Baskin Robbins brand, is supply chain dependent on
Dunkin’ Brands and revenue is generated from sales to franchisees. There is also retail revenue
from company owned stores and licensing. Packaged coffee sold in super markets and retail
locations is the largest piece of Dunkin’ Brands’ licensing revenue, about 2.7%. Through the
first three quarters of 2014, there has been about $7.2 billion in sales at franchisee locations.
Company owned stores have generated $16 million in sales. The effective royalty rate of
Dunkin’ Donut stores in the US has been 5.4% and 5% of Baskin Robbins sales. Dunkin’
Brands collects weekly royalties from its franchisees. Through the first nine months of 2014, the
royalty payments have generated $355 million in revenue. Coffee and other beverages make up
57% of franchisee sales (Dunkin’ Brands, 2014).
This emphasis on the franchise model allows Dunkin’ Brands to obtain large margins.
Gross profit margin is 78.28% while the net profit margin is 24.19%. There are less than 1,000
corporate employees. The marketing budget of Dunkin’ Brands is funded (about 5% of gross
sales) by franchisees, with less than 20% of that fund going to pay administrative expenses
(Dunkin’ Brands, 2014).
Dunkin’ Brands also has, especially in the United States segment, little to no involvement
in the supply chain. Dunkin’ Brands licenses the Baskin Robbins brand to Dean Foods to
produce the ice cream needed by its stores. Dunkin’ Brands makes a 1% royalty on every gallon
of ice cream that its franchisees buy from Dean Foods.

2. QSR (quick service restaurants) accounted for $233.6 billion in sales in the US during
2013 (Fast Food Restaurants Industry, 2014). Dunkin’ US franchisees generated about $9 billion
in sales in 2013, earning a market share of 3.9% (Packaged Facts, 2014).
Debt service is $51 million against $555 million in revenue, making 9.1% of revenue is
marked for debt service. The outstanding long-term debt of Dunkin’ Brands is over $2 billion.
Segments
Dunkin’ Brands business segments are divided across brands and domestic and
international markets. The four segments are Dunkin’ Donuts US, Baskin Robbins US, Dunkin’
Donuts International and Baskin Robbins International.
Dunkin’ Donuts US had growth of 7.4% in revenues in 2013 over 2012 numbers. This
growth is mainly driven by franchisees opening restaurants and expanding the footprint of
Dunkin’. As Dunkin’ Brands has no control over revenues except those generated by
franchisees, the expansion of stores is the only way that Dunkin’ Brands can show growth
without raising franchise royalties. Of the $35 million in revenue growth, 23% ($6.7 million) is
from franchisee fees. That is not repeatable or controllable without franchisees renewing and
expanding their footprint. Guidance from management during the last earnings call lowered
estimates of same store sales growth to 2% (Dunkin’ Brands, 2014).
Dunkin’ Donuts International reported a loss of $2.1 million in 2013 from 2012. That is
a decrease year over year of 22.7%. Part of the loss was a write down from a Spanish joint
venture. Dunkin’ Donuts International is moving from development agreements with other
entities in international markets to a franchisee model world-wide. Dunkin’ has also invested in
the infrastructure to grow the International business, further reducing segment revenues for 2013.

3. Financial Ratio Analysis
Examining the ratios that describe return on investment, it demonstrates the almost 100%
franchisee model and reliance on debt does not equate Dunkin’ Brands with other restaurants in
the QSR market. (See Exhibit 1)
An analysis of the ratios that measure the ability to pay off debt, Dunkin’ Brands lags
behind its peers. The long term debt ratio for McDonalds is between .5 and .57, while Dunkin’
.87-.89. Panera Bread and Starbucks are at .35-.40 and .37-.61 respectively. The discrepancy
can be explained by the business model. McDonald’s has a franchise business model, but there
are corporate owned stores and revenue generated by the supply chain that Dunkin’ Brands does
not have. Panera Bread and Starbucks is also reliant on a more 50-50 mix of debt and equity.
Dunkin’s aggressive buy back and long term debt reflect a different capital structure then seen in
the QSR industry.
Break Even Analysis
Since Dunkin’ Brands depends almost entirely on franchisee royalties to generate
revenue, the corporate break-even point will be low relative to the competition. The costs that
need to be covered would be SG&A and interest expenses. There is little to no property or
physical plant that requires continuing investing or maintenance.
On the store level, most stores are operated by franchisees that have more than one unit.
This would lower the initial costs and the knowledge already possessed by the franchisee would
allow an earlier break even. A brand new franchise, similar to the recent expansion into
California, would have an initial franchisee fee of $65,000. There is a marketing start-up fee of
$7,500. Dunkin’ Brands handles the marketing and it is paid for by the franchisees. There is a
variable cost of 5% of gross revenue that is paid for marketing services by every franchisee.

4. The fixed costs required vary depending on geographic area and local economics.
Dunkin’ Brands requires its franchisees to have insurance and indemnification up to $15,000.
Building costs average $625,000 for the store build out. In regards to the rent, an average 1,900
square foot space with a California average of $22 per square foot makes a rent cost of $418,000
for a year. Other costs include $20,000 for the retail information system and cash register.
Opening inventory is about $15,000. Uniforms for the staff is $800 and the various license and
permits needed for the build out and to operate a business in the locality averages $3,500.
Dunkin’ Brands suggests there might be up to $30,000 in miscellaneous costs. For a sample
store in California, there would be a total fixed cost of $1,199,800 for the store opening.
In regards to variable costs, in addition to the marketing fee, there is a royalty fee. The
new royalty fee for Dunkin’ stores is 5.9% of gross sales. Gross sales is everything that is sold at
the store, including merchandise. Labor costs were approximately 30% on average. Food costs
can be up to 20%. Variable costs take up 61% of revenue, leaving a contribution margin of 39
cents per dollar of revenue.
Breakeven revenue for a first year store would be $3.076 million (See Exhibit 2).
Stock Information
As of the market close on October 24th, 2014, the 200 day moving average stock price of
Dunkin’ Brands $45.04. Dunkin’ Brands does pay a dividend that was recently raised to 23
cents a share, giving a dividend yield of 2%. That yield is currently better than the 5 year
treasury. The consistency of the yield and the revenue stream of franchisee royalties put the
stock into a stable investment. The average volume over the last 3 months is 1.2 million shares.
There are 104.84 million shares outstanding, giving Dunkin’ Brands a $4.7 billion market
cap. Starbucks, another organization in the quick service restaurant market, has a market cap of

5. $56.95 billion. Panera Bread Company has a market cap of $4.56 billion. McDonald’s, $90.01
billion and Burger King, $11.14 billion. The available float is 104.44 million shares. Less than
5% of the shares of Dunkin’ are currently being shorted and there are no major block holders and
there is less than 1% of shares being held insiders. The 52 week range for the stock price is
$40.50 – $53.05 (Yahoo Finance, 2014).
The Dunkin’ Brands board of directors authorized in February 2014 another $125 million
to repurchase shares, either on the open market or through private channels. This authorization
expires in 2016. This aggressive approach to share repurchasing accomplishes two things: return
value to shareholders and allows Dunkin’ to increase returns on equity because it is retiring that
equity. In the 3rd quarter of 2014, 1.125 million shares of stock were purchased by Dunkin’.
This strategy allows the EPS to be increased without an actual change in earnings. At an average
stock price of $45, Dunkin’ has only used $51 million of the authorization.
Summary
Dunkin’ Brands has similar financials to competitors, but relies on the franchisee model
to generate almost all of its revenue. There are no inherent factors in the business model or
leverage that can be used to accelerate growth. The dedication to an almost 100% franchise
model forces Dunkin’ to open up territories for new or existing franchisees to build more stores
in order to show growth. Dunkin’ also does not have enough cash on hand to acquire businesses
or consolidate in the competitive quick service restaurant industry. The relatively large debt
burden puts Dunkin’ in a dangerous position if it cannot increase the franchise base and increase
royalties.

6. APPENDIX A
Exhibit 1.
**Dunkin’ Brands had an IPO offering in 2011. This greatly increased the amount of equity at
the start of 2012, lowering the return on equity. Source: Annual Reports
Exhibit 2.
Exhibit 3.
McDonalds 2012 McDonalds 2013 Panera Bread 2012 Panera Bread 2013 Starbucks 2012 Starbucks 2013 Dunkin' 2012 Dunkin' 2013
Return on Equity 0.3798 0.3652 0.2648 0.2387 0.3154 0.3353 0.1452 0.4238
Return on Assets 0.2363 0.2325 0.2085 0.2563 0.2279 0.2249 0.0511 0.0607
Return on Capital 0.2984 0.2895 0.3209 0.3028 0.3794 0.4042 0.0640 0.0906
Long Term Debt Ratio 0.4865 0.4802 0.2048 0.1777 0.1113 0.2028 0.7097 0.8399
Total Debt Ratio 0.5678 0.5629 0.3519 0.4073 0.3777 0.6108 0.8912 0.8725
Current Ratio 1.4464 1.5934 3.2829 2.7618 1.9004 1.0175 1.1881 1.3412
Cash Ratio 0.4041 0.4163 1.0706 0.4129 0.5379 0.4790 0.3821 0.4044
Fixed Starting Expenses Cost Variable Operating Costs Cost
Initial Franchisee Fee $65,000 Ongoing marketing costs 5%
Marketing Start up Fee $7,500 Continuing franchisee fee Royalty 5.90%
Idemification/Insurance $15,000 Labor Costs 30%
Building costs $200,000 Food Costs 20%
Other development costs $50,000 Sum 61%
Equipment, fixtures, signs $375,000
Retail Information System $20,000 Source: Franchisee Disclosure Document
Opening Inventory $15,000
Misc Opening Costs $30,000
Licenses, Permits, etc $3,500
Uniforms $800
1 Year rent - 19,000 sq ft, $22 $418,000
Sum $1,199,800
Restaurant Type Initial Finance Fee
Dunkin' Donuts Branded $40,000 - $90,000
Baskin Robbins Branded $25,000
DD/Baskin Robbins Multibranded $50,000 - $100,000
Source: Dunkin' Brands 2013 Annual Report