Dunkin Donuts and Tommys Franchise Store Analysis - Essay Example

?Dunkin Donuts Case I. INTRODUCTION In this modern day context, the organizations usually prefer the option of franchising stores. However, it would be vital to mention that there are certain issues that can be associated with franchising stores. These might include moral hazards and adverse selection of franchise partners among others (Karle and Staat, “Signaling Quality with Initially Reduced Royalty Rates”). According to the case study of Dunkin Donuts (DD), two issues can be identified as being recently faced by the company that include emphasize whether to disenfranchise with one of its deviant franchisee owners named Tommy and selecting suitable franchise partners between Herman and Benito. With this concern, the essay will qualitatively along with financially analyze and recommend better implementation strategies for DD in addressing and mitigating the aforementioned issues. II. DUNKIN DONUTS AND TOMMY’S FRANCHISE STORE ANALYSIS Tommy can be apparently observed as serving a franchise owner of DD for more than 17 years. However, as days passed, the performance of Tommy’s store declined as per the standard of Customer Satisfaction Guide (CSG). This eventually resulted in deteriorating the franchisee standard of DD. Besides, DD has also been making complaints against Tommy about his non-payment of fees to DD within the stipulated time period. Thus, considering the aforementioned situation, it can be affirmed that DD should disenfranchise its affiliation with Tommy and restructure the store into a company-owned establishment. The company-owned store would certainly assist DD towards making greater sales through having greater control over the operational functions (Trefis, “How Important Are Company Owned Stores to Mcdonald’s Stock ?”). However, prior to making this decision, certain options that have been provided to this situation require to be analyzed. These options have been elaborated hereunder. 1) Maintaining Tommy as Franchisee. The initial option, which has been provided to DD in this situation, is keeping Tommy as the franchise owner till the end of the contract. It can be affirmed that this particular option would not be appropriate for DD owing to Tommy’s bad performance in maintaining the standards of his franchise store, which in turn, affected the brand image of DD at large. In addition, the non-payment of fees in a fixed time period by Tommy might also generate certain potential problems between him and DD. Thus, this option would not be relevant for DD in the situation of buying the store of Tommy with the lowest probable price. 2) Royce as a New Franchisee Replacing Tommy’s Position. The second option of replacing Tommy with another franchise named Royce has been given to DD. It is strongly believed that Royce will not only be able to meet the industry standards, but would also deliver significant profits to DD. Therefore, this particular option can be justified on the grounds that DD will get 4.5 and 4.9% variable fee along with additional rental fee above sales of $165,000. 3) Company Owned Store at Tommy’s Franchise. The third option is to form a company owned store at Tommy’s franchise. This could be a favorable option for DD in terms of making significant profits. Assuming that this particular store would generate a sale of $ 290,000 and the total profit margin of a company owned store is of 13%, the total cash flow and the profit margin of a company owned store would be more as compared to a franchise store. This can be better understood with the help of the following tabular representation. Apart from attaining substantial profitability, DD can also be benefitted from this option i.e. setting up a company owned store at Tommy’s franchise in terms of effectively monitoring the store, scrutinizing customers’ voice and controlling various operational functions of the store efficiently contributing further to its well-built brand image (Chabaud and Saussier, “Incentives and Control In Company-Owned Vs. Franchised Outlets: An Empirical Study At The Chain Level”). This option will also be beneficial owing to the location prospects of Tommy’s franchise, positioned at adjacent place to the corporate headquarter of DD. III. RECOMMENDATION I – TOMMY Based on the above analysis, it is strongly recommended that DD must form a company-owned store at the place of Tommy. This would not only facilitate the company to earn substantial revenues but would also enable the company to reap other major benefits such as increased brand value through stronger brand image and a more powerful ownership control over the store. IV. HERMAN VS. BENITO ANALYSIS 1) Franchisee. According to the research conducted by Dan O’Neil, the DSM for the metropolitan Boston District, Herman would be the most attractive and the potential franchisee of DD. This can be justified with reference to the fact that though Herman possesses lower expected profits derived from smaller sales projection, its CSG score remains much higher than that of Benito. Moreover, the performance of Herman can be assessed to be much promising along with valuable as compared to Benito, which would eventually support DD to attain substantial profitability in the short-run. It is worth mentioning that Herman would also be the best attractive option for DD as it possesses stable personal assets, resulting in raising the possibilities for DD towards negotiating for greater percentage of upfront fixed fee. 2) Financial Analysis. From financial perspective, it can be affirmed that the store of Benito is anticipated to generate more sales, although the cash flow to DD would only be differing by $2,000 annually. Assuming that Herman would provide DD with more constant returns, lesser sales and extra initial cost of $35,000 would not be a loss for him. This has been explained in the following table. In relation to sales projection, more income will be generated by Benito as compared to Herman. For instance, by taking into concern the land value, which is incessantly appreciating and the prospects for the generation of greater sales, the lower profit and the higher costs would not be the major problems for Herman, as he possesses more capital as compared to Benito, which would back up in terms of owning multiple operations. The sales projection has been illustrated below with the help of a tabular representation. 3) Conflicts with Brookline Village Citizen’s Work Group. According to the case study, Herman faced certain difficulties in obtaining approval for setting up a store on Brookline Village based on social grounds. It was because of the notion prevailing amid the approvers that the fast-food establishments will lead towards the destruction of neighborhood at large. In this similar concern, DD requires to help Herman in getting the approval by changing operating hours. Therefore, in order to actualize the franchise of Herman, strong focus is necessary to be laid upon the background of DD’s Corporate Social Responsibility (CSR). V. RECOMMENDATION II – HERMAN VS. BENITO Based upon the analysis made upon the franchising establishment proposed by Herman and Benito, it is recommendable that Herman should be provided with an option to open another franchise on Harvard Street. In this regard, Benito would require working more upon the factor of CSGs with the intention of wining franchisee bids in future. Based on the conflicts with Brookline Village Citizen’s Work Group, it is advised to DD to form a special task force in order to counter the problems that would appear in the Town of Brookline, on Harvard Street. Moreover, it is recommended that Herman should focus upon altering operating hours, as he did in the case of Brookline Village Citizen’s Work Group for the purpose of addressing any sort of problem. However, there still pertains the probability of the Town of Brookline towards restricting in obtaining the approval of opening a franchise on Harvard Street. In this particular situation, it can be affirmed from a broader understanding that DD might offer a franchise to Benito, who agreed to wait until the meeting conducted with the Town Planning Board. This could be duly considered as an effective strategy towards eliminating possible conflicts especially within the Town Planning Board. VI. CONCLUSION From the above analysis, it can be concluded that DD would disenfranchise Tommy and form a company-owned store at Tommy’s place along with letting Herman to open a second franchise DD store on Harvard Street. These decisions have been made through performing financial analysis and contrasting the effectiveness of diverse franchise partners. Works Cited Chabaud, Didier and Saussier, Stephane. “Incentives and Control in Company-Owned Vs. Franchised Outlets: An Empirical Study at the Chain Level”. n.d. Web. 4 Dec. 2013. Karle, Heiko and Staat, Christian. “Signaling Quality with Initially Reduced Royalty Rates.” 2013. Web. 4 Dec. 2013. “How Important Are Company Owned Stores To Mcdonald’s Stock ?” Trefis. 2013. Web. 4 Dec. 2013. Read More