Time to Make the Doughnuts

Zales Corp. smells sweet success in expanding Dunkin' Donuts

It's 9 a.m. on a Friday in Plano, and Bob Ripper is making his morning run to Dunkin' Donuts.

He comes to this pink and orange storefront on Independence Parkway maybe twice a week, with stops at McDonald's and Einstein Bros. on the days in between for his morning cup of brew. But Starbucks?

Starbucks doesn't even enter the equation for the retired New Yorker, who likes his coffee without all the fancy frills that define the Seattle-based franchise that dominates the domestic coffee market.

For years, Ripper had one choice if he wanted Dunkin' Donuts coffee in Plano—a corner store in a strip mall on Coit Road. But that's changing. Last year, Dunkin' Donuts embarked on an ambitious westward expansion, with plans to open about 9,000 new stores nationwide by 2016.

The expansion comes at a time when Starbucks is scaling back and retailers everywhere are looking for ways to pinch pennies as the economy continues to dive toward recession or worse.

Earlier this year, Starbucks announced plans to close 600 poor-performing stores and cut as many as 12,000 jobs. The decline of the ubiquitous chain, which once seemed invincible, has been attributed to an oversaturated market. In Dallas-Fort Worth alone, Starbucks has more than 300 stores.

With Starbucks retrenching and Krispy Kreme slumping, Dunkin' sees an opportunity to pounce, partly because unlike Starbucks, its growth isn't tied to corporate earnings. Instead, most of the costs associated with opening a new store are shouldered by franchisees.

In Dallas, one of those involved with the franchising of Dunkin' Donuts is Barry Zale, whose family founded Zale Corp., the diamond and jewelry store. Zale's father, Donald, was on a business trip in Boston when he saw something in the paper about Dunkin's plans for expansion. He threw the paper across the desk to one of his partners and told him to look into it.

"We had done well selling Blockbuster stores, mostly in the Washington, D.C., area, and then we got into tanning salons. We were looking for something new, and this seemed like a great opportunity," says the 52-year-old Barry Zale. "You go to Chicago, the eastern seaboard, people don't think of getting their coffee anywhere else. We think the same thing will happen in Texas."

Zale's Texas Donuts LP, one of three franchisees in the area, plans to build 70 units in Dallas-Fort Worth by 2015. They will spend about $500,000 on each store, with expected gross revenues of about $1 million a year per store.

Dunkin' Donuts got its start in 1946, when founder William Rosenberg began delivering what he called "coffee break snacks" to workers and other customers in the Providence, Rhode Island, area. In 1950, he opened his first Dunkin' Donuts store, and by 1955, he began franchising.

Today, there are more than 5,000 Dunkin' Donuts franchises in the United States, which pales in comparison to the 15,000-plus stores Starbucks has.

Dunkin' Brands, which owns the coffee and doughnut franchise, has come under criticism recently for pushing expansion plans too hard, sometimes at the cost of their own franchisees.

In Brooklyn, for example, two business partners recently said they were forced to give up their two stores in the area because of a shift in Dunkin's strategy. In order to expand, franchisee Cindy Gluck wrote in the New York Daily News, Dunkin' is trying to "systematically replace single-store owners with multi-store owners. And because they can't just force these mom-and-pop shops to sell, they strong-arm them with threats of lawsuits over minor 'contract infractions.'"

In Gluck's case, she said she and a partner sunk their life savings into a Dunkin' Donuts franchise in 2005 and then opened a second the next year. Soon after, she said, she offered her store manager a 15 percent stake in the store. When she notified Dunkin of her plans, she says, she was sued for violating company policy, even though she had notified the corporation beforehand.

Gluck's not alone. Dunkin' Donuts has sued franchise owners 154 times since 2006. During that same time period, McDonald's was involved in five lawsuits and Subway, which has four times as many stores as Dunkin' Donuts, sued its franchisees 12 times.

On the other hand, recent data suggests Dunkin' Donuts stores are among the best-performing franchises in the nation. According to data compiled last year, individuals who took out small business loans to open up a Dunkin' Donuts store had a failure rate of less than 5 percent.

One concern for all franchisees regardless of size is that by flooding the market with stores, Dunkin' could eventually face the same fate as Starbucks. In Dallas-Fort Worth there are currently three large franchisees building stores. One plans to build 110 stores, 60 of them in Collin and Tarrant counties alone.

"I think it's always a concern," says Barry Zale. "We realize that cannibalization is a factor, and we've got to be very careful."

For the time being, Dunkin' remains a bit player in the Texas coffee and bagel market, and it hardly seems as if Starbucks is hurting. On a recent visit to a Starbucks near the new Dunkin' Donuts in Plano, the lines were typically long and patrons filled the tables. Starbucks did not respond to requests for comment.

None of this matters much to folks like Bob Ripper, who is finishing his coffee at the new Dunkin' Donuts store on Independence Parkway. Ripper is just glad there's more than one Dunkin' Donuts in his neighborhood.

"My only concern," he says with a smile, "is that I don't eat too many doughnuts."

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