Business overview: An investor's guide to Dunkin' Brands Group (Part 4 of 10)
Dunkin’ Brands Group doesn’t typically supply products to its franchises. Revenues derive from royalty fees as opposed to product distribution (with the exception of licensing fees from ice cream sales paid by Dean Foods). Purchasing for the Dunkin’ Donuts brand is carried out by National DCP, LLC. The NDCP is a company owned by its franchisee members that’s responsible for every step of supplying business inputs to Dunkin’ Donuts franchises: sourcing, storing, and shipping raw ingredients to centralized manufacturers. The NDCP sources coffee from a variety of South American and Asian countries.
Centralized production is an element of Dunkin’ Brands Group’s supply chain aimed at sustaining aggressive growth efforts in addition to providing consistent product quality. The company franchises centralized manufacturing locations (CMLs), which are responsible for producing donuts and bakery goods. It then delivers fresh baked products to Dunkin’ Donuts restaurants daily. This process is designed to simplify restaurant-level processes. There were 127 CMLs in the United states as of the end of FY2012.
A handful of Dunkin’ Donuts brand restaurants produce donuts and baked goods onsite as opposed to relying on CMLs. Satellite franchises with limited access to CMLs (especially in newer markets) will often rely on onsite producers to supply their facilities. This approach enables the Dunkin’ Donuts brand to expand efficiently into newer domestic and international markets. Likewise, it allows management to make quick changes to the manufacturing process without disrupting store-level operations.
Baskin-Robbins ice cream was manufactured and sold by the company to the franchises prior to 2000. Since then, Dunkin’ Brands made the strategic decision to outsource both the production and distribution of ice cream products to Dean Foods. This strategic transition was completed as of 2003, allowing Dunkin’ Brands to strengthen its focus on improving franchise relationships and operations. You’d be correct in inferring that Dean Foods has a large amount of buyer power domestically. It controls 40% of the nation’s fluid milk supply, 60% of organic milk, and 90% of soy milk as of March 2011. This means that Dunkin’ Brands Group and the domestic milk market are largely influenced by one key player.
Dunkin’ Donuts international franchises are responsible for sourcing ingredient inputs that comply with corporate standards. They follow a strict process when producing their own donuts in-house. Certain countries’ franchises source all inputs locally, while a few maintain ties with the NDCP (some unavailable supplies must be sourced via the NDCP). Baskin-Robbins’ manufacturing network is neither owned nor operated by the corporation. It supplies the international marketplace with ice cream products from nine worldwide facilities. Dean Foods is one producer for locations with access to the manufacturing network. Master franchise facilities, joint venture facilities, and certain other international franchises are often left to rely on third party–owned facilities to supply their inputs.
Browse this series on Market Realist:
- Part 1 - A new leaf: Why Dunkin’ Brands is a strong and growing player
- Part 2 - Must-know: Which of Dunkin’s segments have upside potential?
- Part 3 - Why a franchise-focused business is Dunkin’ Brands’ golden ticket
- Consumer Discretionary
- Dean Foods