The Carlyle Group's Sweet Deal
A neglected Dunkin' Donuts gets the touchy-feely treatment
Both sides seem pleased so far. The owners say that Dunkin's revenue for fiscal year 2006, which ended in August, beat their targets. And Luther feels he's getting more support than he used to. When Dunkin' was owned by Allied Domecq, he says, "I used to fly to England to beg for attention. Now I make a phone call and get three calls back within an hour." And Luther still feels as if he's in charge of the Canton, Mass., company: "They haven't camped out here. Most of the time I initiate the conversation."
The new owners should be particularly helpful priming overseas growth. A Taiwan-based company that invests with Carlyle, Mercuries & Associates, asked Carlyle about Dunkin' Donuts franchising opportunities. The lead was passed to Luther's team, and within three months a deal was in place for Mercuries to open 100 Dunkin' outlets in Taiwan, starting in January-the brand's debut there. The new owners could be especially helpful in China and other developing countries Dunkin' hasn't yet dipped into. Carlyle, for instance, has an Asia-Pacific real-estate team that could help find good storefront space. "They bring a dimensional perspective we don't have," says Luther.
Such connections aren't free. Dunkin' pays its owners an undisclosed "management fee," which Luther describes as "moderate," for their time, advice, and overhead. The sudden change has also left some franchisees feeling shut out, with management raising the bar too high, too fast. "They paid a premium price for the brands, and now management is under a lot of pressure to crank up performance," says Mark Dubinsky, president of DD Independent Franchise Owners, which represents about 200 owners with 1,500 stores. One complaint: promotions on coffee and baked goods, which draw traffic to stores but cut into profit margins. Franchisees also tried to purchase a small equity stake in Dunkin' Brands and get a board seat during the sale last year-and were rebuffed. Dunkin' says franchisees are adequately represented on an advisory council that will give input to the board twice a year, starting in 2007.
They could get another chance to become shareholders once the private owners feel it's time to cash out. The most likely "exit strategy" for the private owners is a public stock offering. They could also sell to a "strategic owner" like Yum! Brands or McDonald's. But to reap the market-beating returns private equity promises its investors, Dunkin' must first show that it can grow aggressively, get leaner, and remain stable. It could be a few years before that order is ready.
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