William Rosenberg opened his first coffee-and-doughnut shop in Quincy, Massachusetts, in 1950. In 1995 he began licensing the right to imitate his retail operation to independent owner/operators, called franchisees. Business format franchising, as this type of cloning relationship came to be known, was in its infancy in the early 1950s. By the late 1980s, however, business format franchising had become a major force in retailing in the United States. Meanwhile, Dunkin’ Donuts had experienced similar growth. As of the end of 1987 there were 1,478 Dunkin’ Donuts units in operation in its North American region, of which 1,449 were franchised. Dunkin’ Donuts licensed an additional 191units throughout the rest of the world. By early 1988, however, deteriorating sales to capital ratios, stiffening competition, and uneven expansion threatened not only the level of company profitability but also its relationship with the franchisees. A number of options that related primarily to increased distribution were being explored. Any new changes in strategy would require careful examination of its effect on both the franchisees and the company. Competition from convenience stores and supermarket bakeries was becoming increasingly acute. In 1988 there were over 20,000 supermarket bakeries, and the second-largest selling item in those bakeries was doughnuts. Moreover, convenience stores were expanding into food service at an alarming rate and had become a serious threat. By 1987 nearly 80% of all new shops were franchisee-developed. This was much easier to accomplish in Region I(the eastern United States and Canada) where 75% of all domestic Dunkin’ Dounts shops were located, where the average store sales were significantly higher than in Region II(the western United States), and where existing franchisees were much more active in purchasing real estate and developing stores in order to expand their existing operations. In a nationwide sample of customers who...
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