Executive Insights | September 2010 | By Carolyn Walkup

Nigel Travis Talks Dunkin’s Strategy

Fresh off his success at Papa John’s, Dunkin’ Brands CEO Nigel Travis is taking Dunkin’ Donuts from a New England treat shop to an international coffee chain.

The midst of the worst recession in decades may seem like a tough time to take the reins of a restaurant company that sells discretionary treats not needed in the everyday diet. However, Nigel Travis, whom Dunkin’ Brands hired to head its Dunkin’ Donuts and Baskin-Robbins brands in January 2009, quickly showed he was up to the task.

Fresh from a four-year record of achieving excellent results at Papa John’s, Travis set out to do the same at the privately held, 60-year-old treats company. Dunkin’ Brands’ board of directors chose Travis to succeed CEO and industry veteran Jon Luther. Luther, who joined Dunkin’ Brands in 2003, remains as executive chairman of the board and worked with the board to develop an orderly succession plan.

In announcing Travis’ appointment, Luther singled out his accomplishments in several companies he headed of building strong franchisee networks, improving sales, and furthering global growth.

In spite of the economic downturn, Dunkin’ Donuts opened 350 new stores worldwide in 2009, with 250 of those in the U.S. When counting sister Dunkin’ Brands treats concept Baskin-Robbins, franchisees opened 550 stores last year. Dunkin’ Donuts units alone number nearly 6,400 in the U.S. and 2,700 overseas.

“We think this trend will continue and get better,” says Travis, who predicts that Dunkin’ Donuts brand openings this year will exceed last year’s to total 500 newcomers worldwide.

“The recession caused some difficulties,” he says. “High unemployment had a negative impact. The biggest impact has been the lending environment and getting new people to come in.”

He’s optimistic, though, about recent talks with banks, and has found some that “seem very positive about our brand.”

“The recession is just a problem you have to attack with vigor,” he says. “We are focused on the top line and are reducing costs of operating and construction. Our franchisees worked with their store economics.”

The brand does seem to be faring well, according to restaurant consultant Aaron Allen, founder and chief executive of Aaron Allen Restaurant Consultants, who credits Dunkin’ with doing a good job of keeping costs in line.

Dunkin’s policy of allowing franchise agreements with no minimum number of store openings required, along with its flexible unit designs utilizing smaller footprints, encouraged franchise development in these challenging times. Design choices include kiosks, gas stations, in-line units, and end caps, as well as free-standing stores.

The chain is favoring multiunit franchisees, helping to move it forward faster, says Dennis Lombardi, executive vice president of foodservice strategies at WD Partners, a restaurant development and design firm based in Columbus, Ohio. He also says that Dunkin’s pace of growth beyond New England is “right on the money.”

“We have a huge opportunity in the U.S.,” Travis says. “We have 65 percent of the U.S. still to go.” Based in Canton, Massachusetts, Dunkin’ Donuts initially developed a stronghold in the Northeast. Although units remain concentrated east of the Mississippi, stores are now located in 35 states and the District of Columbia.

“Our approach is to grow contiguously instead of all over the place,” Travis says, noting the Southeast as a major focus for future expansion. Some of the most recent multistore-development agreements inked deals in Louisville, Kentucky; Birmingham, Alabama; Madison, Wisconsin; and Erie, Pennsylvania.

Despite its growth, the company’s biggest obstacle might not be the economy, but the American consumer. Travis says the coffee-drinking culture is not as strong in other parts of the U.S. as it is in the Northeast. But he says that is changing, especially as both hot and cold specialty coffee drinks become more prevalent.

As a result, the brand targeted a triangular region from Philadelphia to Chicago to Miami as its primary expansion focus, Allen says. And to bring in consumers who might not be as caffeinated as Northeasterners, franchisees are allowed to develop some regional products in addition to the traditional menu offerings.

“America may run on Dunkin’, but it does so from behind the wheel of a car.”

Dunkin’ is growing internationally, too, particularly in the Middle East and China, as well as in other Asian countries such as South Korea and Thailand. Soon the company will double the number of units in the Middle East to 1,500 and fill in Europe, particularly Eastern Europe, with new stores and franchisees.

“China is a major focus,” Travis says. “We have two stores open in Russia, and we are excited about the early results.”

The majority of new units are stand-alone Dunkin’ Donuts, but franchisees are free to open cobranded units with Baskin-Robbins, as many have done. The pairing makes sense because of the two brands’ differing daypart strengths.

While doughnuts and morning coffee remain Dunkin’s core business, the concept is facing ever-intensifying competition for breakfast on the go, with everyone from Burger King to Subway vying for morning market share. “We welcome the challenge—it makes us better,” Travis says.

Travis may be downplaying the intensity of the breakfast battle, according to some observers. “Dunkin’ Donuts will have to fight to keep its share of breakfast; the low-level breakfast wars are continuing,” Lombardi says, adding that Dunkin’ can hold its own as long as it maintains its reputation for good coffee, which often determines where breakfast customers go for that daypart.

Although coffee is not part of Dunkin’s name, it is an integral part of Dunkin’ Brands’ heritage. “We are about coffee, doughnuts, and ice creamÑthose remain our strengths,” Travis says. Not only hot coffee, but iced versions have extended the coffee line to more than a dozen choices.

“We are No. 1 in market share in terms of iced coffee,” he says. “It’s fascinating that Dunkin’ Donuts has transitioned itself from being strongest in the colder months to being strong in the summer. It has an energy drink attraction to younger customers, especially in New England.

“Beverage is a growing category; coffee is the second-biggest beverage after water in the world,” Travis says.

With that kind of following, coffee is finally getting the attention it deserves from the quick-serve industry. And as more companies expand their premium coffee offerings, Travis is taking note. “We pay attention to everyone who serves beverages. I have huge respect for McDonald’s and Burger King, and Starbucks is a tremendous competitor,” says Travis, who previously worked for Burger King as managing director, Europe, Middle East, and Africa before moving on to Blockbuster and then Papa John’s.

In building his own executive team at Dunkin’ Brands, Travis even picked two former Starbucks executives, Paul Twohig, now brand operating officer, and Christine Deputy, senior vice president of human resources.

Starbucks, which considers Dunkin’ a direct competitor since the doughnut chain upped the varieties of its coffee drinks, succeeded in delaying Twohig’s start date at Dunkin’ in a settlement of a lawsuit it filed after Twohig joined Dunkin’, charging him with violating his noncompete agreement. The agreement also required him never to share any of Starbucks’ trade secrets with Dunkin’.

And then, of course, there’s McDonald’s, a newer kid on the premium coffee block. McDonald’s Premium Roast Coffee began to receive positive public reception as far back as 2006. The mega-chain supported that major roll out with extended drive-thru hours and technological advances. And analysts credited the upgraded coffee, along with expanded breakfast menu offerings, for much of the chain’s consistent same-store sales growth.

More recently, McDonald’s expanded its espresso drinks and other beverages, widely touted as its biggest menu modification in 30 years, accompanied by its own moniker, McCafé. There is no doubt that coffee will continue to be a major and growing part of McDonald’s brand identity.

On the doughnut front, the much smaller Krispy Kreme and Tim Hortons, which is expanding outward from its Canadian home base to the U.S., are lesser competitors, but competitors to watch nonetheless.

Travis went outside the industry to hire John Costello, chief global customer and marketing officer, who formerly held marketing positions with Home Depot, Sears, and Yahoo. In addition to increasing television advertising in its strongest markets, Dunkin’ continues to emphasize local-store marketing, which Travis says he learned to appreciate while he was in the pizza industry.

Some markets, for example, ran limited-time offers to capture more late-afternoon business, offering 99-cent coffee drinks between 3 p.m. and 6 p.m. Couponing also emphasizes coffee beverages.

But it’s not just promotions that are getting customers through the doors. Travis sees the drive thru as an ever-important edge in the competition for customers in a hurry. About two-thirds of Dunkin’ Donuts’ units have drive thrus, and he expects the percentage to increase as new stores open. “Everyday Americans want to get their coffee very quickly,” he says. “People are looking for convenience. The world is speeding up.”

Consultant Lombardi says Dunkin’ should expand its drive thrus in locations where they make sense because of their proven ability to increase average unit volumes. “America may run on Dunkin’, but it does so from behind the wheel of a car,” he says, referring to the brand’s advertising tagline.

With the record of tripling online sales during his four years at Papa John’s, Travis is bringing his strengths in technology to his new post. “I like technology. We are currently focused on a consistent platform of technology at both Dunkin’ and Baskin-Robbins,” he says, adding that franchisees are enthusiastic about advancing technology, both to speed customer service and to improve operations in a variety of ways.

“We are moving from selling franchises to supporting franchisees throughout their lives,” Travis says. “Our relationship with our franchisees is spectacularly good. If you focus on a collaborative relationship, everything else will follow.”

Jim Coen, president of the Boston-based Dunkin’ Donuts Independent Franchise Owners (DDIFO) organization, declined to comment on the status of franchisor-franchisee relations. “There have been changes,” he says. “Right now we are negotiating on a couple of different fronts; there are some extremely important negotiations ongoing.”

The DDIFO represents about 2,500 shops, or 40 percent of the U.S., Coen says.

Good franchisor-franchisee relations have not always been the case, as witnessed by some 350 outstanding lawsuits against franchisees at the end of 2009. Consultant Allen credits Travis with shifting away from “a culture of fighting with franchisees. They were one of the most eager-to-sue companies in the franchise industry,” he says.

Most of those suits accused franchisees of various brand-noncompliance issues. “When you’re 100 percent franchised, it’s important to keep on good terms with franchisees,” Allen says.

“If you focus on a collaborative relationship, everything else will follow.”

Lombardi is not bothered by Dunkin’s record of some friction with franchisees. “In any system that has stores that have been built over decades and where you have a large number of franchisees, there is a constant battle to make sure that the bottom 20 percent improves their quality,” he says.

“It’s critical that the franchisor protect the brand, both for the franchisor and franchisees who are pulling their weight. It’s an ongoing thing that they will continually have to do,” Lombardi says.

Overall, he says Travis was a good choice for the job. “He knows franchising and foodservice. The succession was orderly, and I think it was done absolutely correctly,” he says.

Whether Travis stays at Dunkin’ for the long term or moves on to a newer challenge in a few years remains to be seen. When deciding to hire him as part of its succession plan, Dunkin’ Brands’ board of directors looked to his proven track record of delivering outstanding results at Papa John’s, Blockbuster, and Burger King as an indication that he was the right executive to succeed Luther.

Now that Travis has had time to grow into his position, he says, “The opportunity ahead of us is spectacular. When you are doing good work, it’s fun.”