BlueMauMau reports that Dunkin’ Brands has announced its intent to purchase some of the stores of troubled Kainos Partners Holding Company, a master franchise of 56 Dunkin’ Donuts shops located in New York, South Carolina and Nevada. Dunkin’ will acquire the franchisee’s stores to be owned and run by the franchisor, and then refranchise them later.
Kainos Partners Website
In an email sent out to Dunkin’ franchisees, CEO Nigel Travis explained the franchisors intent to buy the company. “Kainos has been unable to emerge from bankruptcy and has filed a motion seeking an order authorizing bidding procedures to be employed in connection with the proposed sale of their Dunkin’ Donuts restaurants and related assets,” Travis wrote. “Dunkin’ Brands has submitted a bid to purchase a substantial portion of the assets and business operations.”
Travis went on to write, “Kainos will continue to operate its Dunkin’ Donuts restaurants in Buffalo, NY, Greenville, SC, and Las Vegas, NV until the conclusion of the sale process.”
Attorney Adam Seigelheim, chair of Stark & Stark franchise group elaborates. “The implication from Nigel’s email is that Kainos is not going to put forward a plan to come out of Chapter 11,” the franchise attorney explains of last Wednesday’s deadline by the court to file a plan and the company’s missing of that deadline. “They’ll remain in chapter 11 but will move to sell off their assets in the ordinary course of business,” says Seigelheim.
Refranchising bankrupt Dunkin’ stores
“Dunkin’ submitted a proposed order to acquire the assets of Kainos under a 363 sale, which is the code section for selling stuff through bankruptcy,” says Jim Balis, who is both chief executive officer and chief financial officer of Kainos Partners.
A “363″ sale refers to a sale of a company’s assets who is undergoing bankruptcy, as in a Chapter 11 reorganization. It refers to the bankruptcy code that regulates the procedure, 11 USC §363.
“I think the order will be entered on Monday (March 
for that proposed 363 sale, says Balis. “Over the next month, we will be marketing units to see if anybody else is interested to buy the assets of Kainos, the debtor.”
“It looks like they are going to sell off their assets through a liquidated chapter 11,” explains franchise attorney, Adam Seigelheim.
Michelle King, director of global public relations for Dunkin’ Brands, adds, “Other buyers will have an opportunity to purchase the assets of Kainos subject to bankruptcy court approval. Although a final date has not yet been set for completion of the sale, we believe it to be in early April. In the meantime, Kainos will continue to operate in all markets.”
One year’s high flyer crashes the next
Kainos’ Balis says that the original franchise agreement that Dunkin’ required was for Kainos to commit and build over a hundred units in various states. Kainos received development money when credit was flowing from private equity investor Palisades Capital and senior secured lender CIT.
The master franchise quickly built some 56 stores in New York, South Carolina and Nevada since 2005.
Dunkin’ was happy.
Dunkin’ Donuts honored New York-based Kainos Partners as “developer of the year” in July, 2008, meant to have the way it grows emulated by others. In a toast given at a ceremony for its award winners, Jon Luther, who at the time was chairman and chief executive officer of Dunkin’ Brands, Inc., said: “This room is filled with an accomplished and elite group of leaders from all around the world who represent the very best of the Dunkin’ Brands system. I applaud the values and dedication you all bring to this company.”
But a year later, Kainos was filing Chapter 11 for bankruptcy protection.
When asked why the master franchise failed and whether the high number of store locations spread out in such a diverse geography had caused the company’s downfall, CEO Balis replied, “Unfortunately, I cannot comment on that.”
Dunkin’ has been caught up in the coffee wars, a war over the menu price among McDonald’s, Starbucks and others over cups of coffee. Meanwhile, competitors are increasing breakfast offerings to raise revenues in the tough economy. “It is a challenging market,” says Balis over his firm’s decline. “It didn’t help that some of our competitors are advertising very aggressively in the breakfast segment.”
Kevin McCarthy, current chairman of Dunkin Donuts Indepedent Franchise Owners association and a former vice president of real estate and operations at Dunkin’ Donuts, thinks that it is a problem of franchisor Dunkin’ not understanding the chain’s traditional strengths. Speaking strictly on behalf of himself, McCarthy thinks misconceptions caused Dunkin’ to use the wrong development strategy.
He stresses that Dunkin’ is largely a mom & pop franchise chain. It should grow organically, rather than using large area developers. “Nothing replaces a franchise operator who is on premise,” declares McCarthy. He stresses a slower but more steady growth is by opening a store to get it profitable, and then open another in a fairly contiguous neighborhood that the owners know well.
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Opening numerous stores is not managing equity and resourses properly.
Dunkin stores take time and lots of effort to make any store successful.
Nothing beats the franchisee operating a store to make that store functional
and profitable.
Kevin is right on I don’t think Dunkin relizes how difficult and super focused a franchisee needs to be in developing markets. I am in in a low volume market and it took alot of time to be profitable. And this is a small market with locations that have been here over 40 years.
While Kevin and Choice Donuts make reasonable points, the real issue isn’t having owners in the stores nor waiting 40 years for acceptable market support nor opening numerous stores/not managing equity or resources properly.
The real issue is that the Dunkin Brand equity simply isn’t strong enough to compete effectively outside of it’s core northeast market.
Since Dunkin started to agressively grow outside of the northeast in 2005several dozen highly capable and well financed operators signed up to open stores in many new markets. Since then, regardless of the size of the operator, Sales have been too low and Costs have been too high to achieve the cash flows required to make a business profitable in almost every new market Dunkin entered outside of the northeast. As these operators had previously or were currently demonstrating success with other (even the same) brands in other markets (which was a requirement to get the opportunity to open Dunkins in new markets), it must be concluded that the primary issue is the weakness of the Brand’s equity, not the behavior of the operator.
In modern times, many brands have demonstrated that when their value proposition is aligned with a market’s needs/wants Sales are strong, Costs are reasonable and Profits are acceptable. It then follows that opening a lot of stores quickly is a proven strategy to overtake a market and establish a highly defensible position. Starbucks and McDonalds immediately come to mind in this space.
However, since 2005, Dunkin has repeatedly seen (but not yet learned) that its brand power does not travel well outside the northeast, that much of its core menu is off trend, and that its marketing proposition does not do well against the better established other daypart competitors. Although it certainly could, Dunkin’s senior leadership is consistently too self-centered, myopic and not well atuned with consumer trends. Nor has its leadership directed its support systems to cost effectively provide the quality and quantity of resources that are always required by start up franchisees entering new markets, regardless of the size or number of stores by an owner (such as supply chain subsidies, allowances for high recruitment and training costs, incremental advertising/marketing messaging, competitive market pricing and products, etc.)
History clearly shows that many better run brands handle these new market challenges by first opening Company stores in key strategic locations and establishing requisite support systems within the market. Then, after having achieved sufficient unit level sales and profits, selling those stores to capable franchisees along with adjacent large area development agreements to provide sufficient incentives to further develop the market. Provided the business model works (ie, there is a continuing customer demand for the products/services which can be consistently delivered at a satisfactory margin) this strategy justifies both the initial investment made by the Company to enter the market and also supports the continuing investment required of the Franchisee(s) to build it out over time.
You’d think after some 20 years with 3 modern corporate owners, and 4 different sets of CEOs and Executive Teams, that Dunkin’s current owners/leaders would smarten up and improve their position by following the examples of their many successful competitors, not by fighting with, crushing and ousting the very franchisees upon whom their success exclusively depends.
Prospective franchisees, regardless of size and resources, would be wise to closely consider the many other choices available in today’s dynamic marketplace before investing their equity and sweat in a brand that continues to struggle with basic leadership deficiencies which hinder trustworthy professional relationships, propogate unnecessary risks and seriously undermines reasonable investment potential.
I totally agree with the last poster.
the brand seems to have no clue as to what it takes to succeed in a store.
They have done a horrible job in trying to crash into other dayparts with most of their ideas falling flat like a flatbread.
Also their advertising has done a terrible job of letting customers know we even exist after breakfast.
It’s been expansion at all cost and if things don’t go as planned it must have been the fault of the big bad franchisee not and illconceived plan on the part of the franchisor.
You are seeing in all of the spactacular failures of large new franchisees in the system the fruits of this illconceived plan.
We unfortunately are going to see more of it before this is over.
This current crop of executives are not going to do any better there only concern is the bonus check they are going to make not to build an enduring loglasting business.
I wouldn’t be surprised to see Dd fade into the woodwork as the new entrants to market like Mickey D’s are executing it better.
Lastly watch out for Tim Horton’s.
Totally agree. And every time they sell a Keurig machine, there goes another daily customer! Let’s not forget about that. And DD continues to drag their feet on the K-Cups!
Kainos CFO embezzled half-a-million dollars. I think that had a great deal to do with their stunted growth.
The embezzlement and that the guy was busy not doing his job definitely didn’t help Kainos. Also, the Kainos growth model is flawed. This isn’t Starbucks. Hey, not even Starbucks is Starbucks. You can’t grow like that without people invested in the business being near and in the stores. You can’t have 10 suits on a payroll (even if they aren’t embezzelers multiple mistresses) without a single store open that have no role in store operations and will never have an ops role and expect to succeed,
If you build out dozens and dozens of stores, only THEN do you need a management level group to handle things like IT, development, etc that are too busy to be pouring coffee and inspectig equipment for proper calibration.
Dunkin Brands brought this upon themselves. What happened to the loss prevention team? Why did’nt they see this. I always wondered how some franchisee’s got the money to open all these stores and now I know. They have all kind of investors, friends, relatives, etc. and then they screw them. Dunkin deserves what happen. Ever hear of Maddow? Dunkin was applauding the wrong group. Bigger is not always better. I remember a Dunkin rep telling us at a Dist. Meeting that you have to have 8 stores to make money. Most stupid statement I ever heard. If you can’t make it on one why are we getting another? I know why, so we can take from peter to pay paul. I guess the Radiant Register did’nt help catch all this embezlment.
Wow! You need 8 stores? So, you lose a little on every store, but you make it up on the volume!!
Answer to Barry’s question
If you are losing money on 8 stores, volume is not the answer. You still lose money.
Too many partners in different store locations is not the answer. We
need to go back to the way we started having franchisee involement meaning
working the store on a daily basis. It takes time and alot of effort to make any one
store successful.
Kathy Anczerewicz