After missteps, Dunkin’ Donuts Set for California Expansion

September 4, 2014

pictureChastened by early mistakes, company takes a 2d shot in the state Starbucks rules

By Taryn Luna

Globe Correspondent

Al Golub/AP for the Globe

Dunkin’ Donuts launches its campaign in Modesto, Calif.

Dunkin’ Donuts, the coffee chain so familiar in the Northeast, is nearing the end of an expansion march across the country to become a true national brand.

The retailer kicked off its California expansion on Tuesday, the first step in a strategy to challenge Starbucks’ stronghold on the West Coast.

The company once operated more than a dozen restaurants in the state but shuttered them by the early 2000s, citing logistical problems and poor relationships with franchisee partners.

Dunkin’ temporarily abandoned its California dreams as the international business grew to more than 3,000 restaurants. Today the chain serves its signature Munchkins and Coolattas at nearly 900 stores in South Korea, but has only three nontraditional stores in obscure California locations: on a Marine base, inside a hotel, and at a highway rest stop.

Now the coffee chain is preparing to take another shot in a market where its toughest competitor, Starbucks Corp., dominates with more than 2,500 stores.

Dunkin’ plans to open its first traditional restaurant in Modesto, Calif., on Tuesday and a second store in Santa Monica in the following weeks.

Three additional restaurants in Long Beach, Downey, and Whittier are expected before the end of the year. Franchisees have signed agreements to open nearly 200 stores by 2020 and the company intends to eventually grow to 1,000 stores in the state.

“We’ve learned a lot about operating out West,” said Nigel Travis, chief executive of Dunkin’ Brands. “We’ve been incredibly impressed with the quality of the franchisees.”

But Dunkin’ had to learn the hard way.

The chain was so eager to enter California in the 1990s that it “hopscotched a lot of the country,” said Grant Benson, vice president of global franchising and business development at Dunkin’ Brands.

The nearest distribution center was in Chicago, and truck drivers hauled products thousands of miles to the California stores. “It left a lot of gaps where we didn’t have a supply chain and any development,” Benson said.

Travis has also said that Dunkin’ was less selective with its franchisee partners and did not properly train them.

Dunkin’ vs. Starbucks in California

Locations of the first new traditional restaurants in California, compared to the current locations of Starbucks restaurants in the Golden State.

The company renewed its plans to move into California a few years ago and began building up its network of stores in the West, entering Denver and Salt Lake City in the past year.

The California stores will be supplied from a Phoenix distribution center, and the company intends to open a new warehouse in California as more restaurants get off the ground.

Benson said the chain has also upgraded its training program. It is working with a mix of existing franchisees that operate Dunkin’ restaurants in other states and new partners with experience in California.

Software programs that aggregate data on demographics, competition, and traffic will help the company select the best locations for restaurants, he said.

Darren Tristano, an executive vice president at the food industry research firm Technomic, said that California is a major growth opportunity for the Canton company.

Dunkin’ was the second-largest coffee chain in the United States last year, with $6.7 billion in annual sales and a 30.9 percent market share, according to Technomic. Starbucks posted $11.7 billion in sales and a 53.8 percent share last year. Technomic does not track sales by state.

And although Dunkin’ is entering a region dominated by Starbucks, it will appeal to a different customer, Tristano said.

Starbucks typically opens in middle- to upper-income neighborhoods and generally draws more affluent consumers, Tristano said. Dunkin’ prices are slightly lower, and the chain primarily draws middle- to lower-income consumers who represent a larger percentage of the workforce.

The stores tend to be smaller than at Starbucks, which means Dunkin’ pays less for real estate. They also can open more stores in nontraditional spaces, such as gas stations and convenience stores, he said.

Dunkin’ will serve its hot brews in paper cups in California — a move Tristano lauded and said environmentally conscious consumers will expect in the Golden State. The company will use the same polypropylene recyclable cup that was introduced in Somerville in May to comply with a citywide ban on disposable polystyrene, often referred to as styrofoam.

“When you look at how the brand has evolved over time, they should have a pretty good opportunity to grow there,” he said. “Today I think the California market is ready for Dunkin’.”


It’s Good to be King

September 3, 2014

burgerking-304xx3148-2112-482-0Emon Reiser

© 2014 American City Business Journals, Inc. All rights reserved.

Burger King responded to the public outrage it inspired this week by saying its deal to merge with Tim Hortons was about global growth, not tax evasion.

“We don’t expect there to be meaningful tax savings,” Daniel Schwartz, the 34-year-old CEO of Miami-based Burger King Worldwide, said during a conference call with media on Aug. 26.

The deal is more complicated than that. And the public isn’t buying Burger King’s characterizations. Sen. Sherrod Brown, D-Ohio, called for a Burger King boycott after the company announced the $11.4 billion deal to merge with the Canadian coffee and doughnut chain. So did MSNBC TV host Joe Scarborough.

Sen. Dick Durbin, D-Ill., emailed supporters, asking them to sign a petition to tell Burger King to stay put: “Burger King told us they were proud to be in America, but now we know that was a whopper.”

The deal will create a new holding company for Burger King and Tim Hortons that will be based in Oakville, Ontario. The move was immediately characterized as a tax-inversion acquisition that would allow Burger King to skirt millions of dollars in corporate income tax payments to the U.S. government.

Petitions cropped up on the Internet. Social media commenters flame-broiled Burger King on Twitter and the company’s own Facebook page.

Some of the less vulgar comments:

 

  • “Liars. Tax dodgers.”
  • “Kiss my business goodbye forever.”
  • “I’m not boycotting your product, I’m merely relocating my loyalties.”

 

 

 

Burger King issued a response on Facebook hours after the deal was confirmed, assuring angry customers that it will continue to pay its “federal, state and local U.S. taxes.” The deal, however, will most assuredly lower its tax burden, particularly on dollars it earns offshore.

“Our headquarters will remain in Miami, where we were founded more than 60 years ago, and business will continue as usual at our restaurants around the world,” the fast-food chain wrote. “It’s about global growth for both brands.”

Burger King and Tim Hortons executives reiterated that stance on their conference call. But Schwartz, Burger King Chairman Alex Behring and Tim Hortons CEO Mark Caira never denied that the deal was a tax inversion.

The company paid a 27.5 percent rate in the U.S. last year – about the same rate it will pay in Canada.

The real tax savings potential lies in the income Burger King has earned offshore. The company gets nearly half of its revenue from other countries, and currently has nearly $905 million in cash and cash equivalents on its balance sheet.

“Our consolidated cash and cash equivalents include balances held in foreign tax jurisdictions,” Burger King has disclosed in a regulatory filing.

Were the company to bring this cash to its headquarters to pay shareholder dividends or reinvest, it would have to pay perhaps one-third of it to the U.S. government in taxes.

In Canada, it would keep far more of this money – which could amount to hundreds of millions of dollars to help fund its “global growth.”

In addition to any tax savings, the merger of these two fast-food giants will lower the costs of goods for both companies, said Alex Macedo, Burger King’s president for North America.

“These two brands will have more purchasing power, which will reduce the costs for our franchisees,” he said. “The overall support has been very good.”

It also helps to have Warren Buffett on your team. America’s most popular billionaire is financing 25 percent of the deal. Buffett has crusaded for higher taxes on corporations and the wealthy, and has championed some of President Barack Obama’s ideas about tax policy. His involvement in this deal could be read as hypocritical, or as a sign that he doesn’t see it as driven by tax savings, either.

Local business leaders are pleased Burger King’s Miami headquarters would remain intact, along with its staff.

If anyone will feel the pain of this deal, it’s Burger King’s independent franchisees. Only 52 of its 13,667 restaurants are corporate-owned. In 2013, franchise restaurant revenues were four times that of company restaurant revenues, at $923.6 million and $222.7 million, respectively. So if customers stop eating Whoppers because they’re not American, it will hit the store sales of franchisees first. So far, they don’t seem concerned.

Guillermo Perales, who owns 191 Burger Kings in Florida and Texas, said that, if anything, sales are rising because of the backlash: “Besides the comeback of chicken fries, this is one of the best promotions we’ve had this year.”

Financiers, not franchisees, call the shots at Burger King. A global investment fund, 3G Capital, owns 70 percent of Burger King. It’s a Brazilian firm that has offices in New York and is used to crossing borders with its investments.

It’s betting Burger King customers will have short memories, or that the gains it achieves with its controversial move will overcome any losses in sales.

Some observers say it’s a safe bet.

“I don’t think Americans are concerned with where a brand is based,” said Darren Tristano, executive VP of Chicago-based food industry research firm Technomic.

Being labeled a corporate turncoat on social media hasn’t stopped companies from inversions. And ultimately, it’s problems with U.S. tax codes that are forcing some of America’s household names to leave, many tax experts have said.

Armando Hernandez, head of Hernandez and Co. CPAs in Coral Gables, said the advantages of tax inversion transactions can’t be ignored. After all, a company that doesn’t do an inversion faces steep taxes in the U.S. on earnings achieved abroad.

“If the tax adviser would recommend that their headquarters stay in the U.S., they would be committing malpractice,” he said.

Senior reporter Brian Bandell contributed to this report.

THE EVER-INCREASING MOVE TO TAX INVERSIONS

What is a tax inversion? A tax inversion describes when a U.S. company buys a foreign business and then shifts its headquarters outside the country – as Miami-based Burger King Worldwide (NYSE: BKW) plans to do with Canada’s Tim Hortons. Such a move carries many tax benefits for the companies, even though it largely stiffs U.S. tax collectors.

Why are tax inversions becoming more common? Companies are facing increasing costs, including modest ticks in inflation, higher health care tabs and even the potential for a higher minimum wage. At the same time, Canada and many European countries have cut their corporate tax rates.

What is the U.S. government doing about it? Almost nothing. While President Barack Obama has spoken out against the practice, tax reform is stalled in Congress.

What does the American public think? A wide swath of business-minded people believe anything a company can legally do to reduce its tax bill is a wise course. Others believe corporations should pay their share of income taxes. It’s an easily politicized issue. Walgreen Co. backed away from an inversion after too much of a backlash from its customers. Other companies have accomplished inversions without any backlash at all.

What are the benefits for a corporation? While they must still pay some taxes on their U.S. operations, companies achieve lower corporate income tax bills. Additionally, they can bring the cash they’ve earned overseas into their headquarters without paying taxes. This allows them to pay more dividends or invest in their operations. U.S. companies have accumulated about $2 trillion in cash overseas.

Does a company actually have to move its operational headquarters? No. Under current tax laws, companies don’t have to shift offices or executives overseas to be considered foreign. In the case of Burger King, the company will actually remain in Miami, but it’s corporate parent will be located in Canada.