Playing for Keeps: Strong Unit Economics give Dunkin' Donuts Franchisee An Advantage

"If there's one thing the recent economy has taught, it's that it's more important than ever to pay attention to costs during tough times," says Neal Faulkner, a Boston-area Dunkin' Donuts franchisee with 17 locations open and two more on the way. "I say if you're still operating today the same way you were three years ago, you're either out of business or on your way there."

Stern words to be sure but Faulkner has the track record to back up his proclamations, especially when it comes to unit profitability.

The concept of unit profitability is really pretty simple, says Faulkner. "It's what's at the bottom line at the end of the day."

For Faulkner, that's a function of food costs, labor, and sales. Today he's looking to maximize dollars from the point of distribution to the kitchen, and ultimately to the customer.

So how does Faulkner manage his unit economics? For starters, he has an undergraduate degree in business and an MBA. He also worked for the Dunkin' Donuts corporate office for six years before becoming a franchisee.

"Dunkin' provides many of the tools we need, like regular sales reports," he says. "And the register systems in the stores track all kinds of data for us," which allows him to do many types of analysis and comparisons.

Offering incentives is another good way to strengthen unit economics and enhance employee performance. For example, Faulkner has allowed for bigger bonuses depending on increased revenue numbers.

He's a firm believer in tracking food and labor costs as it relates to his units' sales. "By looking at our reports we can see exactly where costs are," he says. "If we saw food costs edging up near 50 percent, then we would have a problem and quickly address it." Because he keeps a careful eye on his financial data, Faulkner says, he hasn't had to raise his prices in three years.

Labor costs are critical, he says. "It's easy to track this, and it's easy to cut back here, but you don't want to over cut and harm customer service," he says. That's why he constantly monitors "bandwidth" at his stores and determines which need more or fewer employee hours.

Interestingly, Faulkner has discovered that by meticulously tracking all of his costs and revenue, he has been able to cut back on employee theft. "In a tough economy, employees don't only take money out of the registers, they will even take food home. You have to run a tight ship to counter this kind of behavior."

Some franchisees have taken to boiling down the most essential cost and revenue numbers into a one-page "scorecard" report that helps them--and their team members--manage at a glance. Faulkner's no exception.

"Our scorecard lists customer count, payroll numbers, food costs, and guest satisfaction survey results," he says. He holds monthly meetings with all his managers to review the information.

He also tracks the numbers at all 17 locations to determine averages for food costs, labor, and sales. "Over the course of four to five years, I learned where the sweet spot was for strong performers." He likes to bring attention to the stores that are leading in each category and use them as a benchmark for all the stores.

Strong unit economics can play a significant role with lenders who want to deal with experienced operators in strong markets.

"Banks just need to understand that this business is about cash, not property," he says. "In a tough economy when food costs go up, cash flow typically goes down. But if you're really minding the store, then you'll have good numbers that the banks want to see.

"This business can get away from you quickly if you're not watching the numbers," says Faulkner. "But if you're paying attention to the details, you'll be fine."