#153: Dunkin Donuts – Giving People What They Want

The Empire Builders Podcast

Taking a true look at where your business is taking you and working hard to give customers what they want. Bill Rosenberg, way to go.

Dave Young:

Welcome to the Empire Builders podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.

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Dave Young:

Welcome to the Empire Builders podcast. Dave Young here, along with Stephen Semple, talking empires. And what better way to get an empire started in the morning than to have a donut?

Stephen Semple:

There you go.

Dave Young:

And a cup of coffee.

Stephen Semple:

That’s it.

Dave Young:

So today’s topic is Dunkin Donuts.

Stephen Semple:

Dunkin Donuts. There we are. America runs on Dunkin, right?

Dave Young:

I don’t know a lot of history about them. I have childhood memories of Dunkin Donuts and then no memories for a long time, and then sort of rediscovered them when my daughter was going to school in Boston. I think they’re a Boston or Massachusetts origin story.

Stephen Semple:

They are. Very good.

Dave Young:

But I feel like they’ve had some ups and downs maybe.

Stephen Semple:

Oh, they’ve had a bunch of ups and downs. There’s no question. But they are. They’re from Quincy, Mass, just outside of Boston.

Dave Young:

Okay.

Stephen Semple:

Yeah. So they were started by Bill Rosenberg in 1950, and today they have close to 13,000 stores. They’re the second-largest restaurant chain in the US, they’re worth about $9 billion. And if you’re in New York City, they have an unbelievable concentration in New York. There’s one every five blocks. And I’ll tell you, it was weird when I was in New York last summer, and you’re walking around, it felt like there was one every two blocks. It’s more how it felt. But there’s literally one every five blocks in New York City.

Dave Young:

Including the airports, right? They’re everywhere.

Stephen Semple:

They really are. So the origin of Dunkin really goes back to the late 1930s because the US economy at that point had been struggling for close to a decade. With the Great Depression, unemployment peaked at 20% in an era where there was little in the way of safety nets. And this actually had a big impact on the food business because at this time, snacks have started to be reinvented as lunch. So we’re seeing this movement towards these smaller packaged foods. People wanted something small that was a fun to eat item, that was not expensive, that really started to dominate the food market. And we’ve seen that in other podcasts that we’ve done with other foods. So Bill Rosenberg is from Boston, and he has a successful food truck business. And by 1946, he’s starting to make enough to start a brick-and-mortar location. So when he launches the business, here’s something Bill notices, is that in his food truck business, 40% of the sales were coffee and donuts.

Dave Young:

Wow. Okay.

Stephen Semple:

That was 40% of the sales from the food truck. So when he launches the business, he realizes that he wants to create a new idea centered around coffee and donuts. And you know what, it’s interesting. When we go back to companies like Toys R Us and things like that, or even a Dollar Store, it’s this observation of, “Hey, here’s this thing that’s selling.” Or in Toys R Us cases, they looked at it and said, boy, toys are a big part of a department store. Maybe we should just do something along that lines. So this is similar to what he saw. He saw, look, coffee and donuts is a big part of the sales. Why don’t I create something around that?

But here’s the thing, coffee and donut shops didn’t really exist. No one was just doing that. So Bill goes to start this, and he also has a numbers guy on board and a couple of other people, and people around him don’t like the idea of doing just donuts, but he does it anyway.

Dave Young:

Yeah, Bill. Come on, Bill.

Stephen Semple:

So he wants the coffee to be quality. So what does he do? He goes to the best hotels and he finds out where did they get their coffee from, because in his mind, only high quality will work if you’re just doing coffee and donuts. And he decides he’s going to charge 10 cents for a coffee, which is twice the rate at the time.

Dave Young:

Okay, yeah.

Stephen Semple:

But maybe Starbucks learned something from Dunkin Donuts. But anyway, so it’s 1948 and he opens the first location, but the name was not Dunkin Donuts. The first name was,

Dave Young:

Oh, what was it?

Stephen Semple:

Oh, it’s a great name. It’s a fabulous name. Open Kettle. And the reason-

Dave Young:

I’m not too excited about that.

Stephen Semple:

… donuts were made in a large vat called an open kettle. So how appealing is that?

Dave Young:

It’s not appealing.

Stephen Semple:

It’s not appealing. So it’s 1949. It’s not working. It’s failing. He’s losing money and he decides he needs to look around for inspiration. So one of the things Bill notices is Howard Johnson is killing it in ice cream. And their big thing, because it’s funny, we think about Howard Johnson, we sort of forget that their big thing used to be ice cream

Dave Young:

And restaurants and-

Stephen Semple:

And restaurants.

Dave Young:

… I mean, hotels and restaurants. Right?

Stephen Semple:

Yes.

Dave Young:

I mean, they became the… Yeah.

Stephen Semple:

We don’t think of them in terms of restaurants any longer. So he notices that Howard Johnson is killing it at ice cream, and their big thing is 26 flavors. That’s their big thing.

Dave Young:

Oh yeah.

Stephen Semple:

So he’s inspired by that idea. So what does he do? He decides 52 different donut flavors.

Dave Young:

Okay.

Stephen Semple:

Which seems crazy at the time ’cause you know what donuts do that ice cream does not do? Spoil?

Dave Young:

Yeah. They don’t make it till tomorrow. You don’t want yesterday’s donut.

Stephen Semple:

No, you don’t. So he creates all sorts of options and he gives a name to every single one of them. He also decides to rename the store because no one’s attracted. Guess what, Dave? No one’s attracted to Open Kettle.

Dave Young:

No, except for moths and other flying things.

Stephen Semple:

And he wanted Donut in the name. And he also noticed that people would dunk the donut in the coffee. It was really common at the time. And dunk is a verb, and we know how powerful verbs are. So what does he call it? Dunkin Donuts.

Dave Young:

And that’s the end of the story. It ought to be, right, because it’s a great name.

Stephen Semple:

It is a great name.

Dave Young:

It’s alliterative. It’s got the right meter, da-da-da-da. Way better than Open Kettle.

Stephen Semple:

Well, and here’s the other thing is in a lot of cases, if something’s putting the product name in the name of the businesses is often not a good idea. But when there aren’t donut shops around and it’s a new thing, it’s a pretty good idea.

Dave Young:

I think so. And when you stumble onto something as alliterative as Dunkin Donuts.

Stephen Semple:

It’s fabulous. So it’s 1950 and it explodes. He’s doing five grand a week in sales, and he wants to expand. And put in perspective, at the time, McDonald’s only has two locations and there’s other franchises around, but the idea is still new to franchise restaurant space. Really the only space that you sort of really saw franchising going on at this point, as we know, was the hair salon business. As we know from the Martha Harper episode. People weren’t really doing it at restaurants yet.

Dave Young:

So $5,000 a week is what he’s doing now.

Stephen Semple:

Yes.

Dave Young:

How much was a donut at that time?

Stephen Semple:

Oh, I don’t know the price on the donut. I just remember the coffee was 10 cents.

Dave Young:

I mean, a donut couldn’t have been much more than that. Right?

Stephen Semple:

I wouldn’t think that’s a lot of volume.

Dave Young:

I mean, if it was just coffee, that’s 50,000 cups of coffee.

Stephen Semple:

Yes. Yes. He’s killing it.

Dave Young:

If it’s one coffee, one donut, it’s probably about 25,000 customers a week.

Stephen Semple:

Yeah. Oh, yeah.

Dave Young:

Okay. Okay.

Stephen Semple:

Lined up, going crazy.

Dave Young:

Yeah, that is. I was just trying to figure out how do you get to $5,000 10 cents at a time?

Stephen Semple:

It’s incredible. It’s incredible.

Dave Young:

It’s a lot of work. I’m sorry, I interrupted a part of the story because I was baffled by the math.

Stephen Semple:

So he decides he’s going to go into franchising, even though it’s still a pretty new idea for the restaurant space. The money guy quits who didn’t like all of this, and Bill buys them out and he pays them $350,000 to buy them out, which would be about three and a half million dollars today. And keep mind, they’re just like a store at this point. So he borrows a money to do this, gets a second mortgage, opens five locations right away, and by 1955 starts to offer franchises. There’s plans for a hundred locations in five years, and he brings in his son, Bob, who’s a Harvard grad, and they push south. And then eventually the bump up against Krispy Kreme.

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

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Let’s pick up our story where we left off. And trust me, you haven’t missed a thing.

Stephen Semple:

By 1960s, they have a hundred locations. They’re the largest in the company. And here’s the thing that ends up becoming really interesting. Break time becomes renamed as a coffee break, which includes donuts. So it actually becomes this cultural thing. There is actually even a certain point where they offer to buy Krispy Kreme, Krispy Kreme refuses, and they’ve developed a new strategy to become national. In 1978, they go public to raise money to expand. They drive to 300 stores. Now, here’s the interesting thing as they started, they were growing so quickly that earnings started to stumble, and many of the franchisees started to lose faith. And at one point they have to go back and close 100 stores and franchise sales stall.

Dave Young:

This is late seventies, early eighties.

Stephen Semple:

Yeah. Now, here’s the interesting thing, though. There’s two franchisees who are really successful, and they have this new product idea that they’re driving. So there’s these surprising strong sales from Robert and Edna Demery, and here’s the reason why their name needs to go down in donut history. They make donut holes, which are about one fifth the size, and kids love them, and they call them Munchkins.

Dave Young:

Yeah, yeah, I remember Munchkins.

Stephen Semple:

Yeah. And sales explode. So they get going again. And in 1998, Bob retires, business is doing about 2 billion in sales. And then just shortly following that, they come up with the huge successful, Fred the Baker advertising campaign. Remember Fred the Baker?

Dave Young:

Was that out of time to make the donuts?

Stephen Semple:

But he would have to get up in the middle of the night making donuts. That was their way of talking about how-

Dave Young:

“Time to make the donuts.”

Stephen Semple:

Yeah. That was how they sort of showed the donuts were… The story they told that how the donuts were fresh every day.

Dave Young:

In one of the ads, he meets himself coming and going.

Stephen Semple:

I forgot about that. And then if you want to have some fun, there’s a new add out. Well, there was the one that launched at the Super Bowl on the Munchkins with, oh my God, can’t think of the name of the, it’ll come to me the name of, but watch it. It’s quite hilarious. Where they create a little rap tune and whatnot around Dunkin, and they call themselves a DunKings.

Dave Young:

The DunKings. Oh, boy. Do you know, I mean, when they stumbled, when they had to go back in and close some stores, what was the issue there? Did they overextend their supply lines or something? That seems to be about the time that, like I said, I have recollection of it, but then it vanishes for a while. So I’m wondering if there were some stores in the Midwest or Colorado, Wyoming, some place that I might’ve been back in those days. Then they vanished for a while.

Stephen Semple:

They went into some locations they shouldn’t have gone in. They got a little bit overextended. And also basically, were not creating any new… Restaurants sort of do need some new product ideas periodically. And look, and this is one of the challenges when you run a franchise. When you franchise, you want people staying to the franchise formula. But at the same time, it’s amazing how often innovation comes from franchisees offering some new things. So it’s always this really funny line that you’ve got try to run, ’cause same things, McDonald’s, part of their success was preventing people from doing things. And part of their success has been learning from some innovation from some franchisees. So it’s always kind of an interesting challenge. And the DunKings thing, it’s Ben Affleck, Matt Damon and Tom Brady. It’s quite funny. So go and watch it.

Dave Young:

It’s in Boston, guys.

Stephen Semple:

Yes, exactly right. Exactly right.

Dave Young:

That’s interesting. And I think, yeah, there’s a thing with franchisors that you have to kind of pick carefully which franchisees you’re going to kind of pay attention to. It’s people that are being innovative, but in the same spirit as the existing franchise and not like… Like if somebody had decided that they were start doing fajitas, that would’ve been like, no, wait a minute, wait a minute. But donut holes called Munchkin? Of course. I could be wrong on this, but I think just looking at the Krispy Kreme machine and guessing that this is also how Dunkin makes their donuts, there really isn’t such a thing as a donut hole. It’s a ring of batter that drops into the grease. Correct. The hole is just a drop of batter that drops into the grease.

Stephen Semple:

Exactly right. It’s technically not a donut hole, but it was very successful and really revived Dunkin. And then, as I said, Fred the Baker campaign was huge as well. But the part that I found interesting is a couple of things when you look at the origin of this business is he observed in his food truck where most of his sales were coming from. And as we talked about, it’s really interesting how many businesses where a lot of the sales are clustered around a few products or services. And so what he decided to do is, well, why am I doing all these other things? I could build a business just around that. And as we said, in the early days, Toys R Us used to be hugely successful. Similar idea. Dollar General, similar idea. Where’s this clustering of sales? And you could take that and you turn it into something.

And many businesses, many, many, many businesses are like that. But the other thing is, when he started the idea and it was struggling, he went around looking for inspiration. And it would be easy for him to say, well, you can do all those sorts of flavors and ice cream because ice cream doesn’t spoil. You can’t really do it for donuts. What he saw was, this is working. People are attracted to it. They love the variety. I’m going to do the same thing. But on top of that, he took a page from the ice cream where he gave them all a name. He gave every donut a name. But again, it’s that looking outside, looking around, seeing what’s going on, seeing what’s going on at other stores and other industries, and drawing inspiration from that.

Dave Young:

I’ve got a question that may or may not be part of this story. How did Baskin-Robbins get involved? So many Dunkins that I see anymore have a Baskin-Robbins, just co-located as part of the business. Are they owned by the same giant corporation now? Or is that part of this story?

Stephen Semple:

There’s a whole pile of things that happened where they were sold to one private equity firm and then bought to another, and then take public and then take private. And all sorts of things happened kind of 2000 on. And to me, it was not part of the origin story. And it actually started becoming very convoluted and complex. And so basically, I just decided when Bob Rosenberg retired as out of the picture, I just decided that’s kind of where I would end the story.

Dave Young:

No, that’s fine. That’s a story for another day. And there’s something about it that makes sense, there’s something about it that, but it seems to work for a lot of their locations. I think it’s a fascinating story, and it makes me think at some point we need to do a recording about equity, private equity people going in and taking over these companies. That’s a weird one, right?

Stephen Semple:

Yeah, we could absolutely do that. But here’s the thing I thought was also really interesting is changing the name and adding those… It just all of a sudden, just everything exploded. Right?

Dave Young:

And I love the name. That’s absolutely probably one of the biggest factors in their success was just coming up with that name.

Stephen Semple:

Yes.

Dave Young:

And then the idea of finding a new product that’s also a donut and having a cute name and kids love it and ask for it and want it, you can’t go wrong with that. And I think a lesson that a business should learn from that is be willing to try things and make more mistakes, right?

Stephen Semple:

Yes.

Dave Young:

Those people probably tried a couple other things before they found Munchkins, right? There’s all kinds of things. And so innovation often comes from, it’s not that you just wait till you have the one thing. It’s that you try a whole bunch of things and finally one thing clicks and you go, that’s the thing. That’s what we’ve been waiting for.

Stephen Semple:

Then you run with it. Well, look, McDonald’s is constantly testing new menu items. And again, look how we all shorten it. None of us call it Dunkin Donuts. We all call it Dunkin. Dunkin Donuts, Dunkin. Right?

Dave Young:

Yeah.

Stephen Semple:

And it’s interesting ’cause I never realized that Dunkin was not a person’s name, that it was about-

Dave Young:

Dunking?

Stephen Semple:

… because again, we don’t… Yeah, I know. Because the issue in Canada, we don’t have them up here, so you never see the signs. You only ever hear the name.

Dave Young:

Ah, okay. So you thought it was some guy named Dunkin?

Stephen Semple:

Until I was a kid in the US and then saw it as the Dunkin-

Dave Young:

I would guess that Dunkin as a name is more popular in Canada than it is in the US now.

Stephen Semple:

Yeah, it is actually, probably. Yeah.

Dave Young:

I think I know of one Dunkin. Maybe I know one Dunkin. All right, thanks for the Dunkin Donuts story, Stephen.

Stephen Semple:

And go check out the video, The DunKings.

Dave Young:

I will.

Stephen Semple:

It’s fun. It’s fun. All right, thanks man.

Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review. And if you have any questions about this or any other podcast episode, email to [e-mail].