Minimum-Wage Hikes Slow Dunkin' Donuts Franchise Growth

Jed Graham writes:

Dunkin' Brands (DNKN) says franchisees are dragging their feet in opening new stores amid concerns about a higher minimum wage and the outcome of the coming election.

The doughnut and coffee chain, which opened up 61 stores in the third quarter compared with 91 in the year-ago quarter, told Wall Street analysts on Thursday that it now expects to wind up at the low end of its target of 430 to 460 stores opened for the full year.

The news comes just days after a survey of McDonald's (MCD) franchisees found growing tensions with the parent company, with the independent operators complaining of too much discounting even as wage pressures are growing and sales growth has slowed.

Both developments highlight the difficulty digesting big wage hikes for quick-service chains that get most of their revenue from the royalties paid by franchisees. While franchise agreements differ from company to company, they all generally deliver a fixed percentage of sales to the parent company, regardless of the underlying profitability of the restaurants.

Dunkin' Brands CEO Nigel Travis specifically mentioned a New York franchisee that put on hold consideration of opening another location after the state passed a law raising the minimum wage in the fast-food industry to $15 an hour, by 2019 in New York City and July 2021 in the rest of the state.