Dunkin' Donuts 2015 Annual Report Download - page 26

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shifting political or economic conditions in coffee-producing countries, and delays in the supply chain. If commodity prices
rise, franchisees may experience reduced sales, due to decreased consumer demand at retail prices that have been raised to
offset increased commodity prices, which may reduce franchisee profitability. Any such decline in franchisee sales will reduce
our royalty income, which in turn may materially and adversely affect our business and operating results.
Our joint ventures in Japan and South Korea, as well as our licensees in Russia and India, manufacture ice cream products
independently. The joint ventures in Japan and South Korea each own a manufacturing facility in its country of operation. The
revenues derived from these joint ventures differ fundamentally from those of other types of franchise arrangements in the
system because the income that we receive from the joint ventures in Japan and South Korea is based in part on the
profitability, rather than the gross sales, of the restaurants operated by these joint ventures. Accordingly, in the event that the
joint ventures in Japan or South Korea experience staple ingredient price increases that adversely affect the profitability of the
restaurants operated by these joint ventures, that decrease in profitability would reduce distributions by these joint ventures to
us, which in turn could materially and adversely impact our business and operating results.
Shortages of coffee or milk could adversely affect our revenues.
If coffee or milk consumption continues to increase worldwide or there is a disruption in the supply of coffee or milk due to
natural disasters, political unrest, or other calamities, the global supply of these commodities may fail to meet demand. If coffee
or milk demand is not met, franchisees may experience reduced sales which, in turn, would reduce our royalty income.
Additionally, if milk demand is not met, we may not be able to purchase and distribute ice cream products to our international
franchisees, which would reduce our sales of ice cream and other products. Such reductions in our royalty income and sales of
ice cream and other products may materially and adversely affect our business and operating results.
We and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a
failure of such systems or technology could harm our ability to effectively manage our business.
Network and information technology systems are integral to our business. We utilize various computer systems, including our
FAST System and our EFTPay System, which are customized, web-based systems. The FAST System is the system by which
our U.S. and Canadian franchisees report their weekly sales and pay their corresponding royalty fees and required advertising
fund contributions. When sales are reported by a U.S. or Canadian franchisee, a withdrawal for the authorized amount is
initiated from the franchisee’s bank after 12 days (from the week ending or month ending date). The FAST System is critical to
our ability to accurately track sales and compute royalties due from our U.S. and Canadian franchisees. The EFTPay System is
used by our U.S. and Canadian franchisees to make payments against open, non-fee invoices (i.e., all invoices except royalty
and advertising funds). When a franchisee selects an invoice and submits the payment, on the following day a withdrawal for
the selected amount is initiated from the franchisee’s bank. Despite the implementation of security measures, our systems,
including the FAST System and the EFTPay System, are subject to damage and/or interruption as a result of power outages,
computer and network failures, computer viruses and other disruptive software, security breaches, terrorist attacks, catastrophic
events, and improper usage by employees. Such events could result in a material disruption in operations, a need for a costly
repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties paid to us by our franchisees. To
the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or
inappropriate disclosure of confidential or proprietary information, we could incur liability which could materially affect our
results of operations.
Interruptions in the supply of product to franchisees and licensees could adversely affect our revenues.
In order to maintain quality-control standards and consistency among restaurants, we require through our franchise agreements
that our franchisees obtain food and other supplies from preferred suppliers approved in advance. In this regard, we and our
franchisees depend on a group of suppliers for ingredients, foodstuffs, beverages, and disposable serving instruments including,
but not limited to, Rich Products Corp., Dean Foods Co., The Coca-Cola Company, and Silver Pail Dairy, Ltd. as well as four
primary coffee roasters and two primary donut mix suppliers. In 2015, we and our franchisees purchased products from over
400 approved domestic suppliers, with approximately 12 of such suppliers providing half, based on dollar volume, of all
products purchased domestically. We look to approve multiple suppliers for most products, and require any single sourced
supplier, such as The Coca-Cola Company, to have contingency plans in place to ensure continuity of supply. In addition we
believe that, if necessary, we could obtain readily available alternative sources of supply for each product that we currently
source through a single supplier. To facilitate the efficiency of our franchisees’ supply chain, we have historically entered into
several preferred-supplier arrangements for particular food or beverage items.
The Dunkin’ Donuts system is supported domestically by the franchisee-owned purchasing and distribution cooperative known
as the National Distributor Commitment Program. We have a long-term agreement with the National DCP, LLC (the “NDCP”)
for the NDCP to provide substantially all of the goods needed to operate a Dunkin’ Donuts restaurant in the United States. The