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Investment Overview for Dunkin' Brands (NYSE:DNKN)
WHAT HAS CHANGED?
Increase in Dunkin' Brands' market share in single-serve segment
A research report by UBS group stated that Dunkin’ Brands, along with its competitors McDonald's (NYSE:MCD) and Starbucks (NASDAQ:SBUX), further gained some market share in the single-serve K-Cups segment from Keurig Green Mountain (NASDAQ:GMCR). One of the UBS analysts, Keith Siegner, commented that sales of the overall U.S. single-serve cup segment grew by 16% y-o-y, which was slower than the 18% figure over the prior 12 months. However, Dunkin’ Brands was one of the restaurant chains who continued to get a bigger share of the pie. The company gained 80 basis points over the 4 week period ended September 5, 2015, and now has a 5.4% market share in this category, owing to the solid momentum of its K-Cups. The market expects the company to further improve this number in the coming months.
International Segments Under-performing
For the past couple of years (2013-2014), Dunkin' Brands' U.S. segments have been reporting strong and prominent comparable store sales growth, whereas on the other hand, the international segments have been struggling with sales declines for most of the above mentioned period. With declining comparable store sales growth and temporary headwinds, the international segments of both the brands have been struggling to generate required profit margins.
In Q3 2015, Dunkin' Donuts International reported 0.8% comparable sales growth, whereas Baskin-Robbins International reported 2.4% decline in comparable sales.
Below are key drivers of Dunkin' Brands value that present opportunities for upside or downside to the current Trefis price estimate for Dunkin' Brands:
Dunkin' Donuts U.S.
- Average Revenue Per Outlet: Dunkin' Donuts U.S. Average Revenue Per Outlet (ARPO) increased from $0.78 million in 2009 to $0.91 million in 2014. We expect the average revenue per outlet (ARPO) to grow at a CAGR of 1.5% and reach $1.02 million by the end of the Trefis forecast period. In a slightly bearish scenario, if the growth rate slows and the ARPO only rises to around $0.97 million, we could see a 7% erosion in the stock price. On the brighter side, if the ARPO rises to around $1.15 million helped by menu expansion, we could see the stock price jumping by more than 13%.
- Total Number of Outlets: In 2011, the restaurant chain added 243 new Dunkin' Donuts outlets to have 7015 points of distribution. By the end of 2012, there were 7,306 Dunkin' Donuts U.S. stores. The expansion accelerated in 2013 as the company added 371 restaurants in the U.S. The company opened 405 Dunkin' Donuts U.S. stores in 2014. We expect the company to keep adding 330-350 outlets annually so that the total number of stores in the U.S. reaches about 10,800 by the end of the Trefis forecast period. However, if the rate of expansion accelerates and the number of outlets crosses 11,000, then we could see the price estimate rising by more than 5%. On the other hand, if growth remains subdued and the company only manages to reach 9,000 outlets, we could see the estimate declining by nearly 15%.
For additional details, select a driver above or select a division from the interactive Trefis split for Dunkin' Brands at the top of the page.
Dunkin' Brands is a leading franchisor of restaurants, which serve hot and cold coffee, baked goods, and ice cream. It franchises restaurants under the Dunkin' Donuts and Baskin-Robbins brands. Dunkin' Brands has a presence in nearly 63 countries.
It operates in four segments: Dunkin' Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S. In 2014, the Dunkin' Donuts U.S. segment generated revenues close to $560 million, or 76% of the total segment revenues.
As of September 30, 2015, there were 11,568 Dunkin' Donuts globally and 7,617 Baskin-Robbins points of distribution.
Dunkin' Donuts U.S., Baskin-Robbins U.S., Dunkin' Donuts International, and Baskin-Robbins International, primarily derive their revenues through royalty income, franchise fees, and rental income. The company's international business runs via joint-ventures and country license agreements with franchises, who operate and sub-franchise the brand within their licensed areas. Baskin-Robbins International also manufactures and sells ice cream products.
Strong and established brands
Dunkin’ Donuts and Baskin-Robbins brands are well established brands globally. We believe this makes it easier for Dunkin' Donuts to launch new product lines as customers are aware of their brand and trust it immensely. Moreover, this makes it easy for the brand to expand internationally, where they still have the potential to have a strong impact and without any major headwinds. Moreover, the company is planning to expand its international reach through aggressive expansion plans in China, India, Germany, and Mexico.
Franchised business model provides a platform for growth
Dunkin' Brands operates mainly on a full fledged franchise model unlike its competitors, such as Starbucks and McDonald's, which follow a mix of the company operated and franchise business model.
Margins are higher in the franchise model as compared to the company operated model due to low capital investments required. New store development and substantially all of the store advertising costs are funded by franchisees,
and thus explain the high margins in this business model.
Focus on store level economics
In recent years, Dunkin' Brands has undertaken significant initiatives to further enhance store-level economics at its franchises. Dunkin' Brands also facilitated approximately $220 million in franchisee cost reductions primarily through strategic sourcing and other initiatives such as rationalizing the number of product offerings to reduce waste, optimize inventory, and enable mobile payments.
Increase in health consciousness among customers
People are becoming more aware about healthy food intake. Customers are cautious of health disorders resulting from junk food. Consequently, fast food companies have started offering healthier food offerings in order to catch up with this fast emerging trend. We believe this trend will emerge as a key factor that could govern product offerings in the future.
Strong Competition in the restaurant industry
Over the last couple of years, quick service restaurants are facing stiff inter-industry competition for breakfast market share, as breakfast is gradually becoming the highest grossing daypart for the industry. All the top fast food chains have introduced new innovative menu items and expanded their beverage portfolio, especially coffee.
Shift in ice cream consumption in U.S.
The ice cream industry in the U.S. is shrinking gradually. In recent times there has been a growing trend of increased ice cream consumption at home as several key brands are becoming available at grocery stores. As a result of this, sales at ice cream parlors are declining. Over the years, Baskin-Robbins has shut down its superfluous outlets in the U.S.
Increasing competition from Fast-casual restaurants
Fast casual restaurants are a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared, and higher quality food than traditional QSRs, all in an upscaled and inviting ambiance. People with higher disposable incomes and increasing health concerns are changing their food preferences, and are ready to pay some extra bucks for a better quality of food.
Expansion in the Western and emerging markets
Most of the Dunkin' Donuts U.S stores are concentrated in the eastern part of the U.S and don't have a big presence in the western U.S. The company’s plans to expand in the western markets are on the charts. Adding new assets to the company will help them generate more revenues for the upcoming quarters. In the long-term plan, the company plans to add around 5,000 Dunkin’ Donuts units in the western market, around 3,000 in the emerging markets, and only 400 in its core eastern market, to take the total Dunkin’ Donuts U.S. units to 17,000.
The company has doubled its footprint from 32 restaurants in 2010 to 64 in 2013 in Texas, a lucrative western market. In the state, the average weekly sales of the restaurants grew by 57% in the last three years. On the other hand, the comparable same store sales rose from 1% in 2010 to 9% in 2013. Looking at the potential growth opportunity, Dunkin’ Donuts plans to open 800 to 1,000 net new restaurants in the region in the long term. Another major focus area for the company is California.
Trefis Forecast Rationale for Total Number of Outlets
This refers to total number of outlets under the Dunkin' Donuts brand internationally.
As of September 30, 2015, there were 11,568 Dunkin' Donuts globally of which 3,260 are located internationally and the remaining present in the U.S.
Dunkin' Donuts international outlets have increased from 2,620 in 2009 to 3,068 in 2011. By the end of 2013, the figure had increased to 3,181 restaurants. However, in the fiscal 2014, the number of Dunkin' Donuts international rose to only 3,228, indicating a small growth in store openings.
Going forward, we expect the company to add roughly 80 new Dunkin' Donuts international outlets on average each year.
Trefis considered the following factors for its forecast:
- Robust international expansion plans
- Dunkin' Donuts has strong plans to expand in international frontiers. It is keen to increase its footprint across the globe. The company plans to increase its total outlets at international locations to around 4,000 in the next 2-3 years.
- In 2014, the company added 282 net new restaurants for both brands internationally, shifting its focus to higher GDP markets, which in turn would generate higher average revenues per outlet. The company is mainly focusing on regions where, despite the recent slowdown in the economy, the growth is three times the rest of the world.
- In India, Dunkin' Donuts signed an agreement with Jubilant FoodWorks for a joint venture to set up 500 new stores in the 15 years starting from 2012.
- In Taiwan, it plans to open 100 new stores over the course of the next 10 years.
- In Germany, the company has more than 40 Dunkin' Donuts restaurants and opened its first store in the United Kingdom.
The company is also rebooting its Dunkin' Brand in China and is confident of its Baskin-Robbins franchisees in the country.
If Dunkin' Brands succeeds in these markets, the company's top-line growth would be exponential in the initial stages.
- The company also announced its plan to open 1,400 Dunkin' Donuts stores in China over the next two decades, starting with first store opening in fourth quarter of 2014.
- In Mexico, the company signed a franchise agreement with the Mexican subsidiary of Sizzling Platter, a franchisee of Dunkin' Donuts in the U.S., to open restaurants in Mexico. The company plans for the development of more than 100 Dunkin' Donuts restaurants in the country.
Back to Company Overview
- Geographical risks involved
- Failure in understanding and blending with the local culture and taste poses a potential risk to Dunkin' Brands' international expansion plans.
- Increasing competition among food and beverage companies
- The competition in the fast food market has intensified over the last couple of years. All competing firms are trying to broaden their food offerings. Starbucks, for instance, has forayed into bakery and breakfast sandwiches and McDonald's has started offering gourmet coffee.
- Strong competition could result in Dunkin' Donuts failing to meet its growth targets.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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