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Investment Overview for Dunkin Brands (NYSE:DNKN)
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 Average Revenue Per Outlet (ARPO) increased from $0.78 million in 2009 to $0.90 million in 2013. We expect the ARPO to rise to grow at a CAGR of 3.5% and reach $1.15 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 $1 million, we could see a 15% erosion in the stock price. On the brighter side, if the ARPO rises to around $1.3 million helped by menu expansion, we could see the stock price jumping by more than 15%.
- Total Number of Outlets: In 2009, Dunkin' Donuts U.S. had 6566 outlets nationwide. In 2010, it added 206 new outlets. In 2011, the restaurant chain added 243 new 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 expects to open around 380-410 Dunkin' Donuts U.S. stores by the end of 2014. We expect the company to keep adding 350 outlets annually so that the total number of stores in the U.S. reach about 10,500 by the end of the Trefis forecast period. However, if the rate of expansion accelerates and the number of outlets number around 11,000, then we could see the price estimate rising by more than 4%. On the other hand, if growth remains subdued and the company only manages to reach only 9,000 outlets, we could see the estimate declining by around 12%.
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 60 countries.
It operates in four segments: Dunkin Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S. In 2013, the Dunkin Donuts segment generated revenues close to $540 million or 76% of the total segment revenues.
As of June 28, 2014, Dunkin' Donuts had 10,993 global points of distribution and Baskin-Robbins had 7,412 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 are still to have a strong impact and without any major headwinds.
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 easily 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 would emerge as a key factor that would govern product offerings in the future.
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.
Relatively unfazed by rising food and commodity inflation
Since most of its restaurants are franchised, Dunkin' Brands is relatively unaffected by high commodity and food prices. The prices of coffee, dairy products and sugar have skyrocketed since the onset of calender year 2014. Eventually, the input costs influence the menu prices which ultimately impacts the profitability of the company.
Increasing competition from Fast-casual restaurants
Fast casual restaurant is 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 high quality food than traditional QSRs, all in an upscaled and inviting ambiance. People with higher disposable income and increasing health concerns are changing their food preferences and are ready to pay some extra bucks for better quality of food.
Trefis Forecast Rationale for Total Number of Outlets
This refers to total number of outlets under the Dunkin' Donuts brand internationally.
As of June 28, 2014, there are 10,993 Dunkin’ Donuts restaurants globally of which 3,172 are located internationally and the remaining present in the U.S.
Dunkin Donuts international outlets have increased from 2620 in 2009 to 3068 in 2011. By the end of 2013, the figure had increased to 3,181 restaurants.
Going forward, we expect the company to add around 150-200 new Dunkin Donut 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 foot print across the globe. The company plans to increase its total outlets at international locations to around 4000 in the next 2-3 years.
- 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 2009, Dunkin' Donuts opened its first two restaurants in the Shenzhen, Guangdong province and secured agreements to open a total of 480 shops in mainland China over the next 10 years.
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- 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.
- Dunkin' Donuts opened its first outlet in India in 2012 and expects the country to be its third largest market in the next 15 years. However, Starbucks also plans to open its first outlet in 2012 itself. Krispy Kreme also has aggressive plans lined up for India.
- 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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