Is Dunkin’ Brands Losing The ‘All Day Breakfast’ Battle?
The Dunkin’ Donuts division of Dunkin’ Brands (NASDAQ:DNKN) reported a 0.8% decline in its comparable sales for Q4 2015, driven by a decrease in traffic by 100 basis points and a 20 basis points increase in ticket size. While comparable sales increased by 1.4% in the fiscal year 2015, the slight decline in Q4 2015 comes after McDonald’s launched its all day breakfast in October 2015 and reported a more than 5% increase in comparable sales in the U.S. for Q4 2015. Studies suggest that the fast food joint’s all day breakfast strategy is working, with one third of the breakfast buyers during non-traditional hours being new customers. Dunkin’ Donuts is now executing a new strategy to revive its breakfast sales and is also revamping its menu boards to emphasize coffee and “all day” breakfast foods to lure customers. We believe as competition in the “all day breakfast” space intensifies, Dunkin’ Donuts will need innovative ways to attract customers back to its restaurants and reclaim its strong position in breakfast.
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Re-establishing Itself As The Breakfast Specialist
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Disappointed with the fourth quarter comp sales in the U.S., the CEO of Dunkin’ Brands mentioned in the Q4 2015 earnings call that the company is executing against a new five part strategic growth plan which is supported by its franchises. As the competition gets fiercer, consumers are looking at premium offers in both the food and beverage segment. Dunkin’ Brands plans to aggressively pursue coffee innovation and focus on introducing more premium espresso based offerings, such as its current Macchiato line of products. It is working towards enhancing product quality through innovation and has implemented targeted value and smart pricing. Dunkin’ Donuts recently launched a new breakfast burrito which will be available any time of the day, along with other new menu items for spring. While the company believes that the impact of McDonalds’ “All day breakfast” on its sales has been marginal, this new strategy of the fast food joint has initiated a value price war making the market very competitive. Dunkin’ Donuts hopes to benefit from this trend given that it serves the same menu throughout the day in its 2,500 restaurants. The company is revamping its menu boards to increase the emphasis on beverages and food items available all day and reduce the prominence of combo meals.
According to our estimates Dunkin’ Donuts U.S. accounts for nearly 85% of Dunkin’ Brands valuation and we expect its average revenue per outlet to increase at a steady pace and reach nearly $1.02 million by the end of our forecast period.
We believe with McDonald’s launching its “All Day Breakfast” competition in the coffee and fast food restaurants space has intensified. Dunkin’ Brands appears to have a strategy in place to retain its market share, but the recent decrease in momentum is worrying. Whether the increased focus on product innovation and premium offerings will help lure customers back to its restaurants will be visible in the coming quarters.
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